Strategic Opportunities and Cultural Challenges

International Management
As the economies of many countries become more interrelated, international managers

are facing huge challenges and unique opportunities associated with their roles. Now in
its fifth edition, Sweeney and McFarlin’s International Management embodies a balanced
and integrated approach to the subject, emphasizing the strategic opportunities available
to firms on a global playing field, as well as exploring the challenges of managing an inter-
national workforce.
Integrating theory and practice across all chapter topics, this book helps students to learn,
grasp, and apply the underlying principles of successful international management:
■ Understanding the broad context of international business, including the critical

trends impacting international management, the legal and political forces driving
international business, and the ethical and cultural dilemmas that can arise
■ Mastering the essential elements of effective interaction in the international arena,
from cross-cultural understanding and communication to cross-border negotiation
■ Recognizing and taking advantage of strategic opportunities, such as entering and
operating in foreign markets
■ Building and leading effective international teams, including personal and behavioral
motivation, as well as taking an international perspective on the hiring, training, and
development of employees
These principles are emphasized in the text with current examples and practical applica-
tions, establishing a foundation for students to apply their understanding in the current
global business environment. With a companion website featuring an instructor’s manual,
powerpoint slides, and a testbank, International Management is a superb resource for
instructors and students of international management.
Paul D. Sweeney is a Professor of Management and Associate Dean at the University of

Dayton, USA. He is also a member of the Academy of Management (International &
Organizational Behavior Division).
Dean B. McFarlin is the Dean of the Palumbo-Donahue School of Business at Duquesne

University, USA. He also serves as an Associate Editor for Academy of Management
Perspectives and is a member of the editorial board for Journal of Management.
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International
Management
Strategic Opportunities
and Cultural Challenges
Fifth Edition
Paul D. Sweeney and

Dean B. McFarlin
Fifth edition published 2015
by Routledge
711 Third Avenue, New York, NY 10017
and by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
Routledge is an imprint of the Taylor & Francis Group,
an informa business
© 2015 Taylor & Francis
The right of Paul D. Sweeney and Dean B. McFarlin to be identified
as author of this work has been asserted by them in accordance with
sections 77 and 78 of the Copyright, Designs and Patents Act 1988.
All rights reserved. No part of this book may be reprinted or
reproduced or utilised in any form or by any electronic, mechanical,
or other means, now known or hereafter invented, including
photocopying and recording, or in any information storage or
retrieval system, without permission in writing from the publishers.
Trademark notice: Product or corporate names may be trademarks
or registered trademarks, and are used only for identification and
explanation without intent to infringe.
Fourth edition published 2011 by Routledge
Library of Congress Cataloging-in-Publication Data
McFarlin, Dean B., author.
International management : strategic opportunities and cultural
challenges. — Fifth edition / Paul D. Sweeney & Dean B. McFarlin.
pages cm
Includes bibliographical references and index.
1. International business enterprises—Management. I. Sweeney,
Paul D., 1955– author. II. Title.
HD62.4.M395 2015
658′.049—dc23
ISBN: 978-0-415-82527-6 (hbk)
ISBN: 978-0-415-82528-3 (pbk)
ISBN: 978-0-203-40649-6 (ebk)
Typeset in Sabon
by Apex CoVantage, LLC
To three Hohmans that I adore—Emma, Farrell, and Mary
Paul D. Sweeney
To Laurie, Andrew, Elizabeth and Nathaniel . . . no one

could ask for a better family!
Dean B. McFarlin
Contents
Preface xv
Acknowledgements xxii
Part I
On a Global Stage: The Context of International Management 1
1 On a Global Stage: The World of International Management 3
International Challenge: New Balance: Still Running with Production
in the United States 4
International Business: A World of Constant Change 5
Globalization and the Growth of International Business 7
A Snapshot of Regional Trends 9
International Insights: Russia: Corruption in the Wild, Wild East 18
Key Challenges Facing International Business 21
Managing in a Challenging International Environment 27
Chapter Summary 31
Discussion Questions 31
Up to the Challenge? New Balance Makes “Made in the U.S.A.”
Lean and High-Tech 32
International Development: International Management: Living
at 35,000 Feet? 33
From Theory to International Practice: Hitting Home: Understanding
Your Local “China Syndrome” 34
Notes 35
2 Legal and Political Foundations of International Management 41
International Challenge: Crouching Tiger, Hidden Knockoffs: Making
It and Faking It in China 42
The Legal Environment of International Management 44
C O N T E N T S
International Insights: Courting Trouble: American-Style Litigation

and Lawyers in Japan 46
Global Innovations: Social Networking: Islam Style 50
International Law 53
GATT/WTO 53
Political Issues and Risks in International Management 56
International Insights: In Harm’s Way: The Danger of Doing
Business Abroad 60
Summary of Risk Factors 70
Chapter Summary 74
Up to the Challenge? Combatting Counterfeiting in the Middle Kingdom 75
International Development: Culture Knowledge Quiz 77
From Theory to International Practice: Calibrating International
Business Risk 79
Notes 80
3 Doing Things Right: International Ethics and
Social Responsibility 85
International Challenge: Competitive Intelligence: Dumpster Diving
for That Extra Edge 86
Ethics and Social Responsibility in International Management 88
International Insights: Beyond Rangoon: Chevron and Human
Rights in Burma 92
Global Innovations: Doing Good to Do Well: The Changing
Value Proposition for Corporate Social Responsibility 95
Cross-National Differences in Ethical Perspectives 97
International Insights: Is Doing the Right Thing Wrong?—An American
Faces an Ethical Dilemma in South America 100
Ethics Associated with Bribery and Other Questionable Payments 102
International Insights: Bribery as a Business Model—Bavarian Baksheesh
at Siemens AG 104
International Insights: Making Friends and Influencing People:
The Long Arm of the FCPA Got Longer 110
Chapter Summary 112
Up to the Challenge? Competitive Intelligence: Lots of Gray Areas,
No Easy Answers 113
International Development: Bribery in International Business 115
From Theory to International Practice: Analyzing Corporate Codes 118
Notes 118
INTEGRATIVE CASE 1: CULTURE CLASH IN THE BOARDROOM (HBR, 2011) 123
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C O N T E N T S
PART II
Interacting Effectively in an International Environment 127
4 Making Distinctions Across Cultures: Implications for
International Management 129
International Challenge: Hidden Strengths Is India
the Proverbial “Elephant” in the Global Room? 130
Defining and Understanding Culture 131
Classifying Cultures around the Globe 133
International Insights: Old-Fashioned Chinese Guanxi Gets a Decidedly
Yiddish Edge . . . and Begins to Look More Like Schmoozing
All the Time 136
International Insights: It’s a Small Park After All: Queuing Up at the
House of the Mouse 146
Global Innovations: Sharing Is Caring (about Market Penetration):
Facebook in Unfamiliar Places 152
The Implications of Culture for International Management 153
How Individuals and Corporations Can Make Better Sense of Culture 156
Chapter Summary 158
Up to the Challenge? The Steady Rise of the World’s Largest Democracy 160
International Development: Understanding Your Orientation toward
Individualism–Collectivism 161
From Theory to International Practice: The Cultural Minefield
of International Gift Giving 163
Notes 165
5 Perception, Interpretation, and Attitudes Across Cultures 169
International Challenge: Desperately Seeking Latin Culture 170
Perception, Interpretation, and Attitudes Across Cultures 171
International Insights: Getting “Carded” in Japan: Perception and
Business Card Ritual 174
Interpretation of Perceptions 179
International Insights: Attributions on TV 183
Attitudes 183
International Insights: Making the Right Impression on Your Chinese
Boss or Partner 193
The Effects of Attitudes and Stereotypes 196
International Insights: There is No “i” in Havana 197
Chapter Summary 199
Up to the Challenge? Putting the Culture Back into Housewives 200
International Development: Measuring Your Perceptual Orientation
to Time 201
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C O N T E N T S
From Theory to International Practice: Conducting a Cultural Audit

of China 202
Global Innovations: Online and at the Head of the Line for
Internet Business in China 203
Notes 204
6 Communicating Effectively Across Cultures 211
International Challenge: A Small Firm Needs a Communication Boost
to Get the Chips Off Their Shoulders . . . and Off Their Shelves 212
Communicating Effectively Across Cultures 213
Global Innovations: They Have Ways of Making You Talk:
A Japanese Firm Requires English 218
International Insights: The Best Care in the Air Is Cross-Cultural:
Miscommunication can be Dangerous to Your Well-being 220
Communicating in Foreign Languages: Plenty of Room for Error 222
International Insights: Many Americans “Strike Out” When
Communicating Cross-Culturally 234
Nonverbal Communication 236
Chapter Summary 241
Up to the Challenge? Advances in Intercultural Communication—the
Low-Tech Way 242
International Development: Moshi, Moshi: Overcoming Cultural
Barriers to Communication 243
From Theory to International Practice: We Have Ways of Making
You Talk: Researching a Foreign Language 245
Notes 247
INTEGRATIVE CASE 2: CHIBA INTERNATIONAL, INC. (IMD, SWITZ.) 252
Part III
Capitalizing on International Opportunities 263
7 Managing Conflict and Conducting Effective Negotiations 265
International Challenge: Two Sides of a Common Border: Negotiations
between Mexicans and Americans 266
A World of Conflict 268
The Role of “Face” in Intercultural Conflict 274
International Insights: Get out of my “Face”: The Importance of
Respect Across Cultures 275
Other Responses to Conflict 277
International Insights: Conflict in the Middle Kingdom: The Fan
Family Feud 279
Understanding International Negotiation 281
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C O N T E N T S
Global Innovations: Getting to “Yes”: Negotiating Safely

in a Hostage Crisis 281
International Insights: The Devil Is in the Details: The Meaning
of Compromise Across Cultures 290
Chapter Summary 295
Up to the Challenge? The Mexican and American Negotiation Gap:
Returning El Norte, Empty-Handed 296
International Development: Assessing and Comparing Your Conflict
Management Style 297
From Theory to International Practice: Characteristic Features of
Negotiation Behavior in Countries around the World 299
Notes 300
8 Taking Stock: Developing International Strategy 305
International Challenge: Localization and Integration: One Company’s
Solution to the “Either–Or” Dilemma 306
International Strategy: Deciding How to Compete Abroad 307
Corporate Strategy Options in International Business 316
The Process of Developing International Strategy 326
International Insights: Krafting Strategy for International Markets 328
Global Innovations: A Strategic Fast Food Fight: McDonald’s
Faces Tough Local Competition from Jollibee in the Philippines 333
Organizational Requirements for Successful International Strategy 335
Chapter Summary 337
Up to the Challenge? General Electric Upends “Glocalization” in Favor
of “Reverse Innovation” 338
International Development: Conducting a Company Situation Analysis 340
From Theory to International Practice: Making Moves on a Global Stage 341
Notes 342
9 Jumping In: Foreign Market Entry and Ownership Options 347
International Challenge: General Electric Powers up in China . . . But
at a Technological Price 348
Taking the Plunge 349
International Insights: U.S. Firm Battled a Japanese Giant to Protect
Its Technology 355
Foreign Market Entry Options 358
International Insights: Trouble Can Find American Exporters at Home 360
Global Innovations: McDonald’s and Other U.S. Franchisors
Find Foreign Growth Is Golden 366
International Insights: Danone’s Chinese Joint Venture Turns Sour 377
Chapter Summary 382
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C O N T E N T S

Up to the Challenge? GE Antes Up (Some) Technology to Power
China’s Growing Market 382
International Development: Using the Global Practices Instrument 384
From Theory to International Practice: Exporting Your
Technology Products 387
Notes 388
INTEGRATIVE CASE 3: GO GLOBAL—OR NO? (HBR, 2001) 394
Part IV
Managing People in the International Arena 401
10 Motivating and Leading Across Cultures 403
International Challenge: Can Stodgy South Korean Companies Loosen
Up Their Leadership? 404
Motivating and Leading Abroad: One Size Does Not Fit All 406
Western Motivation Concepts and Their Applicability to Other Cultures 406
International Insights: Money Drives Russian Women Working for
Mary Kay and Avon 411
International Insights: Global Dining’s Message to Its Japanese
Employees: Perform or You Are Chopped Liver 417
Effective Leadership in a Global Context 420
International Insights: Vineet Nayar: Changing the Leadership
Culture, 1.2 Billion at a Time 422
Global Innovations: It Takes a Village: Developing an
International Leadership Cadre at PwC 433
Chapter Summary 436
Up to the Challenge? Leadership with Seoul: Korean Firms Are Mindful
of Their Roots While Trying New Approaches 437
International Development: How Are Your Cross-Cultural
Motivation Skills? 438
From Theory to International Practice: Leadership Transitions in BRIC
Countries: Understanding the New Economic Powerhouses 439
Notes 441
11 Building an Effective International Workforce 447
International Challenge: Seoul-Searching a Work World Away:
One U.S. Expatriate’s Cautionary Tale 448
A Strategic Look at International Human Resource Management 449
Staffing Foreign Operations: A World of Choices 453
Global Innovations: Want an Alternative to Traditional
Expatriates? Try “Boomerangs” 455
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C O N T E N T S
Selecting and Developing International Employees 458

International Insights: Glamour, Grunge, or Both? In the Trenches
with International Managers 459
Cultural Differences in Selection and Development Procedures 462
Expatriates: Work a World Away 464
International Insights: Hardship Post or Comfortable Sojourn?
Chinese Expats in the West 473
Returning Home: The Challenge of Repatriation 476
Chapter Summary 478
Up to the Challenge? Trying Fitting in Across an
Ocean of Differences 479
International Development: What Is Your International Orientation? 480
From Theory to International Practice: International Human
Resource Management in Specific Firms 482
Notes 484
12 Evaluating and Rewarding Employees Worldwide 489
International Challenge: Multinationals Are Making
it Harder for Employees to Accept Expatriate Assignments 490
Employee Performance Appraisal: The Global Challenge 492
Multinationals and Performance Evaluation for Expatriates 493
Who Should Evaluate Expatriate Performance? 495
When Should Expatriate Performance Be Evaluated? 499
Context Variables That Impact Evaluations of Expatriates 500
Some Additional Challenges with Cross-Border
Performance Evaluations 501
Evaluating Foreign-Born Employees 503
International Insights: Some Advice for Providing Performance Feedback
to Foreign-Born Employees 505
Compensation of International Employees 506
International Insights: Taking a Holiday from Vacations: Working
Overtime to Change a National Habit 511
Explaining Compensation Differences Across Countries 512
The Challenges of Expatriate Compensation 513
Methods for Compensating Expatriates 515
Global Innovations: What Do Zippers, Prozac, a Dozen Roses, and
a Box of Titleists Have in Common? They Are All in a Day’s Survey 522
Chapter Summary 527
Up to the Challenge? Are American Expatriates Becoming Too Expensive
for Multinationals? 528
International Development: Giving Negative Performance Feedback
Across Cultures 530
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C O N T E N T S
From Theory to International Practice: Assembling an Expatriate

Compensation Package 531
Notes 532
13 Managing Cultural Groups: From Small Work 537
International Challenge: SAP’s Plans Hit a Cultural Barrier 538
Managing Teams and Smaller Work Groups Across Cultures 539
Group Productivity Across Cultures 541
International Insights: Team Dynamics at 35,000 Feet 543
Diversity: Working with Others from Different Groups 544
International Insights: Cross-Cultural Teams Open in the Catskills 545
Labor Relations in and Across Cultures 547
Labor Unions Across Countries 551
International Insights: Labor Relations on the Brink in Belgium:
A Cautionary Tale for Firms Doing Business in Europe 555
Global Innovations: A New Twist on “Dutch Treat”: Government and
Private Support Combines to Save Jobs in the Netherlands 564
Putting Agreements into Practice 566
Chapter Summary 570
Up to the Challenge? SAP’s Decision to Become Less German 571
International Development: Understanding Japanese Group
Decision-Making 573
From Theory to International Practice: Developing Expertise in
International Labor Trends 574
Notes 575
INTEGRATIVE CASE 4: THE CASE OF THE FLOUNDERING EXPATRIATE (HBR, 1995) 580
Name Index 587

Subject Index 591
xiv
Preface
The field of international management continues to evolve rapidly. The “half-life” of

principles, problems, and proscriptions about how to manage globally is getting shorter
and shorter by the year. But, this also makes the field lively and, as the Chinese say,
“may we all live in interesting times.” Yet for authors like us, it is a big challenge to
stay on top of the field. Of course, our problems pale in comparison to those who are
actually doing international management. We can only imagine how difficult it must be
for them to operate effectively when the ground is always shifting under their feet. As
a result, as educators, we admire the skills of international managers and hope that
bringing together their collective responses to these challenges in our book will help
benefit current and future global leaders.
Indeed, the fifth edition is designed to help students grasp the complexities of inter-
national management. Our revised chapters emphasize adaptability and flexibility more
than ever given the current environment, a theme that we weave throughout the book.
Because the field is both relatively new and subject to rapid change, there are no precise
sets of topics that must be covered in an international management text. Consequently,
this offers a lot of flexibility in both our choice of topics and how we treat them. To
make this latest edition even more accessible, we have retained most topics from the
previous edition, but have streamlined our coverage. In doing so, we have worked to
update each chapter with newer and more pointed examples of both challenges and
opportunities in the field of international management.
Strategic Opportunities and Cultural Challenges

The fifth edition will continue to balance our two themes of strategic opportunities for
firms and the challenges of managing an international workforce against the backdrop
of rapidly evolving global markets. Clearly, the economies of many countries are becom-
ing more interrelated and integrated. This presents huge challenges and unique oppor-
tunities that underscore the importance of our balanced approach. There are some very
good textbooks that strongly emphasize a strategic orientation to international manage-
ment whereas others emphasize a people-oriented focus, primarily centering on employee
behavior.
P R E F A C E
Our view, however, is that both should add to the effective practice of international
management. For that reason, in every chapter we discuss state-of-the-art practices made
by companies and managers as well as offer advice from experts in the field. This guid-
ance includes an emphasis on flexibility and adaptability—attributes critical for today’s
volatile international markets. Managers need to think creatively but also analytically
about potential international opportunities, weighing firm strengths and weaknesses as
well as possible competitive threats in the process. Ultimately, that process should cul-
minate in the formation of strategies and tactics designed to take advantage of those
opportunities while side-stepping threats. But actually capitalizing on them is another
matter entirely—that is where skills such as executing and implementing come into play.
That takes time, and these days events can overtake a well-laid plan in a heartbeat (or
a Tweet). As a result, managers need to stay alert and nimble so they can alter course
quickly in the face of change.
The best-laid plans or strategy will not work if they are not implemented correctly.
This is where the human side of the international management equation comes into play.
Many plans derail because they fail to include and anticipate people-related complexities
and complications. Indeed, in the international environment cultural challenges probably
trip up companies just as much as misguided business strategies do—and can trump
even the best-laid plans. Either way, it is fair to say that strategy development and cross-
cultural management skills are both critically important. Ideally, they should be inter-
related. Possible cross-cultural challenges should inform strategy creation. Strategic needs
should help shape management approaches and human resource policies around the
world. Neither is more important than the other. We will continue to present this bal-
anced perspective in a lively fashion. Generally speaking, we will take an applications-
oriented approach that is solidly grounded in the latest research. We will briefly describe
this approach next with reference to specific elements of each chapter
Overview of the Fifth Edition

International Management has been revised and updated in the fifth edition in order
to reflect the latest trends and changes in the field of international management. In
doing so, we combine theory and practice across chapter topics with plenty of current
examples.
To underscore the principles, we include a number of features that highlight impor-
tant themes while providing students and instructors alike accessible ways to put those
principles into practice:
Combining Theory and Practice: Integrative and ChapterSpecific Cases This edi-
tion offers both integrative cases and chapter-specific cases in one volume for the
convenience of instructors and students. The fifth edition includes four of the most
highly rated integrative cases from some of the best providers available (e.g., Harvard
Business School). Three of these cases are popular carryovers from the fourth edition
with one new case that focuses on bribery issues in an international joint venture.
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P R E F A C E
These integrative cases are placed at the end of the appropriate set of chapters. As
was true in previous editions, these integrative cases are placed where they coordinate
with topics across several chapters.
In addition, each chapter includes a new feature, Global Innovations, which directly
aligns with the content of that chapter. These features focus on unique or controversial
approaches being used by firms and/or managers to tackle chapter-specific international
management issues. Some professors have reported that they and students like having
both shorter, chapter-specific cases in addition to longer, integrative cases for each sec-
tion. This is an effort to be responsive to those needs. Overall, each case in the fifth
edition will reflect contemporary international management concerns and provide com-
prehensive background information for analysis. Cases are selected or written by us to
provide an overview of management challenges faced by organizations of all sizes in a
cross-section of industries.
Opening and Closing Chapter Challenges We have kept the well-received “bookend”
feature from previous editions. The opening (International Challenge) and closing (Up
to the Challenge?) chapter vignettes remain in this new edition. These short vignettes
kick off each chapter by framing issues written specifically for that chapter’s content,
posing direct questions and enabling students to have meaningful analysis and discussion
of important chapter concepts. Many of these vignettes have been replaced or updated
for this edition.
International Insights The popular boxed section feature within each chapter carries
over to this edition. These are brief stories focused on companies or leaders of those
firms and some of the challenges and opportunities faced in various parts of the world.
We updated and streamlined this material, eliminating some and adding new ones in the
process. Our goal in doing so was to better integrate these interesting examples of
international management in practice with relevant material in the main text. Overall,
this helps improve the flow and readability of the main text while still capturing the
best of what this boxed section feature has to offer.
Updated with Quality Sources As suggested already, each chapter has been updated
to ensure relevancy and timeliness. We have updated each chapter with new research
and thinking about international management issues, and new illustrations and examples
are provided in each chapter as well. This does not mean that we have abandoned
perennial issues in international management—pernicious ones that seem to remain a
challenge, whether it is 1975 or 2015. We continue to discuss such issues in nearly every
chapter (e.g., communication problems, culture and perception, leadership style across
cultures, stages of international firm development, to name just a few).
Our chapters rely on the most recent and most prestigious publications available.
All of the chapters were updated with the latest articles from The Wall Street Journal,
The Economist, the Financial Times, and the Harvard Business Review, among other
sources. Consequently, we will capture some of the most contemporary thinking about
issues and opportunities in international management. Likewise, the fifth edition continues
xvii
P R E F A C E
to include many updated references to top academic journals such as the Journal of
International Business Studies, Academy of Management Journal, and Strategic
Management Journal, among others.
Two Experiential EndofChapter Features As we have done in earlier editions, we

present two hands-on exercises at the end of each chapter and sketch out projects that
students can complete outside of class on chapter topics. From Theory to International
Practice focuses on application-oriented projects that require students to conduct research
and/or other outside-of-class work about a variety of chapter-relevant issues. Students are
sometimes asked to analyze mini-cases, assess international competitive issues, or evalu-
ate how specific companies are dealing with particular international management issues
(e.g., how do you get an export license?). We provide students with suggested resources
for research and direction to help them get started. The other experiential feature carry-
ing over from the fourth edition, International Development, has been tweaked and
improved. You will see that it asks students to focus on an activity designed to enhance
their skills in areas that are important for success in international management roles.
These include assessing where a student stands on key international dimensions.
Concise, Engaging, and ActionOriented Presentation Finally, the fifth edition is

shorter than the previous edition, yet written in a style that does not skimp on content.
We believe this concise yet engaging approach will connect with both students and faculty
alike. Our audiences have regularly provided feedback that they want a “get to the point”
approach in a package that focuses on key issues in depth without getting bogged down
in too much minutiae. This edition better meets this need and permits instructors to aug-
ment the course with their favorite cases or readings. Moreover, international management
is ultimately about application and figuring out what works. Consequently, each chapter
will have plenty of examples and illustrations from corporations around the world. We
also include concrete guidelines and action recommendations in most every chapter. We
aim to make students as excited about international management as we are—whether we
are describing a piece of research or pitching action “takeaways.”
We believe that all these experiential features make for more interesting reading and
better learning of this important material. Ultimately, we hope this approach can help
students translate the learning into more effective action when they “get out there” in
the international management arena.
Intended Audience
Students with limited exposure to international issues will appreciate the basic founda-
tions and concepts that are laid out in each chapter. Students with some international
coursework or work experience, however, will be attracted by the book’s scope and
concise, to-the-point coverage of critical issues. From a pedagogical perspective, the book
will work well as a primary text in a course on international management. It can also
be used to cover the management side of an introductory international business course.
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P R E F A C E
The strong focus on applications, with a variety of applications-oriented features, appeals

to both students and instructors who wish to take a concise, hands-on approach to the
study of international management.
Organizing the Challenge of International

Management
The fifth edition focuses on the four underlying principles of effective international
management that have been used in earlier editions.
First, managers need to understand the broad context of international business.
Specifically, that includes critical trends impacting international management, the legal
and political forces driving international business, and the ethical and cultural dilemmas
that can pop up when business crosses borders.
Second, managers need to master the essential elements of effective interaction in
the global arena. That means understanding how different cultures perceive and process
information, developing skills in cross-cultural communication, and figuring out how to
negotiate successful cross-border deals.
Third, effective international management requires the ability to recognize and take
advantage of strategic opportunities. That often means deciding how best to enter foreign
markets and then figuring out how to operate successfully once there.
And finally, international managers must motivate and lead people from a variety
of cultures and be able to build effective international teams. It also means taking an
international perspective on the hiring, training, and development of employees—if for
no other reason than the rules of the game on factors such as compensation and labor
relations are very different when borders are crossed.
Preview of Chapters
To emphasize these four principles, this edition will include plenty of contemporary
examples, an active writing style and approach, and a heavy dose of the theory-to-
practice approach detailed above.
Chapters 1–3 cover the essential foundations for successful international manage-
ment. Chapter 1 discusses the basics of international competition, trends impacting
international management, and developments in countries and regions around the world.
We wrote this chapter last to ensure these trends and developments are as fresh as pos-
sible for the reader. Next, Chapter 2 focuses on legal and political issues that managers
need to take into account in their international operations. We discuss the different legal
and political systems that exist around the world and their effects on international busi-
ness. The chapter also tackles various types of political risk that managers may face in
foreign markets and what they can do about them. Much of international business is
set within the legal context of trade and transactions and is why we include this chap-
ter here. Chapter 3 examines ethical values and corporate social responsibility in an
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P R E F A C E
international environment. We consider in detail current and enduring ethical issues such
as bribery, human rights abuses and successes and how global firms have risen to the
social responsibility challenge. We conclude this first major section with a new integra-
tive Harvard case that cuts across this chapter content.
The second part of the book includes Chapters 4–6. The effect of culture on
interpersonal interactions is a strong theme throughout this section. Chapter 4 begins
this section by examining culture in more detail. There has been a lot of thinking about
how culture operates, and we present several basic cultural dimensions and their impli-
cations for managing people around the world. Chapter 5 shows how these culture
dimensions can affect employees’ perceptions of their work environment, their jobs, and
the people around them. We also explain how to manage perception problems—such as
stereotyping—in a culturally diverse business environment. Chapter 6 shows how cultural
differences can impede communication and offers advice for improving verbal, nonver-
bal, and written communication in an international environment. Again, we conclude
with an integrative case in international management that addresses the core themes of
the section.
The third part of the book includes Chapters 7–9 and addresses the broad strategic
and operational decisions faced by international managers. Chapter 7 examines how to
manage international conflicts and conduct successful cross-border business negotiations.
Clearly, effective negotiation requires outstanding preparation and an appreciation of
how strategies vary across cultures. Chapter 8 focuses on defining and developing inter-
national business strategy. First, we distinguish among common international strategies
and explain when they might be pursued. This includes detailed coverage of the process
involved in developing winning international strategies. We conclude by discussing how
companies need to ensure that their internal systems are aligned to support their inter-
national strategy to increase chances of success. In Chapter 9, we take things a step
further by considering implementation issues that companies face in executing their
international strategies. We present the various options available for entering foreign
markets, including the pros and cons of each. In essence, each option can work under
the right conditions, whether exporting, licensing, or foreign acquisitions, just to name
a few possibilities. Finally, a third integrative Harvard case that was well received in the
previous edition is included at the end of this section—one that addresses whether and
under what conditions a firm should step into international markets for the first time.
The final part of the book includes Chapters 10–13 and focuses squarely on the
people side of the international management equation. Mishandling people-related issues
can jeopardize even the best strategy, if not the best intentions, of management. Chapter
10 tackles the challenge of how best to motivate and lead employees across cultures.
We show that cultural values can affect how employees behave and that managers may
have to alter their style accordingly. Chapter 11 explains how managers can build an
effective international workforce. That process starts by taking a strategic approach to
international human resource management—one that aligns human resource needs with
the firm’s international business strategy. Next, we discuss the staffing options available
to firms for their foreign operations (e.g., hire locals or send expatriates?) and methods
for developing their international talent. We conclude with a presentation of strategies
xx
P R E F A C E
that firms can use to help expatriates succeed through appropriate selection mechanisms,
training practices, and support systems. Chapter 12 continues this theme by discussing
how to ensure the effectiveness of a firm’s international workforce. That means figuring
out how to best appraise performance and design compensation systems that work for
employees around the world. This can be complex, but tools are available to help.
Chapter 13 is the last chapter of the book and examines some of the most vexing
“people problems” facing international managers. In particular, we discuss how manag-
ers can develop effective international teams, especially in an environment of increasing
diversity. We also suggest ways to strategically manage union issues and labor relations
around the world. These are no small challenges since the scope, purpose, and historical
roles of unions vary dramatically across countries. A fourth Harvard case concludes this
last section—one that deals with the often vexing challenges facing expatriates posted
abroad.
Supplementary Materials
Accompanying this book is a set of supplements:
■ Instructor’s Resource Manual with Test Items includes chapter outlines, plenty of
supplementary lecture materials, including a set of Reality Checks (interviews with
practicing international managers), comments on special text features, teaching notes
for the cases, and recommended videos.
■ PowerPoint Presentations for each chapter that outline chapter material and present
key chapter exhibits as well as some supplementary material. Some website supple-
ments are imbedded within the PowerPoint slides.
■ Test Bank offers both multiple-choice and essay questions for every chapter.
■ Sample Syllabi and related materials will help new instructors get up and running
with their courses and which provide experienced instructors a way to organize their
treatment of material in this book as well as gauge their presentation of material with
others
■ Student-centered activities on the book’s website that will provide forums for student
discussions, additional exercises, links to various websites of interest to international
managers, and a discussion board for hosting debates and information exchanges
about the issues raised in the text (and act as a repository for all the above resources
as well).
xxi
Acknowledgements
Behind every successful book project is a set of professionals who provide the support,
guidance, and advice so vital to making everything click. We are extremely grateful for
the outstanding reviewers who contributed their time, energy, and academic expertise
toward the development of this project across several editions including: Lawrence A.
Beer, Arizona State University; Kristinia Bourne, University of Wisconsin–Eau Claire;
Charles Byles, Virginia Commonwealth University; John E. Call, New Mexico State
University; Mason A. Carpenter, University of Wisconsin–Madison; Norma Carr-Ruffino,
San Francisco State University; Xiao-Ping Chen, University of Washington; Amon
Chizema, Loughborough University; Simon Collinson, Warwick Business School; Arthur
Cyr, Carthage College; Mark Fenton, University of Wisconsin–Stout; Joseph Fontana,
George Mason University; Bob Goddard, Appalachian State University; Farhad Hossain,
The University of Manchester; Donald Hsu, Dominican College; Selim Ilter, St John
Fisher College; Robert Isaak, Pace University; Daniel James, University of Northern
Colorado; Dong I. Jung, San Diego State University; Marios Katsioloudes, West Chester
University of Pennsylvania; Lauryn McManus, University of Central Florida; Amy
McMillan, Louisiana Tech University; Jeanne McNett, Assumption College; Marin A.
Marinov, University of Gloucestershire; Mark Mendenhall, University of Tennessee;
Behnam Nakhai, Millersville University of Pennsylvania; Lynn Neeley, Northern Illinois
University; John O’Del, Rhode Island College; John P. Orr, Webster University; Tara
Radin, Hofstra University; Roy W. Reeber, Hawaii Pacific University; Kathleen Rehbein,
Marquette University; Daniel James Rowley, University of Northern Colorado; Deepak
Sethi, University of Texas at Dallas; Arnold Sherman, University of Montana; John
Stanbury, Frostburg State University; Richard Steers, University of Oregon; Barb Stuart,
University of Denver; and Kara Swanson, Boise State University.
Likewise, we owe an enormous debt of gratitude to our editor, John Szilagyi, and
his staff at Routledge. John has recently retired and we will greatly miss him—he is a
true professional and we have gained many new insights about the publishing business
from him over the years and across several projects. We wish him all the best in his
retirement. We also wish to thank a very patient Lauren Athmer of LEAP Publishing,
Inc., for her talent at using a variety of “motivational” techniques to move us/drag us
along in the writing and editing process. As a result, we have a greater understanding
of the challenges of procrastination faced by students than we did before!
Paul D. Sweeney
Dean B. McFarlin
part I
on a global stage
the context of
international
management
1 ON A GLOBAL STAGE: THE WORLD OF INTERNATIONAL
MANAGEMENT 3
2 LEGAL AND POLITICAL FOUNDATIONS OF INTERNATIONAL

MANAGEMENT 41
3 DOING THINGS RIGHT: INTERNATIONAL ETHICS AND

SOCIAL RESPONSIBILITY 85
chapter 1
on a global stage
the world of international
management
INTERNATIONAL BUSINESS: A WORLD OF CONSTANT CHANGE 5
GLOBALIZATION AND THE GROWTH OF INTERNATIONAL BUSINESS 7
A SNAPSHOT OF REGIONAL TRENDS 9
KEY CHALLENGES FACING INTERNATIONAL BUSINESS 21
MANAGING IN A CHALLENGING INTERNATIONAL ENVIRONMENT 27

O N A G L O B A L S T A G E
Learning Objectives
After reading this chapter, you should be able to:
■ describe today’s competitive environment in international business;

■ identify major trends, both positive and negative, in international business;
■ describe how managers can respond to international business challenges;
■ identify key foundation concepts in international management.
International Challenge
New Balance: Still Running with Production in the United States

Athletic shoes are everywhere, as are brand names such as Nike. The industry’s largest firms
have all of their shoes made in low-wage locations such as China, Vietnam, and Indonesia,
usually in factories owned and run by foreign subcontractors. Started in 1906 by an immigrant
from England, New Balance Athletic Shoe, Inc., is a major player in the athletic shoe industry
worldwide. New Balance also has foreign subcontractors. Stroll down the aisle of a subcon-
tractor’s plant in China and you will see young women performing repetitive sewing tasks
to produce New Balance shoes and earning very little, at least by American and European
standards.
Of course, the idea is that by reaping big labor savings companies can earn much higher
profits. Plus, some argue that developed economies are better off when low-skill, low-wage
jobs can migrate to countries where labor is cheap and plentiful. But New Balance really is
different. Unlike its main competitors, New Balance has 1,300 employees making 7 million
pairs of shoes annually in its five U.S. factories. A few years ago, New Balance opened a
new state-of-the-art research facility at its Lawrence, Massachusetts, manufacturing site to
develop innovations and new products. Overall, New Balance makes about 25 percent of its
shoes sold in America at its U.S. factories.
But what is interesting is that, the enormous gap in labor costs notwithstanding, the
difference in total costs between the Chinese and American plants is not that great. In China,
the total cost of producing a pair of shoes is about $3 less than in the U.S., only around 4
percent of the price for the average shoe. And that 4 percent is manageable, especially since
American production means New Balance can fill orders and change styles more quickly than
its competitors in the U.S.
New Balance narrows the costs of producing in the United States enough to compete
effectively by being extraordinarily efficient. Its American employees produce a shoe from
scratch in less than 25 minutes compared to three hours in China. So, what accounts for
the American plants’ productivity and efficiency? And what role does management play in
all of this? As you read through this introductory chapter, you will notice that change is a
4
T H E W O R L D O F I N T E R N A T I O N A L M A N A G E M E N T
constant theme in international management. Adapting to change often means coming up

with new paradigms, even if they go against what passes for conventional wisdom. After
you have read the chapter, take a look at our closing Up to the Challenge? feature for an
overview of New Balance’s approach.1
International Business: A World of Constant Change

Even if you’re on the right track, you’ll get run over if you just sit there.
—Will Rogers, American social commentator and humorist
Will Rogers’ words are from the early twentieth century. Yet, his observation perfectly
captures the challenge of international business in the twenty-first century. Indeed, Rogers’
words underscore that today’s international managers must be nimble, innovative, and
adaptable. They must bridge cultural boundaries and cope with extraordinary global
competition that changes and evolves at a pace that is faster than ever. Competitors can
pop up quickly from anywhere, including emerging countries (such as China or India),
while new technologies appear overnight.2
Other factors that contribute to this “new normal” of international business include
global trends toward increased outsourcing of components, flexible manufacturing, and
greater reliance on logistics systems that can deliver parts as needed (i.e., on a “just-in-
time” basis).3 These trends have helped China and other emerging nations with cost
advantages, such as labor and materials, attract investment, develop home-grown tech-
nologies, and build competitiveness. Of course, astounding innovations in information
technologies have made it possible for firms to manage inventories, interact with employ-
ees, collect customer data, and track shipments around the world 24 hours a day, seven
days a week.
The ubiquitous availability of information technology also allows companies to
scour the planet for the best talent at the best price. Wireless technologies, along with
clever local partnerships, are allowing companies to reach hundreds of millions of new
customers in poor economic areas of India and Africa with cell phone and other wire-
less services, despite the weak technological infrastructures within those locations.
Overall, technology enables companies to stitch together far-flung outposts as well as
reach new customers, both of which will help grow international business over the
long haul.4
Globalization and the World Trade Organization
In essence, technology facilitates the interconnections between national economies. This

ongoing connecting process, known as globalization, has increased international growth,
particularly in emerging economies. In the past 20 years, the value of international trade
5
has surged over 400 percent to more than $18 trillion annually. As tariffs and trade
barriers slowly fade, the growth in international business should continue. Indeed, just
a 1 percent reduction in the cost of international trade could boost income globally by
$40 billion.5
Of course, plenty of concerns remain in the meantime. For instance, consider the
World Trade Organization (WTO). This governing body is made up of 159 member
countries (as of 2014), and sets the global rules for trade. Determining those rules
typically requires protracted negotiations, the latest series of which is known as the Doha
Round (begun in 2001 and still used today). The WTO also has elaborate mechanisms
to enforce its rulings on trade disputes between members. A key goal for the WTO is
to reduce barriers and stimulate trade worldwide.6
The WTO, however, is also a battleground for national interests and a lightning rod
for criticism about globalization. For example, in responding to the charge that global-
ization destroys jobs and increases the gap between rich and poor, the WTO argues that
freer trade promotes job creation and wealth building over the long haul. Naturally, the
WTO’s critics are unlikely to be persuaded. Regardless, what is not in dispute is that
the trade issues the WTO wrestles with are very complex. For instance, a single dispute
between the United States and the European Union (EU) over banana tariffs (a
government-imposed tax on imports) took several years to resolve. Of course, the WTO
is not the only body that governs international trade. The growth of regional and bilat-
eral free trade agreements in recent years has been enormous. While these agreements
have many advantages and are generally positive, they also can make managing broader
economic issues more difficult and complex, especially as new powerhouses such as
Brazil, China, and India continue to flex their economic muscle.7
Our Plan for This Chapter
Trade agreements and the WTO notwithstanding, international managers should expect
downturns and setbacks to occur, sometimes in the blink of an eye. Overall, grappling
with the speed of change and the increasing complexity of international business
makes the role of management—and the stakes—more important than ever. If you are
wondering how international business leaders view the threats and challenges facing
them, look at Figure 1.1. It summarizes the threat perceptions of roughly 1,400 inter-
national CEOs. As you can see, international executives have plenty of things to worry
about.8
Yet, all companies face challenges and there are many good reasons to be funda-
mentally optimistic about the long-term prospects for international business. Consequently,
the goal of this chapter is to give you a sense of the trends, opportunities, and challenges
facing international managers today. It is also important to sketch out how firms approach
international competition as well as provide a snapshot of the major players in the global
economy. The chapter begins by describing how international business has grown in
recent years, as well as profiling the countries and regions playing important roles in
that growth.
6
Threat Issue Overall Rank % Mentioning
Over-regulation 1st 18%

Increased international competition 2nd 17%
Currency fluctuations 3rd 15%
Price deflation 4th 11%
Loss of critical talent 5th 11%
Global terrorism 6th 10%
Risk to reputation (i.e., anything that might hurt the firm’s 7th 10%
image or reputation)
Cost of capital 8th 8%
Emerging technologies 9th 6%
Corporate governance issues 10th 5%
Figure 1.1 What Keeps Them Up at Night: International CEOs List Their Top Ten Threats.
Source: Adapted from Champion, M. (2004). CEOs’ worst nightmares. The Wall Street Journal, January 21, A13.
Note that the total percentage exceeds 100 since CEOs could mention multiple threats.
Globalization and the Growth of International

Business
Today, many companies look for ideas, workers, materials, and customers everywhere.
Tough competitors can appear from anywhere. As one European manager put it, “The
scope of every manager is the world.” Needless to say, managing that way is not easy.
Among other things, it requires worldwide information networks, a supportive corporate
culture, and the ability to tap into local needs and initiatives when they exist. For instance,
Electrolux, the Sweden-based appliance maker, routinely rotates hundreds of appliance
designers through the eight design centers it has scattered around the world. The idea is
to expose people to different ways of thinking and the often divergent appliance needs
people have in different parts of the world. By doing so, Electrolux hopes to speed up
product development and be more innovative—something it must do to thrive in the face
of tough competition from America’s Whirlpool and China’s Haier brands. But there is
no single answer. For some companies, just letting local managers pursue their own ideas
is a big step forward.9
The Hottest Areas for Growth and Investment
So, where is all the growth in international business occurring? One way to measure
things is by the flow of foreign direct investment (FDI) into a particular country over
several years. More than just capital, FDI also means that managerial knowledge and
technical know-how is flowing into a country from outside its borders. As such, FDI is
a good measure of a country’s prospects on the international business stage, either as
7
Country FDI Inflow (in $ billions)
2010 2012
U.S. 198 168

China 114 121
Hong Kong 83 75
Brazil 49 65
United Kingdom 51 64
Australia 36 57
Singapore 54 57
Russia 43 52
Canada 29 46
Spain 40 28
India 21 26
France 34 25
Sweden 6 14
Mexico 21 13
Turkey 9 13
Developed Countries 696 561
Developing Countries 637 704
Total World FDI 1400 1300
Figure 1.2 Top Foreign Direct Investment Magnets in 2010 and 2012.
Source: Adapted from United Nations Conference on Trade Development (2013). World Investment Report: FDI
Flows by Region and Economy: 2007–2012, available from: http://unctad.org/en/PublicationsLibrary/wir2013_
en.pdf (retrieved November 20, 2013).
an established market or an emerging one. Figure 1.2 lists the top FDI magnets in 2010
and 2012.
The total worldwide inflow of FDI was roughly $1.3 trillion in 2012, with 52 per-
cent of that total being invested in developing countries—the first time developed coun-
tries as a group saw less investment. As you can see from Figure 1.2, the U.S. was the
single biggest recipient of FDI in 2012 among developed countries. Yet, China and Hong
Kong (combined) raked in $191 billion in 2012 to lead the pack among developing
countries. On a percentage basis, Africa was the region with the biggest recent increases
in FDI inflows. Overall, experts predict FDI inflows worldwide will grow in the years
ahead, perhaps reaching as high as $2.0 trillion by 2017. Interestingly, developing coun-
tries are also investors that, collectively, represent an increasing share of where FDI
comes from. What are now commonly referred to as the BRICS countries (Brazil, Russia,
India, China, and South Africa) collectively accounted for 10 percent of the total FDI
outflow in 2012. Indeed, China alone was the third largest investor country in the world
in 2012 after the U.S. and Japan. Clearly, China is an emerging economic power—one
that both attracts significant FDI and has increasing clout as an investor nation.10
In essence, much of the growth in international business continues to occur outside
the traditional economic powerhouses such as the U.S., Germany, and Japan. For instance,
8
China’s economy has expanded by a factor of ten over the past 30 years. Granted, the
U.S. may not be growing fast, but it remains the biggest economy in the world. At $16.2
trillion worth of gross domestic product, the U.S. eclipses second-place China’s $9 tril-
lion. Yet, statistics underscore that trade among the U.S., Japan, and the EU is becom-
ing less important over time while trade with developing nations and trade within regions
is growing. For instance, U.S. trade with Japan shrank after passage of the North
American Free Trade Agreement (NAFTA), with regional partners Mexico and Canada
making up the difference.11
Clearly, the total value of economic activity in a country, or gross domestic product
(GDP), has generally been growing at a much faster rate in developing rather than
developed nations. Consumer demand in developing markets is rising as citizens become
more affluent and have more disposable income. Consequently, many American,
European, and Japanese firms consider developing countries as markets where they can
reach out to populations eager for new products and services as their income rises.
Indeed, companies everywhere are increasingly creating products squarely aimed at
developing markets, where incomes, albeit rising, are still lower than those in the devel-
oped world. This helps explain why Indian firms have designed $23 stoves and $70
battery-powered refrigerators for their local market. Foreign giants such as General
Electric are taking notice, creating cheap, innovative products for developing markets.12
While we tend to think of large firms when international trade comes to mind, do
not forget about small companies. Starting in 1995, firms with fewer than 500 employ-
ees accounted for a bigger share of total manufactured exports than large firms for the
first time. Exports by small U.S. businesses have grown every year since that time, many
facilitated by government agencies such as the Office of U.S. Trade Representative and
the Small Business Administration. In 2010 small U.S. businesses exported nearly $270 bil-
lion, up nearly 70 percent since 1995. Overall, small businesses now account for 98 per-
cent of known U.S. exporting companies (although they account for a smaller percent,
31 percent, of the overall value of U.S. goods exports). Even small start-up companies
are in the mix, often thanks to the Internet—technology that puts customers and out-
sourced help (e.g., for marketing, customer support) in easy reach.13
A Snapshot of Regional Trends

This section offers brief snapshots of important trends in specific countries and regions.
Special attention is paid to key developed nations as well as to their developing brethren.
The Americas
United States
Steady, if unspectacular, economic growth seems to be the watchword for the U.S. in
the near term. In 2014, while low interest rates continued and energy production soared,
corporate investment generally remained weak, as did job and income growth. Throw
in government gridlock and China inching closer to seize the mantle of the world’s
9
Top Five Trading Partners* Top Five Deficit Countries Top Five Surplus Countries
2013 1998 2013 1998 2013 1998
Canada (617) Canada (329) China (–315) Japan (–64) Hong Kong Netherlands
(+32) (+12)
China (536) Japan (180) Japan (–76) China (–57) Australia (+22) Australia (+7)
Mexico (494) Mexico (174) Mexico (–61) Germany UAE (+20) Belgium (+6)
(–23)
Japan (216) China (85) Germany (–60) Canada Netherlands Brazil (+5)
(–21) (+19)
Germany (157) Germany (77) Saudi Arabia Mexico Belgium (+12) S. Arabia (+4)
(–38) (–16)
Figure 1.3 A 15-Year Snapshot of America’s Trade: Goods Deficits and Surpluses with Top Five Partners.
* Value of imports + exports; all values in $ billions.
Source: Adapted from www.census.gov/indicator/www/ustrade.html.
biggest economy and it is easy to see why many Americans are concerned about the
future going forward. In particular, some feel angst about the increasing presence of
Chinese companies buying American businesses (for example, Lenovo’s purchase of IBM’s
personal computing unit) or investing in commercial property (such as a restaurant
complex in Toledo, Ohio).14
Others point to the trade deficits that the U.S. has been running for many years.
For instance, thanks to stronger exports, the U.S. trade deficit in 2013 was just over
$470 billion—a sizeable drop from the $535 billion deficit in 2012. Of course, these
are still large gaps regardless, with the U.S. continuing to import more goods from other
nations than it exports. China is one of the U.S.’s top trading partners and accounts for
a large chunk of annual U.S. trade deficits. That said, the United States does have trade
surpluses with a variety of countries. Figure 1.3 lists countries producing the top five
deficits and top five surpluses with the United States in recent years.15
But the United States remains a huge target for foreign investment and, over the
past 20 years, has accounted for roughly a third of global economic growth. While some
of its advantages are eroding, the U.S. still leads in knowledge creation, innovation,
entrepreneurship, higher education, and information technology. In essence, the United
States has the most creative economic environment in the world.16
Today, prominent American multinational corporations enjoy considerable success
worldwide. For instance, consumer products giant Colgate operates in over 200 countries,
with foreign sales accounting for 75 percent of the firm’s revenues. In 2012, 132 of the
500 largest companies in the world were American. Yet, back in 2002, over 185 of the
biggest firms were U.S.-based. Figure 1.4 presents the world’s ten largest companies in
both 2002 and 2012. Even in this abbreviated list, it is clear that large energy companies
are more dominant now than they were in 2002. Moreover, Sinopec, a Chinese energy
firm, was not listed in 2002, but was among the top ten largest companies in 2012.
This underscores the rapid growth of multinational corporations from developing coun-
tries over the past 15 to 20 years. In 1997, there was only one firm from a developing
10
2012 2002
2012 Revenues Home 2002 Revenues Home
Rank/Firm ($ billions) Country Industry Rank/Firm ($ billions) Country Industry
1. Royal Dutch/ 485.5 Nether- Energy 1. Wal-Mart 240.53 U.S. Retail

Shell lands
2. Exxon Mobil 452.9 U.S. Energy 2. GM 186.76 U.S. Auto
3. Wal-Mart 446.9 U.S. Retail 3. Exxon Mobil 182.47 U.S. Energy
4. BP 386.5 Britain Energy 4. Royal Dutch/ 179.43 Nether- Energy
Shell lands
5. Sinopec 375.2 China Energy 5. BP 178.72 Britain Energy
6. China 352.3 China Energy 6. Ford 163.87 U.S. Auto
National
Petroleum
7. State Grid 259.1 China Energy 7. Daimler- 141.42 Germany Auto
Chrysler
8. Chevron 245.6 U.S. Energy 8. Toyota 131.75 Japan Auto
9. Conoco 237.3 U.S. Energy 9. GE 131.69 U.S. Diversified

Phillips
10. Toyota 235.4 Japan Auto 10. Mitsubishi 109.39 Japan Trading-
diversified
Figure 1.4 World’s Largest Companies by Revenue: Comparing the Top Ten in 2012 and 2002.
Source: Adapted from Fortune. (2003). Global 500: The world’s largest corporations. Fortune, July 21, 106; and
http://money.cnn.com/magazines/fortune/global500/2012/full_list/index.html.
nation large enough to be among the 500 largest companies in the world. In 2012,
however, China alone had 73 companies on the top 500 list.17 NAFTA has dramatically
increased trade and investment among the three signatory countries by gradually elimi-
nating tariffs, import quotas, and barriers to foreign ownership.18
Canada
America’s northern neighbor emerged from the 2008–2009 financial crisis in reasonably
good shape, though it will likely trail U.S. growth rates over the near term. Canada has
low corporate tax rates at the federal level that promote business investment and it
embraces cultural diversity. Yet, it remains joined at the hip to the U.S., with roughly
75 percent of Canadian goods exported to American customers. Indeed, Canada’s rela-
tionship with the U.S. is fraught with awkward comparisons. Canada and the United
States are each other’s largest trading partner. But Canada’s smaller economy (less than
10 percent the size of the U.S.’s) is much more dependent on foreign trade. Canada frets
about keeping up with its giant neighbor, at least in certain respects. Put simply, Canadians
are taxed more and paid less than their American neighbors. Nevertheless, Canada’s
situation is enviable, both as a place to live and a place to invest.19
11
Mexico
Predating NAFTA was the maquiladora sector. Established by the government, maqui-
ladoras are foreign factories that can import parts and materials into Mexico duty free,
as long as they are used to make products for export. Most maquiladoras are in Mexico’s
northern states, adjacent to the primary destination for their exports—the United States.
NAFTA’s implementation was a huge boost to the maquiladora sector. In less than ten
years, maquiladoras created some 800,000 new jobs as foreign companies, including
American household names such as Ford and General Motors, came in to set up shop.
Today, while Mexico still faces significant challenges, including crime and corruption, it
also has a large and open economy where nearly 70 percent of the national GDP comes
from international trade.20
Like Canada, Mexico is inextricably tied to its American neighbor. Indeed, Mexico
sends 90 percent of its exports to the U.S. Because wages have been rising in China,
labor cost differences between Mexico and Asia’s manufacturing powerhouse are now
minimal. Combine that with cheaper and faster access to American customers and it is
no wonder that having Mexico as an export platform is more compelling than ever for
foreign companies such as Honda. Mexico also has some impressive multinationals in
its own right, including Grupo Bimbo, a Mexican food company that recently bought
part of U.S.-based Sara Lee and is planning to invest some $1 billion north of the bor-
der in the next few years.21
South America
Experts now estimate that 30–50 percent of the population of this important region is
now middle class with significant disposable income. Regardless of the precise definition
of “middle class,” the current situation represents a dramatic improvement from 10 to
15 years ago and is largely the result of faster economic growth in the region. The causes
of that growth are multifaceted to say the least, but include a variety of economic and
educational reforms that most expect will continue. Granted, the pace of reforms is
likely to be uneven. Generally speaking, countries enacting the most significant reforms,
such as Chile, have done better than countries that made fewer changes, such as Ecuador.
The region has also been prone to instability because of its dependence on foreign
capital. In short, capital can move in or out of the region quickly, depending on the
whims of foreign investors and external events. Plus, poverty, corruption, and business
infrastructure issues remain regionwide concerns.22
Argentina, Chile, and Brazil are the region’s three largest economies. Brazil and Chile
have arguably been the most successful in recent years. For instance, American and Indian
information technology firms poured into Chile to take advantage of outstanding computer
engineers, low wages, and a modern business infrastructure. Of course, with over 200 mil-
lion people and a $2.3 trillion GDP, Brazil is by far the biggest economy in South America,
and the eighth largest in the world (as of 2012). Brazil has some positives going for it,
including better fiscal policies, demand for commodities and other exports, and growing
offshore oil revenues. Winning the summer 2016 Olympics was also a coup for Brazil,
providing impetus to improve the infrastructure, tackle persistently high crime, and reduce
poverty in Rio de Janeiro. Overall, there is reason to be cautiously optimistic about the
12
long-term future for South America. Many South American countries are looking beyond
the region for trading partners. For instance, over 40 percent of Mercosur (a trading
block including Argentina, Brazil, Paraguay, and Uruguay) exports go to the European
Union and the U.S.23
The AsiaPacific Region
Excluding Japan, the Asia-Pacific region is the world’s fastest growing with a rising share
of global GDP. For instance, growth was expected to average 5.7 percent for 2014, with
15 of 17 countries in the region predicted to exceed the world average. Generally speak-
ing, the developing economies in Asia have been the most dynamic and fastest growing
in the world for some time—expanding over 7 percent annually in the past 10 to 15
years, a rate more than twice that of the rest of the globe. That said, while Asian coun-
tries have some similarities, they also have many differences. Countries that have struc-
tural problems such as high government debt, weak corporate governance, and poor
legal protections, and are also highly dependent on key overseas markets tend to be
most vulnerable to economic shocks.24
China
Over the past 30 years, China’s ascendance has been astounding, with billions of foreign
direct investment pouring in annually. For much of this period, foreign firms coveted
China’s cheap labor and low costs while salivating at the prospect of serving over a
billion increasingly affluent consumers. Yet, the bloom may be off the proverbial rose
for foreign multinationals. Chinese labor costs have risen dramatically, top talent is tough
to find, and the government is trying to steer the nation toward developing more sophis-
ticated products while it encourages more local innovation. These and other factors are
making it harder for foreign firms to do business, much less make money, in China. For
instance, home-grown Chinese firms are now formidable global competitors in their own
right, increasing the pressure on foreign firms (e.g., Alibaba in e-commerce, Huawei in
smartphones and Haier in appliances). Moreover, foreign companies that approach China
as one big market are likely in for trouble. China is a huge and diverse nation with a
variety of regional differences, tastes, and languages (some 400 million Chinese speak
a language other than Mandarin). As General Electric’s CEO Jeffrey Immelt simply put
it, “China is big, but it is hard.”25
Indeed, there are the formidable obstacles that China puts in front of foreign busi-
nesses, including a weak legal system and opaque government policies. China also effec-
tively limits foreign competition in strategic industries, a list that includes financial services
and telecommunications. Business in China is also guided by guanxi (relationships or
connections built on mutual dispensing of favors) as much as by rules and laws. This
can mean a long courtship for foreigners who want to “get down to business” quickly—
perhaps six to twelve months of relationship building, if not more, to build personal trust
and friendships before business issues can be addressed in depth.26
Overall, China’s competitive intensity is extremely high. Competitors are legion and
the pace of business activity is frenetic. In 2000, there were over 360,000 foreign firms
13
in China. In less than ten years, the number had soared to more than 660,000. No other
country has experienced this kind of corporate influx in such a short period. Plus, millions
of small, privately owned firms offer plenty of formidable competition in China. When
we visited China, a manager at a U.S. consumer products firm said besides competing
against other world-class multinationals such as Unilever, the company faced thousands
of local competitors (mostly small, family-run enterprises) just in Shanghai alone!27
India
Inevitably compared to China, India has a $4.7 trillion economy and a population of
1.2 billion. But within a few decades, India’s population is expected to eclipse China’s.
While India is getting ready, it is getting a late start compared to China, with much less
foreign direct investment, a lower literacy rate, and a larger percentage of its popula-
tion in poverty. But the gap with China is closing, especially in India’s southern states.
Indeed, more than 50 percent of the population in these states, where much of India’s
booming technology industry is based, should achieve middle-class status by 2025.
Experts urge the Indian government to keep moving forward and to focus on reforms
in key areas:
■ Accelerate the sell-off of state-owned enterprises and remove restrictive barriers to

foreign ownership of companies.
■ Reform India’s complex and restrictive labor laws.
■ Deregulate various industries and continue reducing tariffs.
■ Encourage private banking and relax currency restrictions.
■ Keep improving the business infrastructure (e.g., roads, ports, sanitation, power).28
India’s most significant impact on the global economic scene is probably in informa-
tion technology (IT) services. In 1999, India’s IT industry had roughly $4 billion in
revenues—a figure that soared to nearly $60 billion over the next ten years. India is
an excellent source of cheap, well-educated, English-speaking high-tech labor for U.S.
firms. For instance, General Electric, IBM, Microsoft, and Intel are among the American
companies with R&D facilities in India. Moreover, leading Indian IT firms such as
Infosys, Tata Consultancy Services, and Wipro Technologies are now world-class
competitors.29
Japan
With a 2012 GDP of nearly $4.7 trillion, Japan is among the top five economies in the
world. Yet, Japan has endured years of weak growth. Recently, the government has taken
more aggressive steps to enact structural reforms that would place the country on an upward
track. That said, the failing value of the yen in recent years has boosted exports of the
complex goods that many Japanese firms make efficiently at home (e.g., Japan’s Hitachi
Construction saw Chinese demand for its power shovels soar while Toyota enjoyed big
profits on cars exported to the U.S.). Nevertheless, some critics say that Japanese firms still
have too much expensive factory capacity at home for things like domestic car production
when much cheaper labor can be had in places such as Vietnam. Other challenges for Japan
14
include high government debt, weak support for entrepreneurship, and an inflexible labor
force—especially compared with many developed countries. In part, problems with Japan’s
debt and its financial system reflect the government’s efforts to simultaneously protect weak
domestic industries (e.g., chemicals, financial services, retailing) and maintain a thriving
export machine. Weak industries hurt the economy, driving up both the cost of living and
the cost of doing business in Japan.30
It would be a mistake, however, to underestimate Japan. Indeed, Japanese companies
are surprisingly dominant in some unexpected global markets not visible to most con-
sumers. For instance, a number of strong, mid-size electronics firms (called chuken kigyo)
have carved out leadership positions in important areas such as semiconductor substrate
and capacitors for electronic devices. These successes play to traditional Japanese
strengths, including strong cultural values of continuous improvement (kaizen) and mak-
ing things (monozukuri). But other Japanese values, including distrust of foreigners,
inhibit chuken kigyo from partnering with, and learning from, foreign companies.
Overcoming this may become particularly important in the years ahead if Japan’s
dominant specialists in electronics want to stay ahead of foreign competitors. Overall,
Japan is a formidable international competitor, its problems notwithstanding. As a nation,
Japan has impressive strengths, including a highly educated workforce, many world-class
firms, and excellent capabilities in technology.31
South Korea
A key player in the region with a $1.6 trillion economy, South Korea has a highly skilled
workforce, an improved banking system, and a burgeoning information technology
industry. It has incredible export strength in a variety of areas—and not just in cars (e.g.,
Hyundai) and electronics (e.g., LG, Samsung), but in heavy industries such as shipbuild-
ing. South Korea faces plenty of challenges too, including an education system that is
extremely rigid, foreign investment restrictions, government bureaucracy, a relatively
inflexible labor market, and a need to continue reforming the chaebol (huge diversified
conglomerates such as Samsung that still account for a big slice of the economy). Although
transparency and accountability have improved, some problems remain in chaebol firms.
On the positive side, the South Korean government has made it easier for foreigners to
own pieces of the chaebol (e.g., roughly 50 percent of Samsung stock is owned by for-
eigners today), although critics charge that, too often, transgressions by the chaebol
continue to be overlooked or treated lightly.32
This may reflect official concern that South Korea must protect firms in strategic
sectors such as electronics and automobiles, especially because they provide jobs and
help support thousands of vendors and suppliers. Others counter that South Korea would
be better off in the long run if the chaebol sold off or shut down losing businesses. In
fact, many chaebol have disappeared over the past several years, crushed by their moun-
tains of debt. A good example is Daewoo, which made everything from fertilizers to
cars around the world, before collapsing. Interestingly, South Koreans are more interested
in entrepreneurship these days and willing to embrace greater risk than ever before.
Indeed, the percentage of South Korean adults working in firms less than four years old
is far higher than in other industrialized countries.33
15
Europe
Over the past 25 years, staggering political and economic changes have occurred in
Europe, especially in Russia and its former satellites. Since the Berlin Wall fell in 1989,
the people of the region have seen more change in a shorter period of time than just
about anywhere else in the world.
The European Union

Today, the European Union (EU) has grown to a nearly $16 trillion economic colossus
with 28 member countries (thanks, in part, to the EU’s currency, the Euro). Where future
expansion will come from is hard to predict. For instance, while Turkey’s application for
membership continues to be controversial, eastern EU members such as Poland advocate
bringing in other eastern nations like Belarus, Moscow’s objections notwithstanding.
Figure 1.5 provides a snapshot of all EU nations.34
Yet, the EU is also facing stern tests about its future. With the exception of a few
member countries (including Germany), unemployment, particularly among younger
workers, is incredibly high. For instance, unemployment among younger workers is push-
ing 30 percent in Portugal and 50 percent in Spain. Indeed, a broader north–south divide
has emerged, with deeply indebted members such as Greece and Italy clashing with
creditor nations like Germany. Then there are conflicts between the 17 member countries
that use the Euro, such as France, and those that do not, such as the United Kingdom.
Indeed, economic growth has been uneven across the EU in recent years. Some members,
such as Poland, have done well by embracing free markets and transforming their man-
agement talent to match. Others, such as Croatia, still have a long way to go.35
Nevertheless, the EU has come far from its roots in the 1950s as a regional economic
partnership among six nations. Indeed, the EU as we know it today was launched in
the early 1990s with the signing of the Maastricht Treaty. The treaty expanded the
boundaries of monetary and economic integration and laid the foundation for the cur-
rent EU model. Therein lies both the opportunity and the challenge for international
companies. On one hand, manufacturing in the EU allows firms to move their products
to any member country without duties or currency hassles—an attractive prospect, to
say the least, and something that has prompted billions in foreign investment in recent
years. A unified market, however, does not mean that Europe’s diverse cultures have
disappeared. So, companies doing business in Europe often need to be highly responsive
to local preferences to do well, the EU notwithstanding.36
As Figure 1.5 suggests, many of the newer Eastern European members of the EU
are considerably poorer than their Western counterparts in terms of per capita GDP (the
numbers are adjusted for price differences across nations) and are more vulnerable to
economic shocks (Poland being an exception). On the other hand, the EU’s newer Eastern
members generally have cheaper skilled labor and faster growing productivity than their
Western EU counterparts. These factors suggest that the EU’s newer members will con-
tinue to be an attractive target for foreign direct investment and, as a consequence, put
pressure on the more established economies of the EU (e.g., Germany, France) to reform
their more costly tax, welfare, and labor systems. Indeed, cost-cutting pressures in
16
Country 2012 GDP Per 2012 GDP

Capita (relative Per Capita in 2012 GDP
to EU average US $ Growth Using
of 100; purchase (purchasing (% change Year Joined Euro,
power parity) power parity) over 2011) the EU 2012?
All 28 EU 100.0 $33,700 –0.4 — some yes

members
All 17 EU 108.4 $36,530 –0.7 — yes
members using
the Euro
Belgium 120 $38,500 –0.1 1958 yes
Bulgaria 47 $14,500 0.8 2007 no
Czech Republic 81 $27,600 –1.0 2004 no
Denmark 126 $38,300 –0.4 1973 no
Germany 123 $39,700 0.7 1958 yes
Estonia 71 $22,100 3.9 2004 no
Ireland 129 $42,600 0.2 1973 yes
Greece 75 $24,900 –6.4 1981 yes
Spain 96 $31,100 –1.6 1986 yes
France 109 $36,100 0.0 1958 yes
Croatia 62 $18,100 –2.0 2013 no
Italy 101 $30,600 –2.5 1958 yes
Cyprus 92 $27,500 –2.4 2004 yes
Latvia 64 $18,600 5.2 2004 yes
Lithuania 72 $22,000 3.7 2004 no
Luxembourg 263 $81,100 –0.2 1958 yes
Hungary 67 $20,000 –1.7 2004 no
Malta 86 $27,500 0.9 2004 yes
Netherlands 128 $42,900 –1.2 1958 yes
Austria 130 $43,100 0.9 1995 yes
Poland 67 $20,900 1.9 2004 no
Portugal 76 $23,800 –3.2 1986 yes
Romania 50 $13,000 0.7 2007 no
Slovenia 84 $28,700 –2.5 2004 yes
Slovakia 76 $24,600 1.8 2004 yes
Finland 115 $37,100 –1.0 1995 yes
Sweden 126 $41,900 –0.2 1995 no
United Kingdom 106 $37,500 0.3 1973 no
Figure 1.5 The European Union: 28 Countries and Counting.

Sources: Adapted from: Europa. GDP Per Capita in PPS—GDP Per Capita in Purchasing Power Standards, avail-
able from: epp.eurostat.ec.europa.eu/ (retrieved January 18, 2014); The Central Intelligence Agency. (2014). The
World Factbook, available from: https://www.cia.gov/library/publications/the-world-factbook/index.html www.cia.
gov/library/publications/the-world-factbook/ (retrieved January 18, 2014).
17
Western EU nations may lead companies there to another round of outsourcing to cheaper
Eastern EU locations, or what one expert called “the China next door.”37
Overall, the EU markets are less efficient and less flexible than America’s for reasons
including onerous taxes, red tape, and rigid labor laws. Such factors could limit the EU’s
GDP growth over time, everything else being equal. In fact, high labor costs and rigid
employment rules are among the reasons that German engineering giant Siemens has
been shifting jobs and production capacity from Germany to lower-cost locations such
as Hungary, Brazil, and China. This underscores the fact that EU firms, especially those
in Western Europe, have been looking outward for places to invest for some time.38
Russia
Turning back to the east, Russia’s GDP was $2.5 trillion in 2012. With a population of
over 140 million, Russia seems to punch below its weight as a market. Despite joining
the WTO in 2012, the country has been weighed down in recent years by low levels of
foreign investment, weak growth, capital flight, and its dependence on oil and gas min-
ing for revenues. Critics blame the government for not doing more to curb corruption,
strengthen the legal system, streamline regulations, and reform banking rules—all things
that would make doing business in Russia easier. Yet, Russia is too large and has too
many attractive assets (such as huge oil deposits, well-educated professionals, and higher
disposal income than many developing countries) to ignore. This explains why compa-
nies such as U.S. chip maker Intel have been there for years—Intel has sunk $800 mil-
lion into its Russian operations since 1999. The firm employs over 1,000 highly skilled,
but inexpensive, Russian engineers who tackle complex problems for the company.39
Nevertheless, Russia faces other challenges. Infrastructure improvements are sorely
needed and Russian firms must become more innovative. The country is plagued by bad
roads, toxic waste dumps, inadequate electric power, and leaking gas pipelines. Finding
the money, much less actually repairing and modernizing Russian infrastructure, will
take years. Finally, as already noted, corruption is a persistent thorn in the side of Russia
and its foreign investors. The following International Insights feature provides a closer
look at corruption in Russia.40
International Insights
Russia: Corruption in the Wild, Wild East

When your own president describes the country’s economy as “primitive” and beset with
“systemic corruption,” you know that there is a problem. Vladimir Putin, president of Russia,
made similar public statements about corruption, noting at one point that in Russia, “anywhere
you go, you have to go with a bribe.” A Russian think tank estimated that corruption cost
Russia 20 percent of its GDP and that 80 percent of Russian firms paid bribes averaging
$130,000 annually.
18
The roots of this are deep, driven by an old psychology in which government officials
see their role as protecting the state (and enriching themselves in some cases) instead of
helping people. As one Russian business owner put it, “You go to the local administration
to get permission for something and they send you to a private firm that will sort out the
paperwork for you, which happens to be owned by their relatives.” Many businesspeople in
Russia often pay bribes just to be left alone rather than to get something done (what Russians
refer to as the “bribe of survival”).
What is the foreign business perspective on Russia, given the environment of corrup-
tion there? Clearly, many foreign multinationals are in Russia to stay—the corruption
challenges notwithstanding. Moreover, multinationals tend to be less exposed to blackmail
and extortion attempts from officials (other than occasional requirements to make “volun-
tary donations to the community,” perhaps in the form of new police cars or fire trucks for
the local government). Of course, that does not mean that multinationals do not get
hassled. Motorola, for instance, once had a shipment of over 160,000 cell phones impounded
when they arrived in Moscow. Government officials at different points alleged that the
phones violated Russian patents, were counterfeit, and were “smuggled” into the country.
In the end, Motorola got most of its phones back—except the 50,000 or so that may
have ended up on the black market (government officials claimed the missing phones
were “destroyed”).
So, how should multinationals navigate Russia’s murky and often corrupt waters? Here
is some commonly offered advice:
Avoid “strategic” industries (e.g., aerospace, oil, telecommunications) where foreign own-
ership is limited and partnerships with unsavory local firms may be required.
Avoid “oligarchs”—rich, powerful businesspeople who amassed vast fortunes through
dubious means and whose political fortunes can shift quickly.
Focus on locations with the best local government reputations (e.g., St. Petersburg has
attracted considerable foreign investment from U.S. multinationals such as Ford, thanks
to local officials who cut red tape and offered tax incentives).
Be prepared to pay bribes for small, routine tasks—such as getting parts through customs
(one U.S. executive noted his company used customs brokers who “build bribes into the
invoice”).
Be prepared for delays if your company refuses to pay bribes (one pharmaceutical firm
noted building facilities in Russia took two to three additional years than it would elsewhere
because of the company’s refusal to pay bribes).
The good news in all of this is two-fold—many multinationals are sticking with Russia and
senior Russian leaders seem to be talking about reining in corruption more than ever. But
whether this translates into significant action that makes a difference remains to be seen.
Experts argue that political competition, combined with independent media and courts, is
what is needed to really make a major dent in Russian corruption. That may be a tall order
indeed.41
19
The Middle East and Africa
The Middle East and Africa represent regions that come with plenty of risk, uncertainty,
and unrealized potential.
The Shadows on the Middle East

Despite the region having many highly sought-after assets, including oil, political unrest
casts a shadow on investment and economic growth in the Middle East. Civil war in
Syria, ongoing Palestinian–Israeli discord, and political turmoil in Egypt are cause for
great concern. Regional nervousness is a continuing boon for American (e.g., Raytheon)
and British (e.g., BAE Systems PLC) defense contractors looking for business. Yet, when
violence occurs in the region, nearby economies and their peoples often suffer. That
includes Israel, a prosperous and stable nation in many ways—one with an open econ-
omy, impressive support for entrepreneurship, and technologically sophisticated compa-
nies. Economic hardship, however, is more pervasive in the Palestinian territories, which
have many unemployed people, fewer assets, and must cope with Israeli restrictions.
Economic hope, however, springs eternal. For example, a cell phone service operator,
Wataniya Mobile, opened in the West Bank. Wataniya’s majority owner, Qatar
Telecommunications, announced that it would invest some $700 million and create
thousands of new jobs in its new venture over the next decade.42
Overall, long-term prospects for regional GDP growth are hard to predict. The Middle
East faces major hurdles to becoming an integrated economic power. Israel is the only
country in the region to resemble a dynamic, modern economy—with a true middle class
and some globally competitive companies. There are also some successes, such as greater
foreign direct investments and more government encouragement of entrepreneurship, in
places as diverse as Dubai, the United Arab Emirates, and Jordan. Outsourcing is on the
rise in the Middle East, led by Indian firms such as Satyam Computer Services and Wipro.
These companies are putting tech support and service centers in the region because of
multilingual populations, growing local markets, cheap labor, and time zones that fall
between the big economies in Asia, Europe, and North America. Nevertheless, countries
in the region generally need to do more to spur foreign investment and create jobs.43
Africa Ascending
Much of sub-Saharan Africa has emerged from years of slow growth, high inflation,
and untapped potential onto stronger footing. Indeed, some of the fastest growing
economies in the world in 2014 were in Africa. The region ranked second in the world
overall, placing behind Asia.
China, India, and several Middle Eastern nations have become big investors in Africa
in the past decade. For instance, Chinese companies have built power plants, roads, and
mining operations across Africa in recent years and continue to invest. All that said,
many African countries are still beset with heavy government intervention in their
economies, official corruption, tribal conflicts, and weak business infrastructures. Indeed,
there are still horror stories in Africa, such as in Zimbabwe, which has suffered under
President Robert Mugabe and can no longer feed itself. But there seems to be optimism
20
across the continent, especially in sub-Saharan Africa. As one Nigerian investment man-
ager put it, sub-Saharan Africa is “where China was 15 years ago.”44
Speaking with one economic voice could help Africa obtain even more foreign direct
investment and better access to overseas markets, especially for its quality textile and
agricultural products. To improve regional cooperation and self-reliance, the presidents
of several sub-Saharan countries have been working to create “sustainable economic
development” across the continent by improving African infrastructure (roads, telecom-
munications, and air service), sharing resources, eliminating internal trade restrictions,
and lobbying for easier access to developed markets.45
Of course, the star of the continent is South Africa. Its peaceful transformation from a
racist, white minority government to an elected majority-rule democracy, led by Nelson
Mandela, inspired the world in 1994. Today, challenges for South Africa include high unem-
ployment (officially around 25 percent), persistent poverty, and insufficient electric power.
In essence, South Africa is both a rich and a poor country, one with extreme income gaps.
But as an emerging market, South Africa has much to admire, including excellent legal and
financial systems, plenty of natural resources, a growing high-tech industry, and modern
roads, ports, and telecommunications. In fact, foreign investment has been rising in South
Africa since 1994. The world’s car companies are a good example of that investment. BMW,
Ford, GM, Toyota, and Volkswagen all operate in South Africa. They see South Africa as
both an existing market and a jumping off point to the rest of Africa and beyond.46
Key Challenges Facing International Business

This discussion of regional trends underscores the fact that growth and prosperity are
not guaranteed. Optimism has to be tempered by an awareness that a variety of factors,
including political uncertainty, corruption, disputes over trade issues, tough new com-
petitors, and fiscal mismanagement, just to name a few, can derail the best-laid plans
very quickly and at any time.
Technological Sophistication and International Volatility
Advances in communications, information technology, and manufacturing processes have

created new foreign markets and helped firms internationalize. Indeed, innovations in
information technology have made innovating itself quicker and cheaper. Firms can put
new pricing models, products, and services on their websites, quickly giving them detailed
information about how customers react. Being able to respond quickly to customers’
needs is a boon in highly competitive international markets. As a P&G executive put it,
“we do the vast majority of our concept testing online, which has created truly substan-
tial savings in money and time.” So, instead of long, complex R&D processes, companies
use technology to quickly run many small experiments constantly with immediate impact.
Fortunately, the cost of installing a digital infrastructure is falling, making it easier for
companies in poorer countries to catch up and tap technology to innovate more quickly.
Of course, realizing the benefits of technology requires an educated population as well
as affordable access. As you might expect, that is a tall order in some cases.47
21
Technological advances, however, do little to eliminate international business prob-

lems that are driven by cultural differences, political upheavals, corruption, and mis-
management. While technology can make life easier for international business in certain
respects, it also can increase complexity in other areas and help accelerate how quickly
new crises hit companies—challenges that management must grapple with. The key for
international management is take advantage of technology while creating operational
resilience and agility in the company to respond to rapid changes in the environment.48
Currency Volatility
Another challenging area of volatility for international management is currency fluctua-
tion. National currencies can move up or down in ways that dramatically impact busi-
nesses—and often very quickly. For instance, the Euro plunged in value against the
U.S. dollar from its introduction in 1999 to mid-2001, only to reverse course, rising
50 percent against the dollar through early 2004. Currency volatility can also escalate
dramatically during economic downturns—for example, from mid-2008 to mid-2009,
the dollar moved up or down against the Euro by at least 1 percent in a single day over
70 times, compared with just 16 times in the preceding year. And in late 2009, countries
such as South Korea began buying dollars to slow its fall, fearful that their own exports
would become too expensive too quickly as their own currencies rose.49
Volatile currency fluctuations underscore the impact of rapidly shifting business
conditions as well as the use of technology by sophisticated investors. Virtually anywhere,
anytime, an investor can electronically move in or out of international currency markets.
Billions of dollars can flow in and out of a country in minutes, whether sparked by a
real crisis or not. Plus, the sheer size of the currency markets (over $5.3 trillion is traded
daily) makes stabilizing currencies difficult.50
Sudden currency updrafts can make a firm’s exports more expensive overnight, increas-
ing the pressure to reduce costs. For example, such was the case for Toyota in 2008 when
the yen rose 19 percent against the dollar. When you consider that every 1 yen increase
in value against the dollar meant a $450 million hit to operating profits, the point (and
pain) is clear and so is the impact on the bottom line for currency anomalies like these.
The reverse is true as well—falling currencies help exporters. For instance, by 2013 the
situation had flipped for Toyota, with the yen down considerably against the dollar. As a
result, Toyota was making an additional $1,500 on each car exported to the U.S. because
of the currency swing. Likewise, the dollar’s slide in recent years against the Euro made
American companies exporting to Europe gleeful. Farm equipment giant Deere & Company
was a good example—its exports surged, at least in part, owing to the weaker dollar.51
Overall, currency volatility clearly increases the risks inherent in international business.
So, what can international firms do to combat wild currency fluctuations? Currency hedging
is an option. Companies can buy currency options that fix exchange rates for a period of
time. For instance, during periods when the U.S. dollar was falling, many large European
firms bought hedges to protect dollar-based revenues earned in the United States. Indeed,
both BMW and Volkswagen stepped up their currency hedging in 2012 because of worries
about currency fluctuations, including in top markets such as the U.S. But hedging is basi-
cally pricey, complex guesswork. Imagine that a company wants to protect $500 million
22
in earnings against a drop in the dollar against the Euro. If the dollar’s value slipped 10
percent, then that $500 million would be worth only $450 million. But the cost of that
protection could run a steep $26 million. Another way to minimize the risks associated
with exchange rate swings is to use local suppliers and make more products in the places
where you sell them. This is referred to as natural hedging. Honda, for instance, manu-
factures three out of every four cars that it sells in the United States in American factories,
isolating U.S. sales against a rising yen. Some companies use both options. Dow Chemical,
for example, uses financial hedges and scatters its production facilities around the world.52
Of course, currency volatility often hits small firms the hardest. While currency
fluctuations may slice a sizeable chunk off a big multinational’s earnings, it is often just
a nibble in the overall scheme of things. Such firms typically have more experience with
currency problems and thus have more options available for dealing with them than
their smaller brethren. Consequently, more small firms are copying bigger firms by shop-
ping for materials at cheaper locations, opening overseas operations in major markets,
looking for foreign partners, and dabbling in currency hedging. Nevertheless, many of
these steps are beyond the reach of small firms that want to sell abroad.53
While technology helps stitch national economies together, it also makes international
business a volatile proposition. One way that firms try to minimize that volatility is by
scattering facilities and suppliers across many countries. Granted, this is hardly
foolproof—creating supply chain complexities and raising transportation costs in many
cases. Moreover, such moves lead to another set of challenges, including managing
people from diverse cultures. These workforce challenges are examined next.
International Workforce Challenges
Also driving the increasing complexity of international management is the need to have
innovative and productive employees in order to compete. In essence, a global talent
race is underway, one that has profound implications for companies, employees, and
countries alike. Today, companies scour the globe to find the most talented employees
at the most reasonable overall cost, with the jobs involved following the talent overseas.54
Offshoring, Reshoring, and Global Job Dispersion

This process of sending jobs overseas, sometimes referred to as offshoring, is not limited
to big multinationals. Indeed, according to some American venture capital firms, up to
75 percent of the small companies that they invest in disperse jobs abroad. For instance,
a number of small American software companies have offshored jobs such as customer
support and software testing to places as diverse as Greece, India, and the Ukraine.55
This example also begs to question what kind of work firms offshore and why.
Clearly, the reasons vary. The stereotype is that firms are merely chasing cheaper labor
for back-office tasks (for example, the prototypical service center overseas fielding calls
from disgruntled credit card holders). While cheaper labor is a motivation, especially
for smaller companies with limited resources, it may not be the only or even the primary
reason. Instead, education quality and location factors (e.g., political stability) may also
be important. When firms are looking to innovate and create new products, labor savings
23
may be a secondary motivation. Indeed, offshoring jobs for the purpose of innovation,
product development, and other knowledge-generating activity has soared in recent years.
When U.S. firms offshore such jobs, their main motivation is often that better employ-
ees, particularly in technical fields, can be found elsewhere. Because fewer Americans
are earning degrees in technical fields and because the U.S. government restricts the
number of foreigners who can be brought into the country, the local talent supply is
limited. As a result, U.S. firms needing technical employees with science or engineering
backgrounds may move those jobs overseas, especially if innovating in particular loca-
tions provides quicker access to foreign markets.56
This is not to say that potential labor savings from offshoring are trivial, but labor
savings in places such as China and India are evaporating thanks to rapidly rising wages.
Indeed, firms’ expectations regarding labor cost savings can be unrealistic. Take call
centers, for example, which are often located in low-wage locations with well-educated
English-speakers. The Philippines is a top two call center location meeting these criteria.
First, the costs of running call centers tend to be underestimated. Turnover is high and
annual pay increases are often automatic, meaning that costs can rise quickly. In recent
years, companies such as Delta Airlines and insurer AXA SA either closed call centers
or turned them over to outside firms to run to save money.57
Likewise, some firms that offshored skilled manufacturing jobs or knowledge work-
ers (such as software designers and programmers) have pulled back the jobs to their
home countries, sometimes referred to as “reshoring.” Their reasons included underes-
timated costs (thanks to rising wages overseas and transportation expenses), cultural
challenges, and better quality and intellectual property control. For instance, companies
as diverse as Google, Ford, GE, Apple, and Caterpillar have pulled manufacturing back
to the U.S. in recent years. In particular, NCR pulled production for complex ATMs
back to the U.S. after it realized company engineers were spending too much time flying
around the world to fix production problems and design glitches.58
Successful offshoring starts with good management—including analyzing the costs and
benefits, hiring the right people overseas, laying out expectations clearly, providing support
to offshored employees, and effectively dealing with cultural differences. Without this, cost
savings are unlikely regardless of the circumstances. For instance, one California-based
security software firm found this out when it started offshoring software development to
India. Its Indian software engineers did not understand how the firm’s software was used
(because they were not told) and, as a consequence, they left out features that customers
wanted in new products. When customers balked, attempting to solve the problem quickly
across a dozen time zones turned into an expensive nightmare that hurt relationships on
both sides until things were turned around. Offshoring requires careful thought about
what jobs should be sent abroad and how to establish effective foreign operations.59
Besides these management challenges, offshoring is controversial, particularly in the
United States. Companies respond that offshoring is part of a worldwide competition for
jobs and talent. Of course, the realities associated with offshoring are complex. For
instance, some argue that thanks to foreign companies that come to the U.S., the number
of imported jobs (which tend to be high paying, skilled jobs) far exceed the number of
exported jobs (which are more likely to be lower paying). Others argue that offshoring
allows American companies to save money, thereby allowing more high-skilled hiring at
24
home as well as cheaper goods and services for customers. Yet, these arguments are likely
to be cold comfort to American employees whose jobs have been lost to offshoring. For
instance, American software application developers and database engineers are, as one
executive put it, “competing with everyone else in the world who has a PC.”60
Nevertheless, controversy is not likely to slow, much less reverse, offshoring. In
fact, in certain parts of the world, offshoring continues to grow. The call center busi-
ness in the Philippines is one such example, thanks to Filipinos’ good English skills,
an excellent communications infrastructure, cheap facilities, and low wage costs.
Cincinnati’s Convergys Corporation has 12 centers in the Philippines—the company’s
Filipino employees do sales-related work and perform debt collection calls. Convergys
is hardly alone. India’s Wipro Ltd recently opened a call center in the Philippines.61
Granted, many of these offshored jobs provide basic customer and service support
functions. As we have already suggested, however, professional jobs, such as scientific
research and pharmaceutical development, are increasingly moving to “centers of excel-
lence” worldwide. In the meantime, developed nations should embrace the idea that
workforces will more than likely continue to disperse around the world in the years
ahead. In terms of high-tech innovation, product development, and manufacturing,
American skills need to be upgraded to keep up. For example, over 20 years of offshor-
ing have undercut the U.S.’s technology base as work shifted overseas—and increasingly,
the skilled jobs that went with it.62
Workforce Quality and Competitiveness

The common bottom line for international firms everywhere is that they need employees
who can handle increasingly complex work. The best workforce usually wins (and keeps)
their jobs in the process. All of this raises a question: what makes for a highly qualified
workforce? Education, on-the-job training, motivation, and computer literacy all matter.
Having a sophisticated industrial base where new technologies can be developed, com-
mercialized, and manufactured helps create and retain demand for technical workers
and professionals.63
Plus, there is little doubt that workforce quality is an important factor for determin-
ing how competitive a country is—or at least how competitive a country’s companies
are in a particular industry. India’s increasingly competitive IT service companies (includ-
ing Infosys and Wipro) are a case in point and are increasingly a force to be reckoned
with. Part of their success is due to India’s well-educated, high-skilled, and experienced
workforce of inexpensive IT professionals. Figure 1.6 ranks the world’s 25 most com-
petitive countries in 2013, 2009, and 2005. You will notice that India is not on the list.
While there is little doubt that India’s IT workforce is superb in many respects, the
country as a whole still faces enormous challenges with respect to raising the incomes
and educating a large swath of its population.64
Indeed, although they have many differences, a common thread among the top
countries in Figure 1.6 is the overall quality of their workforces. But harbor no illusions
about what can be done anywhere given good worker training and the right infrastruc-
ture. After touring several award-winning Mexican plants, one American union official
put it this way: “The workers at those plants make a fraction of what American workers
25
Country 2013 Rank 2009 Rank 2005 Rank
U.S. 1 1 1
Switzerland 2 4 14
Hong Kong 3 2 6
Sweden 4 6 11
Singapore 5 3 2
Norway 6 11 17
Canada 7 8 3
UAE 8 * *
Germany 9 13 21
Qatar 10 14 *
Taiwan 11 23 12
Denmark 12 5 7
Luxembourg 13 12 9
Netherlands 14 10 15
Malaysia 15 18 16
Australia 16 7 4
Ireland 17 19 10
U.K. 18 21 22
Israel 19 24 *
Finland 20 9 8
China (mainland) 21 20 24
Korea 22 28 30
Austria 23 16 13
Japan 24 17 23
New Zealand 25 15 18
Figure 1.6 Rankings of the World’s 25 Most Competitive Countries over Three Timeframes.
* indicates not in top 25 rankings.
Source: Adapted from The International Institute for Management Development’s (IMD) 2013, 2009 and 2005
World Competitiveness Scoreboards, available from: www.imd.ch/research/publications/wcy/index.cfm.
make, but there’s no drop in quality. Most Third World countries are turning out world-
class products.”65
While the U.S. is at the top of the competitiveness heap at this point, there is reason
for concern, particularly in certain industries. Experts suggest that the U.S. industrial
infrastructure is challenged to produce sophisticated new products in some areas because
the knowledge, skills, and people required have largely been lost (owing to offshoring,
for example). Consider the Kindle e-reader. This innovative electronic reader was designed
by Amazon in California but its parts are largely made in Asia (Taiwan, South Korea,
and China) and it is assembled in China. Asian firms have the necessary skills to produce
these parts thanks to their experience making flat-panel displays and other electronic
components, an outgrowth of the migration of semi-conductor and consumer electron-
ics production to Asia—where a large supplier network is now concentrated.66
26
Moreover, the U.S.’s ability to develop world-class products in some areas is eroding
as sophisticated design work is increasingly done overseas. For instance, besides Apple, no
American computer firm even designs laptops in the U.S. anymore. One response to this
concern is that rising wealth, innovation, and workforce competitiveness in certain nations
does not necessarily mean long-term declines in developed countries such as the U.S.
Regardless, complacency is not likely to do the U.S., or other countries, much good when
it comes to maintaining a top-notch workforce and a rising standard of living for citizens.67
Increasing Workforce Diversity

Workforce competitiveness aside, globalization is also bringing people from diverse
cultures and backgrounds together. Many American and European companies aggres-
sively recruit foreign immigrants, especially for jobs requiring specific technical skills.
Demographic shifts within nations are having a similar impact. In the United States, for
example, people of Hispanic descent will represent almost 25 percent of the population
by 2050, up from 10 percent in 1995. At the same time, the share for non-Hispanic
whites will drop to around 50 percent from over 70 percent in 1995.68
A diverse workforce can help firms better serve their increasingly diverse customer base.
Targeting these and other groups in recruiting brings in employees who can help connect
firms with important segments of their customer base. Indeed, P&G had greater success
penetrating the Hispanic population in the United States after it set up a bilingual team of
employees to do so. Today, according to one P&G executive, “Hispanics are a cornerstone
of our growth in North America.” So, companies cannot afford to let antiquated attitudes
permeate the workforce. For instance, key corporate decisions are increasingly made in
cross-functional groups that bring together people from diverse backgrounds. In fact, experts
recommend introducing cultural diversity into decision-making groups and teams, putting
a premium on managers’ abilities to overcome the difficulties of making it all work. But
few companies have created an atmosphere where diversity is taken seriously. In one survey,
less than 10 percent of firms felt they did a very good job of supporting diversity.69
Managing in a Challenging International

Environment
All of this raises a larger question about the impact of today’s challenging international
environment on management. Clearly, the goal of international management is to achieve
the firm’s international objectives by effectively procuring, distributing, and using com-
pany resources (e.g., people, capital, know-how, physical assets) across countries.70
So, what happens if management decides that China (for example) is a place to
develop, manufacture, or sell a product? What then? How should managers manage in
the environment they find themselves in? These questions defy easy answers. Just imagine
all of the contextual challenges facing managers in firms that operate in dozens of coun-
tries. How do they find the best talent worldwide, much less deploy, train, and reward
them properly? After all, business practices, laws, languages, cultural values, and market
structures may all vary across countries, globalization notwithstanding. These factors
27
can effect every aspect of management, including communication, motivation, compen-

sation, employee development, business strategy, and ethics.71
Executives are feeling the pressure, especially those charged with running complex
global empires. For instance, some two decades ago, P&G was already big, with $7 billion
in sales, 50,000 employees, and facilities in 23 countries. But as of 2014, the firm was
downright gargantuan, with over $84 billion in annual revenues, over 120,000 employees,
and facilities in several dozen nations. As one executive put it, P&G today is “a much
more diverse, much more culturally different, much more global company.” Senior leaders
worry about how to manage their vast operations when information and capital fly around
the world in a heartbeat, economies bounce around rapidly, and customer preferences are
fickle. Many want to improve communications and somehow knit together company
outposts to be more responsive to, if not anticipate, changes in international business.72
Overall, this book will provide some guidelines for responding to these challenges.
Today, successful international firms will be led by managers who:
■ value ethnic diversity and have multicultural experience;

■ embrace teamwork and information sharing;
■ act globally where possible while fine-tuning things for local markets where necessary;
■ look to local managers abroad for ideas and give them control;
■ embrace and encourage adaptation to help the firm thrive in a world where change is
constant and sometimes unpredictable;
■ offer employees around the world an implicit contract where good work is rewarded
with decent wages, continuous learning, and recognition.73
Embracing these ideas, however, may require new assumptions about how to run a busi-
ness. For example, many managers still see their roles in control terms, with corporate
headquarters making decisions for foreign subsidiaries. Unfortunately, this does not take
full advantage of local expertise, nor permit a quick response to rapidly changing local
conditions. In fact, international corporations with a rigid control mentality are fading
from the scene. Wholly owned subsidiaries are giving way to networks of alliances between
organizations. Managing companies this way, however, requires flexible managers who
are willing to accept the ambiguity inherent in relationships not based on control.74
Basic Conceptual Foundations
Some of the points in this chapter rest on several management concepts. These are
introduced now to help you with the rest of the book.
Defining Culture
Culture plays a big role in determining success or failure in international management,
impacting how managers lead, hire, and compete in various countries. But what exactly is
culture? We agree with international management expert Geert Hofstede, who defined
culture as “the collective programming of the mind which distinguishes one group or
category of people from another.” This “programming” cannot be observed directly. Rather,
28
it can only be inferred from behavior. Likewise, people are often unaware of the pervasive
impact of culture on their own attitudes, beliefs, and behaviors.75
Culture is a concept that is only useful if it can accurately predict behavior. While
cultural values can change dramatically when borders are crossed, this is not always the
case. Furthermore, many distinct cultural groups can coexist within individual countries.
On the other hand, knowing someone’s national or group culture may reveal very little
about them as individuals. Consequently, international managers must resist automatically
seeing people as fitting into some kind of cultural stereotype. Despite these complexities,
it is nevertheless important to understand country- or group-specific differences in cultural
values that exist and to consider their potential implications for managerial behavior.76
International Corporations and Their Evolution

Firms tackle international business in many different ways. Some export products from
a home base while others have sales facilities in foreign countries to handle their exported
products. Other firms build or buy facilities abroad to manufacture products or deliver
services. The various approaches to international business are discussed in later chapters,
but for now, a basic understanding of how firms approach the international business
arena might be very helpful.
In particular, you have already been reading about multinational enterprises—companies
that operate in many overseas locations (referred to as multinationals throughout the rest
of the book). Multinationals are large, well-developed international firms that operate
facilities to produce products or deliver services in a variety of overseas locations and have
considerable resources invested abroad. The number of multinationals in 1970 was around
7,000—since then, that number has soared by more than ten times. As of 2013, there
were 1,000 multinationals with sales of $1 billion or more just in emerging market nations
alone (e.g., from Mexico to South Africa to Indonesia). Many of the biggest “economies”
in the world are actually gigantic multinationals such as Wal-Mart that have annual sales
that surpass the total GDP of about 90 percent of the countries in the world. Moreover,
the world’s 1,000 biggest multinationals are responsible for about 80 percent of industrial
production worldwide. Interestingly, multinationals, regardless of their nationality, tend to
use management techniques more effectively than local firms. Indeed, an important role
that multinationals play is the dissemination of best practices when it comes to
management—something that their international experiences have helped shape.77
This does not mean, however, that multinationals all compete in some identical
“global” fashion. As discussed later in this book, some multinationals (such as those in
the semiconductor industry) compete in global industries where few, if any, location-specific
preferences exist. Other multinationals, however, operate in industries where a high degree
of local tailoring has to be done. Even within industries, multinationals may operate quite
differently. This variation results from many factors, including culture, firm values, and
the moves of competitors. For some multinationals, the home country is where the head-
quarters resides and where decisions about firm culture, policies, and practices are made.
In others, local operations have more freedom to make their own decisions. Such multi-
nationals tend to be more diverse internally in terms of both culture and structure. Business
practices, technologies, and cultural values may all vary depending on the needs of
29
particular locations where the firm operates. In short, headquarters may offer suggestions
and guidance, but it is up to local managers to make operational choices. This emphasis
is often reflected in multinationals that rely on local managers to run foreign operations,
as opposed to sending an expatriate from the home country to run operations abroad.
Some multinationals, usually referred to as transnational firms, take diversity one step
further. Their firm cultures have evolved to the point where organizational diversity is a core
value. This value is part of the glue that both holds the firm together and allows enormous
flexibility. Such multinationals tend to be run by teams of managers from several countries.
In fact, other than a few practices that are not subject to negotiation, such as indoctrinating
employees in the firm’s core values, these multinationals operate on a diverse basis.78
Multinationals have changed greatly in the last 100-odd years. As shown in Figure 1.7,
multinationals have gradually changed both their geographic scope and their orientation
toward foreign subsidiaries. But while not all multinationals develop in the same way
or at the same rate, they are generally expected to continue moving toward the more
liberal model in the years ahead.
Era Time Frame Description of Multinational Operations
Paternalism 1900–1960s • Firms innovate in the home country, moving products out to
the rest of the world from there.
• As foreign subsidiaries evolved, however, it became clear that
the home office did not have a monopoly on good ideas.
• IBM and Procter & Gamble are prominent examples during this
period.
Expansionism 1970s–1980s • Some firms set up R&D or other units abroad in an effort to
capture ideas in key markets.
• But these outposts had difficulty integrating ideas across the
company and holding headquarters’ attention.
• Plus, establishing outposts signaled to other foreign facilities
that their ideas weren’t needed (e.g., because they weren’t
in a big enough market or important enough to warrant an
R&D operation).
Liberalism 1990s–today • The emerging approach takes a more democratic twist to the
pursuit of new ideas.
• It assumes that great ideas can come from anywhere,
especially in parts of the firm directly connected to customers/
other constituencies. It also assumes that the farther a foreign
outpost is from the home office, the less constrained it is by
corporate traditions and beliefs.
• Foreign subsidiaries are better viewed as peninsulas than as
islands. With that in mind, firms can expect some of their
most innovative ideas to come from the edges rather than
center of the organization. Leveraging those ideas is a key
challenge for management.
Figure 1.7 The Evolution of Multinationals and Their Approach to Innovation: Three Eras.
Source: Adapted from Birkinshaw, J., and Hood, N. (2001). Unleash innovation in foreign subsidiaries. Harvard
Business Review (March), 131–138.
30
Chapter Summary
The purpose of this chapter is to describe the basic landscape of international business and
the competitive environment that it represents. The strongest growth in globalization will
most likely be in emerging markets. An important way to assess such prospects is by exam-
ining the flows of foreign direct investment. To do so, examine trends in specific regions of
the world, including the Americas, Asia-Pacific, Europe, the Middle East and Africa.
Challenges in international business include sweeping technological changes and the
volatility of international business. Rapid currency fluctuations can impact business and what
management can do in response. Small firms are particularly vulnerable to such fluctuations,
especially because their resources are often more limited than those of larger firms. Another
set of challenges involves offshoring, reshoring, and the increasing internationalization of
workforces around the world. Companies are willing to look anywhere in the world to find
employees with the right set of skills, at the right price, for just about any job—including
innovative work and new product development. So, jobs are dispersing throughout the world
as never before and countries are more formidable competitors when they can offer firms
a hardworking and skilled pool of employees.
For international executives, maintaining workforce quality and managing diversity are
important challenges. To meet these challenges, international managers must, among other
things, value ethnic diversity, have multicultural experience, embrace teamwork, and be
open to ideas from anywhere. The chapter concludes with a discussion of the role of culture
in international management and how multinational enterprises have evolved over the last
100 years.
Discussion Questions
1. What are the most important trends in international business?
2. Which are the biggest management challenges for international firms? Why? What can
firms do in response?
3. Which markets represent the biggest opportunities for international firms? Which markets
represent the biggest risks? Why?
4. What is culture? Why is it important for international management?
5. In your view, what are the pros and cons about the influence of multinationals on the global
economic scene?
6. How have multinationals evolved over the years? What are the implications of this for
management?
31
Up to the Challenge?
New Balance Makes “Made in the U.S.A.” Lean and High-Tech

At the beginning of this chapter it was stated that New Balance was unique among athletic
shoe companies in that it manufactures 25 percent of its shoes in the United States. New
Balance has minimized the cost gap with Asian subcontractors to the point where it can
remain competitive while producing in high-wage locations such as the U.S., where it feels
obligated to keep a foothold in manufacturing. Plus, being close to customers in a major
market offers speed and quality control advantages in terms of fulfilling orders and changing
styles.
But making this philosophy work essentially meant shifting from low-tech to high-tech, both
in terms of equipment and employee skills. Borrowing a page from manufacturing methods in
higher-tech industries, New Balance had employees take classes on computerized manufacturing
and sophisticated teamwork so that they could operate in small, flexible teams. Employees master
many skills, switch jobs continuously, help each other out, and take responsibility for production
activities, while employee training is constant and ever-evolving.
New Balance also took a creative approach in adapting high-tech equipment from other
industries to its needs. For instance, the company bought computerized sewing machines
that came with templates designed for other products, then ripped out the templates and
set up facilities to make their own. With the right templates in place, the result was a
technology-intensive manufacturing operation. With a highly skilled workforce to run the
equipment, New Balance factories in the United States need only one employee for every six
that overseas plants using ordinary sewing machines require.
The New Balance story raises some interesting questions. On the one hand, it suggests
that firms in developed countries can avoid shifting production to low-wage locations abroad
by upgrading the skill levels of work at home. Indeed, the reality is that while the overall
manufacturing workforce in the U.S. has been shrinking, productivity has actually been rising,
with the result that American manufacturing output has soared 100 percent over the last
several years. But what are the limits to this? Should we be concerned about them? Moreover,
what are the costs and risks associated with New Balance’s approach? What might happen
if demand spikes up sharply or drops precipitously? Is New Balance at a disadvantage because
it owns and operates some factories, whereas competitors such as Nike do not? Only time
will tell if New Balance’s approach represents a long-term competitive advantage for the
company.79
32
International Development
International Management: Living at 35,000 Feet?

Purpose
To give a snapshot of what life is like as an international manager, to discuss the implications
of that life, and to present some of the execution challenges companies face in running their
international operations.
Instructions
Read the following short case. Then have a class discussion around the questions raised at
the end of the case. Alternatively, your instructor will divide the class into groups of three
to six students and ask each group to consider the discussion questions and develop a list
of their three most important reactions or ideas (20 minutes). If time allows, your group
could then make brief presentations about its findings to the class (20 minutes). You may
conclude with a general discussion about life as an international manager and what implica-
tions that may have for corporations (15 minutes).
Have Manager, Should Travel?
Accounting powerhouse PricewaterhouseCoopers (PWC) is a bona fide global empire, with

some $32 billion in revenues in 2013. Driving that revenue is more than 180,000 employees
serving clients in over 150 countries from almost 800 offices. Ellen Knapp was one of the
executives who helped build that PWC empire. During her tenure as PWC’s chief knowledge
and information officer, Knapp’s role was to expand PWC and keep its empire running well.
As such, she spent much of her time traveling overseas.
Knapp’s was hardly a unique situation. She once survived three international red-eye
flights crammed into less than a week. In the process, she ran into a colleague in London
who was about to endure two such flights in two days. On another occasion, she ran into
an acquaintance from consulting giant McKinsey at the Philadelphia airport. He was bound
for New Delhi while Knapp was in transit to London and Frankfurt.
These days, international travel is not confined to CEOs who hop on corporate jets for
two-week-long business trips spanning a dozen time zones. The growth of international
business means that managers such as Knapp slog through airports as they crisscross the
globe on their firm’s behalf. But at least Knapp could fly business class. Lower-ranking
employees in most companies endure international travel wedged into economy seats.
Nevertheless, how did Knapp survive such grueling travel burdens? Being extremely
organized, dedicated, and optimistic certainly helped, as did being amazingly immune to jet
lag. On the home front, Knapp had few complications because her two children were grown.
Her two administrative assistants also kept Knapp plugged in at the home office. PWC helps
its traveling executives by holding meetings near big airports and providing office support
when they arrive at a company outpost.
33
If you are wondering why executives such as Knapp have to travel overseas so much,
the answer can be summed up in one word: bonding. Most travel is aimed at building rela-
tionships and trust between employees scattered around the world. The idea, at least in
theory, is that over time better relationships encourage more cross-border information sharing
and greater collaboration. That said, some question whether direct, face-to-face contact is
the best, if not only, way to encourage international sharing and collaboration. Clearly, many
believe that relationship building requires plenty of informal face time (e.g., over lunch).
Nevertheless, whether traveling really pays off or not is debatable. But one thing is certain—
it makes airlines happy.
Discussion Questions to Address
1. How does the work life of an executive such as Knapp sound to you? Attractive? Tiring?
Why or why not?
2. How can executives manage this kind of travel if they have younger kids at home? What if
they also have spouses with demanding careers?
3. Is all this flitting around the world really necessary? How might technology be used to
eliminate some of this travel? What are the potential costs and benefits? To whom? The
limitations? Can technology really substitute for relationship building, especially in far-flung
corporate empires?
Source: Adapted from The Economist. (1999). On a wing and a hotel room, January 9, 64; see also:
www.pwc.com/gx/en/about-pwc/facts-and-figures.jhtml.
From Theory to International Practice
Hitting Home: Understanding Your Local “China Syndrome”

Purpose
To conduct an analysis of companies that import from and export to China in your local
environment.
Instructions
Your instructor will place you into small groups to do research, outside of class, in order to
answer the following questions:
• Which companies are major importers from and exporters to China in the local environment
(city, state, province, region, etc.)? What industries do they represent?
• What efforts, if any, are being made to encourage or help local companies to export to
China (or to discourage imports)?
34
For some general background information about China as well as tips for exporting into the
Chinese market, visit one or more of the following links:
• U.S. Commercial Service: www.buyusa.gov/china/en/.
• Canadian government’s Foreign Affairs International Trade: http://infoexport.gc.ca/eng/

home.jsp.
• European Commission’s Trade homepage: http://ec.europa.eu/trade.
Many national, state, and local government agencies provide help to local firms wanting to
do business abroad. For instance, as part of the U.S. Department of Commerce, the Commercial
Service is a government agency that helps American firms do business in China and other
countries. The U.S. Commercial Service has been in existence for over two decades and has
thousands of trade experts in more than 100 American cities and 150 government offices
outside the United States (e.g., in American trade centers and embassies). If the class is small
enough, your instructor may have your groups make brief presentations (10 minutes) about
your findings to the class. This may be followed by a discussion about the level of involve-
ment with China by local firms. Alternatively, your instructor may make this an individual
assignment and have you write a report and ask you to take part in a general class discussion
on the issues raised.
Notes
1. www.newbalance.com/Made-in-the-USA/made_in_usa,default,pg.html; Lamppa, R. (2009).
New Balance celebrates its shoemaking heritage, June 18, available at: www.coolrunning.com;
Martin, E. (2012). New Balance wants its tariffs. Nike doesn’t. Bloomberg Businessweek, May
7–12, 14–15.
2. The Economist. (2009). The long climb, October 3, 3–5; Guillen, M. F., and Garcia-Canal,
E. (2009). The American model of the multinational firm and the “new” multinationals from
emerging economies. Academy of Management Perspectives, 23(2), 23–35.
3. Engardio, P. (2000). The barons of outsourcing. BusinessWeek, August 28, 177–178.
4. Anderson, J., Kupp, M., and Moaligou, R. (2009). Lessons from the developing world. The Wall
Street Journal, August 17, R6; Baker, S. (2004). Jobs go overseas—under water. BusinessWeek,
April 5, 13; Friedman, T. (2004). The incredible shrinking world. Dayton Daily News,
March 6, A8.
5. Avent, R. (2013). Trade’s triple chance. In The Economist: The World in 2014, 129–130.
London: The Economist.
6. See www.wto.org.
7. The Economist. (2013). The World Trade Organization: Unaccustomed victory, December 14,
78–79; The Economist. (2009). Trade agreements: Doing Doha down, September 15, 15–16;
The Economist. (2000). A different, new world order, November 11, 83–85; King, N., Samor,
G., and Miller, S. (2004). WTO rules against U.S. cotton aid. The Wall Street Journal, April 27,
A2; See also: www.wto.org.
8. Champion, M. (2004). CEOs’ worst nightmares. The Wall Street Journal, January 21, A13;
Carpenter, M. A., and Fredrickson, J. W. (2001). Top management teams, global strategic pos-
ture, and the moderating role of uncertainty. Academy of Management Journal, 44, 533–545.
9. The Economist. (2013). Electrolux’s holy trinity, November 4–10, 55–56.
35
10. See http://unctad.org/en/publicationslibrary/wir2013_en.pdf; see also Economy Watch. (2013).

Economic statistics and indicators, available at: www.economywatch.com/economic-statistics.
11. The Economist. (2001). Trade in the Americas: All in the familia, April 21, 19–22, available at:
www.economywatch.com/economies-in-top/; see also http://money.cnn.com/news/economy/
world_economies_gdp/.
12. Bellman, E. (2009). Indian firms shift focus to the poor. The Wall Street Journal, October
20, A1, A18; Cooper, J. C., and Madigan, K. (2004). The economy is showing real muscle.
BusinessWeek, May 3, 33–34; Engardio, P. (2001). America’s future: Smart globalization.
BusinessWeek, August 27, 132–137; www.economywatch.com/world_economy/world-
economic-indicators/world-gdp.html; www.nationmaster.com.
13. Masserman, M., and Zuelke, A. (2013). America’s small businesses find competitive edge
with creativity. Tradeology. International Trade Administration, Department of Commerce;
http://blogtrade.gov; Bruto, D. (2010). Small business, big world. Forbes, available at: www.
forbes.com; Barrett, A. (1995). It’s a small (business) world. BusinessWeek, April 17, 96–101;
Engardio, P. (2008). Mom-and-pop multinationals. BusinessWeek, July 14 and 21, 77–78; see
also: www.ustr.gov/trade-topics/small-business and www.sba.gov/.
14. The Economist. (2013). Working partners, August 25, 23–24; Freedland, J. (2013). The China
question. In The Economist: The World in 2014, 40; Ip, G. (2013). The wind changes. In The
Economist: The World in 2014, 42–43.
15. Fortune. (2003). Global 500: The world’s largest corporations, July 21, 106, available at: https://
www.cia.gov/library/publications/the-world-factbook/geos/us.html; http://latino.foxnews.com/
latino/news/2014/02/06/us-trade-deficit-narrows-by-nearly-12-pct-in-2013/.
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36
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37
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Journal, August 17, R3; Jana, R. (2009). Inspiration from emerging economies. BusinessWeek,
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(2004). Competitive sport in Boca Raton, February 7, 65–68; Levisohn, B. (2009). Dollar
strategies. BusinessWeek, April 13, 56–57; Slater, J., Mallard, W., and Davis, B. (2009). World
tries to buck up dollar. The Wall Street Journal, November 12, A1, A22.
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by the mighty Euro, March 20, 61–62; Levisohn, B. (2009). Dollar strategies. BusinessWeek,
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38
52. The Economist. (2004). Currency hedging: Holding back the flood, February 21, 72; The
Economist, Tested by the mighty Euro; Zaun, T. (2001). As the yen weakens, Japan’s car makers
smile. The Wall Street Journal, April 10, A15, A19; www.bloomberg.com/news/2013-04-12/
bmw-adds-currency-hedges-with-volkswagen-to-mitigate-volatility.html.
53. Aeppel, T. (2002). The dollar’s strength tests the ingenuity of U.S. manufacturers. The Wall
Street Journal, January 22, A1, A10; Cooper, C. (2000). Euro’s drop is hardest for the smallest.
The Wall Street Journal, October 2, A21, A24.
54. Lewin, A. Y., Massini, S., and Peeters, C. (2009), Why are companies offshoring innovation?
The emerging global race for talent. Journal of International Business Studies, 40, 901–925.
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where, January 19, 1–20; Ante, S. E., and Hof, R. D. (2004). Look who’s going offshore.
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J. P., Bunyaratavej, K., and Hahn, E. D. (2009). Separable but not equal: The location deter-
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57. The Economist, Special report: Outsourcing and offshoring—Here, there and everywhere;
Hookway, J., and Cunneta, J. (2009). Philippine call centers ring up business. The Wall Street
Journal, May 30–31, A14; Worther, B. (2009). Firms close back offices in India to cut costs.
The Wall Street Journal, June 8, B1, B2.
Aeppel, T. (2009). Coming home: Appliance maker drops China to produce in Texas. The Wall
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BusinessWeek, August 24 and 31, 19.
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where; Ante, S. E. (2004). Shifting work offshore? Outsourcer beware. BusinessWeek,
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Wall Street Journal, March 3, A1, A10.
The Economist. (2004). The great hollowing out myth, February 21, 27–29; Haberman, S.
(2004). Software: Will outsourcing hurt America’s supremacy? BusinessWeek. March 1, 84–94;
Mandel, M. (2007). The real cost of offshoring. BusinessWeek. June 18, 29–34; Schlender, B.
(2004). Peter Drucker sets us straight. Fortune, January 12, 115–118; Schroeder, M. (2004).
Outsourcing may create U.S. jobs. The Wall Street Journal, March 30, A2.
Hookway, J., and Cunneta, J. (2009). Philippine call centers ring up business. The Wall
Street Journal, May 30–31, A14; Kripalani, M., and Engardio, P. (2003). The rise of India.
BusinessWeek. December 8, 66–78; Teves, O. (2003). Philippines latest to feel jobs surge.
Dayton Daily News, December 6, D1, D4.
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40
chapter 2
legal and political
foundations of
international
management
THE LEGAL ENVIRONMENT OF INTERNATIONAL MANAGEMENT 44
INTERNATIONAL LAW 53
POLITICAL ISSUES AND RISKS IN INTERNATIONAL MANAGEMENT 56
SUMMARY OF RISK FACTORS 70

Learning Objectives
After reading this chapter, you should be able to
identify the major legal systems in use around the world today and understand how they
impact business done within (as well as outside of) a nation’s borders;
link together the elements of the major legal systems with the effect that they have on
international business;
understand political risk and pinpoint its key elements, as well as its effect on global
commerce;
determine risk management methods that can reduce, or even avoid, problems in doing
business across borders.
Crouching Tiger, Hidden Knockoffs: Making It and Faking It in China

Even if you have not had the pleasure of traveling abroad yet, you probably know people
who have. They may have told tales of designer goods being sold on the streets and in back
alleys of Rio, Moscow, Istanbul, and Jakarta—all for pennies on the dollar. Yet, surely everyone
knows that the $20 Rolex watch sold on Silom Road in Bangkok, the $2 Windows 8 disc
bought in the Ziyuangang market in Guangzhou, and the $30 Louis Vuitton purse acquired
on Canal Street in New York City are not the real deal. From Vietnam to Venice, Chile to
Chicago, there is a thriving world market in knockoffs. Yet, the epicenter of this phenomenon
remains in China.
China’s role in this business has been recognized for some time, but what is remarkable
is that, increasingly, counterfeit goods look just as good as the real thing. And this stretches
beyond just material goods to truly important and possibly life-threatening items such as
medications. Pfizer, Inc., received a call from a woman complaining that its cholesterol-lowering
Lipitor tasted bitter. Lab staff in Connecticut could not determine from the look of the pill,
but chemical analysis confirmed that what the woman, and many others, had bought were
fake, causing the removal of 17 million tablets from pharmacy shelves in the U.S. Whether
it is millions of bogus HP inkjet cartridges seized in Brazil, Turkish police impounding knockoff
Buick windshields or fake Viagra, the confiscation of bogus Nokia phones in France, or Korean
authorities uncovering phony Honda motorcycles, a common denominator is that all were
“knocked off” in China.
To be sure, there are clever counterfeiters everywhere, but none take a back seat to
China—a back seat that may have an American GM stamp on it, but which was made illegally
42
L E G A L A N D P O L I T I C A L F O U N D A T I O N S
in Guangzhou. The Organisation for Economic Co-operation and Development (OECD) and
the World Customs Organization estimate that up to two-thirds of all pirated goods world-
wide come from China. In 2011, over 25,000 seizures of counterfeit goods were made by
U.S. Customs, nearly 65 percent of which were Chinese (only a fraction of what slips through
undetected). Indeed, according to some estimates, upwards of 8 percent of China’s GDP
comes from the sales of counterfeits.1 The scale of the activity means that virtually every
industry has been affected by knockoffs: from clothing, to electronics, to luxury goods, and
increasingly auto and motorcycle parts, memory chips, cigarettes, shoes, and (alarmingly)
medications. The World Health Organization (WHO) recently estimated that up to 10 percent
of medicines worldwide are counterfeited at an annual cost of $46 billion to the pharma
industry.
Counterfeiting today combines skilled labor and product knowledge with good distribu-
tion networks. The results can be impressive and attractive to “consumers.” Factories in
Shenzhen, China, for instance, can copy a new Callaway golf club in less than a week. Yimu
is a city about five hours away from Shanghai and could well be called “Counterfeit Central.”
Global buyers can visit some 40,000 shops to buy products in bulk—90 percent of which
are well-done imitations. Sony PlayStation controllers or Cisco routers take only a little longer
than the Callaway drivers to replicate. As one expert said, “If you can make it, they can fake
it”—even extending to a Mitsubishi elevator that was discovered to be an imitation when
the building owner called the firm for service.2
The trouble is that counterfeiters are getting really good at faking it, leading some
company execs to say that it “takes a forensic scientist to figure it out.” GM has had to
cut apart brakes and batteries and do chemical analysis to determine whether products
were real, while Coach has had to cut apart luxury handbags to confirm a set of imita-
tions. This speaks to the skill of the counterfeiter, but also to the fact that some licensees
keep the designs and blueprints of former Western partners. New Balance recently sued
a contract manufacturer in Guangzhou for selling knockoffs that looked exactly like their
shoes as far away as Europe. And, it is not just exports. Chinese consumers can shop at
a store that looks amazing like Ikea (down to the blue and yellow colors and the naviga-
tion arrows on the floor), then go eat at stores that are identical to Subway (including
the logo and sandwich sizes, despite the fact that China uses the metric system!) and
then have dessert at “Dairy Fairy,” which features colors and products just like Dairy
Queen. A store identifying itself as an Apple Store in Kunming has the same layout as a
true Apple store and their identical logo—selling real iPads and iPhones, although Apple
had no affiliation with them. These may be as, or more, alarming for domestic firms since
retail spending in China will rise by two-thirds from 2011 to 2015, reaching the $4.3
trillion level.
So, what can be done about this epidemic? As you read this chapter, consider options,
both legal and political, that can be used to stem the rising tide of counterfeiting and piracy.
Then, take a look at our Up to the Challenge? feature at the end of the chapter for some
suggestions.3
43
The Legal Environment of International

Management
In Chapter 1, we looked at both developing and longer-term trends in international
management that together provide background for your reading of the remaining chap-
ters. We will apply that background here in Chapter 2, where we will examine the
features of the many political and legal systems in use around the world, as well as the
role these systems play. Laws are the written codes of conduct that guide and restrict
the actions of companies and individuals and there are three main systems used by the
majority of countries in the world today. Information about these legal systems and the
differences and implications of each approach is critical for those doing business across
borders, as non-compliance could result in monetary losses and other negative impacts.
The second half of the chapter looks at political issues that emerge in international
business. These issues may be even more important for global managers to know as
laws may be constrained, altered, or ignored altogether because of global politics. What
is more, if political power changes hands, the legal framework may also be altered. For
these reasons, multinationals should closely monitor the political situation occurring at
home and abroad and may also engage themselves in political activity in order to better
operate their business.
Legal Systems Across the Globe
Several systems have been devised for categorizing the different types of legal systems
within countries. Although no one approach covers every legal system in operation, an
approach that helps familiarize us with cultural variations among laws is presented in
Figure 2.1.4 The figure shows that the number and types of laws are varied and complex.
Yet, most prevalent systems are civil law and common law.
Civil Law
Civil law is the most common legal system, used in over 80 countries.5 Also referred to
as code law, this approach is based on an elaborate and detailed set of rules. At its core,
the civil law system operates on a detailed set of regulations about what is right and
wrong. In Western culture, this legal system can be traced back to Roman times (around
the fifth century b.c.). Major developments have included the Napoleonic Code and its
spread throughout French colonial possessions during the nineteenth and twentieth
centuries. It was a major advancement from previous feudal laws and was established
to outline that laws could only be applied if they had been published and communicated
to all citizens, as well as to prevent judges from refusing justice. In addition, the impact
of German civil code on Germany’s colonial possessions also advanced the role of the
civil law system. Most European Union states, as well as Greece, Indonesia, Japan,
Mexico, Turkey, and many South American and African countries, are examples of those
that use the civil law system. Because of the detailed code of legal regulations, there is
consistency among countries in the conduct of legal proceedings, especially in contrast
44
Type of Legal System Characteristics of the System
Civil law • codified

• based on abstract principles
• predictable because of elaborate code
Common law • based on precedent
• emphasis on procedures
• flexible
Islamic law • religious/faith-based code
• codified and predictable
• applicable to daily life
Communist/socialist law • based on ideology
• based on bureaucracy
• minimal private rights
Sub-Saharan African law • community oriented
• based on custom
• group-based outcomes
Asian law • social order/harmony stressed
• low use of legal mechanisms
• bureaucratized
Figure 2.1 International Legal Systems.

Source: Adapted from Richards, F. L. (1994). Law for Global Business. Boston, MA: Irwin.
to the common law system. Code law typically involves less interpretation than other
legal systems, including common law, because stipulations are concise and codified and
more directive.
Common Law
Common law is practiced in over 30 countries, including the United Kingdom and most
of its former colonies, such as the United States (except Louisiana), Canada, Australia,
Ireland, Pakistan, and Malaysia.6 Instead of relying on elaborate preexisting codes, com-
mon law uses the balance of previous cases (or precedent) to resolve legal disputes.
Because of the focus on the case at hand and its similarity to previous cases—instead
of an application of general principles or codes—there is great emphasis on procedural
issues in common law. A judge in a common law system is less active than those in civil
law systems, typically controlling the courtroom by functioning as a neutral referee. Yet,
judges do exercise the power to interpret the law and its application to the case at hand,
whereas in civil law, there is little room for judicial interpretation. In common law
approaches, the lawyers for the plaintiff and defendant are expected to present evidence
and develop the legal case in order to resolve the dispute. In the civil law system, how-
ever, a judge takes a much more directive role in the proceedings, including the decisions
about what evidence will be presented to the court.
45
To those unfamiliar with the common law system, rulings seem widely discrepant,
often changing from year to year and even case to case. The effects of previous rulings,
court interpretations, and legal modifications lend themselves to some inconsistency.
Because of the elaborate specifications featured in civil law, there is considerable stabil-
ity in statutes. Being influenced by precedent is a plus for common law in that it is a
more flexible system than code law. But, this also means that common law can be more
adversarial and that parties work hard to detail elements of their cases based on a large
body of sometimes contradictory rulings. A good contrast between civil and common
law is provided by comparing legal proceedings in Japan and the U.S., as we show in
the accompanying International Insights feature.
Courting Trouble: American-Style Litigation and Lawyers in Japan

Before 2005, foreign law firms in Japan were required to follow rules that did not apply to
Japanese firms. For instance, foreign firms had to first list the name of their resident partner
in Japan, followed by a phrase meaning “foreign business lawyer,” and only then display
their trademark firm name. So, on their office doors, business cards, stationery, and even in
the directory of the American Chamber of Commerce, the Tokyo office of the well-known
U.S. firm of Coudert Brothers was called “Stevens gaikokuho-jimu-bengoshi Coudert Brothers.”
Yet, foreign law firms (gai-ben) say that these naming rules were only a minor irritant
compared to other restrictions. For example, they were not permitted to advise on Japanese
law or even to employ Japanese lawyers who could give advice. Foreigners were not allowed
to join with national firms to get around the restriction and were barred from lucrative arbi-
tration proceedings. For years, the Japan Federation of Bar Associations opposed the opening
of the nation’s legal market by supporting the above restrictions. In 1990 there were fewer
than 50 gai-ben (mostly Americans) registered in Japan and only about 350 there 20 years
later.
Additionally, the bar exam in Japan restricted all but a very few Japanese college
graduates from becoming lawyers. The passage rates fluctuated between 2 percent and
3 percent for most of the post–World War II era. (Consider that about 65 percent of those
who sit for the bar exam in the state of Ohio, U.S.A., pass the exam.) This meant that only
about 500 lawyers each year were admitted to the bar in all of Japan. Many believed that
the 20 to 1 ratio of lawyers in the U.S. vs. Japan reflected values steeped in years of social
norms and business practice. Japanese businesses were often organized into a close network
of relations (keiretsu) and disputes could be handled informally or through agreed-upon third
parties.
The head-on, aggressive legal style of American lawyers was also anathema to the
Japanese, while formal litigation is viewed as a last resort in Japan. Consider some of the
American behavior that Japanese would find offensive: Within 24 hours of a major accident
at a Union Carbide plant in India, American lawyers were on the ground soliciting clients,
46
and in four days they were back home having already filed lawsuits in U.S. courts (where
judgments would be of higher authority than in India). The Japanese react very differently
to these situations. After a Japan Airlines (JAL) flight crashed near Tokyo, the airline’s presi-
dent, Yasumoto Takagi, humbly bowed to families of the victims and apologized “from the
bottom of our hearts.” He vowed to resign once the investigation was complete. Next of
kin received condolence payments and settlements with the airline; only one lawsuit was
filed and it was quickly resolved.
This all seemed to change as the 1990s came to an end. Perhaps as a result of a period
of economic stagnation and national deregulation, more and more legal disputes occurred.
In part because of this, Japan began undertaking a series of steps to transform the nation’s
education system in order to meet the need for more attorneys. In 2004, for the first time,
the Japanese government allowed universities to begin graduate law programs. In the decade
since, 74 new law schools have opened. The first graduating classes (of more than 3,000)
began to take a less restrictive bar exam in 2006. Now, a graduate degree is required to sit
for the bar exam, whereas before, anyone over the age of 18 could take the test. More
lawyers also began to enter private practice in lieu of government or business. And, more
American-style court outcomes also started to emerge. For example, Sumitomo Bank and
Mitsubishi Financial squared off in court after a desired purchase fell apart.
Despite this shift, however, we are certainly not predicting that Japan will be just like
the litigious U.S. Indeed, as of 2006 there was still only one lawyer per every 5,800 Japanese,
a tiny fraction compared to the 1 to 270 U.S. figure. As of 2009, there are already signs of
oversupply, especially because accountants complete a fair amount of legal work. Prior to
2006, the proportion of associates who made partner was very high (35 percent) by U.S.
standards, but it appears that this number may be tracking downward. The Japanese economy
apparently has just not needed the number of attorneys being minted at law schools, resulting
in an oversupply. The Mishimura law firm, for example, has doubled in size since 2004 and
is now the largest law firm in Japan (with 450 lawyers). No layoffs are planned, but some
employees are wary. Others, however, are optimistic and point to Japanese experience with
down markets and generally predict that the “legalization” of Japanese society will continue.7
Impact of Code and Common Law Systems

If common law emphasizes the active role of attorneys making their case, then there
should be a greater need for attorneys and litigation than in civil law countries.8 Figure 2.2
presents some data that support this claim. The left side of this figure shows the per
capita number of lawyers in a variety of civil and common law countries. In general,
there is a tendency for countries with civil law (such as South Korea, Japan, and France)
to have relatively few lawyers, whereas common law countries (such as the U.S., Canada,
and Pakistan) have a relatively high number of lawyers. In fact, the U.S. alone has nearly
40 percent of the world’s lawyers, whereas Japan seems to have only a small fraction
of this percentage. Figure 2.2 also provides further data on this point; it shows the tort
costs as a portion of GDP across different countries. This measure refers to the costs
(legal and damage awards) associated with lawsuits involving products (such as
47
Country Number of Lawyers Country Tort Costs

per 100,000 People (as % of GDP)
Pakistan 508.4 United States 2.20

Singapore 396.0 Italy 1.70
United States 312.0 Germany 1.1
Belgium 214.0 Spain 1.0
Germany 190.1 Belgium 1.0
Canada 168.5 Japan 0.8
Australia 145.7 Switzerland 0.8
United Kingdom 133.8 U.K. 0.7
Japan 101.6 France 0.7
Italy 81.2 Denmark 0.6
Brazil 69.1 Poland 0.6
France 49.1
India 34.4
South Korea 7.7
China 4.2
Figure 2.2 Number of Lawyers and Tort Costs in Various Countries.

Sources: Cherry, T. R. (2006). U.S. tort costs and cross-border perspectives: 2005 update. New York: Tillinghast-
Towers Perrin; The Economist. (1994) Frequency of lawyers across the globe, March 5, 36.
automobiles and cigarettes) and services (such as malpractice). The U.S. (at 2.2 percent)
has a very high proportion relative to a set of other industrialized nations (about three
times as much as Japan, which is a civil law country).9 These costs are significant. To
put the U.S. figure into context, consider that tort judgments cost $260 billion in 2005,
which translates to about $880 per person.
We should note that the tort costs are not driven solely by the form of the legal sys-
tem. A number of factors that are responsible for the differences are presented in Figure 2.2,
including health care systems across those countries. Many countries have national health
care that mitigates lawsuits, whereas malpractice judgments against doctors alone cost
about $30 billion in 2009. Even within countries with a stable legal system, tort activity
can vary, as it did in the U.S. when the relative growth of tort costs tripled from 1970 to
1990.10 Furthermore, managers should be aware of important differences even among
similar systems. The U.S. and the U.K. are common law countries, yet the discovery pro-
cess in the U.S. is extensive and open. A defendant’s counsel is well aware of the witnesses
that will be called by the prosecution and they may also depose those witnesses to find
out exactly what they will testify. In the U.K., however, no extensive discovery process
exists. Often, a defendant will simply be provided with a list of potential witnesses and a
brief summary of why they were called. Likewise, contingency fee arrangements (whereby
an attorney might take 40 percent of the trial judgment) are common in the U.S. but are
considered unethical in the U.K., where clients pay hourly rates. It is common in the U.K.
for the losing party to pay trial costs and attorney’s fees of the opposition.11
48
Islamic Law
Islamic law relies upon religious stipulations in the Koran—the holy book of Islam.
Islamic law is also known as sharia (or God’s rules) and functions as both a moral and
legal code. While the Koran is not, strictly speaking, a code of law, it includes covenants
of relevance to business, including admonitions to honor agreements and to observe
good faith in business transactions. This legal system considers that God’s law was given
to the prophet Mohammed. Some experts go so far as to claim that by the end of the
tenth century, religious scholars had determined that divine law had been translated and
clarified sufficiently and that no more substantial interpretation (ijtihad) was necessary.12
In practice, however, there is a good deal of debate about the application of Islamic law
to more contemporary issues, and thus it is typically practiced as a hybrid mixed with
civil and common law components.
As with the other legal systems, there are differences across the approximately 30
countries that embrace Islamic law (or parts of it). Yet, the fact that much of the code
was developed centuries ago and that some of it endures today with relatively few
changes can create challenges for multinationals, particularly Western ones. Consider
the basic principle in many Western countries of interest earned on an investment. Islamic
law requires obedience to the principle of riba, which prohibits the collection of interest
on loans in deference and respect to the poor. Speculation is also taboo under sharia,
yet risk and speculation are an essential part of many financial systems. Money provided
as capital must be backed by collateral. And, if financial instruments are traded, they
have to sell for face value. An advantage of this approach is that this has prevented
many banks from repackaging debt. As a result, many Islamic banks avoided the
trouble associated with collateralized debt obligations and other toxic investments that
so many others experienced in the late 2000s.13
Islamic courts have acted consistently with such principles. A federal court in Pakistan,
for example, ruled that interest earned on an investment was non-Islamic and thus ille-
gal. The Pakistani Supreme Court subsequently sided with that court, and even went
further by ruling that over 20 laws dealing with financial and banking issues were in
violation of Islamic law.14 A government commission formed in response to the Court’s
ruling recommended that a banking system without interest be instituted. Several banks
challenged the rulings, as did the finance minister, Sardar Asif Ahmed Ali, who said that
the ruling would negatively affect foreign investment and the treatment received by
Pakistan from international agencies such as the World Bank.15
To overcome some of the practice problems that occur in international commerce,
Muslim businesses have devised some unique approaches. In Kuwait, Saudi Arabia,
and Malaysia, for example, banks have charged up-front fees for a loan in lieu of
interest payments or have created leasing arrangements that comply with Islamic law.16
Some U.S. banks have developed similar creative financing arrangements to address
the Koran’s prescriptions. For example, when Dr. Ala-ud-Din, a dentist in San Jose,
California, wanted to buy a house in the most expensive U.S. real estate market, he
faced problems. Fortunately, a small Islamic financing company actually bought the
house for Dr. Din and leased it to him over a 15-year period that eventually made
him the owner.17 Banks in some countries, eager to be seen as respectful of sharia
49
principles but also eager to do business, try to uphold the spirit of the law by doing
the same thing. Many times they will engage in ijara—they will acquire a capital item
for a firm and then lease it to them or sell it at a mark-up to reflect the risk taken
by the bank. Some firms have used this approach and variants to handle foreclosures
and defaults.18
Many people who live in Islamic law countries have seen newfound wealth and are
seeking ways to put that to use. Despite its current financial challenges, Iran has the
largest amount of sharia-compliant assets under management as of 2007 ($154 billion),
three times as much as Saudi Arabia. What has resulted is a huge rise in Islamic equity
funds and bond issues. Aggressive banks will also issue interest-free bonds at a discount
to par.19 In its 2008 Islamic Funds Report, leading professional services organization
Ernst & Young estimated that monies in Islamic bond funds (sukuks) rose from just
over $1 billion when first issued in 2002 to nearly $50 billion in 2007.
In 1999, there were just about a dozen such funds but this figure grew to about
200 in 2006. To be sharia-compliant, however, there can be no investment in firms
that sell alcohol, tobacco, pork-related products, conventional financial services,
entertainment, and more.20 Experts estimate that this still leaves more than half of
the Standard and Poor’s (S&P) 500 companies (e.g., Microsoft, SWA, and Nike) in
compliance. They also estimate that in 2008, the amount of Islamic assets under
management was about $800 billion, although some believe this figure was closer to
$4 trillion.
Sharia compliance can be tricky. Consider that investment in a manufacturer of
women’s clothing could be a violation because the company may make clothes that do
not cover the whole body. To many, whether or not the eventual user is Muslim is
irrelevant. Even firms included on the Dow Jones Islamic Market Index are not immune
to such analysis, as was the case for Malaysia, which solved these interpretation problems
by creating a national sharia board. Groups such as the Accounting and Auditing
Organization for Islamic Financial Institutions and the Institute of Islamic Banking and
Finance are having increasing influence. This process is driven by scholars, not financiers,
who act as a spiritual rating agency in conjunction with banks and funds.21 It is easy
to see why Islamic entrepreneurs are thinking broadly about Muslim-specific ventures,
including such ideas as social networking platforms, as illustrated in the following Global
Innovations feature.
Global Innovations
Social Networking: Islam Style

With nearly 1 billion users globally, it seems as though everyone has a Facebook account. Growth
in older users (women and men over 55) has been tremendous. These social networking sites
provide a way to connect with nearly anyone in the globe and to cut across many social (and
50
physical, ethnic, racial, gender, etc.) boundaries. Further, no one is turned away (as long as you
are over the age of 13) and there are few, but reasonable, restrictions on use (no spamming,
nudity, etc.). Is there room for another social networking site—one that is more specific in scope,
as well as more defined for a group than for individuals, than Facebook?
Some investors from Turkey, Russia, and Kazakhstan think so and are on the verge of
launching what they hope is the next big hit in the social networking world–Salamworld.
The company’s directors believe that there is a huge market for a Facebook-like site for
Muslims—one based on Islamic values and law. The founders believe that a platform that
promotes an Islamic community (rather than Western-style individualism) will be a hit in the
market. Existing products contain content that is not appropriate, says the chairman of
Salamworld, as “there are 250 million Muslim Facebook users because there is no halal
alternative.” (Halal is Arabic for “lawful” or “permitted.”) “We’ve created a halal alternative
that addresses the needs of the modern Muslim.”
That alternative includes a positive view of Islam, something the developers believe is of
value today. But, more than that, they want to connect Muslims to other Muslims and,
because they are businesspeople, they want to make money. A beta version of the site was
recently released and is to be followed by launches in 17 other countries in short order. In
addition to pages of photos, videos, and posts that characterize other social media products,
Salamworld will provide an e-library of books on Islamic history and heritage, city guides for
Muslim attractions (such as mosques, centers, restaurants, etc.), and counseling from certified
imams. Funding has been secured for the first three years of operation and Salamworld
already has offices in 12 different countries. Their goal is to have 50 million users within five
years—an attractive number to advertisers. There are over 300 million Muslim Internet users
and the research firm Halafire estimates that the value of halal-type products and services is
near $1 trillion.
But, the going is not likely to be easy. You cannot just “like” an advertiser. Ziad Mokhtar,
for example, a partner at a Cairo-based venture firm, says, “Facebook doesn’t contradict
Islam, so there’s nothing wrong with the current product.” He says that the Salamworld
group would be better off developing applications (apps), and points to the failure of Muslim-
based predecessors. Muxlim.com launched in 2006 (when Facebook had only 10 million users
and $52 million in revenue) and recently failed. At least two other platforms with the same
business proposition have also failed. And, obviously, Facebook now presents a much bigger
challenge. Another challenge results from an ambiguous definition of what is halal and what
is haram (unlawful or prohibited). The firm does tout that it will have a strict filtering process
based on what is acceptable content in various countries (e.g., Indonesia, Malaysia). Salamworld
also points to the fact that Facebook uses filters and other constraints and that this is a
“dynamic” process too.
It remains to be seen if Salamworld will be able to stake out its position with Muslim
users. It will probably be decided on good old-fashioned and relatively universal business
lines, as Sultan Sooud Al-Qassemi, a Dubai-based investor, stated that “the social networking
area is already overpopulated . . . if they don’t give customers what they want, they simply
won’t migrate from Facebook or Twitter.”22
51
Other Legal Systems
There are other legal systems in operation today, including socialist and communist or
bureaucratic law and sub-Saharan African law, as well as combinations of systems.23 In
China, for example, the legal system is a complex and dynamic combination of several
systems, leaning toward civil law. Chinese law now represents an interesting case, one
that should be watched closely by firms eager to enter and capture that market. In 2004,
at the National Congress of the Communist Party of China, Hu Jintao introduced a
far-reaching plan to overhaul laws dealing with the nation’s burgeoning market economy,
which some consider the biggest economic change since Deng Xiaoping’s introduction
of the “socialist market economy.” Many believe that this reform will yield internal
benefits, such as reduction in bureaucratic corruption. Experts such as Professor Li
Shuguang at the China University of Science and Law voice this view: “China has been
operating under a market economy for 20 years, but it doesn’t even have such basic
laws as a bankruptcy law or a monopoly law to ensure fair competition.”24
This gap in bankruptcy laws rose to prominence during the worldwide economic
recession that also slammed China. In 2008, over 300,000 factories closed (many small
ones). If this had happened within the U.S., owners could file for bankruptcy protection
from creditors and even external funding to continue operating. Reforms enacted after
Hu’s speech were supposed to provide similar protections in China, but they were complex
and few judges understood the laws. As a result, many business owners shut their factories
down, sometimes in the middle of the night, leaving behind the mess for workers, suppli-
ers, and others. In Dongguan alone, for example, there were 673 cases of owners aban-
doning their factories (affecting over 100,000 workers owed $44 million). Nevertheless,
these reforms and a very robust economy will continue to help China over time.25
Differences aside, many feel that legal systems around the world share more and more
in common as decades pass. It remains to be seen if this is actually the case and opinions
vary, as we illustrate with one example in Figure 2.3. There, data collected from over
Highest-Ranked Countries Lowest-Ranked Countries
Rank Country Rating Rank Country Rating
1 Denmark 9.21 52 Bulgaria 3.00

2 Austria 8.94 53 Portugal 2.85
3 Iceland 8.93 54 Indonesia 2.75
4 Finland 8.91 55 Romania 2.58
5 Hong Kong 8.78 56 Mexico 2.46
6 Norway 8.78 57 Croatia 2.42
7 Australia 8.71 58 Russia 2.39
8 Netherlands 8.66 59 Poland 2.11
9 New Zealand 8.61 60 Argentina 2.03
10 Canada 8.57 61 Venezuela .55
Figure 2.3 Ratings of the Fair Administration of Justice in Various Countries.

Source: Adapted from IMD (2006) The World Competitiveness Yearbook, 2006, Lausanne, Switzerland: IMD.
52
10,000 executives in over 60 countries is presented on views about whether justice is

administered fairly. More developing economies fall at the bottom of these. The U.S. ranks
at #23 (rating = 6.87, with higher ratings equating to better justice), a drop of seven places
since 2002. China is ranked #37 (rating = 5.45). Things can change quickly and the next
such survey may show considerable change. All this suggests that one additional source
of regulation that multinationals need to pay attention to is international law.
International Law
While no single body of law or code applies across borders, some sets of rules or guide-
lines do exist. Moreover, some important agreements have been reached over the years
that can serve as relatively clear and important guidelines for international law. These
are important because: (a) they have resulted in a number of standing organizations that
seek to promote international commerce law, and (b) each has a big impact on the
conduct of international business.
GATT/WTO
The General Agreement on Tariffs and Trade (GATT) is one such agreement that affects
international commerce. GATT resulted from a 1948 conference of 53 nations concerned
with the effect of protectionism and high tariffs on the world economy. The purpose
was to extend fair and similar trade policies to all other GATT members, a so-called
“most-favored-nation” status that provided a stable set of preferential tariffs. Currently,
153 nations are members of the World Trade Organization (WTO), which was the 1995
successor to GATT, and others are in the process of seeking membership (e.g., Algeria,
Belarus, Iran, Serbia). Member nations are responsible for 95 percent of all world trade.
The membership process can prove long and contentious, averaging about five years if
the process goes well. China’s 1986 application for entry into the WTO was initially
delayed by a public fight between the United States and the EU over insurance. One
complicating factor was whether AIG, the largest insurance company in the United States,
should continue to receive preferential treatment by China at the expense of its EU
competitors.26 China finally became a WTO member in 2002. Russia waited the longest
to hear about its application, some 19 years.
Once it becomes a member, however, a nation is required to make its tariff and
other business laws consistent (“harmonize”) with guidelines or it is liable to face rebuke
and sanctions from the WTO. Membership requires compliance with the more than 60
major agreements that are part of the WTO and many specific stipulations which were
negotiated in lengthy sessions or “rounds.” For example, the Uruguay Round lasted 87
months and the still-running Doha round began in 2001, with several major impasses
occurring since then.27
While the WTO has resulted in several positive outcomes (such as stiffer guidelines
regarding intellectual property), it has also been criticized. For one, the organization is
often seen as too slow—perhaps because over 150 countries are involved in the negotiation
process and because of the periodic process involved.28Additionally, there are some escape
53
clauses in the WTO structure that allow countries to have disparity, not harmony, in
their tariffs on a selected few products (as the U.S. has done in the past for textiles,
steel, and motorcycles).
Countries have become increasing aggressive in filing complaints with the WTO in
recent years. For example, the EU complained that subsidies provided to Boeing presented
an unfair advantage to Airbus in 2002, and complaints by Brazil and Canada moved
the WTO to open an investigation into U.S. farm subsidies in early 2008. Complaints
come from all quarters—some feel that the WTO has a reputation as a bully, whereas
others (such as The Wall Street Journal) say it is indecisive and powerless.29 There is
also a trend for countries to act on their own to strike deals with a few others, possibly
undercutting WTO influence.30
Resolving International Disputes
The mere presence of an agreement to oversee trade does not ensure a lack of conflict
between countries. Instead, there is considerable trade and legal disagreement among
countries. Resolving any disputes across borders can be and is very complex. This is
partly because the trade conflict may be viewed or treated differently by international
and domestic laws. The U.S., for example, has been castigated by some countries for
trying to restrict U.S. and foreign exports to nations it is in conflict with, such as Cuba
or Iraq. They claim that the U.S. action violates WTO stipulations, whereas U.S. officials
point to domestic laws and constraints that force their hand. An important question in
situations like this is: where should the issue be resolved? Which court or country has
or should have jurisdiction in situations like this?
Source of Jurisdiction
One of the most important examples of this issue happened in 1984, when one of the
deadliest industrial accidents in history occurred near Bhopal, India. Union Carbide
India, Limited (UCIL), an Indian corporation, operated a chemical plant near Bhopal.
An accident, allegedly resulting from negligence of the operators, was catastrophic. Winds
blew a lethal gas into the densely populated city and the death toll was staggering. Over
2,100 people lost their lives and nearly 200,000 others suffered injuries, some of which
were debilitating. It is important to note that UCIL was incorporated under Indian laws
and its stock was traded publicly on the Bombay Exchange (Bombay is now Mumbai).
A majority of its stock (50.9 percent) was owned by Union Carbide Corporation (UCC),
a U.S. company; 22 percent of the stock was owned by the Indian government; and the
remaining 27 percent by private Indian investors.
Immediately after the accident, American lawyers traveled to India and signed up
many Indian clients (most all of those affected were Indian). Within four days of the
accident, the first of over 100 legal actions was filed in the U.S. District Court. To jus-
tify the filings in U.S. courts, the argument was made that the American parent corpo-
ration (UCC) controlled the subsidiary (UCIL). Union Carbide countered by claiming
that they no longer had operational control over this or the other seven UCIL plants in
India; plant operation was terminated at least a year before the accident. They claimed,
54
therefore, that Indian courts were the correct forum to hear the case. All parties (UCC,
the U.S. lawyers, and the victims’ families) were of course, aware that any damage
awards would probably be substantially higher in U.S. courts. The U.S. Circuit Court
of Appeals ruled in 1987 that India was in fact the appropriate forum to hear the case,
provided that UCC submit to the jurisdiction of Indian courts and agree to satisfy any
judgment reached against them. Eventually, Union Carbide (U.S.) reached an agreement
with the Indian Supreme Court to pay $480 million to the victims, a relatively small
amount by U.S. standards.
In a more far-reaching case, an Australian court ruled in early 2003 that a flamboy-
ant Australian mining mogul (and rabbi), Joseph Gutnick, could sue New York-based
Dow Jones & Co. (owners of The Wall Street Journal Online) in Australian courts.
Rabbi Gutnick claims that an article published in the U.S., and distributed via the
Internet, defamed his reputation. The ruling let Gutnick avoid U.S. courts where free
speech traditions would likely have been a dead end and enter Australian courts where
defamation laws gave him a good chance of winning. This left The Wall Street Journal
Online to defend itself in this distant venue; they settled the case in late 2004. Many
companies paid close attention to the case as it raised troubling issues for cross-border
commerce. For example, what if an Englishman sues an American publisher for defama-
tion and the American firm must defend itself under the British legal code? Libel laws
in the U.S. place the burden on the plaintiff to show intent to defame, whereas the
burden falls on the defendant in British courts. Or, what might happen to an American
firm that made a movie with nude scenes? Could they be prosecuted in those countries
that ban such scenes, such as Kazakhstan?
The Wall Street Journal is read online in hundreds of countries and one implication
is that it would have to heed laws in those countries. Another case was brought forward
by a Saudi businessman, Yousef Jameel, in Britain against The Wall Street Journal for
defamation. He claimed that the article incorrectly linked him to a list of contributors
of money to al-Qaeda. The case, however, was dismissed by a high court in the U.K. in
2005 without ruling on the jurisdiction or location issues, because it was read by only
a few people. While many companies are watching these cases closely, some others have
already acted. Intuit, the database software maker, has pulled its products from countries
such as France as a protective reaction to avoid libel, product liability, and other legal
actions.31
These cases raise issues about whether foreign companies are responsible for the
effects of their products and alliances in foreign markets and illustrate that it is difficult
to decide which country’s courts and laws apply to Internet and other such situations.
Several legal principles apply. One of these is the principle of sovereign immunity, or
the general protection of a country or leader from civil suit or criminal prosecution. An
interesting example recently occurred when a deep-sea treasure-hunting company in
Tampa, Florida (U.S.), found over $500 million in coins, silver, and gold on a Spanish
galleon sunk by the British off the coast of Portugal in 1804. The firm spent millions
locating and salvaging the find. Spain disagreed that the U.S. firm had the right to keep
the treasure and filed suit in the U.S. to claim the booty as theirs, according to maritime
law. U.S. courts ruled in Spain’s favor and dismissed suits against the country based on
sovereign immunity. Spain flew two C-130 cargo planes to Tampa to recover the massive
55
treasure. Likewise, a law passed in 1789 by the first U.S. Congress, called the Alien Tort
claims law, although inactive for centuries, has recently been used by non-U.S. citizens
to sue in U.S. courts over what are claimed to be violations of international law com-
mitted overseas. For example, a recent suit was filed in the U.S. on behalf of Nigerian
refugees against Royal Dutch Shell (an Anglo-Dutch firm). It alleges that the country
aided the oppressive Nigerian regime in abusing workers and other serious violations.
The case has reached the Supreme Court and justices have raised questions about why
the case belongs in a U.S. court, since it has nothing to do with the U.S. other than that
a subsidiary of Royal Dutch Shell is in the U.S. A ruling was expected in July of 2014
that will have far-reaching effects for this little-used law from the late 1700s.32
As illustrated by these cases involving governments and cross-border issues, problems
may be the result of political issues surrounding the legal ones.
Political Issues and Risks in International

Management
We have shown that it is important to be aware of the prevailing legal system operating
in any one country, but legal systems can be impacted or changed altogether by the
prevailing political situation. This can have far-reaching consequences on the conduct
of business in that country. Many multinationals are experienced at evaluating the
political environment of their home country. They may have less experience, however,
with making such judgments about other countries. It is easy to understand that it is
tough for a multinational to run smoothly in times of great political strife, revolution,
or war. Less obvious, however, is the fact that there are many other sources of risk for
international managers to consider. In this part of the chapter, we will first define
political risk, give examples of various forms of business risk, discuss predictors of risk
used by firms, and then talk about ways to manage or reduce that risk.
What Is Political Risk?
Political risks are the actions by groups of people or governments that have the poten-
tial to affect the immediate or long-term viability of a firm. This definition encompasses
a large number of events—all the way from a revolution that results in confiscation of
a firm’s operations and assets, down to small changes in the tax code. Some of these
directly involve legal issues (such as a law that does not permit exports to a certain
country). Although they may be based on legal code, their enforcement or existence itself
represents a form of political risk for a multinational.
Many of the factors involved in determining political risk are difficult to predict or
anticipate, even for an expert in international politics. For example, many experts believed
that Iraq would not invade Kuwait in 1990 and therefore did not consider the potential
negative effects on operations in that country. Conversely, many thought that the Chinese
economy was bound to cool off after several years of remarkable growth, but growth
did not abate. While there is no doubt that the Middle East is generally viewed as risky,
there are forms of risk inherent in most areas of the world. For example, the EU severely
56
restricts Japanese auto imports and the United States has a history of tight control over
foreign investment in the banking industry and strong government support of agriculture,
both of which are due to internal political reasons.
Because even experts have difficulty with political predictions, it would be difficult
for business leaders to anticipate all of the political risks affecting global business.
Nevertheless, because of the potentially calamitous effects of political events, manage-
ment needs to investigate political risk before entering a new market, and continually
monitor political events that may affect ongoing operations. To accomplish this, some
firms maintain and consult up-to-date descriptions of the political environment in an
effort to predict the effects on their operations.
Types of Political Risk
What is the nature of the many political risks involved in international operations? Some
feel that there are too many to account for, and this may be true. Nevertheless, there
have been some efforts to help companies respond by classifying political risks into
manageable categories. One system divides types of threats or risks into three main
categories. These include risks resulting from (1) the political environment, (2) prevail-
ing domestic economic conditions, and (3) external economic relations.33
Figure 2.4 presents examples of each of these three main categories, and we will
talk about each of these in turn. Please note that in this figure numbers are assigned to
each risk variable. This effort to quantify many different threats to doing business in a
particular country has two main purposes. If you sum up the total scores for each
country, you can get a relatively accurate way to compare the risks of doing business
internationally. By quantifying specific types of risk, a company can target and work on
specific threats. For example, if there are severe restrictions on money transfers from a
country that a firm otherwise finds attractive, the system can focus its entry efforts on
dealing with that threat. Perhaps the company could strike a deal with the government
that would reduce such restrictions for a reasonable period of time.
Political Environment Risk

First, there are many types of political variables that could present a risk to conducting
business. For instance, the stability of a country’s government and political system are
important sources of uncertainty. In recent years, we have seen the effects of dramatic
and sometimes violent changes in political systems, and these changes have had major
negative effects on the multinationals operating in those countries.
Perhaps the most important risk faced by firms in such situations is nationalization.
This occurs when a government forces the transfer of ownership from private to state
control. The height of this activity occurred from the 1960s through the 1970s, during
which time over 1,500 firms were nationalized by about 70 different countries. Industries
that were capital-intensive and based on indigenous resources such as crude oil production,
mining, and steel were most susceptible to nationalization. The reasons for government
takeover of an industry are many. For one, a new government may wish to show that it
is tough—tough enough to face up to foreign powers and businesses. A government may
57
Type of Risk Examples Minimum Score Maximum Score
Political/ Stability of political system 3 14

economic Possibility of internal conflicts 0 14
environment External threats to stability 0 12
Degree of economic control 5 9
Dependability as trading partner 4 12
Provides constitutional guarantees 2 12
Effectiveness of public administration 3 12
Quality of labor relations/social peace 3 15
Domestic Size of population 4 8
economic Per capita income 2 10
conditions Economic growth, last 5 years 2 7
Potential growth, next 3 years 3 10
Inflation, last 2 years 2 10
Openness of cap market to foreigners 3 7
Availability of high-quality labor force 2 8
Ability to hire foreign nationals 2 8
Availability of energy resources 2 14
Regulations on environment/pollution 4 8
Degree of infrastructure development 2 14
External Import restrictions 2 10
economic Export restrictions 2 10
relations Foreign investment restrictions 3 9
Ability to enter into partnerships 3 9
Protection for brands, trademarks 3 9
Restrictions on money transfers 2 8
Currency revaluation previous 5 years 2 7
Balance of payments condition 2 9
Amount of oil/energy imports 3 14
International financial standing 3 8
Currency exchange restrictions 2 8
Figure 2.4 A Method for Rating Political Risk across Countries.

Source: Adapted from Dichtl, E., and Koeglmayr, H. G. (1986). Country risk ratings. Management International
Review, 26, 4–11.
also nationalize a company because of its value to national defense or because of the
power that industry may wield globally. The crude oil industry is an excellent example of
this goal. At the beginning of the century, most crude oil operations were foreign owned.
Through the decades, especially during the 1970s, oil operations were nationalized—so
much so that most oil production facilities are now domestically owned.34 Recently, Bolivia,
Venezuela, and Ecuador have all engaged in this process. In 2006, for example, Bolivia’s
President Evo Morales nationalized the oil and gas industry by sending in troops. As the
largest investor in Bolivian energy, Brazil was the biggest loser in that action.35
58
If a government nationalizes an industry or company and then compensates the

multinational that is affected, then that action is called expropriation. Many countries
(including the U.S.) recognize the right of a country to expropriate assets via the sover-
eign immunity principle we discussed earlier. Here, this principle means that no nation
has the right to judge or challenge the internal actions of another state, provided that
state has proceeded justly.36 Of course, the meaning of just action is complex and open
to interpretation. Nevertheless, it appears that a government cannot expropriate property
or other assets unless three requirements are met:
1. The expropriation must be for a public purpose.

2. The action must be performed in a nondiscriminatory way—foreign investors must be
treated the same way as domestic investors.
3. Investors must be provided prompt and adequate compensation for their equity
holdings.
Courts have typically ruled that if a sovereign government acts consistently toward
domestic and foreign firms, then full compensation may not even be necessary.37 The
mass nationalization of the crude oil industries by many countries in the Middle East
and North Africa in the 1970s is an example of expropriation since foreign and domes-
tic firms were typically offered compensation for their losses. Although there may be
long-term negative effects when a country expropriates (such as future reluctance to invest
by foreigners), usually an agreement is reached that both parties find at least acceptable.
When nationalization discriminates against foreign firms by offering little or no
compensation for loss of property, however, this action is called confiscation. In this
case, courts have typically ruled that property owners are entitled to full compensation.
Regardless of a favorable court ruling, confiscation can be devastating and there are
many recent examples. For instance, in the years following World War II, governments
in China and Eastern Europe confiscated a great deal of private property with little or
no compensation to foreign investors. Cuba did the same following the communist
takeover in 1959, and more recent examples include Venezuela, Chile, Peru, and
Zimbabwe. Although expropriation and confiscation have been relatively rare since the
early to mid-2000s, firms should be mindful of the risk. When it does occur, the effect
is substantial. Consider BP’s experience in Russia in 2008, where it was forced to cede
control over its Sakhalin oilfield to Russian companies.38 One tactic used by some big
Russian firms was to pay public officials to raid offices of BP (or other foreign business
competitors) and make them subject to criminal investigations.39
Figure 2.4 shows that many other political events can happen. Internal strife and
violence may result in disruption of production and productivity as well as more impor-
tant things such as threats of injury and possibly even death to employees or their
families. Likewise, radical political activity such as terrorism and other forms of violence
have created great hardship and problems in many different countries,40 including the
U.S., India, Indonesia, and many more.41 Unfortunately, one such example is the dramatic
increase in crimes such as kidnapping. While Mexico may not be the first example that
comes to mind, kidnapping has skyrocketed there over the last six years. Latin American
countries in general have some of the highest kidnapping rates in the world. There are
59
about 3,000 kidnappings each year in Colombia,42 resulting in millions of dollars of

payout money. Up to one-third of executive time is spent on security issues and coor-
dination while in Colombia.43 See the following International Insights feature for more
detail on this serious topic and what firms can do about it.
In Harm’s Way: The Danger of Doing Business Abroad

Among all of the business success stories over the last decade, one is not particularly well
known—the explosive (and growing) “industry” of kidnapping. While no international agency
keeps precise records, a non-governmental organization (NGO) that is headquartered in the
Netherlands estimates that there were 25,000 confirmed kidnappings in 2007. Because of
mistrust of government officials in many countries, resolutions of kidnapping are often done
without their involvement. So, this figure may be closer to 75,000. Nearly half of these crimes
occur in Latin America, with Mexico leading the way, although kidnapping is becoming more
prevalent globally. Some kidnappings are politically motivated and make the news, such as
kidnapping, and subsequent rescue, of Colombian presidential candidate Ingrid Betancourt,
3 American (Northrop Grumman) contractors, and 11 Colombian police in 2008. They were
held by rebels in the jungle for over six-and-a-half years.
But, experts believe that this case is the exception. Most kidnappings involve the old-
fashioned profit motive and this is why the abduction of wealthy individuals and executives
has metastasized into a worldwide business. In fact, U.S. businesspeople are victims of nearly
100 violent attacks each year while doing business in foreign countries, recently affecting firms
such as Adobe, Chevron, Halliburton, and Schlumberger. Criminals target tech executives and
their children in India, oil company workers in Nigeria, ship operators off Somalia, and affluent
businessmen in Asia. Forbes reports that the frequency of kidnapping, robberies, and other
crimes rose steadily throughout the 1990s into late 2008. Between 2005 and 2007, nearly
500 non-Iraqi workers (44 Americans) were kidnapped. A third of the Americans and one in
seven others were killed outright, even though ransoms of nearly $100 million were paid.
Africa has its share of problems too. In the Niger Delta, 150 oil industry workers were
kidnapped for ransom. Shell, Chevron, and Transocean have all grappled with this problem.
An oil engineering firm, Willbros Group, left Nigeria after nine of its employees were kidnapped
by militants. In Haiti, 150 Americans have been kidnapped since 2004. Most victims were
taken while visiting family during holidays and involve relatively small ransoms.
But, nowhere has the rise been as steady as in Mexico. Powerful drug cartels have
“diversified” their portfolio by expanding into kidnapping, with a focus on businesspeople.
A particularly brazen event occurred recently when armed members of the Zeta cartel abducted
two Americans in Austin, Texas. They were moved in a car trunk to Dallas before Dallas police
rescued them thanks to a tip from a third American who had been kidnapped but who
escaped. Even Mexicans were shocked recently when the 14-year-old son of Alejandro Marti,
the wealthy owner of a Mexican sporting goods chain, was kidnapped. A $500,000 ransom
60
that was paid to the La Flor gang did no good. Sadly, the boy was killed and his body later
recovered in a car trunk. Demonstrators took to the street after the arrest of the ringleader,
a former Mexico City police detective. Still, about two people a day are kidnapped in Mexico,
leading the U.S. State Department to issue travel alerts for visitors to Mexico.
Oddly, all of this has given rise to a cottage industry surrounding this increasingly popular
crime—that of private security companies that provide information as well as personal security and
negotiation skills. Kidnappings and ransom insurance are an example of this growth: 60 percent
of Fortune 500 firms carry this insurance for their employees. Firms such as Chubb Insurance have
seen their global premium revenue jump 15 percent each year since 2000, generating $370 million
in 2010. Insurers, in turn, contract with consultants who size up the kidnappers, deal with their
demands, negotiate the ransoms, and determine when to pay. Data show that this is effective:
victims are four times more likely to survive if they are insured. In total, the kidnapping industry
racks up about $1 billion a year, not counting the $500 million portion for the perpetrators.
So, what are businesspeople to do? Experts say that terrorists often target high-profile
executives before they even set foot in a country. Increasingly, the lower and mid-level employee
is also feeling the negative effects of crime, yet they are the ones least likely to be protected by
a security service. How can they—or anyone, for that matter—travel and do business more safely?
One way is to follow the advice of Chuck Vance, a former Secret Service agent who worked for
three presidents and now has clients in over 1,500 companies in more than 50 countries (www.
vancesecurityusa.com). He suggests to “learn how to blend in with the scenery.” You may become
a target simply because you look very foreign and wealthy. Leave your Rolex watch and your
Armani suits at home. Rent a mid-sized Ford rather than a Mercedes. Fly commercial, as opposed
to the corporate jet. Criminals monitor the airports and use this as a marker for a good target.
Fly non-stop, as take-offs and landings are the most dangerous times. If you are one of Vance’s
famous clients and are willing to spend the money, he will eliminate trouble ahead of time. Agents
will travel to the country in advance of your visit to scout the airport, your proposed routes, and
your hotel. If you cannot afford these services, Vance recommends that you do your own home-
work by investigating the country that you will visit and contact the U.S. embassy and State
Department before you go. One final piece of advice from Vance is to “think like the terrorist.
If I were going to knock me on the head, where would I do it? When would I strike?” More
than 85 percent of all kidnappings occur on a weekday morning, on a public highway while the
victim is on the way to or from work. This means that you have to stay alert and vary your daily
routine. Do not eat every night at the same bistro at the same time, or go jogging every morning
at 7 a.m. Swap cars with other employees unpredictably and avoid cabs. Do not share any
personal information, including your hotel name or room number, cell phone number, or the like.
Give out your work address and office phone number at most. After all, history shows that
wherever international business goes, bandits are sure to follow!44
Figure 2.4 also presents other forms of political risk. Although less sensational in their
effects, they are probably more common. For example, the climate surrounding a country’s
labor relations is something to consider in every region where a multinational might do busi-
ness. As Chapter 13 discusses, labor regulations vary dramatically, and some are not favorable
to business. It is important to review those relations periodically in the countries in which the
company already has a presence. Regardless, like the other specific examples of political
threats or risks, each can be evaluated and scored by the concerned company.
61
Domestic Economic Conditions as Risk Factors

Figure 2.4 also presents a number of domestic economic criteria that could make a
foreign investment more or less risky. Domestic conditions such as per capita income
and growth rate and the presence of roads, airports, and communication systems can
add or reduce the amount of risk a company may face. Ordinarily, good infrastructure
support reduces risk and thereby facilitates entry and expansion of business. At the same
time, however, risk can present opportunity. Take, for example, the telephone infrastruc-
ture in Hungary, where in the early 1990s there were only 96 phone lines per 1,000
people (the U.S. rate was 545 phone lines per 1,000 people), and the installation of a
new home land line required a five-year wait. A U.S. firm, Qwest, viewed this as an
opportunity and entered the Hungarian market with their cellular division. Business
boomed; they immediately received over 10,000 requests for service.45 While Hungary
is widely viewed as one of the most stable and risk-free economies around, this example
highlights the fact that risk evaluation systems should not be applied thoughtlessly or
without creativity.46
Other domestic risk factors include the passage of legal regulations on environmen-
tal pollution. The enforcement of such laws could restrict how a multinational may
operate in a foreign country. In turn, these restrictions almost always increase operation
costs to the company. For example, in Germany, companies must abide by rigid packag-
ing laws when selling and shipping their products. This “green dot” law requires busi-
nesses to do two things:
1. accept back from consumers all excess packing materials;

2. encourage recycling of the materials by alerting customers about this option with
a green dot on the material and with prominent recycling facilities at the point of
purchase.
Many experts suggest that such laws will continue to spread across the globe and that
“green” is the new watchword in business today—not necessarily resulting in cost or
risk, but instead in opportunity. Chapter 3 discusses Nike’s “green” changes that save
the firm some $800 million a year.
In Germany, as in the U.S., there are many similar restrictive environmental laws
that affect the production and disposal of industrial wastes. In some countries, however,
environmental laws are lax or, in some cases, almost nonexistent. This absence of regu-
lation may be due partially to the struggles of developing countries to improve economic
conditions. Environmental issues may be lower on the priority list, or a country might
wish to do as little as possible to discourage foreign investment. As a result, these coun-
tries may become places for waste-producing countries to dump this material. For
example, “e-waste” such as old computer monitors, keyboards, printers, and TVs,
contains dangerous amounts of lead, cadmium, and mercury.
This is a huge problem today in the U.S., where the electronics market is massive
and product turnover cycles are getting shorter.47 Nearly 1,200 mostly smaller companies
have emerged that “recycle” this waste. Some, even those who extol green practices, are
breaking the law with illegal shipments of such waste overseas. These dealers may set
up trucks in suburban mall parking lots and advertise that they will recycle equipment
62
for free or a small charge, so many environmentally conscious and well-minded people
head to these to recycle old TVs and computer monitors. Yet, some of these firms have
been accused of shipping this waste to places such as Guiyu, China, a notorious e-waste
site where local children have lead levels twice that of EPA limits. This is especially
problematic for China because it already faces an environmental crisis due to its quest
for (and use of) resources to fuel its burgeoning economy.48 To deal with this problem,
over 50 countries became signatories to the Basel Convention, an agreement on the
international transport of hazardous wastes. A key element of the agreement is that
informed consent about the movement of the toxic waste must be given and permission
received from all countries through which it passes.
Many countries are increasingly concerned with the effect of industry on their envi-
ronment. In addition to the direct costs to firms doing business, there are also indirect
effects of concern for the environment. Because of several major environmental disasters,
awareness of these important issues has intensified. Some countries like Germany even
have major political parties organized around environmental issues. Thus, there are direct
and indirect forms of risk associated with this factor. Clearly, these affect the business
decisions of multinationals. A consumer products company may build its plant in Mexico
rather than in the U.S. (its intended market) because American pollution control regula-
tions require expensive equipment. Similarly, a chemical company may manufacture in
Indonesia rather than in Germany because of the extensive industry restrictions. These
examples raise ethical and other issues, such as whether a multinational should capital-
ize on weaker restrictions in another country, a topic discussed in the next chapter. For
now, we note that the relative presence or absence of legal restrictions in any one coun-
try is often considered in an overall risk rating system like that presented in Figure 2.4.
External Economic Relations as Risk Factors

Figure 2.4 shows that the manner in which a country relates economically to another
country can also be a source of risk. Whereas some of the earlier factors we considered
were rare (e.g., civil war), virtually every country restricts its external economic relations
in several ways. This makes this final risk category all the more important. For example,
many countries have restrictions on imports, usually in the form of tariffs. A tariff is a
fee paid by an exporter to the country of import and, therefore, is something that
increases the price of that foreign product or service relative to the domestic counterpart.
Through the use of taxes such as these, a country can restrict imports and provide
protection for domestic industry (even if unwittingly).
Tariffs, however, are not the only way that imports can be restricted. One country
may wish to limit imports. This might be done in order to force another country to
accept more of its goods or because of internal politics that impact imports (e.g., a weak
motorcycle industry). Until 2000, when it was prohibited by the WTO, the EU limited
the import of Japanese autos to a percentage of the total autos sold in the EU. The U.S.
did the same at one point in order to pressure Japan into purchasing more American-
made components because it was believed that Japan had informally restricted the import
of those parts. Finally, a country may restrict imports when they are perceived as a
threat to the health or safety of its citizens. In 2003, “mad cow disease” was discovered
63
in U.S. livestock. While the U.S. argued (similar to the British before them) that the
disease did not affect the harvesting of the beef, 65 countries placed restrictions on the
import of U.S. beef products. Exports of U.S. beef declined from 1,300,000 metric tons in
2003, before the first mad cow was detected in the U.S., to only 322,000 metric tons
in 2004. It has since risen to its earlier levels.
Export controls, or restrictions, are important concerns for international managers
and there are many different forms. Sanctions, embargoes, and boycotts are three terms
that refer to actions by a country that constrain trade for political rather than economic
reasons, but they differ in their intended magnitude. Sanctions are sets of specific restraints
involving trade and can take many different forms. For example, a country may cancel
its preferential tariff fees for another country, restrict access to computers or other high
technology, or prohibit the export of certain weapons systems. Some of these sanctions
were used by the U.S. against China after that government’s violence against the pro-
democracy movement in 1989, and again in Haiti in 1994 in an effort to restore a
democratically elected government. The U.S. also maintains sanctions against Iran, Sudan,
Cuba, Syria, Burma, North Korea, Venezuela, and the Democratic Republic of Congo,
among others.
An embargo is an all-out prohibition of trade with another country—not just com-
merce in several specific service industries or of critical goods. Typically these are imposed
in order to protect national security or to promote a certain foreign policy, and they
have been used by the United States since the late 1700s. Often embargoes are instituted
during times of war, but they are imposed during peacetime as well. The President of
the United States has considerable discretion to enact an embargo. He or she can direct
the Department of Commerce’s Bureau of Export Administration to add a country to
an embargo list because it impacts national security or is not in compliance with world
agreements on weapons.49
Based on these criteria, the United States currently has designated Cuba, Iran, Libya,
North Korea, Sudan, and Syria as countries for which this broad set of controls currently
applies.50 The embargo against Cuba, for example, has been in place since 1961, when
the attempted invasion of U.S.-backed forces was crushed. An extremely strong lobby
in the U.S. has kept this embargo in place despite some efforts to remove the trade ban
and some signs from the Obama administration of a willingness to open relations.
Critics have pointed out that the use of embargoes (and sanctions) is not effective.
For example, an analysis of the nearly 50 different uses of sanctions and embargoes to
achieve political goals from 1970 to 1983 showed that few were successful.51 Partly, this
lack of success resulted from the diffuse focus of the sanctions, some dealing with
improvement of human rights and others as protests against terrorism. But mainly the
restrictions were ineffective because other countries filled the void left by the sanctioning
country. This is one of the major complaints from the business community about such
restrictions. American businesspeople sometimes object by asking, “Why should we be
penalized by our government from doing business in Burma because their human rights
record is not up to our standards?” They maintain that U.S. multinationals are unfairly
punished because American sanctions are often not observed by other countries that
may continue to do business, and even take advantage of opportunities created by
American sanctions.
64
The relevant U.S. government agencies (such as the Departments of Treasury,

Commerce, and State) that are responsible for developing and implementing sanctions
and embargoes are familiar with these complaints. The Commerce Department (via its
Bureau of Export Administration) is in fact charged with issuing licenses for exports,
some of which may override existing sanctions. A business must file an application for
an export license, the first step of which is to properly classify for the government the
commodity that you want to export. This is a complex process that involves classifying
a product, detailing where it is going, and learning the nature of the restrictions that
are in place. An application for the export of scuba gear and outboard engines to a Gulf
country, for example, might not be permitted because of fears of attacks on oil tankers
in the Gulf.52 After receiving an application, the Department of Commerce then has
90 days to issue or to deny a license to export the product(s), although approval recently
has averaged only about five days.
The application for license, like a tax return, is a self-report of one’s behavior. As is
the case with a tax return, there are some applicants who do not tell the truth. One
example is those who provide misleading information about the nature of their product
or where it is going. An infamous example of this occurred in 1986, when the U.S. Navy
determined that Soviet submarines were somehow able to move without any detectable
noise. Over the next several months, it was revealed that the Soviets had acquired advanced
equipment from Toshiba, in violation of Japanese and U.S. export laws. It was discovered
that Toshiba received permission to export because they had deceived the Japanese gov-
ernment by changing the description of the exported equipment. Because of this threat
to security, the U.S. reacted strongly: government contracts totaling over $200 million
with Toshiba were canceled, and Congress banned the company from doing business with
the government for three years. The Japanese reacted lightly to the infractions, suspend-
ing the sentences given to Toshiba executives and imposing only a $16,000 fine.53
Violations can also occur via the problem of diversion. This term refers to the use
of an export license to provide materials to a third party not included on the license. A
U.S. oil company might legitimately seek a license to export oilfield equipment to one
country, but that recipient could in turn send the equipment on to Tripoli, which would
be in violation of the U.S. export embargo on Libya. This situation is not uncommon
and has led courts to rule that the burden is on the exporter. That is, it is the exporter’s
responsibility to screen and proceed diligently with foreign buyers regarding their intended
uses of the product. There are very extensive civil and criminal penalties in place for
those found in violation of export laws.
Even if a company proceeded with good faith, filed a legitimate application for a
license, and then went to great lengths to investigate a customer, they still may be denied
a license. Most likely this will be because of the national importance of the export
controls that have been implemented (such as weapons technology). Nevertheless, they
still have an avenue of appeal. A firm could request that the Secretary of Commerce
determine the foreign availability of their product. If there is a non-U.S. source of the
product that is comparable in quality, they may still be granted a license to export despite
the controls that are in place. Almost certainly, however, an application and appeal will
be denied if the business involves exporting controlled weaponry (such as missile tech-
nology or nuclear equipment and materials). Supercomputers are also highly controlled
65
because of their strategic significance. There are many global agreements on the trade
in these items, and several important governing organizations, such as COCOM
(Coordinating Committee for Multilateral Export Control), are devoted to the control
of such exports. COCOM, in particular, was originally formed in 1949 to prevent the
Soviets from acquiring technology that could lead to a military advantage (now super-
seded by the Wassenaar Agreement and involving over 40 countries).
Export controls such as sanctions, embargoes and control lists can often be ineffec-
tive because the products can be provided by companies in other countries who are not
so constrained. If the issue is important enough, a set of countries may wish to go one
step further to restrict trade by enacting a boycott. If sanctions and embargoes represent
a unilateral unwillingness to engage in trade (such as the U.S. against Cuba), a boycott
is a multilateral or collaborative effort to do the same thing. Examples of the collabora-
tion of many countries to try to restrict trade include the Wassenaar Agreement, men-
tioned previously, and the international coalition formed to confront Iraq’s invasion of
Kuwait in 1990. Thus, boycotts have the same purpose as sanctions, embargoes, and
other controls. They are simply more extreme in their scope. Because of the collabora-
tive nature of boycotts, they tend to be more effective than export controls established
by only one country. As you might guess, boycotts are much more difficult to organize
and implement, as illustrated by the incredible effort of getting traditional enemies (such
as Israel and Jordan or Saudi Arabia) on the same side against Iraq in the Gulf War.
One additional problem with boycotts is that unless the organization is very com-
plete, it can polarize sides against one another. An example of this situation is the
boycott instituted against Israel in December 1954 by the League of Arab States. The
League (currently composed of 22 nations) agreed that companies that traded with Israel
could be blacklisted and would not be permitted to do business with League members.
Because of its close political ties with Israel, the U.S. enacted anti-boycott laws that
prohibit American firms from complying with, or otherwise supporting, the boycott by
refusing to do business with Israel or a blacklisted firm. Courts have ruled that by merely
returning an Arab League questionnaire that sought information about business relations
with Israel, Briggs and Stratton Corporation was in violation of the law.54 Given the
volatile situation in the Middle East, it remains to be seen what will happen regarding
business risk for firms via the boycott. After the Gulf War, some Arab countries (such
as Kuwait) resumed doing business with Israel, but events that occurred since the begin-
ning of the Intifada in 2000, the Gulf War, and the U.S. military presence there, have
deflated hopes that the nearly 50-year boycott may be coming to an end. While the
boycott has lost considerable steam since its peak in the 1970s, it still presents a risk
to U.S. business that some other countries do not face. 55 U.S. firms are required by law
to report efforts by companies around the globe to force them to obey the boycott and
this number is tracking upward. An example might be when ship entry documents for
entry into the United Arab Emirates (U.A.E.) ask if any of the cargo is of Israeli origin.56
Exports are significant parts of the economy of every country; they provide much-needed
foreign exchange and are the source of many jobs. But they are only one important
example of external economic risk factors. In Figure 2.4, we presented many other types
of risk involved, including restrictions on the extent of foreign investment allowed in a
particular country. Some EU countries, for example, restrict the ownership of television and
66
radio stations to nationals. Germany gives preference to companies that are majority owned
by its nationals when awarding licenses to broadcast. The U.S. also has some detailed
restrictions on the percent of foreign ownership of radio and TV stations. Typically, restric-
tions like these are imposed to prevent foreign control of critical industries (e.g., finance,
communications, etc.). And, these restrictions increase the risk of doing business since they
prevent the foreign multinational from having key operational control of the firm.57
Protection for Trademarks and Other Intellectual Property
One of the biggest external risks that companies face is the lack of legal protection of
their products and trademarks in a foreign country. The most common legal protections
are the use of patents, trademarks, and copyrights. Several international agreements are
in place to provide such protection. The Paris Convention, for example, is a set of
international guidelines recognized by nearly 80 countries. Ultimately, however, a mul-
tinational must rely on law enforcement within a country to protect its products and
intellectual property rights. To comply with WTO requirements, India again began to
honor international pharmaceutical patents in 2005—something that it had not done
since the early 1970s. In 2009, the Swiss firm Novartis had its patent on the cancer
drug Gleevec rejected by India’s Intellectual Property Board. Novartis has filed a lawsuit
in Indian courts seeking to change an element of that country’s patent law.58 Market
share of foreign drug firms in India has dropped considerably. Hopes were raised with
a new patent law passed to fulfill its WTO obligations, but the patent rules in India are
a major source of frustration to the large pharma companies.59
Yet, if the reward is great enough, a firm may wish to take the risk of operating in
a country where the enforcement is lax at best. Such is the case in Spain, where unli-
censed generics create a major headache for U.S. drug firms. Spain has a complex court
system, one with no special courts or judges with expertise in patent law or the complex
pharmaceutical industry. So, when U.S.-based Merck sued the Spanish generic maker
Chemo-Iberica for violating its patent on the anti-cholesterol drug Zocor, the case was
mired in Spanish courts for years. At one point, Chemo-Iberica even claimed that they
had developed a new fungus fermentation process (aspergillus obscurus) to produce
Zocor, and in doing so bypassed Merck’s patent (the generic price was about $11 vs.
Zocor’s price of $24). This procedure was “obscurus” all right—in fact, mycology experts
finally convinced the court that this procedure just did not exist. Finally, Spanish courts
ruled for Merck, but they awarded no damages and the process went on so long that
the patent expired two days after the case concluded anyway.60
Firms that enter China are worried about critical design features or recipes of their
products.61 Professor Kenneth DeWoskin, a Chinese expert at the University of Michigan
School of Business, believes that “Chinese research and design institutes look for the
best technology in the country and spread it around. They also examine plans and [the]
specifications of new ventures, so [there is] bound to be some leakage.”62 Clearly, there
is a good deal of “leakage,” and the losses extend beyond the entertainment and com-
puter industry. For example, after DuPont introduced its Londax herbicide in China, it
decided to build a $25 million plant in Shanghai to produce the chemical. By then,
67
however, a state-owned company jumped into the market with a much cheaper knock-
off of Londax. Likewise, shortly after Pilkington opened a plant in China to make glass,
a state glass factory sent an order for production equipment to Germany—complete with
detailed and obviously pirated plans that were emblazoned with Pilkington’s name. And,
in plain sight of police on main streets in Guangzhou and Shanghai, Chinese music fans
can pick up the latest popular music CDs or Microsoft Office computer software for
only $1.50. The U.S. Trade Representative’s office states that “anyone can walk into a
store in Beijing and buy a pirated copy of Microsoft software. The store simply copies
it while you wait.” Toymakers such as Mattel and Hasbro are especially concerned, as
it is common for their new toys on display at the international Hong Kong Toy Fair to
also be displayed by a Chinese competitor that had advance information about them.
Because China makes about 70 percent of the world’s toys, including those of many
American companies, the designs can easily and quickly be copied. After Mattel decided
to prototype its new designs in-house and then bring them to the Hong Kong fair, their
staff had to chase away would-be copiers who were using cameras, copiers, and iPads
to spy on and to copy the designs. Mattel no longer attends the fair.63
It’s not just products, either—protecting a brand name in the China market is dif-
ficult at best. A bogus Chinese breakfast cereal product called “Kongalu Cornstrips”
has a trademark and packaging identical to that of Kellogg’s cornflakes. A small Chinese
computer manufacturer, called “Mr. Sun,” has used Sun Microsystem’s trademark for
all its machines.64 And, Shanghai consumers can now enjoy coffee at a series of Xing
Ba Ke stores. The loose translation of this is “Shanghai Starbucks,” although you do
not have to read closely as their logo appears identical to that of Starbucks. The general
manager of Xing Ba Ke states that “we have a totally different operation” and cites
waiters and higher prices as examples of this “new” business model. Starbucks is hardly
convinced and had gone to the mat before to protect its brand and logo by suing com-
panies called “Mr. Charbucks” and “Sambucks,” among others. In 2006, a Shanghai
court ruled in Starbucks’ favor, saying that Xing Ba Ke’s use of the name and logo from
Starbucks was “clearly malicious and improper,” and ordered the company to pay a fine
as well as to stop using those marketing materials.65
Despite this danger of product piracy, once its critical features are revealed, many
companies move into the Chinese market anyway. Coca-Cola is one firm, however, that
steadfastly refuses such revelations and thus has been careful in China. Because of a
similar restriction in India, they have left that country altogether. Coca-Cola quit India
after the government demanded that it reveal its secret recipe and transfer other techni-
cal information to local management.66 Many companies, such as Pilkington, are now
wary of seeing their partners become their rivals. New Balance Shoes is aggressive in
this regard. At a shoe factory in southern China, a man named George Arnold closely
inspected the stitching and workmanship of a run of nearly 7,000 New Balance shoes.
Arnold pronounced the lot as authentic and promised Horace Chang, the plant owner,
that he would wire the $120,000 payment soon. But, in fact, this was a sting orchestrated
by New Balance using private detectives. It and other companies such as Rolex, Reebok,
Gucci, and Cartier are making these interdiction efforts to stem the tide of counterfeit-
ing. Interestingly, Chang was a licensed supplier and manufacturer for New Balance
since 1995. But after a disagreement about shoe quality and brand name, and armed
68
with evidence that his factory was producing “on the side” shoes, New Balance began
its crackdown. It was galling to see its $60 shoe being sold for around $20 (from Chang’s
factory) and it severed any relation with Chang. This reflects an increasing trend for
authentic products, not knockoffs, to be in competition in the marketplace. Procter &
Gamble recently fired a supplier that sold its empty shampoo bottles to a counterfeiter
who then filled them with different product, and Unilever recently found its partner was
producing extra soap and selling it directly to stores.67
Stopping this illegal activity is difficult, especially at the company level. In general,
however, research indicates that the presence of laws protecting intellectual property rights
has a positive impact on foreign direct investment and that this is especially the case
among developing countries.68 Software piracy, for instance, seems to happen in many
places, not just China. Several years ago The Wall Street Journal reported a raid by the
Spanish police at a Madrid monastery where Jesuit priests trained their students on
computers using mostly pirated software.69 Figure 2.5 shows the impact of piracy in a
number of markets. This figure presents the percentage of software that is pirated in use
for a particular country, a figure estimated each year by the non-governmental organiza-
tion Business Software Alliance (BSA). BSA estimates that over 90 percent of all software
in use in Georgia is pirated. Several countries have dramatically reduced their percentage
of pirating in recent years. Since 2004, Russia has had the greatest reduction (19 percent)
and China the third largest decrease since that time (10 percent). Japan and the U.S. have
among the lowest software piracy rates in the world. Still, about one in five software
Country Piracy Rate Losses Due to Piracy (in $m)
Georgia 91 52
Bangladesh 90 147
Libya 90 60
Pakistan 86 278
Indonesia 86 1,467
Nigeria 82 251
Vietnam 81 395
China 77 8.902
Russia 63 3,227
India 63 2,930
Mexico 57 1,249
Saudi Arabia 51 449
Canada 27 1,141
Germany 26 2,265
Sweden 24 461
Japan 21 1,875
U.S. 19 9,773
Figure 2.5 Piracy Rates and Losses in Selected Countries.

Source: Adapted from Business Software Alliance (BSA). (2012). BSA website, available at: www.bsa.org/globalstudy.
69
systems are pirated. Plus, the total losses in the U.S. are the highest in the world because
of the number of computer users in the U.S. relative to other countries.70
Many of these knockoffs and originals alike are targeted to the U.S. market. Some
of the more commonly fake products are a “who’s who” list of brands: Nintendo, Nike,
Louis Vuitton, and Nokia, among others. While some shipments are intercepted before
reaching the U.S., many items get through. A few years ago, we witnessed knockoffs of
$250 Oakley sunglasses going for $15 near the Pike Street Market in Seattle. Students
at our own university (the University of Dayton) were even a source of some leakage.
On a summer exchange program in Thailand, students brought home DVD copies of
the hit Disney movie Finding Nemo, before it had even been released to video stores in
the U.S. The price on Bangkok streets was $1.71 Given the importance that knowledge
plays in the economy, some analysts have targeted intellectual property as one of the
main competitive advantages for a country into the next century.72 The ability to preserve
those property rights may become an even more important risk factor for the U.S.
economy in the near future. In 2006, all WTO members were to have implemented basic
rules for protection and enforcement of counterfeiting and intellectual property protec-
tion. Yet, a number of high-profile cases have been brought before the WTO in this
regard. In 2007, for example, the U.S. brought several actions against China. These
sought to force China to improve legal protections and to increase enforcement of those
laws. The case ruled in favor of the U.S. in early 2009. As Chinese law is tightened and
more Chinese firms file patents, those of other countries are more likely to be honored.73
Summary of Risk Factors

As this chapter has shown, there are a large number of legal and political risk factors
associated with doing business in a foreign country. A plus of using a category system
like the one presented in Figure 2.4 is that this large number can be itemized and
evaluated. A firm considering a big investment in a foreign country may wish to sys-
tematically weight all of these factors themselves or use information provided by com-
panies specializing in risk assessment. Many such providers exist in the marketplace and
for a fee will provide a detailed analysis of the risks of market entry. Political Risk
Services and the Economist Intelligence Unit are two firms with widely circulated lists
of annual risk ratings for countries around the globe. If the overall score is too high, a
multinational might be advised to drop that country from consideration unless the risk
can be managed or reduced in some way. For example, Burma, Nigeria, Russia, Sudan,
and Yemen often make the top ten of riskiest countries, whereas Norway, the Netherlands,
and Canada are examples of countries often rated as the least risky. China recently broke
the top 30 in the world (among about 150 countries rated), and the U.S. is often within
or near the top 15 the least risky countries.
The details provided by these firms can often surprise you, as in the case of India.
In late 2008, a widely publicized terrorist attack and siege on the Taj Mahal luxury
hotel in Mumbai brought attention to political violence in India. Over 160 people were
killed and many more were injured during a 60-hour attack captured on television—one
that featured great heroism among hotel employees and security forces alike. But, many
70
outsiders (including investors) are now aware of how dangerous India can be. In fact,
there were nearly 2,500 deaths in 2008 in India from acts of terrorism. From 1993 to
2008, over 29,000 people have died in terrorist attacks in India. This figure excludes
about 5,000 who have died since 2002 in the Maoist rebellion in the Chattisgarh region,
as well as the thousands who have died in anti-Muslim riots in the country.74 This does
not mean that firms should not enter India—in fact, the opposite is true, even though
some foreign firms are rightfully concerned. Experts believe the tipping point for such
decisions is an investor’s assessment of whether the government will make changes to
correct these and other related problems. Of course, there is plenty of room for optimism.
Consider the strong governance and education systems in southern India (especially
Bangalore). These are features that have helped this region build a $60 billion outsourc-
ing industry from scratch.75 The same can be said about Russia and elsewhere, where
investors must weigh the risk and rewards of doing business there.76
Managing or Dealing with Political Risk
One advantage of quantifying risk is the ability to make better decisions about entering a
country or whether to scale back existing operations in a particularly risky country. Leaving
the country completely or scaling back within the country are only two options that firms
can use to manage risk. Another advantage of using a rating scheme such as the one dis-
cussed earlier is that serious sources of risk can be isolated, and then concentration on
those factors can help manage risk. Take, for example, a situation in which labor relations
are shaky at best. If this is a critical risk factor, then the multinational might be able to
deal with poor labor relations by making some concessions or other proactive steps.
Categorizing Risk Reduction
There are many ways in which a multinational could potentially stave off risk—probably
as many methods to reduce risk as there are actual sources of risk. For our purposes,
however, we can classify all of these techniques into a more manageable set of categories.
For example, there are defensive/reactive strategies that a multinational could use to deal
with risk.77 These types of methods try to keep company operations or other assets out
of the reach of the risk factor, such as a hostile government. There are also linking/
merging strategies. These entail methods by which a firm tries to get closer to the risky
country, perhaps even making itself indispensable to the local economy. Each of these
strategies can also be direct, in that efforts to take on the problem in a head-on manner
are used (such as by legal action). But, a strategy could also be indirect in that it is
approached in a roundabout way, with hopes that in the long run risk will be reduced.
Figure 2.6 presents some examples of each of the four types of risk management.
Examples of Risk Reduction

A type of direct/defensive risk reduction is to make operations in the target country
dependent upon your work in one or more other countries that are less risky. This
dependency allows firms to preserve control over key supplies, components, and critical
71
Type of Strategy Direct Indirect
Defensive/ • Legal action • Risk insurance

reactive • Make operations dependent on • Contingency planning methods
parent company • Home country government
• Control makeup of management pressure
Linking/ • Long-term agreements (e.g., NAFTA) • Lobbying of foreign governments
merging • Joint ventures • Becoming good corporate citizen
• Promoting host goals to host country
Figure 2.6 A Classification of Approaches to Managing Risk.
technology that are necessary to run the subsidiary, and it can have a number of positive
effects on the firm’s exposure to risk. For example, operation dependency would make
a subsidiary less attractive for expropriation by a host government X. This is because
the plant could not operate without supplies that are provided via a plant in country Y.
This approach would also leave your firm less open to risks of trademark or copyright
theft if critical technology was deployed in another country. In this way, a multinational
can reap multiple benefits from one action, a characteristic typical of many of the risk
management strategies listed in Figure 2.6.
It is not uncommon for companies to use several different risk management tech-
niques simultaneously in an effort to hedge risk. Another type of risk management
that could be used is a direct/linking strategy. A multinational may wish to enter into
long-term agreements with a foreign country that specifies treatment of its subsidiary,
and the home country may do the same. The North American Free Trade Agreement
(NAFTA) is one example of this method. The option to enter into joint ventures
(discussed in Chapters 8 and 9) may be available; in this case, the subsidiary is already
jointly owned by either the host government or a firm headquartered in the host
country. In those situations, a company has less equity at risk and other national
firms also share a fair amount of the risk. But, there are also significant barriers to
overcome in order to have successful links.78 Another common example is when a
government itself invests in a venture in another country, as Thailand has done with
its strategic plan to open over 3,000 Thai restaurants in the U.S. and to partner with
Starwood Hotels.79
A multinational may also wish to use a set of indirect methods to manage risk. It
may purchase political risk insurance as an indirect/defensive strategy. Political risk
insurance is an indirect strategy because it does nothing to deal with or alter the actual
potential risk; it simply serves to protect the firm if and when the risk materializes.
Several private firms provide insurance to cover various risks that are inherent to doing
international business, including many of the risks reviewed previously (e.g., political
violence and nationalization). These private firms have increased their presence in recent
years and have offered new products. A Bermuda-based insurer, Sovereign Risk Insurance,
is in over 100 emerging markets. One of its contracts is for a seven-year, $95 million
policy for a bank’s structured finance deal in Brazil. Banks increasingly seek this type
72
of insurance against foreign governments that abrogate contracts for political reasons
(e.g., an infrastructure loan which a government subsequently expropriates).
In the U.S., the federal agency Overseas Private Investment Corporation (OPIC) also
provides similar coverage. Started in 1971 in order to promote private American busi-
ness investment in developing countries, OPIC is self-sustaining, has recorded a positive
net income every year of operation, and runs at no net cost to U.S. taxpayers. Currently,
the insurance programs are available for new and expanding business in over 140 coun-
tries, although they now specialize in emerging markets that fit U.S. policy priorities.80
Risk insurance covers some but not all of the risks, though. A company can purchase
protection against expropriation and confiscation of its foreign enterprise or coverage for
property and income losses caused by political violence (e.g., declared or undeclared wars,
civil war, revolutions, terrorism, sabotage and more) are covered. OPIC compensates the
investor’s share of income loss resulting from the political violence and other risk factors.
Riders to the policy can be added that compensate for losses resulting from damage out-
side a firm’s plant or facility that affects business (such as railways, power stations, and
suppliers). OPIC also protects the multinational against currency inconvertibility. This is
not insurance against currency devaluation; the company has to assume this risk itself.
Instead, investors are compensated if they suffer new currency restrictions that prevent the
conversion and transfer of profits from their foreign investment. In general, this insurance
is very comprehensive and can help overcome a firm’s reluctance to deal with risk factors
in a foreign operation or investment.81 The From Theory to International Practice exercise
at the end of the chapter will provide additional information about OPIC.
Other examples of indirect/defensive strategies are presented in Figure 2.6. These
can be used as contingencies that help manage events after the decision is made to take
on the risk. This “scenario planning” approach, proven in military applications, is
becoming an increasingly popular method for balancing risk in international business.82
Or, a firm could gradually increase its investment in a foreign operation while appealing
to its own government to pressure the foreign (host) government. This was a common
practice in Japan a decade ago when American automakers felt that the risks of closed
markets and opportunities could be altered by pressuring the U.S. government to seek
concessions from the Japanese.
Finally, a multinational can use indirect/linking strategies to remove or reduce some
forms of risk. One way it can do this is by making itself into a “good corporate citizen”
by contributing to local charities and supporting public projects. This strategy involves
linking with the local community as opposed to pulling away, and is indirect because it
is hoped that the goodwill generated by the donations will eventually spread to the
company itself. Starbucks’ approach is a good example of a market acting locally while
thinking or doing business globally. In addition to seeking to protect its trademark in
China (a direct approach), the company has also made an effort to position its stores
as members of the local community. In Beijing, for example, Starbucks supports many
local groups and it feels that these indirect approaches have paid off. When the mistaken
U.S. bombing of the Chinese embassy in Belgrade happened in 1999, protestors cut
through Starbucks, buying coffee on their way to (violent) protests at the U.S. embassy.
Sales actually rose at Starbucks that day, whereas other prominent American businesses
suffered some damage.83
73
Indirect/linking strategies are used by firms in many nations. Japanese efforts to

increase U.S. philanthropic activity in the late 1980s and early 1990s is yet another
example. Lobbying is another method of this type of risk reduction, although it is dif-
ficult to classify in practice. It can be a form of linking in that lobbying could be done
to directly increase relationships with other countries (e.g., to jointly form trade asso-
ciations). Lobbying could be a defensive strategy as well, as when U.S. special interest
groups (such as steel, automobiles, and textiles) seek import restrictions that reduce the
risk in their businesses.84 Foreign firms long ago recognized the important role that lob-
bying plays in the operation of the U.S. federal government. The Foreign Agents
Registration Act (FARA) was passed in 1938 out of fear that German firms were exer-
cising too much influence in the U.S. The FARA still requires that every agent lobbying
on behalf of a foreign client register and detail what he or she is working on, which
government officials he or she visits, and any donations provided.85 Records indicate
that Belarus, sometimes referred to as the last dictatorship in Europe (because of a ter-
rible human rights record), has hired AG Consulting to “urge for a more favorable
attitude toward” the country. Indeed, the number of registered lobbyists to the U.S.
government has grown from about 7,000 in 1991 to nearly 15,000 in 2012.
Chapter Summary
We reviewed several of the most important legal systems in operation around the world
today, including civil law, common law, and Islamic law systems. Each has unique implica-
tions for commerce that take place under its jurisdiction. Other systems have their own
characteristics and constraints.
Laws operate—or sometimes fail to operate—within a particular political system, and
a new regime can dramatically change the legal system. The importance of political issues
above and beyond the rule of law are highlighted within the chapter. We also showed that
the amount of political risk incurred by a multinational can have major negative effects.
Political risk can result from many different events or actions taken by governments or groups
of people. A variety of domestic and external economic conditions can also increase risk.
The chapter concludes on one of the most important points of all—what a multinational
can (and should) do after it senses or encounters a risk. The options include strategies of
direct risk reduction and/or indirect efforts to stave off potentially catastrophic effects if the
risk materializes. Finally, we recognize that while some multinational actions might be both
legally consistent and politically astute or expedient, the action might still be inconsistent
with company or society values—this last point provides a bridge to our next chapter on
international ethics and social responsibility.
74
1. Describe the differences among the three main legal systems that exist today. How might
each affect the commerce that is conducted within its jurisdiction?
2. How might the specifics associated with a civil or Islamic legal system present problems
for U.S. business? What behaviors might you see, and which ones could you tie to their
respective legal systems?
3. What are the key forms of political risk and why might Nigeria, Peru, or Burma be considered
relatively risky places to do business? Why might the U.S. be not as highly ranked as you
might think and what steps would you recommend to deal with this risk?
4. What steps would you recommend to deal with other forms of risk in the above and other
countries?
Combatting Counterfeiting in the Middle Kingdom

At the beginning of the chapter we presented a challenging problem for manufacturers
around the globe—the ability of Chinese companies to quickly develop, manufacture, and
distribute counterfeit products of some of the world’s most famous brands. These bogus
products are often tough to distinguish from the authentic ones, whether those are Callaway
golf clubs, Winston cigarettes, or Louis Vuitton handbags. We asked you to consider what
can be done to combat this issue.
This is a tough problem that needs to be tackled in multiple legal and political ways.
For one, multinationals are going to have to spend money. Louis Vuitton spent more than
$16 million in 2007 on investigations and legal fees into knockoffs of their products. GM
added seven full-time staff members to scour the globe for counterfeit parts, and Pfizer has
five such staff members in Asia alone. This money and personnel on the ground can be
helpful in designing anti-counterfeit measures. Nokia, for example, learned that making their
phone batteries with holographic images and 20-digit identification codes that must be
authenticated online would help. Cigarette maker JT International has spent millions of dollars
over the last half decade developing a network of investigators and informants within facto-
ries that they suspect of counterfeiting. Pfizer introduced RFID tags on all Viagra pills sold
within the U.S., allowing them to track drugs from the lab to the consumer. Callaway scans
websites looking for low-priced golf clubs bearing their name. But, many complain that once
they shut one illegal manufacturer down, another opens quickly. So, some clever companies
have tried to beat the knockoffs in the market with overt and covert tracking methods.86
Anheuser-Busch has taken big hits from knockoffs in China. In some cases, counterfeiters
were simply refilling discarded Bud bottles. The firm started to use more expensive, imported
75
foil on the bottle tops and added a temperature-sensitive label that changed colors when
cold; this kept knockoffs at a low level.
A bigger challenge has been getting the Chinese authorities on board with enforcing
the anti-piracy laws within the country. A small Danish furniture franchise shows that this
can be done if you persist. Bo Concepts makes attractive modern furniture and its outlet in
Shanghai did well. But, within its first two years of operation,12 companies opened nearby
that made furniture whose resemblance to Bo Concepts’ design was uncanny. These compet-
itors had the Bo Concepts catalog and bragged that they would make exact replicas for
one-sixth of the price. Bo Concepts petitioned the State Administration for Industry and
Commerce (SAIC) for help. It hired private detectives to present evidence before SAIC judges,
but this was a dead end. It persisted, however, using old-fashioned Chinese connections
(guanxi). Through contacts in the SAIC, it repeatedly petitioned the judges and the local
Chinese patent bureau. After months of constant badgering, Bo Concepts got the board to
confront the copycats and force them to stop making fakes. While the “war” continues in
China for Bo Concepts, it at least won a battle.
Increasingly, however, Chinese officials have gotten more aggressive about this illegal
activity, in part because knockoffs are now starting to hurt Chinese firms in their potent
domestic market. Some recent cases have also changed the view that counterfeiting is a
victimless crime. In 2005, for example, 15 infants died from phony milk powder; the perpe-
trators were sentenced to eight years in prison. Recently, Li-Ning Co., China’s market leader
in athletic apparel, reported that many of its products were being counterfeited. Now, it too
employs a staff to ferret out counterfeiters. U.S. firms who distribute products made by
Chinese suppliers can also run into trouble, especially when safety shortcuts occur. U.S.
product recalls of space heaters, table lamps, wooden toys, and tires have all impacted
American distributors. Efforts to seek compensation from those Chinese suppliers go unad-
dressed and have brought down the U.S. firm.87
Under political pressure from the OECD, the U.S., EU, and the WTO, China has begun
to toughen laws regarding knockoffs. The value of goods that a counterfeiter was required
to have on hand upon arrest in order to be prosecuted was lowered from $12,000 to $3,600.
And, a high-profile trial of two Americans charged with selling nearly $1 million of DVDs via
the Internet emphasized the point. Having stricter laws is one thing, but enforcement often
depends on local officials, who may themselves be involved. Raids conducted on behalf of
Titleist and Nike Golf in the Fujian province turned up a “plant,” hidden by a dirt-covered
hatch and protected by a dark empty cave. The occupants had apparently left earlier with
their products, having been tipped off by local officials.
Microsoft has tried the “carrot” in addition to the legal and political “stick” to fight
piracy in China. It agreed to build a new cloud computer center in Hangzhou; a $1 billion
investment. The purpose was to establish a model city where property rights have greater
protection than elsewhere in China. Hangzhou has promised to “robustly” clamp down on
pirated software and officials have set enforcement targets, including shutting down knockoff
shops and encouraging local businesses to use authentic software. Yet, the deal has been
criticized by many because even if the Hangzhou/Zhejiang government enforcement is effec-
tive, it is but one city or province within a large country.
76
Either way, this particular strategy is unusual, even for Microsoft, which in the past has
used its muscle to lobby the central government to increase enforcement. The Hangzhou
deal comes on the heels of a 2009 case pushed by Microsoft in which 11 people were
convicted in a Chinese court of making and distributing counterfeit software. Likewise, in
late 2008, Microsoft started sending out software updates that turned computer screens
black if they had a pirated version of Windows—a move that angered a large number of
Chinese. In the meantime, the U.S. is aggressively moving to protect American firms, including
initiating direct talks with China (and other countries) and putting added pressure on the
WTO to enforce its piracy guidelines. There are some initial promising signs—the Business
Software Alliance reports that piracy has dropped 10 percentage points since 2005.88
Culture Knowledge Quiz

Purpose
To promote an awareness of cultural differences.
Instructions
The following questions are intended to provide insights into your awareness of other cultures.
Please indicate your best answers to the questions listed below—there is no right or wrong
answer. Use the following scale, recording it in the space before each question. When you
have finished, add up your score and compare it with those of others in your group. Generally,
higher scores are associated with greater knowledge and awareness of cross-cultural features.
Your instructor may place you in small groups and ask you to look at differences in more
detail. One way to approach this is to discuss sets of questions in more detail (see categories
below). Talk about the general strengths and challenges your group might have (what area
might be the biggest challenge to your group? What subarea is a real strength?) Compare
these strengths and weaknesses with those of other groups. Are there consistencies among
students as a whole in terms of possible strengths and challenges?
(Note: This brief instrument has not been scientifically validated and is to be used for
classroom discussion purposes only.)
1 2 3 4 5
Definitely no Not likely Not sure Likely Definitely yes
1. ___ I can conduct business effectively in a language other than my native language.
2. ___ I can read and write in a language other than my native language with great ease.
77
3. ___ I can understand the proper protocol for conducting a business card exchange in at
least two countries other than my own.
4. ___ I can understand the role of the keiretsu in Japan or the chaebol in Korea.
5. ___ I understand the differences in manager–subordinate relationships in two countries
other than my own.
6. ___ I understand the differences in negotiation styles in at least two countries other than
my own.
7. ___ I understand the proper protocols for gift-giving in at least three countries.
8. ___ I understand how a country’s characteristic preference for individualism versus col-
lectivism can influence business practice.
9. ___ I understand the nature and importance of demographic diversity in at least three
countries.
10. ___ I understand my own country’s laws regarding giving gifts or favors while on inter-
national assignments.
11. ___ I understand how cultural factors influence the sales, marketing, and distribution
systems of different countries.
12. ___ I understand how differences in male–female relationships can influence business
practices in at least three countries.
13. ___ I have studied and understood the history of a country other than my native country.
14. ___ I can identify the countries of the European Union without looking them up.
15. ___ I know which gestures to avoid using overseas because of their obscene meanings.
16. ___ I understand how the communication styles practiced in specific countries can influ-
ence business practices.
17. ___ I know in which countries I can use my first name with recent business acquaintances.
18. ___ I understand the culture and business trends in major countries in which my organiza-
tion conducts business.
19. ___ I regularly receive and review news and information from and about overseas locations.
20. ___ I have access to and utilize a cultural informant before conducting business at an
overseas location.
Scoring: Sum up the scores you assigned to each item in the categories below to create
these subscores. Then, add together your five subscores for your total scale score.
1 Language/communication (sum of items # 1, 2, 15, 16)

2 Interpersonal protocol (#s 3, 7, 12, 17)
3 Business practices/approaches (#s 4, 5, 6, 11)
4 Basic county features, such as laws, history, news (#s 10, 13, 14, 19)
5 Key cultural values (8, 9, 18, 20)
Total (Sum all subscores above)
Source: Goodman, N. R. (1994). Cross-cultural training for the global executive. In Brislin, R. W., and
Yoshida, T. (eds) Improving Intercultural Interactions (pp. 35–36), Copyright© 1994 by Sage Publications,
Inc. Reprinted by permission of Sage Publications, Inc.
78
Calibrating International Business Risk

Purpose
To provide hands-on understanding of the risks present in an international environment. You

will be asked to apply this knowledge to one or more specific countries.
Instructions
The Overseas Private Investment Corporation (OPIC) is a U.S. federal agency whose purpose
is to provide services, including insurance, to companies that invest overseas. One service
that it offers is political risk insurance to protect firms against the risks of expropriation, war,
and other negative economic events (e.g., inconvertibility of local currency). OPIC is well
organized and service oriented. Its website (www.opic.gov) is detailed and informative about
a number of OPIC programs.
For this exercise, we want you to choose one or two countries in conjunction with your
instructor. Research these countries with a special eye toward legal, political, and economic
risk factors. Many sources are helpful here (e.g., the CIA Factbook is an excellent example:
https://www.cia.gov/library/publications/the-world-factbook/; the U.S. government supersite
can also be helpful here: www.export.gov; as can the Export–Import Bank of the U.S., which
has country-specific features: www.exim.gov/). Additionally, you may also be able to obtain
a political risk rating for your chosen countries. To get this number and an interpretation,
you could refer to several sources: (1) The Economist Intelligence Unit’s analysis of risk (regis-
tering allows you access to sample country reports), or (2) a more widely available source,
such as the annual risk ratings that appear in The Wall Street Journal.
Then, scour the OPIC website, especially the pages dealing with its insurance programs.
Its “Doing Business with Us” page is a good overview of the organization’s history and
activities, and its “Publications and Resources” page has lots of detail on its insurance
programs. Look through this latter page with an eye toward information you would find
useful for investigating the countries you have chosen. After reading those materials, prepare
a brief (one page or less) report on your countries of choice. Some of the questions you may
wish to address in this report are:
• In general, what is the OPIC and what is its purpose?
• Are your countries eligible for OPIC support?
• In particular, what kind of support is available?
• How would you or an interested company request support?
• What exactly is insured by your participation in the program?
• What is the approximate cost to a company of such insurance?
• What aspects of risk in your countries would be covered by OPIC?
79
Notes
1. Homeland Security News Wire. (2011). China overwhelms U.S. with counterfeit goods, avail-
able at: www.homelandsecuritynewswire.com/ (retrieved May 31, 2013); ABC News. (2013)
China big in counterfeit goods, available at: ABC News.com (retrieved May 30, 2013).
2. Rocks, D., and Halperin, A., (2008). Stalking the wild copycats. BusinessWeek, August 18,
62–63; Yatsko, P. (2000). Knocking out the knockoffs. Fortune, October 2, 216.
3. This opening box is based lar Endnote Text gely on: Burkitt, L., and Chao, L. (2011). Made in
China: fake stores. The Wall Street Journal, August 3, B1–B2; Balfour, F. (2005). FAKES! The
global counterfeit business is out of control, targeting everything from computer chips to life-
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7, 54–64; Behar, R. (2000). Beijing’s phony war on fakes. Fortune, October 30, 189–208.
4. Richards, E. L. (1994). Law for Global Business. Boston, MA: Irwin.
5. Czinkota, M. R., Ronkainen, I. A., Moffett, M. H., and Moynihan, E. O. (1995). Global
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6. Czinkota, Ronkainen, Moffett, and Moynihan, Global Business.
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8. Richards, Law for Global Business.
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80
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24. Chen, K. (2003). A see-through China? Leaders aim at transparency. The Wall Street Journal,
August 13, A8.
25. Roberts, D. (2009). As factories fail, so does business law. BusinessWeek, April 13, 46–48; see
also: The Economist. (2009). Hard to swallow: China indicates that the real targets of its anti-
monopoly law: outsiders, March 21, 68–69.
26. The Economist. (2001). Unprofitable policies: Insurance in Asia, August 11, 57–58.
27. Miller, J. W. (2009). Economic downturn makes trade talks a priority: WTO chief says rest of
world is waiting for U.S. to make its position clear. The Wall Street Journal, July 7, A5; The
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30. King, N., and Miller, S. (2003). Post Iraq influence of U.S. faces test as new trade talks. The
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laws: The internet may not have borders, but the legal system certainly does. The Wall Street
Journal, April 28, R8.
31. Newman, So many countries, so many laws.
32. Berfield, S. (2012). Odyssey and the lost Spanish treasure. BloombergBusinessweek, June 7,
70–75; The Wall Street Journal. (2012). Alien tort invasion, October 1, A14; Bravin, J. (2012).
Justices probe “alien tort” law. The Wall Street Journal, October 2, A4.
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35. Luchow, D., and de Cordoba, J. (2006). Bolivia’s President Morales orders nationalization of
natural gas. The Wall Street Journal, May 2, A1, A12.
38. Powell, B. (2008). How the KGB (and friends) took over Russia’s economy. Fortune, September
15, 85–94.
39. Bush, J. (2008). Russia’s raiders: companies are paying public official to raid the offices of busi-
ness rivals. BusinessWeek, June 16, 67–71; Bush, J. (2008) Roughed up in Russia. BusinessWeek,
June 16, 69.
40. Cohen, L. P. (2007). Chiquita under the gun. The Wall Street Journal, August 2, A1, A9;
Timmons, S. (2000). Doing business among the body snatchers. BusinessWeek, July 31, 22–23.
41. The Wall Street Journal. (2008). Companies caught in India drama, November 28, A3.
42. Bray, R. (1997). Busy execs can be easy targets. Financial Times, February 6, 12.
43. The Economist. (2009). Kidnapped: Bosses are taken hostage in France, March 21, 68;
Fifield, A. (2003). War on terror creates unlikely allies. Financial Times, August 18, 4.
44. The Economist. (2012). Buying safety, June 9, 65; Vardi, N. (2008). Kidnap, Inc. Forbes,
October 13, available at: www.forbes.com; Booth, W. (2008). Kidnap consultant taken in
Mexico. The Washington Post, December 16, (www.washingtonpost.com); Conley, J. (2009).
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(retrieved July 15, 2009); Yu, R. (2010). Companies try efforts to protect workers in world’s
danger zones. USA Today, August 24, A1.
45. Griffin, R. W., and Pustay, M. W. (2000). International Business: A Managerial Perspective.
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46. The Economist. (2003). Political and economic stability, May 17, 90; The Economist. (2003).
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47. Grow, B., and Elgin, B. (2008). The dirty secret of recycling electronics. BusinessWeek, October
27, 41–44; Kollar, M. (2005). Cops of the global village: How standards of conduct set half a
world away are shaping big companies’ behavior. Fortune, June 27, 158–166.
48. The Economist. (2008). A ravenous dragon: A special report on China’s quest for resources,
March 15, 1–22; The Economist. (2008). Melting Asia: China and India are increasingly keen
to be seen tackling climate change, June 7, 29–32; Engardio, P., Roberts, D., Balfour, F., and
Einhorn, B. (2007). Broken China. BusinessWeek, July 23, 39–45.
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ber 21, 1–2; available at: www.domain-b.com/economy/trade/20070921_businessman.html;
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R. S. (1996). Software theft extends well beyond China. The Wall Street Journal, May 20, A1.
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Schuman, M., and Ressner, J. (2005). Disney’s great leap into China. Time, July 18, 52–54.
72. The Economist. (2009). Hard to swallow: China indicated the real targets of its anti-monopoly
law: Outsiders, March 21, 68.
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(2009). Battle of ideas: Chinese companies are enforcing patents against foreign firms, April 25,
68; Murphy, J. (2009). Toyota builds thicket of patents around hybrid to block competitors.
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75. Srivastava and Lakshman, How risky is India?
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78. Kunreuther, H. (2003). The pitfalls of an interdependent world: Businesses can reduce their expo-
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79. The Economist. (2007). Of coups and coverage: Political risk insurance, April 7, 71–72.
80. Bennett, J. (2001). Small businesses abroad get a big hand from OPIC. The Wall Street Journal,
May 14, B10.
81. Federgruen, A., and Van Ryzin, G. (2003). New risks put scenario planning in favour. Financial
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82. Gadiesh, O., and Pean, J. M. (2003). Think globally, market locally. The Wall Street Journal,
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taurants to promote nation abroad. The Wall Street Journal, February 6, B1, B4.
85. Barron, A. (2011). Exploring national culture’s consequences on international business lobby-
ing. Journal of World Business, 46, 320–327; Please see the home page of FARA: www.fara.gov/
86. Li, L. (2013). Technology designed to combat fakes in the global supply chain. Business
Horizons, 56, 167–177; Sudler, H. (2013). Effectiveness of anti-piracy technology: Finding
appropriate solutions for evolving online piracy. Business Horizons, 56, 149–157.
87. Berman, B., and Swani, K. (2010) Managing product safety of imported Chinese goods. Business
Horizons, 53, 39–48; Welch, D. (2007). Importer’s worst nightmare: A Chinese supplier, safety
shortcuts, and an American middleman under siege. BusinessWeek, July 23, 46–48.
88. This closing box is based in large part on Balfour, FAKES; Back, A. (2009). Microsoft tried car-
rot to fight China piracy. The Wall Street Journal, May 16–17, B5; Yatsko, Knocking out the
knockoffs, 213–218; Zimmerman, A. (2013). Contending with Chinese counterfeits: culture,
growth, and management responsibility. Business Horizons, 56, 141–148; Stumpf, S. A., and
Chaudhry, P. (2010). Country matters: executives weigh in on the causes and countermeasures
of counterfeit trade. Business Horizons, 53, 305–314.
83
chapter 3
doing things right
international ethics and
social responsibility
ETHICS AND SOCIAL RESPONSIBILITY IN INTERNATIONAL

MANAGEMENT 88
CROSS-NATIONAL DIFFERENCES IN ETHICAL PERSPECTIVES 97
ETHICS ASSOCIATED WITH BRIBERY AND OTHER QUESTIONABLE

PAYMENTS 102
Learning Objectives
■ identify the two major approaches to ethics in international management and appreciate
their complexity and overlap;
■ understand cross-national differences in ethical views and practices and corporate codes,
as well as enforcement of those codes;
■ recognize how multinationals deal with issues of questionable payments and bribery;
■ describe the Foreign Corrupt Practices Act and its implications for U.S. and non-U.S. firms.
Competitive Intelligence: Dumpster Diving for That Extra Edge

Global business is a high stakes competition. Many firms want an edge on the competition,
and for some firms this comes via competitive intelligence (CI). CI does not refer to blatantly
illegal acts such as stealing another firm’s proprietary documents. Instead, CI is often a fuzzy
set of activities that involve the acquisition of useful information about one’s competition. That
is not to say that (in practice) this activity does not skate close to, and sometimes over, the
line when it comes to ethics and legality—it does. When practiced in a devious way, as it is
sometimes, CI becomes a genteel term for what we know as spying. When Oracle, a hardware
and software engineering company, went dumpster diving in Microsoft’s trashcans in search
for documents and clues as to its most recent moves, the whole concept of CI received much
attention. But most companies have more panache than Oracle did in that one case. Indeed,
that dumpster operation “was the sort of thing that gives legitimate business intelligence a
bad name,” stated Alden Taylor of Kroll Associates, a large CI firm in New York.
But what exactly is CI? Part strategic planning, CI is designed to anticipate the moves
of a firm’s competitors via a range of data collection techniques. CI involves sifting through
vast amounts of information for emerging trends and information about what competitors
might be doing about them. Who conducts CI? Analysts range from librarians to ex-spies
and from in-house experts to outside consulting firms. These analysts prowl web pages and
trade shows, traipse through the patent office, and keep their eyes and ears open in airports.
Companies such as Real World Intelligence, for instance, offer customized versions of software
created for the CIA. The software scans through voluminous Internet data, such as new
product information on firms’ web pages.
How effective is all of this CI effort? It seems to work well, according to insiders. Former
bosses of Monsanto’s CI unit estimated returns to the tune of $50 million annually. Motorola’s
former chair, Robert Galvin, hired former government intelligence officers to set up a CI
unit for the firm back in the 1970s. Since then, Motorola has never been blindsided in the
86
D O I N G T H I N G S R I G H T
way Xerox was in the 1980s when their market share in copiers was cut down to size by
Japanese firms.
The real issue for business ethicists is not whether CI helps the bottom line, but whether
it is morally defensible. For example, a food company wanted to win market share from a
competitor with a surprise price cut. First, its CI agents interviewed former employees of the
competitor. The idea was to find out exactly when the competitor’s sales reps and managers
had to get approval from senior management before offering retailers a discount. Next, the
actual next-door neighbors of the competitors’ senior executives were telephoned under
various (false) pretexts in an effort to learn about their schedules. That is when it was discov-
ered that the executives were on a European plant tour. An unwitting, but cooperative, travel
agent even handed over their entire itinerary. As a result, the food company’s price cuts were
launched immediately because they knew that the competitor’s executives could not respond
quickly. The competitor lost business as a result.
CI and related activity is on the rise. The number of countries spying on U.S. industry
has actually increased—not declined—since the end of the Cold War. A 2011 report produced
by several U.S. government agencies suggests that the cost to U.S. business, governments,
and universities from espionage is in the billions annually, and points fingers at other coun-
tries. Some of this activity is blatant, such as when former Russian President Boris Yeltsin
chided domestic business leaders for not effectively using stolen technological secrets. And
being an ally to a company (or nation) is no assurance that you will be free from CI. The
former head of French intelligence publicly admitted that he organized a unit to spy on U.S.
firms and that Air France flight attendants eavesdropped and taped the conversations of U.S.
businesspeople flying on that airline.
Thefts of U.S. industrial secrets from firms involving Chinese citizens in particular have
significantly raised the profile of CI. Yan Ming Shan, an employee of PetroChina, a state-owned
oil company in China, was recently charged with stealing the source code for one of the world’s
most powerful programs for locating oil and gas deposits. Mr. Shan was training on the soft-
ware at 3DGeoDevelopment Inc. in San Francisco and transferred that code from its network
to his computer. A week after 3D officials confronted him, Mr. Shan was arrested at the San
Francisco airport as he was about to board a flight to Shanghai. Officials found the source
code on his laptop as well as several programs used to break passwords and gain illegal access
(one was called “Crack”). The indictment since then shows that prior to Shan’s arrest, officials
from his company (PetroChina) had visited the U.S. and gave him a large-capacity storage drive.
The CEO of 3DGeo admits “it could have killed the company” but yet expressed hopes to
continue working with PetroChina. This is only the tip of the iceberg according to a U.S. Inter-
Agency report—a large number of cases involving China have come to light recently.1
It is easy to see unethical qualities when someone is arrested and charged with a felony.
But what about more subtle CI activity? Is that unethical? For example, think about whether
the following information-gathering activities are unethical:
■ Digging through a company’s trash on public property.

■ Deliberately eavesdropping on private company conversations.
■ Sending phony job-seekers in response to a competitor’s want ads.
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■ Hiring a competitor’s former employees.

■ Sending phony visitors to tour a competitor’s facilities.
■ Attending trade shows where a competitor’s wares are displayed.
The Up to the Challenge? feature at end of this chapter provides some surprising answers
to these questions.2
Ethics and Social Responsibility in International

Management
As shown in Chapter 2, it is important to have an understanding of the legal and
political framework of the countries in which you do business. But, just because business
actions are legal or politically expedient does not mean that the action should be taken.
There are cases in which those steps might raise a larger personal, organizational, or
societal concern. As a result, firms might be better served in the long run by acting
within a broad set of value-based guidelines. Yet, practical, useful guidelines are difficult
to develop and to implement. Experience has also shown, however, that exacting such
rules may increase customer goodwill, help avoid litigation, and possibly even benefit
the culture and country in which firms conduct business.3
It is important to start by discussing ethical values—an individual’s moral judgment
about what is right or wrong. Once this is discussed, it is important to move from the
personal realm to the corporate one, taking a look at corporate guidelines and how they
help companies in various communities and nations in which they do business. For
decades now, multinationals have been urged to build such corporate social responsibil-
ity (CSR) clearly into their business strategies. Several frameworks exist to help multi-
national corporations (MNCs) move in this direction by spelling out various types of
ethical and socially responsible corporate behavior.4 Yet, this is a complicated issue—one
that becomes even more intricate and tangled when we move from country to country.
Philosophies and Perspectives on Ethics
How should we act and how should others behave? These are major, and enduring,
philosophical questions that have been debated for centuries. Ongoing debate reveals
many answers to these questions, as well as strong feelings associated with each. Because
these philosophies are not our direct concern here, we will boil them down to two main
positions: universalism and relativism. These two perspectives suggest sharply different
behavior for international managers.5
Universalism
Universalism is the belief that there are widespread and objective sets of guidelines for
behavior that cut across countries and cultures. Advocates of this position agree that
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there is a set of moral rules that everyone should follow. For example, universalists point
to the fact that there are certain behaviors that most every culture considers wrong, such
as harming others or the property of others, and that even seemingly disparate religions
share some basic values such as these.
Likewise, advocates also point out that there is wide acceptance of some basic prin-
ciples for doing business. For example, virtually every country in the world has some
sort of law that prohibits bribery, lying, and stealing in business.6 Such laws may be
enforced differently across nations, but the underlying moral code exists, and thus they
are widely applicable “rules” for doing business that everyone should obey. Universalists
are typically not content to sit back passively with the hope that people will discover
these basic principles on their own and then act accordingly. Instead, a common strategy
has been to actively develop a set of acceptable behaviors that constitute universal
guidelines. Several transnational or global codes of ethics for businesspeople currently
exist.7 For example, universalists have developed a set of minimal rights for international
workers. Among other things, these include the right to physical security, free speech,
subsistence, and nondiscriminatory treatment.8 A large-scale study of over 30,000 respon-
dents from 29 countries shows that those from Middle Eastern countries (such as Egypt
and Saudi Arabia) are more likely to endorse a universalist position on ethics than are
those from over 20 other Western and Eastern countries.9 This can have important
implications for business dealings such as negotiation and conflict resolution across these
cultures.
Figure 3.1 outlines several of the more well-known global guidelines.10 These codes
deal with topics as diverse as basic human rights, product safety, environmental concerns,
and illegal payments. Figure 3.2 provides a more in-depth look by examining the United
Nations Global Compact (UNGC) code. This code consists of a number of principles
that multinationals should follow, but it also provides some specificity in areas such as
human rights, the environment, and corruption, all of which should be taken into account
UN Universal Declaration of Human Rights

Organization for Economic Cooperation and Development Guidelines for Multinational Enterprises
European Convention on Human Rights
Helsinki Final Act
International Labor Organization’s Declaration of Principles Concerning Multinational Enterprises
and Social Policy
International Covenant on Economic, Social, and Cultural Rights
International Covenant on Civil and Political Rights
UN Code of Conduct on Transnational Corporations
European Economic Community Code of Conduct for Companies with Interests in South Africa
Sullivan Principles: A set of seven rules, set forth by Rev. Leon Sullivan of the U.S., for companies
doing business in South Africa during the apartheid-era (pre-1994). They advocate equal
treatment for all in pay, advancement, and other employment practices
Figure 3.1 Sets of Ethical Obligations for Firms Conducting International Business.
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Human Rights—Businesses should:

Principle 1 Support and respect the protection of internationally proclaimed human rights
Principle 2 Make sure that they are not complicit in human rights abuses
Labor Standards—Businesses should:
Principle 3 Uphold freedom of association and the recognition of the right to collective
bargaining
Principle 4 Work to eliminate all forms of forced and compulsory behavior
Principle 5 Eliminate child labor
Principle 6 Eliminate discrimination due to employment and occupation
Environment—Businesses should:
Principle 7 Support appropriate cautions to protect the environment
Principle 8 Undertake initiatives to improve environmental responsibility
Principle 9 Encourage the development and diffusion of environmentally friendly
technologies
Anti-Corruption—Businesses should:
Principle 10 Work against corruption in all its forms, including extortion and bribery
Figure 3.2 The United Nations Global Compact.

Source: United Nations Global Compact (2000) The Ten Principles, available at: www.unglobalcompact.org/
AboutTheGC/TheTenPrinciples/index.html.
if firms wish to operate with integrity. This initiative, launched in 2000, is a partnership
among companies, labor, academics, and governments. Over 3,000 companies from 100
countries have endorsed the principles. U.S. firms, such as Nike and Cisco, exemplify
the willingness of the private sector to promote corporate citizenship and for business
to be part of UNGC’s goal of a better and more inclusive global economy.
In practice, however, at least two problems emerge with the implementation of
universal principles. First, because the codes attempt to be broad and universal, there is
plenty of ambiguity about how they should be interpreted. This has led to inconsistency
in the way that different multinationals view (and use) principles such as “favorable
working conditions” and “cooperation with local government.” Are favorable conditions
defined by a 10-hour work day, by regular breaks, and a minimum wage? Some codes,
such as the UNGC, have made efforts to provide specific definitions. They have elabo-
rated on the ten basic principles, providing website tools, resources, and implementation
details that can help firms better deploy the principles.
A second issue is that many countries and companies have not officially adopted all
(or even some) of these ethical obligations. For example, although the U.S. is often seen
as being highly concerned with ethical issues, it was slow to sign on to several sets of
these global principles presented in Figure 3.1.11 This is partly because the U.S. disagrees
with certain aspects of the guidelines. In addition, it is due to internal political pressures.
At times, the U.S. has endorsed various international agreements dealing with ethical
issues, but has had trouble getting other countries to cooperate. The enforceability of
agreements after getting parties to sign on is a related problem. The UNGC, for example,
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has little regulatory or enforcement “teeth” to it; indeed, it does not police or measure
the actions of companies that have signed on. Members are required to report annually
on their progress, while the U.N. takes complaints of egregious or systematic abuse of
the principles. If there is some evidence of abuse, companies will be asked to respond.
If no response is received or if it is inadequate, companies are removed from the Compact.
Relativism
A popular alternative viewpoint is that of cultural relativism.12 Proponents of relativism
believe that ethical behavior in any one country is determined by its own unique culture,
laws, and business practices. Therefore, if it is common to provide a public official with
a nominal payment to process paperwork for imports, this may be the thing to do—even
though it may be illegal in your own country. This perspective of “when in Rome” is
often justified on several counts. Perhaps the most important argument is that to do
otherwise is to disrespect the culture in which you are a guest. The obvious implication
of this argument is that international managers should follow the accepted practices of
the country in which they are doing business.
An example of this situation occurred some time ago when American actress Michelle
Pfeiffer was in Moscow filming the movie The Russia House. She left the set after a few
weeks of filming to protest the fact that Russian extras were not allowed to eat the lav-
ishly catered food provided to foreign actors. She was embarrassed by this because the
movie was being made at a time and in a place where it was often difficult or very
expensive to get quality food, soap, and other necessities. As it turns out, however, there
was a law forbidding Western film companies from feeding the Russian extras that they
employed. Local officials were called to explain this to Ms. Pfeiffer, as well as convince
her to return to the set, stating that this was just the way things were done in Russia.
Pfeiffer was eventually convinced, stating, “I didn’t sleep that night. Then I realized, this
is so typically American of you. Whether I was right or wrong wasn’t the issue. The issue
was, do I have the right as an outsider to come in and force my sensibilities on this
culture?”13 Ms. Pfeiffer’s reaction here is a good example of cultural relativism in practice.
Research shows that there may be differences in adherence to the universalist vs.
the relativist position. For example, one study compared views about marketing ethics
and found that a U.S. sample was significantly higher in what they called idealism (uni-
versalism) and lower in relativism than was a Chinese sample. In this study, U.S. mar-
keters were more likely to believe that actions are moral if they conform to some
absolutes (e.g., the appropriateness of a successful ad campaign that may have been
offensive to certain groups). The Chinese relied on a combination of relative and abso-
lute values to make their ethical decisions. Moderation of behavior in concrete situations
rather than absolute rules has a bigger impact in guiding their decisions.14
Corporate Social Responsibility
Becoming a relativist—even if only temporarily—does not give a manager or a firm a

“get out of an ethics issue free” card. Unfamiliar, and perhaps distasteful, customs are
not immune from analysis or judgment. For example, most people would not agree that
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suppressing political freedom, using slave or prison labor, or other violations of human
rights are morally acceptable because these happen in Rangoon rather than Santiago,
Jakarta, or Miami.15 Likewise, being a universalist does not always translate into the
need for action, such as the enforcement of those codes for the good of others. In fact,
the belief that corporations are responsible for the impact of their activities on various
stakeholders (such as their shareholders, their local and foreign communities in which
they operate, and the environment) is the relatively recent notion of corporate social
responsibility (CSR). CSR is the deliberate inclusion of public interest into corporate
decision making, including attention to the so-called triple bottom line: people, planet,
and profit. Critics of this approach argue that CSR detracts from the fundamental role
of business—which is business! It’s not personal. Others are skeptical of efforts made
by organizations in order to engage in CSR, calling it “window dressing” and an effort
to keep watchdog groups and government off their back.16
Likewise, devotion to a relative or a universal belief set does not always lead to
clear choices, nor does it always satisfy critics. Consider that firms sometimes provide
responses and justifications for continuing their business activity in countries where
indisputably immoral actions are taking place. In apartheid-era South Africa, for exam-
ple, many multinationals argued that if they divested their business interests in the
country, greater harm would result to those for whom sanctions were intended to help.
In particular, many thought that divestiture would cause many black employees to lose
their jobs. Some firms also argue that they would be better able to push for government
reforms by, for example, remaining a player in the South African economy.17
Is a corporation being socially responsible by “staying in the game” or taking their
capital and going home? “Stay in the game” arguments continue to be made by firms
doing business in countries with problematic records in human rights, the environment,
and more. PepsiCo continued its business in Burma for years after a coup d’état in 1962
that brought a repressive military regime to power. Under increasing pressure from
consumers, government and human rights organizations, PepsiCo decided in 1997 to
end its presence there.18 This is the same year that international economic sanctions were
imposed on Burma by the U.S. Many other firms have since left. The Burma military
government has also cut deals with foreign companies to commercialize its vast natural
gas reserves, including U.S. firms such as Unocal (now Chevron). In the accompanying
International Insights feature, we provide background on the social responsibility issues
raised by this business arrangement—some of which might conflict with the UNGC’s
basic principles for multinationals, presented in Figure 3.2.
Beyond Rangoon: Chevron and Human Rights in Burma

The behavior of the repressive military government in Burma has been well known since at
least 1988, when it initiated a crackdown on pro-democracy demonstrators, killing thousands.
Free elections in 1990 resulted in a new prime minister, Aung San Suu Kyi, but the military
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refused to recognize the election and placed her under house arrest. Although the outside
world did recognize her contributions (she won a Nobel Prize in 1991 as well as a U.S.
Congressional Gold Medal), she has remained confined for 14 of the last 20 years, only
having been released in 2011.
After the 1988 crackdown, some U.S. companies pulled out of Burma because of what
they saw as a hostile investment climate, disappointing returns, and an active anti-Burma
movement within the U.S. Sanctions have prevented U.S. investment there since 1997, and
an import ban on Burmese goods to the U.S. has been in place since 2002. Prior to these
actions, Burma signed a contract in 1992 with a French firm giving them the right to develop
their massive Yadana gas field, enough gas for 40 years of heavy production. The French
invited other companies to buy in as partners, with the military government netting an esti-
mated $400 million a year.
Unocal (purchased by Chevron 2005) decided to invest in the project, despite the known
risks, including a U.S. State Department report indicating that the Burmese military maintained
order via “arrests, harassment, and [the] torture of activists. Torture, arbitrary detentions, and
compulsory labor existed.” Unocal felt that the benefits to shareholders and the Burmese
people outweighed these problems, and in late 1992 it bought a stake in the venture. A
pipeline was built for the gas (under the sea) across Burma and crossed a region inhabited
by the Karen, a minority group hostile to the government. Between 1993 and 1998, the
pipeline was completed, but at huge costs to the Karen. Human rights groups and the U.S.
State Department reported that the military forced hundreds of thousands of Burmese to
labor on the project, under very harsh conditions, and that many thousands were subject to
forced resettlement. Unocal’s own consultant, hired in 1995 to investigate the situation,
concurred with earlier reports of human rights violations and added that imprisonment and
executions of those opposing to forced labor occurred.
Unocal asserted that engagement rather than an isolation strategy was the best course
of action in order to move toward a more open Burma. By 2004, the pipeline was delivering
600 million cubic feet of gas per day. During construction, Unocal had begun programs to
benefit the Burmese living along the pipeline, including paid jobs to over 7,000 construction
workers and continued employment of about 500 afterward. New medical programs were
developed, schools and roads were built, and Unocal provided opportunities for small Burmese
businesses. Those negatively affected by Unocal’s engagement strategy, however, did not feel
that the benefits outweighed the downsides. Fifteen Karen Burmese minority individuals filed
suit in U.S. courts, seeking millions in retributions for injuries inflicted by the military along
Unocal’s pipeline via a law allowing foreign litigants to seek damages in U.S. courts. They
claimed that Unocal was a partner with a repressive government and thus complicit. The
case was first dismissed, then appealed, and finally settled quietly by Unocal in early 2005.
The Burmese litigants received $30 million and Unocal also agreed to create a new fund to
improve living conditions there (beyond the programs above they already initiated).
Some observers were shocked that Unocal settled, especially those who were defendants
in similar cases (e.g., ExxonMobil, Coca-Cola, and Del Monte Foods). Weeks after the settle-
ment, Unocal merged with Chevron. This case is important because, as one law professor
observed, “[t]raditionally, international human rights law is applied only to countries and not
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individuals or companies.” Yet, even human rights groups are divided around the question
of whether the pluses outweigh the downsides. EarthRights International said “whether
Chevron is there or not, those dollars are still going to flow to the generals as long as
someone is paying the gas bills.” Others, however, maintain that there would be great
symbolic and moral value if the American firm had refused to profit from an alliance with a
repressive military regime. Importantly, in 2011 the military took steps to relinquish control
in what they say will return Burma to the family of nations, including the release of Aung
San Suu Kyi. The EU and the U.S. have in turn eased sanctions on Burma.19
Pressure on Firms to Engage in CSR

Corporations that seek to act as relativists are not always given a free pass, as suggested
by the governmental pressure put on PepsiCo and by Unocal’s (Chevron) out-of-court
settlement with Burmese citizens. Likewise, special interest groups and non-governmental
organizations (NGOs) also press their cases for CSR. For example, well before Unocal
settled its lawsuit, protestors showed up at Unocal gas stations in the U.S. to draw
attention to the indirect support provided to the authoritarian regime in Burma. Other
companies, such as Heineken and Carlsberg, terminated their investments in Burma after
similar protests. In 2007, Apple came under fire from Greenpeace and Computer TakeBack
Campaign for the use of toxic chemicals in manufacturing, as well as the production of
e-waste, a great deal of which is disposed of overseas. Steve Jobs responded to criticism
with an open letter reinforcing Apple’s commitment to the environment and outlining
new steps that the company would take to demonstrate this, including the phasing out
of the most toxic chemicals used in its product production. The Rainforest Action
Network pressured Citigroup with full-page ads in national publications, lobbying by
actors shown cutting up their credit cards, and more. Citigroup agreed to no longer
finance projects in emerging markets that would damage the environment.20 This reac-
tive stance of many firms has led to criticism of high-profile CSR efforts of some firms
as mere public relations. Yet, there are several signs that this criticism might be misplaced,
including research on CSR.
Firm Performance and CSR

A review of 167 studies conducted over the past 35 years indicates that there is a link,
albeit small, between firm performance and social responsibility actions. A more recent
study of 200 companies found that the firms most engaged in social and environmental
sustainability in developing countries were also the most profitable.21 This goes hand in
hand again with a global survey of executives (see the Global Innovations feature), which
reported that over 50 percent of surveyed executives felt that CSR provided a better
brand reputation, made a firm more attractive to employees, and provided better deci-
sion making in the long term. Figure 3.3 takes a peek into the future. The figure shows
the issues that executives from different countries feel will be important five years down
the road. The continued attention given to this topic, as well as pressure from NGOs,
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Issue (global rank) U.S. Germany China Brazil
Environment (1) 2 2 2 1
Safe products (2) 5 6 3 2
Retirement benefits (3) 4 1 4 7
Health care benefits (4) 1 8 1 8
Affordable products (5) 6 3 5 3
Human rights standards (6) 8 9 9 4
Workplace conditions (7) 9 4 7 6
Outsourcing job losses (8) 3 5 13 13
Privacy/data security (9) 7 7 6 10
Ethically produced products (10) 10 10 8 9
Investment in developing countries (11) 16 14 12 5
Ethical marketing (12) 12 16 11 11
Political influence of firms (13) 11 12 14 14
Executive pay (14) 15 11 10 15
Other (15) 13 15 16 12
Opposition to freer trade (16) 14 13 15 16
Figure 3.3 What Corporate Social Responsibility Issues Will Matter Most in Five Years?
Source: Adapted from The Economist. (2008). Just good business: A special report on corporate social responsibil-
ity, January 19, 20.
has changed the minds (if not hearts) of some multinationals. This could be, in part,
due to a changing perspective on CSR, one that also makes good business sense. In the
accompanying Global Innovations feature, please read about the proactive efforts that
firms take in order to do good for the global community as well as to profit from their
CSR efforts.22
Global Innovations
Doing Good to Do Well: The Changing Value Proposition

for Corporate Social Responsibility
Recent views of corporate social responsibility (CSR) suggest it is no longer a “do-good
sideshow,” but instead is more mainstream and a source of value to a firm. According to
The Economist magazine, CSR business is booming. Many firms have preferred to call their
efforts “corporate responsibility,” dropping the social part of the title because it is too narrow
or confining. Some even refer to it as “building sustainable business.” Nike was ahead of
this curve, releasing a twenty-fifth anniversary edition of the Pegasus running shoe that was
designed around the concept of green principles and techniques in 2008. Nike now rates
each sneaker that it makes according to a sustainability index, a software tool that scores
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each product on its environmental impact.23 Importantly, Nike has also used this method as
an impetus for saving the company a lot of money. The Eco-index was developed by a
consortium of over 100 apparel companies who ultimately want a common index for rating
the effects of their products along environmental/human rights line—similar to the energy
rating tags on home appliances.
While the group is comprised of large players in the apparel industry (such as Levi Strauss,
Nike, and Target), the message is being widely heard. A survey of over 1,000 global execu-
tives conducted in 2011 by The Economist showed that nearly 67 percent of executives
believe the degree of priority that their company has given to CSR to be high or very high,
rising from 35 percent (shown in a 2005 survey).24 More and more of those executives believe
that CSR actually works and is not just for public relations, which has been hinted at in the
past. In this same survey, only 4 percent of executives reported that corporate responsibility
activity was a “waste of time.” Nearly 60 percent did say that it is a necessary cost of doing
business, but about the same percentage said that it gave their firm a distinctive position in
the market. If anything, experts suggest that firms may be too defensive about their contri-
bution to society.
Consider the apparel industry and its major impact on the environment. Tanning leather
for shoes requires toxic chemicals and synthetic fabrics need lots of crude oil and other
materials that release volatile compounds. A staple of the apparel industry (cotton) requires
huge amounts of water in order to grow. The cotton is then shipped from the U.S. to Asia,
where it is turned into thread and fabric. It is then shipped to the Dominican Republic for
cutting, then to Haiti for sewing, then back to the U.S. to be distributed to outlets. Some
clothes circle the globe multiple times before then ending up on the shelves of Old Navy or
the Gap in your town. And Americans tossed out nearly 13 million tons of textiles last year,
after they were finished with these products (such as jeans)—it is a figure that has risen
much faster than any other source of trash.
The Eco-index can be used here to rate a product such as jeans. Questions covering the
various stages of product creation and the processes involved in producing the products feed
into a product grade. For example, Levi’s can gain “points” by developing a recycling program
for donating worn jeans to Goodwill, and Timberline’s shoe score will rise if its tannery
suppliers have water purifying systems. Points are lost for the inclusion of, or use of, too
many packing materials or a lengthy supply chain. The index also factors in estimates of how
many times the product will be washed. They know, for example, that the 3,480 liters of
water used in a pair of jean’s lifetime can be reduced by using a cold water wash and more
points are gained via line drying. Critics say that the estimates are just that—estimates—and
that the self-report nature of the measure leaves too much open to the manufacturer. The
index has yet to be officially released as members have not yet agreed on various index
elements.
Nevertheless, Levi’s has also done well with the current index, thus illustrating the new,
truly dual purpose of CSR. It has improved operations by changing its transportation routes
for increased efficiency and reduced carbon emissions by 700 million tons. It also saved money
by cutting back on packaging costs and materials and now only permits three labels to be
attached to jeans (before, there were up to eleven tags!). The business benefits of CSR extend
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well beyond the apparel industry. Firms as varied as PepsiCo, FedEx, Intel, and Pfizer are
supporting small teams of their employees to go to developing countries such as India, Ghana
and Nigeria to provide free consulting services to non-profits. IBM, for example, gets more
volunteers than it can handle—those chosen continue to receive their salary while on the
two- to four-week assignment, representing a significant firm investment per employee. The
program has received great publicity, but there is also great value to IBM. For one, the firm
credits millions of dollars of new business to the program, such as a contract it received to
manage a public service program in Nigeria. Moreover, the firm gains local name recognition
in markets that it seeks to enter. IBM employees report that the experience is personally valu-
able and “gives meaning” to their career. Data also show that these IBM employees remain
on the job longer and rise further in the organization. Doing good can mean doing well!25
Cross-National Differences in Ethical Perspectives

The universalism–relativism debate and the CSR movement raise the question of whether
countries diverge in how they view and act on ethical principles in business. Many stud-
ies have been conducted on this topic and they generally confirm that there are different
approaches taken to ethical issues across countries. One study, for instance, found that
American managers were more likely to view personnel issues (such as employee theft
and misuse of company information) in ethical terms than were their counterparts from
Austria and Germany, who were more likely to view these from a legal lens. On the
other hand, Austrian and German managers were more likely to view involvement in
local politics in ethical terms, whereas Americans thought this to be a personal choice
not of ethical significance. These differences may reflect cultural values. Americans tend
to be highly individualistic and, as a result, may feel that the individual is the main
source of ethical values. Germans and Austrians, while also generally individualistic,
tend to be more community oriented. In fact, business ethics in these countries has been
described in terms of the relationship between businesses and their local environments.26
Another interesting study compared the reactions of managers in the U.S., France,
and Germany to several ethical topics, including illegal payments, coercion, conflicts of
interest, and environmental concerns. These issues were presented to the managers in
the form of short stories that provided background. The following is an example of one
of the stories that managers read:
Rollfast Bicycle Company has been barred from entering the market in a large Asian
country by collusive efforts of the local bicycle manufacturers. Rollfast could expect
to net $5 million per year from sales if it could penetrate the market. Last week, a
businessperson from the country contacted the management of Rollfast and stated
that he could smooth the way for the company to sell in his country for the price
of $500,000.
The managers were then asked whether they would pay the bribe. In most cases, U.S.
managers were less likely to pay the bribe than either of the European managers, who
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in turn did not differ much from one another. Managers were also asked about the
reasons for their behavioral reactions. Not surprisingly, the reasons varied across coun-
tries. For example, nearly 50 percent of the U.S. managers said that they would not pay
a bribe because they thought it was unethical, illegal, or against company policy. Only
15 percent of the French and 9 percent of the Germans mentioned these reasons. Instead,
the Europeans were much more likely to pinpoint competitive forces as the reason why
they might consider paying the bribe (e.g., “It is the price to be paid to do business in
that country” or “Competition forces us to take the offer”). Overall, the U.S. managers
were more concerned about ethical issues, while the Europeans were more concerned
about maintaining a competitive business presence in the market.27
Studies using different research methods in several other countries have reached
similar conclusions. Remarkably, this research shows that even when attitudes about
ethical issues are similar across countries, they may be the result of different moral
reasoning processes. These different perspectives may result from the legal frameworks
of each country, their economic environments, or their unique cultural values. As a result,
cross-national differences in ethics may also be fairly resistant to change in the short
term, even if the political, social, and economic conditions in a country are shifting
dramatically.28
For instance, despite the incredible changes that have occurred in South Africa over
the past decades, attitudes toward ethical business practices in the country have remained
stable. Another recent study underscored this cultural “persistence” effect on ethical
attitudes. These researchers wanted to separate the impact of country and culture on
ethical behavior patterns. They compared the responses of Chinese, Americans, and
Chinese-Americans (living in the U.S.) from a questionnaire that included items measur-
ing general and ethical values. The results showed that cultural background and beliefs
were more important than national background in predicting similarity in values and
ethics.29 More research shows that these ethical postures have an effect on business
interactions across culture. Chinese negotiators, for example, are more likely to rate
cultivating relations and friendships through gifts, entertainment, or personal favors as
more appropriate than are U.S. or British negotiators. Chapter 7 will show that personal
gifts are a more common relationship-building method in Asian cultures.30
Codes of Ethics
Another example of the different emphasis that nations place on ethics can be found by
looking at the presence (or absence) of corporate codes of conduct across countries. One
important study looked at this issue by comparing 600 European firms (British, French,
and German) with a similar sample of American companies and several interesting find-
ings were presented. First, U.S. firms were more likely to have ethical codes in the first
place. Only about 30 percent of French firms, 51 percent of German firms, and 41 per-
cent of British firms had codes of ethics in place—all less than a corresponding figure
of 75 percent for American companies. Further, most European firms that did have codes
had instituted them after 1985. The Zeiss Company of Germany introduced a code for
its employees as early as 1896, but this is the exception rather than the rule. Those
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European firms with corporate codes were also more likely to have a stronger U.S. con-
nection than those without codes: 25 percent of European firms with codes were U.S.
subsidiaries, whereas only 2 percent without such codes were U.S. subsidiaries.31
In addition to looking at whether a company had a code of ethics in place, research
has also looked at differences in the content of the codes.32 Although there are some
differences among European companies, when considered as a whole they differ sharply
from the codes of U.S. firms. For example, 100 percent of European firms mentioned
employee conduct somewhere in their corporate codes. Only 55 percent of U.S. firms
dealt with this issue. In keeping with the traditional American focus on marketing,
however, U.S. firms (80 percent) were more likely to mention customers than European
companies (67 percent). And, U.S. firms (86 percent) referred to government relations
much more frequently than did their European counterparts (20 percent).
What the codes said about political issues also reveals important things about their
outlook. Many U.S. firms state that their commitment to abiding by the law is strong,
but they appear to mistrust the role of government in business. For example, the cor-
porate code of Dow Chemical (at the time) stated that “[we] pay our taxes gladly, yes,
but we do not pay them blindly [emphasis added]. We have the right to question the
wisdom of regulatory zeal.”33 In contrast, the few times that European firms mention
political issues, they do so in general, positive ways. Bertelsmann (Germany) states that
it “supports a free, democratic and socially responsible society” and Wella Corp.
(Germany) says that it “welcomes political, social, and cultural activities of employees.”
Impact and Enforcement of Codes
Although there has been a good deal of attention placed on the presence and content
of ethical codes, this does not mean that corporate actions always align well with those
prescriptions. In fact, one expert suggests that claims made about the impact that these
codes have on employees and stakeholders—especially on those in developing countries—
are exaggerated. Many companies freely admit this problem, including Levi Strauss, J. C.
Penney, Target, and Walmart. They say that with operations located around the world,
the real issue is enforcement.34 Code enforcement, auditing of foreign partners to assure
they comply with code elements (e.g., no child labor), and applying sanctions are all
easier said than done.
In highly publicized cases in the 1990s, Nike was slow to act on allegations of
violations of its code in areas such as treatment of workers and child labor among its
subcontractors in Pakistan and elsewhere. Nike’s policy at the time suggested that it
would be sufficient if contractors adhered to local labor laws, but the company eventu-
ally toughened its ethical code after critics demonstrated that local laws did little to
protect workers in some countries.35 Boycotts conducted on college campuses and pro-
tests held at NikeTown stores helped change Nike’s ethical stance, so much so that in
1998 CEO Phil Knight acknowledged that the Nike product “had become synonymous
with slave wages, forced overtime, and arbitrary abuse.”
Nike responded to this view by increasing the presence of monitoring programs, the
use of auditors, and adding more external observers at suppliers’ plants. In 2005, Nike
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became among the first companies to release the names and location of its factories—
both to increase transparency and to pressure those overseas suppliers to hold to ethical
codes. Yet, this is a tall task to fulfill, as Nike has nearly 700 contract factories, which
employ thousands of workers across multiple countries in its global supply chain, many
with weak local regulations. This leaves Nike and other companies like it to police their
suppliers. With over 95 percent of its shoes produced in China, Vietnam, Indonesia, and
Thailand, the challenges are huge—success is far from complete. To its credit, Nike
turned over its audit data to an independent evaluator (MIT). The findings released in
late 2006 were stark: “despite significant efforts and investment by Nike . . . workplace
conditions in almost 80 percent of its suppliers have remained the same or worsened
over time.”36 For its part, Nike continues to make changes and to work to respond to
criticisms, as well as to report actions taken to improve these conditions and criticisms.
At least one observer has stated that Nike now has a “well-developed focus for improv-
ing conditions in contracted factories, aiming for carbon neutrality, and making sports
available to young people across the world.” Overall, critics charge that without enforce-
ment, codes are nothing more than public relations efforts designed to assuage custom-
ers about poor working conditions in developing countries.37
The solution is not easy, as Nike found when it severed a contract with Saga Sports,
its chief supplier in Pakistan, over a child labor dispute. About 4,000 workers lost their
jobs, which in turn impacted thousands more who lost their family income as a result.
In addition, while government officials admit Saga did wrong, they worry about the
void left behind and the potential impact of extremists who may now have more appeal
there.38 Also in the 1990s, in Bangladesh, clothing makers tried to head off criticism of
child labor practices in that country by removing children from the workplace, only to
see them end up in worse situations, such as prostitution.39 As shown by these examples
and the International Insights feature, doing the “right thing” is not always an easy or
obvious decision.
Is Doing the Right Thing Wrong?—An American Faces

an Ethical Dilemma in South America
Several years ago, we spoke to a global purchasing executive of a medium-sized multinational
about the challenges of doing business in some international markets. John Williams (a pseud-
onym) had been with his firm for over 25 years and had a variety of challenging assignments.
One of those assignments was in a South American country where he encountered a very
thorny ethical issue—one that he said still bothers him today. His firm had just purchased an
operation from a large local company. This allowed his company to move its equipment to
a new building and to start operations back up in record time. The company hired new line
employees, but used the existing staff line already located in the South American country, as
well as some divisional support from the U.S.
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The problem started when Mr. Williams, as the country manager, requested the purchasing
unit and others to cut costs and improve quality. He asked the managers of these units to
tour factories of their suppliers in some small rural towns to address these issues. In one
factory, suppliers noticed that about a half dozen of the workers were very young, maybe
13 years old at most. Recalling the company’s ethical code (that had been drummed into
them), the suppliers were deeply concerned. One of the managers raised this child labor
issue, making the supplier very embarrassed. The suppliers began a frantic discussion in their
native language with one of the firm’s managers in the visiting party. After several minutes
of emotional discussion, an explanation was offered by the suppliers (in English) to all. The
firms’ managers from that country supported the explanation, and underscored to Mr. Williams
later that it was normal, acceptable, and legal—generally not a problem.
The explanation that had convinced the managers that this practice was acceptable was
not obvious when it was considered from afar in the U.S., especially because it so clearly
violated corporate code. The argument was that, even in this small town, children are left
homeless and parentless. The only alternative for these children is to live off the street, thus
they end up begging and stealing. If they do, the townfolks pressure the police to “run the
delinquents off.” Strangers may victimize the children or recruit them for criminal activities
in the big cities. So, the courts have required local large businesses to provide room, board,
and other services (medical care, education, an allowance) to these homeless children. In
return, the businesses can have them do some tasks similar to household chores (run errands,
wash cars, etc.). The suppliers stated that this was a successful program designed to help
abandoned children, unlike what they had heard is done in the U.S. Interestingly, every one
of the company’s local managers in South America thought that it was okay. They also pointed
out that the firm’s headquarters in-country has office boys that run errands and the like, and
that the law there allows 12-year-olds to work in some jobs. Yet, Mr. Williams was strongly
opposed to this practice and also suspicious of the suppliers who had explained the situation
to him.
Given the seriousness of this issue, you might understand Mr. Williams’s suspiciousness.
Child labor not only violates corporate code, but if this practice became public, it could have
serious consequences for the firm. Mr. Williams demanded copies of documents that sanc-
tioned the relationship between the courts and the children/company. Representatives told
Mr. Williams that it would be insulting to ask for this and a sign that they were not trusted.
He replied that he understood this cultural issue, but that he needed his American cultural
values met, too—which meant some form of proof that this was acceptable. But, he did not
yet press that course of action.
Instead, Mr. Williams followed up with visits in smaller, informal groups where he asked
a trusted local national, with lots of U.S. experience, to make the request yet again, in private,
to the supplier’s management. The result of this was a promise that they would provide some
documentation. Feeling satisfied, Mr. Williams returned to his office. But the documentation
never arrived. Over time, the issue was always in the background and never quite resolved—
no paperwork was ever presented. He finally resolved this lingering situation by not giving
that supplier any new business and as the “legacy” business was completed, they dropped
them from their bidders list.
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Upon reflecting on the situation, Mr. Williams told us that he did not know whether
the children were exploited by the company any more than they would be by an orphanage,
foster parents, or by begging on the streets. He also said that “I do know, though, that I
still have a very uncomfortable feeling about the whole affair.”
Ethics Associated with Bribery and Other

Questionable Payments
Concerns about whether multinationals are responsible for protecting the rights of
workers—even employees of their foreign contractors— form a big ethical question, to
be sure. There are many other issues, however, around which ethical concerns swirl. The
treatment of women in the workplace, for example, is highly uneven. In some countries,
it is illegal to hire female managers for many jobs, whereas other countries have legal
protection for gender discrimination in employment.40 Is it unethical to do business in,
or with, those countries that do not hire female managers? Similarly, is it unethical for
firms to avoid strict domestic environmental laws by locating facilities offshore? Is it
right for a multinational to market a drug in India that has yet to pass very stringent
trials in the U.K. or the U.S.? In some of these situations, multinationals have argued
that their actions are justified and even morally correct, occasionally using relativist
arguments.
One international business practice that intersects with ethical relativism is the use
of questionable payments. Practices such as bribery, extortion, and “grease” payments
made to bureaucrats and business leaders, both foreign and domestic, still hold a dubi-
ous place in international business.41 In addition to direct monetary payments, suspicious
practices such as giving expensive gifts (e.g., jewelry and art), providing lavish entertain-
ment (e.g., exclusive dinners, tickets to sporting events, or concert seats), and offering
free trips to foreign or domestic dignitaries also occur in business around the globe.
In fact, the use of illegal or questionable payments has been common practice in
many societies throughout recorded history—including Africa, Asia, the Middle East,
Europe, and the Americas. Research done on many early civilizations show that careful
records were sometimes kept for such payments, a practice still replicated today. Bribery
is so much a part of nearly every culture that most languages have a word for it. For
example, the payment of baksheesh in some Arab and Turkish-speaking countries may
reflect centuries of rule by an all-powerful state (such as the Ottoman Empire). In these
countries, baksheesh could provide the protection for businesses that an imperfect and
sometimes abusive legal system could not. Likewise, in Mexico the term la mordida
(literally, “the bite”) might reflect a similar sense of powerlessness with the government
bureaucracy. Similar terms in other languages—such as the Italian bustarella (“little
envelope”) and the French pot au vin (“jug of wine”)—carry vivid and evocative images.
In Nigeria, a foreign firm that does not dash local bureaucrats may not be able to com-
pete well within that country. Countless other countries from all continents also have
terms for such payments.42
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Interestingly, almost every country in the world explicitly outlaws bribery of its own
officials.43 So, if an illegal payment is made to a foreign official, that person or corpo-
ration risks prosecution. Despite this near universal view of bribery, countries vary
dramatically in terms of how much they tolerate the practice. In some countries, there
is actually little or no risk of prosecution because bribery is so commonplace, if not
expected. A recent survey of Indonesian businesspeople showed that over 65 percent of
households said that they had been asked for “unofficial” payments by public officials.
Likewise, over 50 percent of respondents also said that, in some locations, teachers ask
for payments in order to ensure a child’s continued enrollment in school. Even public
officials themselves acknowledged their role in bribery—nearly 50 percent admitted that
they received “under the table” payments.
In other cases, however, the magnitude of bribery and other forms of corruption
(e.g., embezzlement of company or government funds) may be just too great to ignore,
even if bribery is an accepted practice within a given country. In 2003, nearly two-thirds
of Indonesian businesspeople polled stated that they would willingly pay up to 5 percent
of their annual revenue in additional taxes if it would be used to battle corruption.44
The situation has changed dramatically for the better since then, however, beginning
with the election of President Susilo Bambang Yudhoyono in 2004—the nation’s first
directly elected leader. Mr. Yudhoyono is a retired four-star general who rose through
the ranks during Indonesia’s era of dictatorship. But, beginning with his handling of a
tsunami and its aftereffects during his first year in office, he has proven to be a strong
leader. Plus, his image as a dedicated corruption fighter with high moral integrity has
ushered in a time of financial and political stability for Indonesia. He was re-elected to
another five-year term in 2009.
Bribery Across Countries
In Figure 3.4, we present the results of a survey conducted annually by Transparency

International (TI), a nonprofit organization that tracks corruption worldwide. The 2013
survey interviewed over 114,000 people across 107 countries regarding corruption-related
activity in their respective country. Corruption was defined as the percentage of people
who have reported paying a bribe within the last year to one or more service agencies
(e.g., a government office, to police/law enforcement, to an educational agency, etc.). In
the figure, bribery rates are shown for the ten most corrupt nations, as well as the ten
least corrupt nations. As you will see, bribery is rare in Australia and in several of the
Nordic countries. The U.S. rate of 7 percent compared well, but it is not in the top ten.
You will also note that some African countries (such as Sierra Leone and Liberia) bring
up the rear as the most corrupt nations, according to TI. In Sierra Leone, for example,
84 percent of people surveyed reported paying a bribe in the previous year. Overall,
nearly one in four people around the world reported paying a bribe last year—a shock-
ingly high number, but relatively consistent across survey years.45
Some countries that have ranked relatively high in previous survey years have expe-
rienced well-publicized corruption scandals or crackdowns. French magistrates became
fed up with a system of cozy relationships between business and government, especially
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Least Corrupt Most Corrupt
Nation % reporting Nation % reporting
Australia 1 India 54
Denmark 1 Uganda 61
Finland 1 Zimbabwe 62
Japan 1 Mozambique 62
Spain 2 Libya 62
Canada 3 Cameroon 62
Korea (S) 3 Kenya 70
Malaysia 3 Yemen 74
New Zealand 3 Liberia 75
Norway, Portugal, Uruguay 3 Sierra Leone 84
Figure 3.4 Rankings of the Most Corrupt and Least Corrupt Nations.
Note: Corruption is defined as the percentage of respondents in each country who report having paid bribes in the
past year (to any of eight service areas such as law enforcement, police, education, etc.).
Source: Adapted from Transparency International, Global Corruption Barometer (2013), available at: www.trans-
parency.org/gcb. About 1,000 people in each of 107 countries responded to this survey.
at a time when an anemic economy and high unemployment rate plagued the country.
Since 1995, dozens of top executives and politicians have been targeted for investigation,
if not already convicted and jailed, and these include leaders of some of France’s most
well-known companies.46 The New York Times reported (at the time) that French and
Swiss investigators researched claims that the French engineering firm Alstom had paid
hundreds of millions of dollars in bribes in order to obtain contracts in Asia and South
America from 1995 to 2008.47 France, and some other European countries, have immu-
nity laws that protect those with high government roles from prosecution. This law
helped Jacques Chirac, the former president of France, avoid facing charges of financial
impropriety that allegedly occurred while he was in a position of authority in Paris.
During Mr. Chirac’s 2003 re-election campaign, opponents carried pictures of him that
read “Vote for me or I go to jail.”48 To their credit, however, Transparency International
ranked France (and Germany) as countries that made among the most progress in inves-
tigating and prosecuting corporate bribery since that time. A case in point is presented
in the accompanying International Insights feature involving a massive bribery scheme
by the giant German firm, Siemens AG.
Bribery as a Business Model—Bavarian Baksheesh at Siemens AG

What do the following have in common: transit companies in Venezuela; medical equipment
firms in China, Vietnam, and Russia; power companies in Iraq and Israel; oil firms in Mexico;
IT firms in Argentina; and telecom companies in Nigeria and Bangladesh? They have all been
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bribed by Siemens AG, the giant German engineering firm that makes everything from wind
turbines to high-speed trains. The Department of Justice and the SEC presented evidence
that the firm’s level of corruption was widespread and systemic. Between 2001 and 2007,
Siemens made at least 4,283 bribery payments totaling $1.4 billion to company and govern-
ment officials around the globe in order to win business.
These crimes involved employees at all levels of the firm, including senior management.
In early 2007, Munich police raided Siemens’ headquarters and carted away mounds of bank
records and other data. Shortly thereafter, CEO Klaus Kleinfeld abruptly resigned. More
evidence was then uncovered showing a pattern of bribery unprecedented in magnitude and
geographic scope.
The SEC showed that Siemens used “slush funds,” unreported accounts, and a system
of intermediaries to facilitate payments to government officers. For example, the firm paid
$40 million to Argentine officials, including the president who received $2.6 million. Payments
were made via sham consulting contracts in which officials were paid for “professional
services.” Siemens used removable “post-it notes” with affixed signatures to obscure audit
trails. They also set up “cash desks” where employees filled up empty suitcases with as much
as $1.3 million at a time to pay the bribes. Ironically, the cash desks used an “honor” system:
no questions asked, no documents required, with managers “approving” their own requests.
Between 2001 and 2004, roughly $70 million traveled in those suitcases. The SEC charged
the Siemens board with malfeasance because it ignored and suppressed red flags. The SEC
also accused Siemens’ former CFO of ignoring suspicious Nigerian payments, payments flagged
by auditors, and of misleading the board on compliance matters. About 300 other suspects
were investigated, and the German courts handed out suspended prison terms to three former
Siemens’ managers.
Although Siemens is a German company, the U.S. claimed Foreign Corrupt Practices Act
(FCPA) jurisdiction because the company was listed on the NYSE. For its part, Siemens vowed
to clean up its operations as part of a settlement agreement. In fact, the Department of
Justice described cooperative steps taken by Siemens after the corruption was uncovered as
“extraordinary.” It cited efforts made by Siemens to replace board members and the action
of hiring hundreds of new compliance officers since that Munich police raid in 2006. The
Department of Justice went on to state that Siemens took “aggressive steps” in order to
preserve evidence after that raid, sharing over 100,000 pages of relevant documents. As a
result, U.S. prosecutors argued for leniency for Siemens and factored this into their decision
not to press for the maximum fine of $2.7 billion.
Siemens was not formally charged with bribery, but instead admitted to inadequate
internal controls and doctoring of its books. Keeping charges of bribery out of the case
allowed Siemens to keep bidding for public sector projects within the U.S. Instead, it paid
an $800 million U.S. fine and $830 million in German fines. Plus, there is an additional
$1 billion in internal costs and reforms to be made, including hundreds of millions of dollars
paid to a U.S. law firm to conduct an investigation of Siemens in order to show that it was
coming clean. Coming clean is going to be a hard process for Siemens, because bribery has
played such a big role in business development since 1946. Plus, until 1999, bribes were
deductible as a business expense under German tax code and paying off foreign officials was
not a crime. But, Siemens found it hard to part with the old ways and created only a shell
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of a compliance program. Even after 1999, other countries complained of suspicious payments
flowing offshore. In 2008, the new CEO announced the fines and agreement and vowed to
make Siemens a model for best practice in anti-corruption. Skeptics, however, say that old
habits are hard to break and that Siemens only got unlucky and broke the eleventh
commandment—“thou shall not get caught”—with many others continuing the practice.49
France is hardly the only country where concerns about bribery and other corrupt prac-
tices have prompted crackdowns.50 There have been plenty of examples over the last
decade. Consider the following sample roster of incidents that have either resulted in
criminal convictions or have prompted various investigations:
■ The Japanese construction firm JCF Corp. recently agreed to pay over $200 million
in fines for its part in a long-running case involving bribery to obtain contracts for a
natural gas business in Nigeria. JCF admitted guilt in the case brought forward by the
U.S. involving a project worth $6 billion. Other firms were also involved in this ven-
ture, including French, Dutch, and U.S. companies. This and other such cases came on
the heels of a loan scandal involving the Japanese Ministry of Finance and organized
criminal gangs (collectively known as the yakuza). Questionable loans were allegedly
made to yakuza front companies even as yakuza members were attending fundraisers
for Japanese politicians.51
■ A grand jury recently indicted a handful of executives from Kolon Industries, Inc., a
South Korean firm. The action, filed in a U.S. court, accuses employees of a multi-year
espionage conspiracy to steal trade secrets from DuPont. They are also charged with
paying DuPont employees for trade secrets on production, production data, and sales
figures for the Kevlar body armor product of DuPont’s. This comes on the heels of a
$920 million judgment against Kolon the previous year (a claim made by DuPont).
This was preceded by several previous wages of graft and corruption where, for exam-
ple, the Chairman of Korean’s SK Corporation (the son-in-law of the former president
of Korea) was released from prison after serving only three months for a multi-billion
dollar tax fraud. Koreans reacted with outcry and suspicion.52
■ Corruption in China is a major issue for the government. Thousands of cases of graft
and corruption have been investigated since 2003. A survey conducted by KPMG found
that 43 percent of businesses that had operations in China claimed to have suffered
from fraud. This often involves government officials themselves. Convictions in the last
few years included a 16-year sentence for the Beijing mayor and Communist Party sec-
retary, a suspended death sentence for the mayor of Shenyang for corruption and ties
to gangsters, another suspended death sentence for the Vice-Minister of Public Security,
and a completed death sentence for the vice chairman of the Chinese parliament.53
■ Opposition party leaders in Moscow threatened investigations in addition to legis-
lative changes in order to curb emerging Russian conglomerates that seem to have
“uncles” (dyadyas) within the government to watch out for them. They provide the
conglomerates with breaks on taxes, import duties, and legislation involving foreign
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competitors, allegedly in return for payoffs. Some 32 of these Russian industrial giants
run 500 factories and 72 banks, and have 2.5 million employees.54
■ DaimlerChrysler, BMW, and Volkswagen have been raided just as German police
raided Siemens, as well as put under investigation and had employees arrested.
Recently, investigations initiated by an online whistleblower have been opened into
Deutsche Post’s DHL unit for alleged payments to Kazakh officials.55
The U.S. is hardly the perfect bastion of proper business practices. A recent case involv-
ing charges that U.S.-based multinational corporation Halliburton bribed Nigerian offi-
cials during the construction of a gas plant is a case in point. The company agreed to
pay $559 million to settle those charges brought by the Department of Justice. This
judgment far exceeds the previous record of $44 million in 2007 paid by U.S. oil services
firm Baker Hughes for improper payments made to Kazakhstan officials.56 Recent
examples also include Wal-Mart’s admission of paying millions of dollars in bribes to
Mexican officials in order to sidestep regulations; Pfizer and Johnson&Johnson’s settle-
ment fines based on a federal investigation into bribery overseas; Avon’s internal inves-
tigation of millions of dollars of questionable payments to officials in China, Brazil,
India and Japan; and HP’s recent indictment by German officials for kickbacks paid to
obtain business.57
Still worse, people from other nations often think Americans fail to acknowledge
their own ethical foibles. As a result, the U.S. is sometimes seen as being pious or
hypocritical, especially considering that Americans have had their fair share of scandals
and ethical problems, even before the first wave of well-known scandals involving Enron,
Worldcom, and Tyco in 2000, and the second major wave in 2008 involving fraud and
financial Ponzi schemes. Europeans, for instance, think that the United States needs to
“lighten up a little” and be less naive about separating business and personal ethics.58
Perhaps the major reason why this corrupt activity continues across countries and
across the ages is that “you get who you pay for.” That is to say, bribery may be less
pernicious if it did not end up being a pretty good investment. The Economist reported
on research conducted at Cambridge University regarding a study of 166 prominent
cases of bribery since the mid-1970s. The sample spanned over 50 countries and involved
firms listed on 20 different world equity exchanges. The research showed that the aver-
age return on bribery payments was nearly 11 times the value of the payments made to
obtain the business. The U.S. Department of Justice found similar levels of “return” for
firms that it has prosecuted. It is no wonder that over 15 percent of respondents to an
Ernst & Young survey stated that bribery to win business can be justified if it helps a
firm survive hard times (a figure that has nearly doubled since a survey conducted the
previous year). A whopping 39 percent of businesspeople report that bribery is common
in regions where they do business.59
The Foreign Corrupt Practices Act
Many of the provided examples involve corruption in which the political or business
leaders of foreign countries may somehow be “on the take.” Few countries, however,
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outlaw bribes by their own citizens to those foreign public officials. Most countries
act as though the “when in Rome” perspective applies and that common practice
should be followed when operating in a foreign nation. Until 1999 in Germany and
2000 in France and Switzerland, tax laws allowed bribes to be deducted from corpo-
rate taxes.60 It could be argued that, at minimum, this is a tacit endorsement of
corruption.
Until a few decades ago, payoffs made by U.S. firms to foreign representatives
were also more common. In the mid-1970s, however, several high-level cases of cor-
porate corruption became widely publicized, perhaps because sensitivities were height-
ened because of the Watergate scandal that occurred at the time. For instance, the
then-president of Lockheed, Carl Kotchian, made payments to Japanese government
officials to secure a large contract from Nippon Air to buy Lockheed airliners. Japanese
officials told Lockheed that if it wanted the contract, payments were needed to close
the sale. Kotchian was approached several more times for further payments, in the
end totaling $12.5 million.61 When the press uncovered the Lockheed payments, the
firm was charged with many tax code violations as well as with falsifying records. In
Japan, the public disclosure of the Lockheed payments created quite a furor in that
country too. Officials involved in this incident were criminally charged and one even
committed suicide.62
The Lockheed case received wide attention, including an article detailing the events
by Mr. Kotchian himself ;63 other articles also revealed a corporate pattern of bribery.64
Lockheed, however, was hardly alone. Nearly 450 U.S. corporations made inappropriate
payments to foreign officials or companies between 1974 and 1976 when the Lockheed
situation occurred. The reaction of an already outraged American public pushed Congress
to pass the Foreign Corrupt Practices Act (FCPA) in 1977, making it the first such
bribery law enacted by a country. The FCPA made it illegal to pay or to offer to pay
officials of foreign governments to gain or increase business. Penalties for violators
included fines of millions for companies, as well as fines and up to five years of impris-
onment for the individuals involved.
The current version of the FCPA does not prohibit all “questionable” payments to
foreign officials or governments. A distinction is made between bribes and facilitating
payments. The latter are often called “grease payments” because they are made to “grease
the wheels” of business. It is not illegal to make payments to low- and middle-level
officials to get them to perform functions that they perform and are needed in the ordi-
nary course of business. For example, in some countries it is necessary to provide small
payments to customs officials in order to get them to do what they legally should do,
such as inspect and pass shipment or validate a passport. A customs official might impede
or backlog a shipment until he or she receives the grease payments. Other examples of
grease payments that are not illegal under the FCPA include: (1) providing “gifts” that
help overcome bureaucratic technicalities that impede business; (2) “gifts” given to
supplement an environment of low wages, with the gifts acting as gratuities for services
performed; and (3) the facilitation of permits and equipment that are allotted via the
extra payments. The difference between a bribe and a grease payment is that the latter
are small and they are not offered to get anything more than a business is entitled to
anyway (the import license, passport stamp, etc.).
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Effects of the FCPA
Although the FCPA was enacted with some fanfare, a number of U.S. multinationals
complained about it. The complaints centered on the law’s effect on the competitiveness
of American business. Several prominent business leaders pointed out that they had lost
contracts with foreign governments in the past because they had refused to pay requested
bribes. In fact, they noted that companies with inferior products and services—who in
a fair environment would not receive a contract—often ended up getting the business.
Opponents argued that the FCPA would dramatically exaggerate this effect. In order
to compete effectively, U.S. businesses must also be allowed to use methods of
competition—including bribery—that foreign multinationals are able to use.65 Furthermore,
the critics noted that many other governments do not outlaw bribes and indeed some-
times sanction them (e.g., by making them tax deductible). This situation changed in
1999 with the passage of European anti-bribery statutes, laws that have many elements
similar to the U.S. FCPA, and other countries have developed their own statutes with
mixed success. Nevertheless, executives still wonder how U.S. business can compete in
world markets with such one-sided restrictions.66
Research has been done to address the question of whether or not the FCPA had a
negative effect on the competitiveness of U.S. business. One study looked at the market
share of U.S. business since the passage of the FCPA. This involved surveying U.S.
Embassy and Department of Commerce officials about business practices in over 50
different countries. The goal of this part of the study was to identify countries in which
the prevalence of improper payments was very high and countries in which this practice
was rare. Researchers then examined whether the passage of the FCPA was more likely
to be an export disincentive in countries where illegal payments are common. A key
measure was the change in market share before the passage of the FCPA (1971–1976)
and after passage (1977–1980). Interestingly, the FCPA did not decrease the overall
competitiveness of American multinationals overseas. In fact, there were no differences
in market shares between the two types of countries either before or after the passage
of the FCPA.67
This study, however, does have some limitations. For one, the researchers studied
the effects over a relatively short time interval after passage of the FCPA. Competitiveness
could decline slowly as a result of the act. Second, the market share data itself is quite
variable. For example, in the airline industry it was common to observe market share
changes of nearly 100 percent over one year. Although this was not consistently associ-
ated with countries in which bribery is common, it does show that the data can jump
around dramatically. Boeing, for example, may sign a contract with Saudi Arabia one
year and be shut out entirely the next year when Airbus Industries wins the next Saudi
contract.68
Nevertheless, although the data are far from perfect, an initial conclusion would be
that the FCPA does not significantly affect American international competitiveness over-
all. This does not mean, however, that U.S. multinationals do not lose out on specific
contracts because they will not provide a cut to a foreign partner. Indeed, American
telecom firms complained about being shut out of contracts awarded by Ecuador as it
privatized the state-run phone company. Some 90 percent of the nearly 200 contracts
109
awarded went to non-U.S. firms, allegedly because American firms would not pay 10
percent of a contract’s value to government officials. Other firms, such as Ford,
Johnson&Johnson and others, feel the same way.
Summing Up Questionable Payments
At this point, we can only speculate about the level of corrupt activities currently being
carried out by American firms—FCPA or not. Yet, there is also little doubt that the
FCPA has worked to reduce corruption in international business.
One response of many U.S. firms is to develop clear corporate guidelines about
illegal payments and to communicate them directly to their managers. In fact, it is esti-
mated that almost 80 percent of U.S. multinationals have incorporated such guidelines
into their operations. As we pointed out earlier, the percentage for U.S. multinationals
with such guidelines is larger than for multinationals of several other nations. Some of
these codes, such as Caterpillar’s, provide detailed guidelines about what payments are
and are not permitted. In fact, some corporate codes, such as that of IBM, take a very
strong ethical position by not allowing managers to even use legally permitted grease
payments. In general, however, these codes are not very precise, and they usually tell
managers what they should not do as opposed to what they should.69
As a result, some experts actually recommend that multinationals set up ethics hot-
lines that employees can call anonymously.70 Although there are many hurdles to over-
come, including how to deal with false allegations, at least some firms are starting such
hotlines and other reporting mechanisms. Another proactive step is to make efforts to
convince foreign multinationals and their governments—mostly through U.S. government
channels—to implement stronger laws against bribery and other corrupt practices.71 In
general, however, such efforts have not been very successful. And those that have passed
such laws or signed on to international agreements have few or no prosecutions under
their belt. The following International Insights provides more details on these and other
obstructions that U.S. managers face in conducting international business.
Making Friends and Influencing People: The Long Arm of the FCPA Got Longer
Some aggressive foreign companies use payoffs to gain access to markets and some U.S.
firms are doing the same thing. Unlike their European and Asian counterparts, however,
American firms are subject to the big teeth of the FCPA. Lockheed-Martin was convicted in
1995 of paying $1.5 million to an Egyptian official and paid $24 million in fines—more than
twice the profits from the contract itself. GE paid a $69 million fine after one of its employees
bribed an Israeli general. In 2008, Baker Hughes paid $44 million in a settlement with the
Department of Justice. Other companies subject to FCPA review include Sun Microsystems,
Royal Dutch Shell, Titan Corp., and Lucent Technologies.
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Until recently, FCPA prosecutions were not common. Fewer than 50 cases were filed
between 1977 and 2003, partly because cases often required cooperation from the countries
in which the violation occurred. In addition, some firms paid settlement fines despite not
admitting guilt. Yet, when U.S. officials were tipped off about payments made by Exxon-Mobil
to the tune of $78 million, routed through the Swiss accounts of Kazak officials (including
their president), this resulted in indictments of a Mobil executive. Likewise, cooperation with
German officials was key to the settlement of charges against Siemens.72
The U.S. government, however, has become much more aggressive lately. By 2007, the
Department of Justice had open investigations into 84 companies, which was a dramatic
jump since 2002, when only four cases were open. Experts, such as those at Sherman &
Sterling LLP, a law firm that tracks corruption, say that in the more than 30 years of the
FCPA’s existence, they have never seen this degree of activity. Justice department officials
believe that anti-corruption cases have become a “significant priority” and have added addi-
tional lawyers and an FBI team. The severity of the penalties given has risen too. By 2010,
$1.5 billion in penalties were because of violations of the FCPA. The recent judgment of over
$500 million against Halliburton in the Nigerian bribery case is another example. Plus, a
Halliburton officer who masterminded the bribery scheme received a seven-year prison
sentence—and he had even cooperated with prosecutors. This was the longest term ever
handed out under the FCPA.73
Interestingly, the costs associated with uncovering aspects of the corruption and all that
is involved can often be more expensive for firms than the FCPA fines themselves. In what
has now become widespread practice, firms often spend millions of dollars investigating
themselves, hoping that this show of good faith will reduce sentences and fines. The Siemens
case illustrates this effect all too well. Siemens engaged more than 300 lawyers, forensic
accountants, and other professionals from law firms and Deloitte LLP to conduct a two-year
internal investigation. Siemens estimated that it was charged for over 1.5 million billable
hours during that investigation—one that involved 34 countries, nearly 2,000 interviews, and
over 100 million documents. About 24,000 of those documents were given to the Department
of Justice, which cost Siemens $100 million alone.74
All of these costs aside, it is clear that, relative to other countries, the U.S. appears
vigilant. The Organisation for Economic Co-operation and Development (OECD), a group of
34 industrialized nations, has required its members (since 1999) to promise to enact and
enforce tougher bribery laws. Yet, a 2007 OECD report suggests that members have a long
way to go, as some have yet to launch a single prosecution. The U.K., Denmark, Japan, and
Canada were not spared in the report—it said that one-third of member states have yet to
take any significant action to enforce corruption laws. Dozens of nations, such as China and
Russia, have laws that prohibit overseas bribery, but adoption does not equal enforcement.
The U.S. has brought more cases than anyone else. An exception might be the new U.K.
anti-bribery law passed in 2010, which is wide in coverage and tough on penalties.
Nevertheless, OECD countries may still have reason to fear the U.S. FCPA law. Foreign firms
listed on U.S. exchanges must obey the law, as illustrated by the Siemens experience. Likewise,
a Norwegian company paid a bribe in Norway, but the money was wired through a U.S.
bank and it was caught.75
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A more common strategy for U.S. firms is to make friends via donations and other
“philanthropic” activity—something acceptable under the FCPA. When IBM chairman Louis
Gerstner visited Beijing in 1995, for instance, the company donated $25 million in hardware
and software to 20 Chinese universities. A related strategy is to spend hundreds of thousands
of dollars to bring foreign officials to the U.S. to court their business. Officials spend at least
part of their time visiting factories and the like, but side trips to Walt Disney World, Las
Vegas, and Atlantic City are common. But, even this may be a thing of the past. Lucient
recently settled charges that it failed to record millions spent in travel for about 1,000 Chinese
Telecom officials to Las Vegas, Los Angeles, and Orlando. The company had characterized
the trips as “factory tours.” They admitted guilt and paid $2.5 million in fines in 2007. As
the Department of Justice cracks down further, perhaps these “creative” approaches, and
good old-fashioned direct payments, will decline in popularity.76
Chapter Summary
This chapter reviews various writings and research done on ethical values and corporate
social responsibility in international business. It reviews two major perspectives on ethics.
Universalism argues that there are sets of ethical values that should apply everywhere. Many
international and corporate codes of conduct have been developed based on this perspec-
tive. Relativism is a perspective that embraces the idea that countries often have different
sets of ethical values that are shaped by their own unique laws and practices. In practice,
each is difficult to enact.
Most research suggests that Americans tend to be more concerned with ethical issues
than their counterparts in Europe, Asia, and other parts of the world although that gap is
narrowing. U.S. multinationals, for example, are more likely to have written codes of conduct
in place that spell out what is considered unethical behavior than are European or Asian
multinationals.
Most nations have laws that prohibit the bribery of officials. Few, however, actually
outlaw bribes that their citizens may pay to foreigners—some view bribery as simply a part
of doing international business. Bribing foreigners to get business for U.S. firms came to a
head with several high-profile cases in the 1970s and led to the passage of the Foreign
Corrupt Practices Act (FCPA), which made it illegal to pay foreigners bribes in an effort to
win business. Other countries have since followed suit.
112
1. What role do universalism and relativism play in international management? What are the
practical constraints involved in each perspective?
2. How should multinationals deal with human rights abuses made by foreign governments?
Should they involve themselves in social issues that follow from their businesses? Why or
why not?
3. How should multinationals handle bribery attempts? How should they address other ques-
tionable practices? Should they involve themselves in social issues that follow from their
businesses? Why or why not?
4. What is your assessment of the Foreign Corrupt Practices Act (FCPA)? Is it likely to be a
major hindrance for U.S. multinationals? What position should the U.S. government take
regarding the tactics used by foreign multinationals in international competition?
Competitive Intelligence: Lots of Gray Areas, No Easy Answers

At the beginning of this chapter we challenged you to make some judgments about the ethics
and legality of some specific behaviors associated with information gathering about other firms.
While the field of competitive intelligence (CI) has grown as a legitimate business discipline,
some firms take short cuts and do not follow legal or ethical guidelines in this increasingly
popular practice of competitive information gathering. The following exhibit summarizes the
behavioral incidents mentioned earlier, as well as, according to experts, whether or not they
are legal, illegal, or in an ethically gray area. Deliberate theft of company materials or secrets
from company property is illegal, at least in the U.S. Several of the examples of competitive
intelligence that we have cited, however, would be considered unethical by many Americans.
U.S. Legal Behavioral Example Ethical Status
1. Calling neighbors under false pretenses to assess managers’ Ethically gray area
whereabouts
2. Securing a copy of a competitor’s travel itinerary from a travel agent Ethically gray area
3. Digging through a company’s trash on public property Legal
4. Deliberately eavesdropping on private company conversations Illegal
5. Sending phony job-seekers in response to competitor’s want ads Ethically gray area
6. Hiring competitor’s former employees Legal
7. Sending phony visitors to tour competitor’s facilities Ethically gray area
8. Attending trade shows where competitor’s wares are displayed Legal
113
Many of these situations have involved U.S. companies. For example, a crayon company
employee posed as a potential customer and easily gained access to the firm’s production
processes. While this is unethical, what about standing outside a plant to count employees
who leave various shifts? What about the Japanese firm that sent employees to measure the
thickness of rust on train tracks leaving a U.S. plant and then used that data to estimate
plant output?77 Raytheon Co., a defense contractor, agreed to pay a multimillion settlement
not long ago to resolve charges that it hired private detectives to eavesdrop in a failed attempt
to outrun Ages Group’s bid for a U.S. Air Force service contract. Even universities are getting
into the act. At the University of Missouri classes are taught in how to do “pipeline” analysis
in the drug industry. This involves using public sources to ferret out what products are in the
competition’s research pipeline.
The early 2000s was a down market, but some companies still found the funds to engage
in CI. John Pepper, then CEO of Proctor and Gamble (P&G), for example, was surprised to
find out that CI had gotten out of hand in that firm. Michael Mace, the CEO at Palm, did
not give a second thought to commissioning a $70,000 “scouting report” on the Japanese
PDA market. As times got tougher in the late 2000s, more firms got involved in the process.
A major survey conducted in 2008 showed that corporate interest in CI was on the rise. One
finding was that firms in countries such as Israel, Sweden, India, and Brazil rank as the most
sophisticated technology users for corporate intelligence programs. The U.S. and most
European companies fall into the middle or the bottom rankings. John Nolan, a former intel-
ligence officer now running a CI training business, said it best: “Nothing changes table
manners faster than a smaller pie.” Data showed that among firms without an organized CI
capability, 45 percent said that they planned to start one the following year. A major survey
conducted in 2008 showed that corporate interest in CI is on the rise. One finding was that
firms in countries such as Israel, Sweden, India, and Brazil rank as the most sophisticated
technology users for corporate intelligence programs, with the United States and most
European companies falling into the middle or the bottom of the rankings.78
If CI is on the rise and is getting more competitive itself, what should a firm do? In our
opening scenario we asked about recommendations that you might give multinationals that
are interested in protecting their secrets from prying. Here are some tips:
• Have all joint venture partners and consultants sign nondisclosure agreements.
• Be sure to tightly control access to all facilities and electronic mail systems.
• Use written policies to make all employees more aware of the risks of security lapses.
• Test areas within the firm itself that might be vulnerable to information leaks.
• Establish a centralized electronic reporting system that will allow employees to report any
suspicious incidents.
Plus, the firm might consider what P&G did in 2001. CEO John Pepper was informed
that a competitive intelligence effort toward competitor Unilever had spun out of control.
After hearing the details he was shocked and put an end to the “operation” immediately.
When Pepper found that three of his managers had hired others to gather Unilever informa-
114
tion via dumpster diving, misrepresentation and more, they were fired immediately. P&G had
obtained dozens of documents that spelled out Unilever’s plans for its U.S. hair care business
(including prices, launch plans, and margins). None of these actions violated U.S. law, but
they did violate P&G’s internal guidelines and CEO Pepper took more action. He confessed
to Unilever, calling its CEO personally and following this with a memo outlining the transgres-
sions. P&G also agreed to pay Unilever $10 million, to take actions so that the information
would not be used, and to toughen up internal enforcement of its code. It also agreed not
to employ the “consultants” who conducted the above activity (the Phoenix Group, headed
by John Nolan, quoted above).
While this was a sad chapter for P&G, its actions after uncovering the events are laud-
able. One expert has observed that firms with formal competitive intelligence systems tend
to have fewer legal and ethical problems, probably because the guidelines make it clear what
is and what is not acceptable.
Finally, the Society for Competitive Intelligence Professionals maintains an ethical code
that can help guide business in this important area (www.scip.org/). Competitive intelligence
properly done is a legal activity, indeed one that is needed in today’s environment. Yet, this
is all the more reason to be concerned with how you do CI so that it becomes an asset to
the firm rather than an ethics problem.79
Bribery in International Business

Purpose
To discuss ethical issues associated with bribery and corrupt practices that may be encountered
in international business dealings.
Instructions
To accomplish this, 12 short mini-cases are presented. These are designed to get you thinking
about ethical issues associated with bribery. Your instructor may review the Foreign Corrupt
Practices Act (FCPA) and other background material before getting started. These brief mini-
cases deal with issues including bribes versus grease payments, whistleblowing, the black
market, and interaction with government officials.
Your instructor will divide the class into groups of four to six members. Depending on
the time available and the number of groups, your group may be assigned to all 12 or a
smaller number of the mini-cases. Discuss the cases with your group and decide what course
of action should be taken. (Try to spend 20–30 minutes on each case, depending on the
number of cases that your group must tackle.)
115
Your instructor will then lead a discussion about the ethical issues raised by the mini-
cases. An instructor may choose to ask your group to briefly present its recommended courses
of action.
Mini-cases
1. You are driving to a nearby country from your job as a manager of a foreign subsidiary.
In your car are a number of rather expensive gifts for family and friends in the country
that you are visiting. When you cross the border, the custom official tells you that the
duty owed on these items will be equivalent to $200. Then he smiles, hands back your
passport, and quietly suggests that you put a smaller sum, equivalent to $20, in the
passport and hand it back to him. What do you do?
2. You have been hired as an independent consultant on a U.S. development grant. Part of
your job involves working with the Ministry of Health in a developing country. Your assign-
ment is to help standardize some procedures to test for various diseases in the population.
After two weeks on the job, a higher-level manager complains to you that money donated
by the World Health Organization to the ministry for purchasing vaccines has actually been
used to buy expensive computers for top-ranking officials. What do you do?
3. You have been trying for several months to privatize what was formerly a state-owned
business. The company has been doing well and will likely do better in private hands.
Unfortunately, the paperwork is slow and it may take many more months to finish. An
official who can help suggests that if you pay expenses for him and his family to visit the
parent company in the United States (plus a two-week vacation at Walt Disney World in
Orlando and time in New York City), the paperwork can be complete within one week.
What do you do?
4. One of your top managers in a Middle Eastern country has been kidnapped by a terrorist
group that has demanded a ransom of $2 million, plus food assistance for refugees in a
specified camp. If the ransom is not paid, they threaten to kill him. What do you do?
5. On a business trip to a developing country, you see a leather briefcase (which you badly
need) for a reasonable price in the local currency (the equivalent of $200 at the standard
exchange rate). In this country, however, it is difficult for the locals to get U.S. dollars or
other hard currency. The shop clerk offers you the briefcase for $100 if you pay in U.S.
dollars. What do you do?
6. You are the manager of a foreign subsidiary and have brought your car with you from
the U.S. Because it is a foreign-purchased car, you must go through a complicated web
of lines and bureaucracy (and as the owner of the car, you yourself must do it—no one
can do it for you), which takes anywhere from 20 to 40 hours during business hours.
One official tells you, however, that he can “help” if you “loan” him $100 and buy him
some good U.S. bourbon. What do you do?
7. Your company has been trying to get foreign contracts in this developing country for
several months. Yesterday, the brother-in-law of the finance minister offered to work as
116
a consultant to help you secure contracts. He charges one and one-half times more than
anyone else in a similar situation. What do you do?
8. You have been working as the director of the foreign subsidiary for several months. This
week, you learned that several valued employees have part-time businesses that they run
while on the job. One of them exchanges foreign currency for employees and visitors.
Another rents a few cars to visitors. You are told that this has been acceptable behavior
for years. What do you do?
9. As manager of a foreign subsidiary, you recently discovered that your chief of operations
has authorized a very convoluted accounting system, most likely to hide many costs that
go to his pocket. Right now, you have no real proof, but rumors are circulating to the
effect as well. This chief, however, has close ties to officials in the government who can
make or break your company in this country. What do you do?
10. You have been hired to do some management training in a developing country. The costs
of the program are almost entirely covered by a U.S. government agency. The people
responsible for setting up one of the programs in a large company tells you they want
the program to be held in a resort hotel (which is not much more expensive than any
other) in a beautiful part of the country. Further, because they are so busy with all the
changes in their country, they cannot come to a five-day program, which is what has
been funded. Could you please make it a little longer each day and shorten it to three
days? You would get paid the same. What do you do?
11. You have been hired by an investment firm funded by U.S. dollars. Your job is to finance
companies in several former communist countries. If you do not meet your quota for each
of three months, you will lose your job, or at least have your salary severely cut back.
One of the countries is still run by communists, though they have changed the name of
their political party. They want you to finance three companies that would still be tightly
controlled by the state. You know that they would hire their relatives to run those com-
panies. Yet if you do not support them, no other opportunities will exist for you in this
country. What do you do?
12. Your new job is to secure contracts with foreign governments in several developing coun-
tries. One of your colleagues takes you aside one day to give you “tips” on how to make
sure you get the contracts you are after. He tells you what each nationality likes to hear,
to soothe their egos or other psychological needs. For example, people in one country
like to be told they will have a better image with the U.S. government if they contract
with your company (of course, this is not true). If you tell them these things, he says, they
will most definitely give you the contracts. If not, someone in another company will tell
them similar things and they will get the contracts. What do you do?
Source: This exercise was prepared by Dorothy Marcic. Copyright © 1993 by Dorothy Marcic. All rights
reserved. As appeared in Management International: Cases, Exercises, and Readings by Dorothy Marcic
and Sheila Puffer. Copyright © 1994 by West Publishing Company, Minneapolis/St. Paul, MN, a division
of International Thomson Publishing Inc.
117
Analyzing Corporate Codes

Purpose
This activity seeks to understand important elements of corporate codes, the complexities
involved in constructing such guidelines for behavior, as well as to examine differences and
similarities across countries/cultures.
Instructions
In this chapter, we talked a good deal about corporate codes of ethics and the ways they
are both similar and different. For this exercise, do some research to find codes of conduct
for three multinational corporations. Using websites or library information, compare the codes
and evaluate them. After getting this information, please do the following:
1. Answer these questions about the codes that you have chosen and those of others discussed
in class.
• What topics are covered in the codes?
• Which topics are not covered?
• How are these issues communicated in the codes?
The instructor may wish to keep a tally of the common themes across the various
companies. Compile a list by industry and jot down what you think the reasons are for
possible differences across those industries.
2. Put together your version of a generic corporate code of ethics. Many international accords
exist that provide a good base for your work (and for corporations), and a variety of web-
sites are useful for this purpose and for answering the questions raised above:
• www.ethicsweb.ca/resources/ This site includes a discussion of many business ethics
issues and links and discussion of corporate codes of ethics.
• http://commfaculty.fullerton.edu/lester/ethics/codes.html. A set of links dealing
with issues involved in corporate codes of ethics.
• http://managementhelp.org/businessethics/ethics-guide.htm. A tool kit on business
ethics with many available resources and links.
• www.transparency.de/English.1222.0.html. The site on international corruption men-
tioned earlier in this chapter.
Notes
1. Riley, M. A., and Vance, A. (2012). Inside the Chinese boom in corporate espionage: It’s not
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Gorman, S. (2011). China singled out for cyberspying. The Wall Street Journal, November 4,
A8; Wilke, J. R. (2003). Two silicon valley cases raise fears of Chinese espionage: Authorities
118
try to tie alleged thefts of secrets to government-controlled companies. The Wall Street Journal,
January 15, A4.
2. Drab, D. (2004). Economic espionage and trade secret theft. Defending against the pickpockets
of the new millennium. A White Paper: Xerox Global Services, available at: www.xerox.com/
downloads/wpaper/x/xgs_business_insight_economic_espionage.pdf (retrieved 17 July 2013);
King, N, and Bravin, J. (2000). Call it Mission Impossible Inc.: Corporate-spying firms thrive.
The Wall Street Journal, July 3, B1, B4.
3. Wood, D. J. (1991). Corporate social performance revisited. Academy of Management Journal,
16, 691–718; Gottlieb, J. Z., and Sanzgiri, J. (1996). Towards an ethical dimension of decision
making in organizations. Journal of Business Ethics, 15, 1275–1285.
4. L’Etang, J. (1995). Ethical corporate social responsibility: A framework for managers. Journal
of Business Ethics, 14, 125–132; Schlegelmilch, B. B. and Robertson, D. C. (1995). The influ-
ence of country and industry on ethical perceptions of senior executives in the US and Europe.
Journal of International Business Studies, 26, 859–879.
5. The Economist. (2000). Business ethics: Doing well by doing good, April 22, 65–67.
6. DeGeorge, R. T. (1993). Competing with Integrity in International Business. New York: Oxford
University Press.
7. Buller, P. F., Kohls, J. J., and Anderson, K. S. (1991). The challenge of global ethics. Journal of
Business Ethics, 10, 767–775; Frederick, W. C. (1991). The moral authority of transnational
corporate codes. Journal of Business Ethics, 10, 165–177.
8. Donaldson, T. (1989). The Ethics of International Business. New York: Oxford University Press.
9. Forsyth, D. R., O’Boyle, E. H., and McDanile, M. A. (2008). East meets West: A meta-analytic inves-
tigation of cultural variations in idealism and relativism. Journal of Business Ethics, 83, 813–833.
10. Jackson, K. T. (1994). Jurisprudence and the interpretation of precepts for international busi-
ness. Business Ethics Quarterly, 4, 291–320.
11. Jackson, K. T. (1994). Jurisprudence and the interpretation of precepts for international business.
12. Baron, D. P. (1996). Business and Its Environment. Upper Saddle River, NJ: Prentice-Hall.
13. Hinson, H. (1990). Movie stars. Esquire, December, 120–126.
14. Singh, J. J., Vitell, S. J., Al-Khatib, J., and Clark, I. (2007). The role of moral intensity and
personal moral philosophies in the ethical decision making of marketers: A cross-cultural com-
parison of China and the United States. Journal of International Marketing, 15, 86–112.
15. Kaltenheuser, S. (1995). China: Doing business under an immoral government. Business Ethics, May/
June, 20–23; Kelly, M. (1996). Is Pizza Hut Burma’s keeper? Business Ethics, July/August, 73–75.
16. The Economist. (2010). Companies aren’t charities, October 23, 82; The Economist. (2012).
Good business; nice beaches, May 19, 76.
17. Sethi, S. P. (1993). Operational modes for multinational corporations in post-Apartheid South
Africa: A proposal for a code of Affirmative Action in the marketplace. Journal of Business
Ethics, 12, 1–12.
18. Kazmin, A. (2003). Burma’s timber may blunt impact of sanctions. Financial Times, October 5, 3.
Kaltenheuser, China: Doing business under an immoral government; Kelly, Is Pizza Hut Burma’s
keeper?
19. USA Today (2012). Obama Administration Eases Burma Sanctions Before Trip, USAToday.
com, November 16, available at: www.usatoday.com/story/theoval/2012/11/16/obama-lifts-
sanctions-burma-visit/1710253/ (retrieved July 12, 2013); Magnusson, P. (2005). A milestone
for human rights. BusinessWeek, January 24, 63; Coile, Z. (2008). Chevron’s Dilemma Over
its Stake in Burma, San Francisco Chronicle Online, July 5, available at: www.sfgatge.com;
Goldstein, J. (2008). Feinstein Fights McCain on Burma Tax Break for Big Oil, The New York
Sun Online, June 6, available at: www.nysun.com.
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March, www.kiplinger.com; see also: www.fuld.com/News/PressReleases/pr080821.html.The
room was already packed when Liu Peijin walked in. His flight from Shanghai to Chongqing
had been delayed, and he had fretted about missing the training. But fortunately he’d gotten
there in time. Liu knew his presence was important. As the president of Almond China, he
wanted to show his Chongqing colleagues how much he cared about the topic under discussion:
ethical business practices.
122
Case 1: Culture Clash in the Boardroom

The room was already packed when Liu employed by Almond’s competitors.
Peijin walked in. His flight from Trying to do business without them,
Shanghai to Chongqing had been Wang argued, was foolhardy. “This is
delayed, and he had fretted about miss- China, not Europe,” was his refrain.
ing the training. But fortunately he’d But the line between these practices
gotten there in time. Liu knew his pres- and breaking the law was a fine one.
ence was important. As the president of Almond was headquartered in Munich
Almond China, he wanted to show his and listed on the New York Stock
Chongqing colleagues how much he Exchange as well as the Frankfurt Stock
cared about the topic under discussion: Exchange, meaning it was required to
ethical business practices. adhere to the U.S. government’s Foreign
Taking his seat, Liu nodded at the Corrupt Practices Act, which specifically
head of HR, who was running the train- forbade the bribing of foreign govern-
ing. The two went way back: Both had ment officials by U.S.-listed companies.
been with their German parent company, Liu kept an eye on Wang as the HR
Almond Chemical, since 1999, when it director explained Almond’s ethics regu-
first established operations in China. lations and the legal consequences of
Since then Almond China had set up business bribery. Liu knew the rules
two joint ventures with local partners— made sales more difficult, but Almond’s
the only way foreigners could do busi- policy was clear, and he wanted to make
ness in chemicals in the country. Almond sure that every member of the sales team
controlled 70% of the stock in one of understood it.
them. The other was a venture with He had taken the same hard line on
Chongqing No. 2 Chemical Company, safety and environmental practices. The
in which Almond had a 51% stake and production facilities in Chongqing had
the Chinese directors were very active. been built according to German national
Liu sat next to Wang Zhibao, the standards, and all the safety equip-
vice president in charge of sales for the ment—helmets, shoes, and protective
Chongqing joint venture. Wang looked clothing—had come from Europe. The
skeptical. He was good at his job, hav- Chinese partners had called these invest-
ing closed several key deals that had ments “wasteful” and “frivolous”—
kept the business afloat during its early “luxurious expenditures” that the young
years. But he was also at the center of venture couldn’t, and shouldn’t, afford.
a conflict between the venture partners: But, with backing from the head office,
The Chongqing executives were increas- Liu had stood firm. Similarly, he’d
ingly vocal about how difficult it was to insisted that the factory’s MDI (methy-
operate according to European standards, lene diphenyl diisocyanate) waste be
particularly the rules against gifts and treated as a dangerous substance and
commissions. Such incentives were com- processed with a special cleaning agent,
monly accepted in China and routinely in accordance with European standards,
123
even though Chinese law didn’t mandate Liu nodded, not surprised.
it. His partners had been dismayed at Ho continued. “Wang is close to
the millions of yuan this would cost. But making a huge sale—30 million yuan—
Liu refused to compromise, because he but the customer’s purchasing manager
had witnessed the consequences of lesser is insisting on a 1% commission. He says
standards firsthand. Years before, when that’s what he’s being offered by other
he was working for another Chinese companies.”
chemical company, an affiliate’s chlor- “We can’t do that,” Liu said.
alkali plant had suffered an explosion, “That’s what I said. But Wang was
injuring 200 staff members and residents insistent. He said that if we can’t do that,
of the surrounding area and halting pro- we should at least be able to offer the
duction for more than a month. manager a trip to Europe, a visit to
The training was reaching its end, Almond headquarters.”
and the HR director signaled to Liu that “What did you say to that?” Liu
it was his turn to speak. Liu hesitated asked.
slightly as he looked at his Chongqing “No—of course,” Ho replied. “But
colleagues. “At Almond, ethics are non- he accused me of jeopardizing the ven-
negotiable,” he said. “We need to ture. He said that we ‘foreigners’ have
remember these laws as we go about our so much money, we don’t care about the
business. We are not just a Chinese com- performance of the business.”
pany; we’re a global one.” Solemn, blank “You did the only thing you could
faces stared back at him. do,” Liu said.
As he left the room, he couldn’t help “I can’t believe Wang thought that
feeling that his remarks had fallen on suggestion would fly, especially after the
deaf ears. training,” Ho said. He walked down the
hall toward the boardroom. Liu fol-
lowed.
“We Cannot Concede”
The meeting had barely begun
Two weeks later, Liu was back in when Chen Dong, the chairman of the
Chongqing for the second-quarter board joint venture and a Chongqing No. 2
meeting. As he walked into the lobby of Chemical executive, raised the commis-
the Hilton, he ran into George Ho, the sion issue. (His leadership position was
finance director for the joint venture. Ho one of the many concessions Almond
looked flustered. had made to lure his company into the
“Are you all right?” Liu asked in joint venture.)
English. Ho was from Hong Kong and That was fast, Liu thought. He sat
didn’t speak fluent Chinese. He held a quietly while Dolf Schulman, the vice
unique position: He reported to the gen- chairman of the venture and Almond
eral manager of the joint venture but Chemical’s senior vice president of
also to the finance director at Shanghai business development, fielded the
headquarters. question.
“I’m worried about this meeting, “Chen, we cannot concede on these
Liu,” Ho said. “I had a disturbing con- issues,” Schulman said. “There are no
versation with Wang last week.” exceptions to be made. Almond must be
124
a law-abiding corporate citizen—as “All you do is make us spend, spend,

should every Almond employee.” spend—on German goggles, unnecessary
Ho looked up and nodded at Liu. waste processing, and ridiculously high
But Chen was not ready to end the dis- salaries.” He turned to Ho, who looked
cussion. “To the best of my knowledge,” bewildered. “And now I hear rumors
he said, “many foreign-owned compa- that you are planning to launch SAP’s
nies reward Chinese customers for their ERP software to synchronize with head-
business. Some companies organize over- quarters. When will the spending stop?”
seas visits, some provide management Chen continued, his voice rising.
training, some arrange golf outings. This “We need a tighter control on costs. We
is good business practice in China. We can’t possibly meet our profitability tar-
need to be flexible in order to compete. get when our expenses are so high. We
If we can’t provide the commission, let’s want to choose the finance director going
at least consider a visit to Munich head- forward, so we can give this venture a
quarters.” real chance at succeeding. We see no
This was typical behavior for Chen. other option.”
He had a tendency to develop very strong He sat back in his chair and crossed
opinions but keep them to himself until his arms. Schulman was squirming in his
the board met. Schulman waited for the seat. Ho was pale with shock. Liu wasn’t
translator to finish; then he hesitated, sure what to say. He was astonished that
trying to come up with a suitable Chen had brought up the safety stan-
response. Liu knew he needed help. dards—he’d thought that issue was set-
“Commission or trips, it’s all the tled long ago—and astounded by the
same thing: business bribery,” Liu slap at Ho. But he needed backup if he
said. “We can get orders without these was going to oppose the joint venture’s
tactics.” chairman.
Chen picked up the Q2 financial Finally Schulman spoke. “Chen,
statement that had been distributed at thank you for being honest about your
the beginning of the meeting and said, concerns,” he said. “At this point I think
“Orders? What orders? We made only all these issues are still open for discus-
60% of our target for this quarter. When sion.”
we set up this joint venture, we assigned Liu almost choked. What was
our very best people to it—our best tech- Schulman thinking? Seeing Liu’s expres-
nicians, best salespeople, best managers. sion, Schulman looked at his watch and
Why? Because we believed we could said, “Should we take a 15-minute
manufacture some of the best chemical break?” With that, he stood up.
products in the world and, in turn, get
more orders. But look at this.” He threw
the statement down on the table. “Our
“This Venture Is Critical”
performance is sinking fast. This joint As Liu walked out of the room, Schulman
venture has done nothing but hurt us. grabbed his elbow and steered him
We have yet to see any return at all.” toward a smaller meeting room down
Chen paused to let the translator the hall. Once the door was closed,
catch up but then thought better of it. Schulman’s shoulders slumped.
125
“Liu, what should we do?” he asked. game bribery? We do that in Germany

“Do you think we should concede to all the time.”
these demands? This venture is critical Liu realized that Schulman wasn’t
for us—you know that.” asking for his opinion. He was asking
Liu did understand how high the for permission to give in. Suddenly Liu
stakes were. China accounted for only felt like a kid stuck between two warring
3% of Almond’s current business, but parents. The break time was almost up.
the company was depending on the They needed to get back to the meeting
country for future growth. The and respond to Chen’s demands.
Chongqing operation was supposed to
prove that Almond could expand further Assignment Questions
in China, and the company was already
planning additional acquisitions. But Liu 1. Outline the dilemma facing Liu Pei-
was shocked that Schulman would even jin (and the firm). Be sure to explain
consider bending the company’s stan- all the contributing elements to this
dards regarding ethics and safety. ‘culture clash’.
“We need to stand strong,” Liu said, 2. What should Liu do? He has only
“not give in.” He was thinking about minutes to determine how he can
Almond’s reputation as well as the juggle these competing demands and
future in China. He had joined the how he should approach these issues.
century-old German company not only 3. Be sure to fully explain the options
because it boasted the world’s leading and potential consequences he faces
chemical-production technology, but as he struggles to deal with these
also because of its values, management issues. Provide some specific and
approach, and safety ethic, which he’d tangible recommendations for how
hoped would serve as a model for Liu should react when the meeting
Chinese industry. resumes.
“But we shouldn’t annoy them,”
“Culture Clash in the Boardroom” by K. Xin
Schulman said. “We need Chen. And he’s and W. Haijie. Reprinted by permission of
right about the numbers. We could be Harvard Business Review, 2011. Copyright
in trouble without Wang’s sale. Besides, © 2011 by the Harvard Business School
where do we draw the line? Is a golf Publishing Corporation. All rights reserved.
126
part II
interacting effectively
in an international
environment
4 MAKING DISTINCTIONS ACROSS CULTURES 131
5 PERCEPTION, INTERPRETATION, AND ATTITUDES ACROSS

CULTURES 169
6 COMMUNICATING EFFECTIVELY ACROSS CULTURES 211

chapter 4
making distinctions
across cultures
implications for
international management
DEFINING AND UNDERSTANDING CULTURE 131
CLASSIFYING CULTURES AROUND THE GLOBE 133
THE IMPLICATIONS OF CULTURE FOR INTERNATIONAL

MANAGEMENT 153
HOW INDIVIDUALS AND CORPORATIONS CAN MAKE BETTER

SENSE OF CULTURE 156
I N T E R A C T I N G E F F E C T I V E LY
Learning Objectives
categorize cultures and countries based on their key, overall value sets;
identify the impact of embracing particular underlying values on work behaviors and
practices;
identify differences and customize management practices to specific cultures.
Hidden Strengths: Is India the Proverbial “Elephant”

in the Global Room?
India is a complex, messy, and chaotic place with hundreds of millions of poor citizens and
a ramshackle infrastructure. This is accentuated particularly when compared to the gleaming
new ports, highways, and airports that China has been installing across the country in recent
years. Moreover, India has long been plagued by a notoriously inefficient, albeit democratic,
government. As a result, China has more than made up economic ground on India (and the
rest of the world too). On most measures of development, the “Dragon” (China) beats the
“Elephant” (India) hands down. On indicants ranging from life expectancy, to literacy rates,
to Internet use and GDP per person, China enjoys a healthy lead over India. For example, a
child’s odds of surviving past their fifth birthday are as bad in India today as they were in
China in the late 1970s.1 Interestingly, these and other challenges and barriers may have
uncovered a latent but remarkable set of assets among the Indian people. All these challenges
may have inculcated a problem-solving mentality that provides crucial help to many Indians
to quickly, cheaply, and cleverly invent new products and new ways of doing things.
Indeed, this way of thinking has caused multinationals the world over to flock to India,
not just for backroom outsourcing in Bangalore, but to tap some of the most innovative
minds around. As a result, optimists are saying that India today is booming in many respects,
and that while growth rates lag behind those of China, the steady progress in India is more
manageable and better for the economy in the long run. India also has a variety of world-
class firms such as Tata Motors and mobile phone provider Bharti Airtel. Not surprisingly,
some of those same experts who believe in India’s booming economy predict that India’s GDP
growth may pass China’s in a few years. By 2016, estimates are that another 200 million
Indians will join the ranks of the middle class, bringing their spending power to bear on the
Indian and world economy.
Interestingly, while China’s approach to growth has been, for the most part, government
driven, India’s successes are more connected to the collective efforts of its nearly 50 million
130
M A K I N G D I S T I N C T I O N S A C R O S S C U L T U R E S
entrepreneurs. The unleashing of India’s entrepreneurial culture has been driven by several
factors, including reforms that started 20 years ago, such as lower tariffs on imported goods,
friendlier rules for foreign investment, and less red tape for businesses. Another factor is the
domestic market. While many Indian companies do a brisk export business in services, the
local market is large and demanding, with customers wanting cheap products that work well
from the get go. India’s “frugal innovators” give them what they want. In fact, some of what
they have come up with is nothing short of mind-boggling. For instance, Tata Chemicals has
developed a water filter that costs less than $1, needs no power, and provides 30 days of
pure drinking water for a five-person family. Indian scientists have also developed a new
laptop that they hope to bring to market—one that costs just $35.
All of this is consistent with recent research about cultural values that seem to encourage
people striking out on their own and becoming entrepreneurs. The real question, however,
is whether this problem-solving mentality that is embedded within the culture can continue
to help lift the country up faster and farther than its challenges and weaknesses will hold it
back. Think about this as you read about the various distinctions made among cultures in
this chapter. Do you think that India is well positioned (culturally and otherwise) to move its
economy forward? What specific elements of its culture might contribute to this advance-
ment? Which features might provide strong support for continued success at various entre-
preneurial ventures? Taking this a step further, how might you, as an international manager
on assignment in India, adapt to the business and culture milieu and possibly capitalize on
India’s expertise in “frugal innovation”? After reading this chapter, take a look at the Up to
the Challenge? closing box for some insights into India’s cultural values.2
Defining and Understanding Culture

Chapter 1 describes culture as “the collective programming of the mind which distin-
guishes one group or category of people from another.” Given this very abstract descrip-
tion, it is believed that people are not fully aware of the pervasive impact of culture on
their own attitudes and actions.3 Yet, there is plenty of evidence that culture has an
impact on the management of international business, often in some very unexpected
ways. Cultural differences can impact everything from the treatment that employees
expect from their companies, to how expatriates adapt to foreign environments, to
overseas investment strategies and patterns. The influence itself may cut both ways—
cultural differences have the potential to produce friction and disruption as well as
enormous benefits. On the one hand, lack of appreciation of “indigenous” methods of
motivation and leadership can lead to very bad outcomes. On the other hand, when
managers work to understand and use the best of what various cultures offer, this can
lead to very good performance.4 The chapters that follow explain how culture plays a
role in many different facets of international business.
The stakes for management have never been higher. The ongoing growth of inter-
national business has helped raise questions about the impact of cultural values. So,
131
expatriate managers need to know which motivation strategies work best in their
operations across the globe—and that is just the beginning. Human resource practices,
organization structure, strategy formation and implementation, conflict management
approaches, negotiation tactics, and leadership styles can also vary across cultures.5 Even
the reasons that entrepreneurs start companies can be driven in part by culture. For
instance, in East Asian countries (such as Indonesia and Thailand), the level of interest
in entrepreneurship may be more strongly connected to concerns about social status,
such as gaining status from success or losing it from a business failure, than it is in
Anglo countries such as Australia and the U.S.6 Research has even examined whether
varying beliefs in the importance of hard work and thrift may help explain different
economic growth rates among nations.7
The management challenge is not only to be aware of the role that culture can play
within business, but to turn that awareness into action where possible. For example,
research shows that foreign subsidiaries perform better financially, as indexed by a higher
return on assets and return on sales, when they use management practices that are
consistent with the local culture.8 Good opportunities may pop up anywhere in today’s
rapidly evolving global environment, sometimes in parts of the world that are poorly
understood. So, those firms that are culturally aware, and can more quickly size up and
intelligently interpret local business practices, will be in the best position to succeed.9
There are not many businesspeople these days who would disagree with the conclusion
that understanding culture is an asset. But, there are many more who underestimate the
difficulty and time needed to do this well. Not surprisingly, managing “smart” from a
cultural perspective is not easy. Part of the problem is the complexity of culture itself. Yet,
managers sometimes feel in desperate need of tools to help sort out the culture of their
latest assignment in Jakarta, Guangzhou, or Santiago, even at the risk of oversimplifying
matters. This state of affairs explains why so many cultural frameworks have popped up
over the past few decades trying to explain the pattern of norms, behaviors, and customs
that are common in a given society. Yet cultural frameworks are seductive in that they can
reinforce management tendencies to rely on the time-saving analytical shortcuts they offer.
In turn, this can actually inhibit managers’ ability to be effective as they oversimplify culture
and paint employees around the world in a series of broad-brush generalizations.
Nevertheless, when they are used thoughtfully, cultural frameworks can prove help-
ful. This means that managers should treat these frameworks not as one-size-fits-all
labeling devices, but instead as a guide and a starting point for helping them understand
different work environments. Managers also need to remember that all cultural frame-
works have inherent limitations. For instance, we will review four influential frameworks
that each try to capture cultural differences through sets of bipolar dimensions (e.g.,
individualism–collectivism). Typically, nations are located somewhere on each cultural
dimension. But this reductionism cannot fully capture the complexities and paradoxes
we see in specific cultures. For instance, if Americans are so self-focused, then why are
they also so generous with charities and willing to help when natural disasters such as
hurricanes and floods strike? If Central American countries are so well known for dis-
playing interpersonal warmth, then why do service workers in those countries often seem
indifferent to customers? Indeed, in one survey, bank customers in Costa Rica preferred
to interact with “polite” machines (ATMs) instead of human tellers.10
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With these limitations in mind, we will next present four major cultural frameworks
that have attracted considerable attention from international managers. Along the way,
we will also point out their benefits and limitations. We will wrap up the chapter by
suggesting ways in which managers and multinationals can better combat cultural ste-
reotypes and bridge cultural differences.
Classifying Cultures around the Globe

Ronen and Shenkar’s Country Clusters
The Clustering Approach Trying to make sense of cross-cultural differences among

nearly 200 countries, which are then each comprised of many subcultures, is an extremely
difficult task. One way to make things easier is to identify a core set of values that are
shared by a specific set of countries. In 1985, Ronen and Shenkar did just that—they
created a set of clusters based on their exhaustive and comprehensive review of previous
research.11 They also conducted a comprehensive survey of thousands of employees in
nearly 50 countries to help improve the classifications. The survey included questions
about:
■ Various work goals/what employees want from work (e.g., interesting work, job se-
curity, or promotion opportunities)
■ The extent to which work satisfies certain needs (e.g., personal accomplishment, job
satisfaction)
■ Preferences for various management styles (e.g., preferences for autocratic versus
democratic leadership)
■ General questions about work roles and relationships (e.g., how well managers relate
to subordinates).
Ronen and Shenkar’s goal was to cluster countries based on the patterns of similarity
among all these attitudes toward work. The result of their classifications is presented in
Figure 4.1. There are several features about this figure that are noteworthy. First, eight
country clusters were identified. Four separate and independent countries were also
identified. This did not fit well with the attitude patterns of the other clusters; you will
see those placed outside of the circle of clustered countries. Second, countries within a
particular cluster were said to share some basic cultural values. Third, within each clus-
ter you will see that the richer, more developed countries are positioned closer to the
center. For example, the Nordic cluster shows that Sweden is the most highly developed,
whereas in the Latin European cluster this distinction belongs to France.
According to these researchers, the level of development and technological advance-
ment within a country is one of the factors driving the clustering of countries. It stands
to reason, therefore, that as development proceeds, cultural values may also change.
Another thing to note about Figure 4.1 is that the clusters generally include countries
that are close to each other geographically. This reflects the idea that cultural values
should develop first in those areas nearest to a particular culture’s point of origin. At
133
NEAR NORDIC
EASTERN Finland
Turkey Norway INDEPENDENT
Iran Denmark Brazil
Greece Sweden Israel
ARAB
Japan
Bahrain GERMANIC
India
Abu Dhabi Austria
United Arab Emirates Germany
Kuwait, Oman Switzerland
Saudi Arabia
FAR EASTERN ANGLO

Singapore, Malaysia United States
Hong Kong Canada, Australia
Philippines New Zealand
Vietnam United Kingdom
Indonesia, Taiwan LATIN Ireland
Thailand LATIN South Africa
AMERICAN
EUROPEAN
Argentina
France
Venezuela
Belgium
Mexico
Italy, Spain
Chile, Peru
Portugal
Colombia
Figure 4.1 Classification of Country Clusters: Ronen and Shenkar.

Source: Ronen, S., and Shenkar, O (1985). Clustering countries on attitudinal dimensions: A review and synthesis.
Academy of Management Review, 10, 449.
the same time, however, you might see that great geographic distances exist between
some countries in the Anglo-American cluster. This certainly reflects the immigration
patterns and reach of the British Empire, which took Anglo cultural values to many
different parts of the globe.
Another similarity within clusters is language. For example, the Latin American
cluster contains Spanish-speaking countries and the Anglo cluster English-speaking coun-
tries. While the countries in the Latin European cluster have different languages, they
are considered Romance, or Latin-derived, languages. Many work values, goals, and
attitudes can be shaped by linguistic meanings and interpretations.
Work values and goals may also reflect religious attitudes and beliefs. Catholicism
is the major religion in both of the Latin clusters. Buddhist and Confucian values tie
the countries together in the Far Eastern cluster; these values emphasize the obligations
people have to their families and the shame that is associated with failing to live up to
those obligations. Finally, the countries labeled as independent (Brazil, Japan, India, and
Israel) have unique religions, languages, and histories. In the case of Japan, this also
includes a level of geographic isolation that further contributed to a distinctive culture.12
134
Overall, Ronen and Shenkar’s clusters provide a useful snapshot for international
managers interested in knowing where broad similarities and differences may exist
between countries in terms of the business practices and approaches used in various
countries. Consequently, those armed with such knowledge are likely to operate more
effectively in foreign environments.13
Limitations of Ronen and Shenkar’s Approach

While providing great value for thinking about cultural/country differences, there are
also some limitations associated with this approach. For instance, the clusters are miss-
ing many countries (e.g., none of the countries in the former Soviet Union are included).
Likewise, few developing countries are represented, nor are those countries that are now
economic powerhouses (such as China). Where would these countries fit today? We do
not know for sure, and the answer to this question is more complex than it might seem.
For example, it is easy to imagine a new Asian cluster consisting of Japan, China, and
South Korea. All three countries are well known for emphasizing harmony in interper-
sonal relations, an emphasis traceable to some common Confucian values. But, “harmony”
takes on a different meaning in each country. In Japan, harmony is often defined in
terms of group activities and membership, whereas in China and Korea harmony is often
defined in terms of relationships between individuals (Figure 4.2 presents a summary of
these differences).
Feature Country Term for Harmony
Japan Wa China Guanxi Korea Inhwa
Definition Stress on group Stress on friendly Stress on harmony

harmony, mutual relationships that are between unequals;
cooperation to based on the exchange workers are loyal,
reach group goals of favors bosses are obligated
Employees’ commitment To company To boss, family To boss, family
Role of the individual Be an effective Maintain favorable Be loyal to boss
group member exchange relations
Decision-making Participative, Based on personal Based on family
consensus- loyalties and favors ties, hierarchy
based, illusion of owed
agreement key
Performance feedback Indirect, often Indirect, often done Indirect, often done
done via third via third parties to via third parties to
parties to preserve maintain equity in preserve harmony
group harmony relationships among unequals
Management style Group facilitation Benevolent paternalism Clan management
Figure 4.2 Defining “Harmony” Differently in Japan, China, and Korea.

Source: Adapted from Alston, J. P. (1989). Wa, guanxi, and inhwa: Managerial principles in Japan, China, and
Korea. Business Horizons, March–April, 26–31.
135
The Japanese may value wa, group cohesion and group loyalty, above individual
needs. This means that they may work for the group’s benefit and identify strongly
with their company. Since harmonious group relations are so important, interpersonal
conflict tends to be minimized. For example, achieving a consensus in decision making
is critical, even if it requires maintaining an illusion of agreement among everyone
during the decision-making process. Open disagreements tend to be avoided. While
American managers often feel free to disagree (sometimes in very frank terms), some
Japanese managers avoid conflicting views to a great extent. For Americans, the word
sincerity means telling the truth. The closest Japanese equivalent, makoto, means
promoting harmony and showing support for colleagues.14 As mentioned, however,
cultural values are always evolving, even if slowly and incrementally— something that
may be the case with Japan, a society that’s faced tough economic times in recent
decades.
In China, however, harmony is expressed by guanxi, the special relationship that
Chinese have when they are mutually obligated to each other. This obligation includes
the exchange of favors and can take precedence over firm procedures and sometimes
even law. A failure to return favors results in a loss of face and may lead to the end of
the relationship. Employees tend to be loyal to their individual guanxi relationships,
rather than to the company. Guanxi can exist between two people of unequal status,
like a manager and a subordinate. In this case, the subordinate will be loyal in exchange
for being taken care of by the manager. This unequal exchange honors the more power-
ful member of the relationship and is linked to Confucian expectations that powerful
family members help weaker members.
The result in China is a benevolent paternalism where managers may act as kindly
father figures who provide for their “children” (subordinates). These complex but infor-
mal relationships affect how business gets done: laws, procedures, and regulations are
routinely circumvented because of guanxi. Developing guanxi-based “connections” can
help foreign companies succeed in China.15 But, just like those in Japan, traditional
Chinese values may also be evolving. See the accompanying International Insights feature
for a look at the case of one of those traditional values, guanxi.
Old-Fashioned Chinese Guanxi Gets a Decidedly Yiddish Edge . . . and Begins to Look
More Like Schmoozing All the Time
The Chinese term guanxi means connections (loosely translated) and anyone with a passing
familiarity with the country will tell you that it is necessary to have guanxi in order to get
anything done. Having it and getting it are key to setting up important meetings, getting
vital approvals, and cutting a business deal. In fact, the sky’s the limit sometimes if you have
good guanxi, an appetite for banquets, and enjoy XO brandy!16
136
Like many things in Asia, and China in particular, times are changing. Increasingly, guanxi
seems to be evolving and has now taken on a more Western feel, where lots of schmoozing
is done. The word “schmooze” is of Yiddish origin and means to converse casually, especially
in order to gain a business advantage or make a social connection. One Chinese MBA
graduate talked about the new guanxi in this same way: “it used to mean access . . . now
it’s about relationships that inform and educate you.” Even the likes of Yang Yuanqing,
chairman of Lenovo Group (the Chinese giant that bought IBM’s laptop business several years
ago) had come to value more Western-style schmoozing: “more and more Chinese who
studied or worked overseas need to understand how to build these networks.” One networking
source consists of Chinese who meet in an American or European MBA program, such as
Gary Wang, who earned an MBA from INSEAD, a top-ranked business school in France. Mr.
Wang now runs a YouTube-type firm called Tudou that he built largely based on his business
school connections. His business partner is a Dutch MBA classmate, who in turn married
another one of their fellow classmates. Another alum helped with public relations work. Yet
another is a partner at a global ventures firm and helped raise $9 million after yet another
friend heard him speak at a conference.
This general ring of information, education, and relationships seems to be on the rise
as Chinese businesspeople become more globally savvy. Some business schools have system-
atically fostered this “schmoozing.” They encourage alumni networks and provide the foun-
dation for continuing smaller, more intense circles of relations. Multinationals are also getting
into the act. Proctor and Gamble (P&G) China “graduates” of a “class” of over 80 college
recruits 1997 were all asked to reflect on their personal bonding experiences within the
company. The group now has its own website, where members share information with each
other, from golf lessons to job opportunities. Of course, playing the game is still paramount—
knowing the party boss (or his kids) probably cannot hurt in any country or in any business—
especially in China. Plus, working the room for 30 minutes is neither good guanxi nor good
schmoozing; that only goes so far and does not build relations of lasting value. That said,
increasingly it seems that East is meeting West in China.17
Similar to China, the South Korean version of harmony (inhwa) is defined by relation-
ships between individuals. In South Korea, however, the relationship commonly involves
people of unequal status and power. The guiding principle is the Confucian norm that
individuals are to be loyal to parents and to authority figures. Thus, harmony is a func-
tion of observing hierarchical ranking. At work, managers sometimes expect the same
loyalty and obedience that a person would give to a parent. In fact, in many large Korean
firms real parent–child relationships exist in executive ranks. Traditionally, a company’s
founder brings members of his family or clan into top positions.18 Nevertheless, all par-
ties are expected to be emotionally supportive of each other, regardless of their rank or
family status. One consequence is a strong reluctance to engage in direct criticism or
provide negative performance feedback.19
Overall, the differences among Japan, China, and South Korea illustrate the limita-
tions of clustering countries that appear to have very similar cultural values. Similarly,
137
in the Anglo cluster, British managers tend to be more formal, more class-conscious, and
more autocratic than their American counterparts.20 It would be a mistake to assume a
high degree of cultural homogeneity in a region.21 The same point is true for “within-
country” differences. Immigrant migration to the U.S., Germany, and other countries
has put managers in the position of having to motivate employees from diverse cultural
backgrounds. Doing a better job of managing this diversity can enhance the competitive-
ness of American companies.22 Likewise, in South Africa, approximately 10 percent of
the 45 million population are white descendants of Dutch and British settlers. South
Africa’s black citizens come from several ethnic groups (such as Zulus and Xhosas).23
In the presence of such diversity, it is not surprising that cultural differences affect work
in South Africa in complex ways.24
In summary, Ronen and Shenkar’s approach to clustering countries has important
limitations—ones shared by all frameworks that seek to cluster countries and cultures.
Hofstede’s effort to distinguish countries is no exception.
Hofstede: Clustering Countries on WorkRelated

Value Dimensions
Geert Hofstede’s work represents the largest and most influential effort to cluster
countries by cultural values.25 Hofstede’s conclusions are based on a survey that
asked over 116,000 employees in more than 70 countries about their values and
beliefs. From these data, Hofstede extracted four basic cultural dimensions:
individualism–collectivism, masculinity–femininity, power distance, and uncertainty
avoidance. He created scores, ranging from 1 to 100, for each dimension and then
used these scores to compare countries. In addition, to help interpret his results,
Hofstede also created cultural “maps” that position each country in terms of pairs
of culture dimensions. Since countries also tend to cluster, similarities and differences
between groups of countries were assessed. Overall, Hofstede’s work, especially
around these four dimensions, has important implications for managing employees
around the world.26
Individualism–collectivism
This dimension describes whether people in a culture tend to view themselves primar-
ily as individuals or as members of a group. In individualistic cultures, people are
expected to take care of themselves, and a high value is placed on autonomy, indi-
vidual achievement, and privacy. In collectivist cultures, however, people are more
likely to view themselves as part of a group that protects and takes care of them in
exchange for loyalty and devotion. The group may be the family, a clan or tribe, or
an organization. It is believed that these values are deeply embedded in a culture and
have been communicated among members throughout their lives—including very early
on in life and children’s school years. Some research confirmed this belief by studying
grade school textbooks. As you might expect, even in the process of conveying knowl-
edge, authors regularly impact key values to their readers and this is exactly what
138
one author recently found. Nearly 100 grade school textbooks from both Japan and
the U.S. were coded for the number of references and stories that related to individual
(self-direction, personal achievement) or collective (group harmony, fitting in) themes.
The results confirmed that individualistic values are much more common in U.S.
textbooks and collective themes more common in Japanese books. This same effect
even extended to pictures (single individuals vs. group interaction), narrators, and
more.27
Individualism–collectivism is the most widely studied of Hofstede’s dimensions, and
it also may be the most complex. Recent research suggests that collectivism and indi-
vidualism are actually multifaceted.28 For instance, individualism may include both
economic (e.g., “I achieve things by competing”) and expressive (e.g., “I want to be seen
as a unique person”) elements. Likewise, collectivism may also contain economic (e.g.,
“members of the group should share resources”) as well as expressive (e.g., “group
members should be emotionally involved with each other”) components. On top of that,
cultures may vary considerably when it comes to how they view a particular component
of individualism or collectivism. For example, while cultures that share Confucian and
Latin roots tend toward collectivism, at least compared to the U.S., they may view
expressiveness quite differently. In many Latin American countries, open displays of
emotion and warmth are expected and encouraged. On the other hand, such displays
are much less likely to be found in Japan. In short, what constitutes “collectivism” (or
“individualism,” for that matter) may vary from place to place and it is important to
dig deep to understand that.29
Masculinity–femininity
This describes whether success and the assertive acquisition of money and power (at the
expense of others, if necessary) is highly valued—or whether people, the quality of life,
and good relationships with co-workers should take precedence. Hofstede noted that in
most cultures men were more likely to endorse the assertive (or “masculine”) view.
Masculine cultures are achievement oriented, tend to view the ambitious pursuit of high
performance as the ideal, and feel that men are better suited for positions of power.
School systems in such cultures tend to identify and develop “high performers.” Likewise,
an important social value is having a “successful career.” Workplaces tend to be com-
petitive, stressful, and prone to conflict.
Feminine cultures, on the other hand, emphasize the equality of men and women,
place a high value on taking care of the disadvantaged, and desire harmony in the
workplace. Consequently, there is a stronger emphasis on job security and creating
stress-free work environments. Career pressures also tend to be lower and labor–
management discord less likely.
Power distance
Power distance (PD) reflects the extent to which people accept large differences in
authority and power between individuals or groups in an organization. Put simply, how
acceptable is it to have power distributed in an unequal manner? In high PD cultures,
139
people are more likely to accept their station in life and follow the direction of those
with greater authority. The view is that some people either deserve or are destined to
be in command and others are not. So, a company hierarchy that spreads powers
unequally is acceptable because managers and employees are seen as different types of
people. Overall, leadership discretion and managerial authority tends to be more con-
centrated in high PD cultures.
People in low PD cultures, in contrast, are more likely to be wary of concentration
of authority. Power is more likely to be used in a decentralized way, with companies
having fewer layers of management. In these low PD cultures, managers tend to develop
close, trusting relationships with their subordinates and use their power with care. Free
wielding of power is frowned upon and is often subject to a variety of laws, procedures,
and standards, which, if violated, can create a backlash as well as other problems for
managers. Research shows that empowerment methods (e.g., giving employees discretion
on decisions) are more effective in low PD cultures than high PD ones.30 But, a recent
study suggests that it is important to be careful about how empowerment is defined.
Depending on its definition, using empowerment methods can be successful in both
Canada (low PD) and China (high PD). When the empowerment is defined as the degree
of management trust and support (leadership empowerment), it can have positive effects
in high and low PD cultures.31
Uncertainty avoidance
How people react to uncertain or ambiguous events defines Hofstede’s uncertainty avoid-
ance (UA). People in cultures that are low in UA embrace the idea that life is unpredict-
able by definition. As a result, there is less concern with or adherence to rules, procedures,
or organizational hierarchies. Risk taking, especially in the pursuit of individual achieve-
ment, is desirable. Competition and conflict are both viewed as inevitable parts of life
in an organization.
Individuals in countries or cultures where UA is high, however, tend to feel threat-
ened by ambiguity and will go to great lengths to create stable and predictable work
environments. In such cultures, there is an emphasis on ‘absolute’ truths and unusual
behavior or ideas tend to be rejected. As a result, rules and procedures designed to keep
uncertainty at bay, such as employee treatment, tend to be more common. Likewise,
there tends to be less risk taking in decision making and reduced personal initiative in
regard to career moves in high UA cultures.
Cultural maps
Hofstede created cultural maps by crossing pairs of cultural dimensions and plotting the
corresponding scores for each country. Each map is divided into quadrants representing
different combinations of the cultural dimensions. Countries whose pairs of scores tend to
cluster together are also identified. The basic idea is that countries may possess certain
combinations of cultural values that have unique managerial implications. We will look at
managerial implications of this in more detail later. For now, we will focus on understanding
140
ARA Arab countries (Egypt, JPN Japan

Lebanon, Libya, Kuwait,
Iraq, Saudi Arabia, UAE)
ARG Argentina KOR South Korea
AUL Australia MAL Malaysia
AUT Austria MEX Mexico
BEL Belgium NET Netherlands
BRA Brazil NOR Norway
CAN Canada NZL New Zealand
CHL Chile PAK Pakistan
COL Colombia PAN Panama
COS Costa Rica PER Peru
DEN Denmark PHI Philippines
EAF East Africa (Kenya, POR Portugal
Ethiopia, Zambia)
EQA Ecuador SAF South Africa
FIN Finland SAL Salvador
FRA France SIN Singapore
GBR Great Britain SPA Spain
GER Germany SWE Sweden
GRE Greece SWI Switzerland
GUA Guatemala TAI Taiwan
HOK Hong Kong THA Thailand
IDO Indonesia TUR Turkey
IND India URU Uruguay
IRA Iran USA United States
IRE Ireland VEN Venezuela
ISR Israel WAF West Africa (Nigeria,
Ghana, Sierra Leone)
ITA Italy YUG Former Yugoslavia
JAM Jamaica
Figure 4.3 Abbreviations for Countries and Regions Used in Hofstede’s Culture Maps.
Hofstede’s culture maps. Figure 4.3 shows the abbreviations for the countries used in
Hofstede’s research.
We will start with the positions of countries on the individualism–collectivism crossed
by the power distance dimensions. As Figure 4.4 shows, only Costa Rica combines col-
lectivism and small power distance. Instead, large power distance and collectivism more
commonly occur together, with most countries in this quadrant being either Asian or
Latin American. Similarly, small power distance and individualism go together, with
northern European and Anglo countries such as Sweden and Great Britain populating
this quadrant.
141
0 Small power distance Large power

Collectivist distance
8 EQA GUA Collectivist
COL VEN PAN
COS FAK IDO
TAI PER SIN
16
KOR SAL WAF
24 CHL THAHOK MAL
POR EAF YUG
32 MEX PHI
GRE
JAM URU TUR
ARA
40 IRA BRA
ARG
Individualism–Collectivism
JPN
48 IND
ISR SPA
56 AUT
FIN
64
NOR GER SAF
IRE SWI
SWE FRA
72 DEN
ITA BEL
NZL NET
80 CAN
GBR
88 AUL
USA
96
104
112 Small power distance Large power

Individualist distance
Individualist
10 20 30 40 50 60 70 80 90 100 110
Power-Distance index
Figure 4.4 Culture Map for Individualism–Collectivism Crossed by Power Distance.

Source: Hofstede, G. (1991). Cultures and Organizations: Software of the Mind, 54. London: McGraw-Hill U.K.
Used with permission.
Figure 4.5 displays the map crossing the uncertainty avoidance and masculinity–
femininity dimensions. Hofstede suggested that cultures with weak uncertainty avoidance
and masculine values will be achievement-oriented. These tend to be Anglo countries or
their former colonies (such as India, Hong Kong, and the Philippines). The second
quadrant, combining strong uncertainty avoidance and masculinity, produces security
motivation. For countries in this quadrant, both performance and job security are valued.
In contrast, the combination of feminine values and strong uncertainty avoidance pro-
duces social motivation. Here job security, positive relationships, and a good quality of
life are prized. Scandinavian countries dominate the fourth quadrant, which combines
feminine values and weak uncertainty avoidance. In these countries, risk and performance
are acceptable, but social relationships and a high quality of work life are valued more
than individual achievement. We might expect to see a larger number of paid holidays
in these countries as opposed to countries exemplifying achievement motivation, and
research typically finds this to be true.
142
0 Weak uncertainty avoidance Weak uncertainty avoidance

Feminine Masculine
8 SIN
JAM
16
24 DEN HOK
SWE
32 GBR
MAL
IRE
40 IND
PHI
Uncertainty Avoidance Index
CAN USA
48 NOR IDO
WAF NZL SAF
NET EAF AUL
56 FIN SWI
IRA
GER
THA
64 ARA AUT
TAI PAK EQA
72 ITA
BRA COL VEN
ISR
80 KOR FRA TUR
COS MEX
ARG
CHL SPA PAN
88 YUG PER JPN
SAL BEL
96
GUA URU
POR
104
GRE
Strong uncertainty avoidance Strong uncertainty avoidance
112
Feminine Masculine
10 20 30 40 50 60 70 80 90 100 110
Masculinity–Femininity Index
Figure 4.5 Culture Map for Uncertainty Avoidance Crossed by Masculinity–Femininity.

Figure 4.6 displays the final map that crosses uncertainty avoidance and power dis-
tance. Asian countries dominate the family quadrant (large power distance and weak
uncertainty avoidance). In these countries, there is often somewhat less concern about laws
and procedures than on being loyal to strong, paternalistic leaders. In contrast, the pyra-
mid of people quadrant (large power distance and strong uncertainty avoidance) produces
cultures accepting of powerful leaders, but in a context that is fairly hierarchical and
rule-bound. We count 14 Latin American countries within this quadrant. Organizations
in these countries often have vertical and clear lines of communication—they know who
reports to whom. Of course, by clarifying these features, organizations become more
predictable. This diverse quadrant contains Mediterranean, Latin, and some Asian countries.
Germanic countries dominate the well-oiled machine quadrant (small power distance
and strong uncertainty avoidance). In this environment, leaders are less important than
having clear rules and procedures that promote efficiency. Finally, the village market
quadrant contains Anglo and Scandinavian countries. Here the combination of small power
143
0 Small power distance Large power distance

Weak uncertainty Weak uncertainty
8 avoidance SIN avoidance
(village market) JAM (family)
16
DEN
24 HOK
SWE
32 IRE
GBR MAL
IND PHI
40 USA
Uncertainty Avoidance Index
NZL CAN IDO

SAF
48 NOR NET EAF
AUL WAF
56 SWI
FIN THA
IRA EQU
64 PAK TAI
GER ARA
AUT
72 BRA
ITA CHL VEN
ISR COL
80 KOR TUR MEX
ARG
COS SPA PAN
FRA YUG
88 PER
JAP BEL SAL
96
URU GUA
POR
104
Small power distance GRE Large power distance
112 Strong uncertainty Strong uncertainty avoidance
avoidance (pyramid of people)
(well-oiled machine)
10 20 30 40 50 60 70 80 90 100 110
Power-Distance Index
Figure 4.6 Culture Map for Power Distance Crossed by Uncertainty Avoidance.
distance and weak uncertainty avoidance allows for a great deal of experimentation and
risk taking that’s not automatically limited by powerful leaders. In such cultures, good
negotiation and conflict management skills may be critical for getting things done since
elaborate procedures are replaced by fewer management layers and less formal controls.
Long- versus short-term orientation

More recently, Hofstede proposed this fifth cultural dimension, which evolved from
his work on Asian cultures with colleague Michael Bond. This helps distinguish between
cultures that have a forward-looking perspective on life (long-term) and those that are
more concerned with the past and present (short-term). Specifically, cultures that are
long-term oriented feel that values focusing on the future (e.g., frugality, hard work,
adaptability, persistence) are most important. Indeed, many Asian societies are long-
term oriented, something that may help explain the economic success enjoyed by some
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More Long-Term
Oriented
China
Taiwan
Japan
South Korea
Brazil
India
Thailand
Netherlands
Sweden
Germany
Australia
United States
Great Britain
Canada
Philippines
Nigeria
Pakistan
More Short-Term
Oriented
Figure 4.7 Long- Versus Short-Term Orientation: Where Do Various Countries Stack Up?
Source: Adapted from Hofstede, G. (2001). Culture’s Consequences (2nd ed.), 356. Thousand Oaks, CA: Sage.
Asian countries (e.g., South Korea, China, Japan) over the last decades, despite some
major bumps in the road (e.g., Asian financial crisis of 1997). On the other hand,
cultures that are short-term oriented feel that values focusing on the past and present
(e.g., respect for tradition, stability, fulfillment of social obligations) are most impor-
tant (e.g., Pakistan, Philippines, Canada, U.S.). In general, Asian countries tend to
have the strongest long-term orientation, while those with more short-term orientation
include both some “Eastern” and “Western” countries (see Figure 4.7). If you are
wondering about how long- versus short-term orientation relates to Hofstede’s other
four dimensions, the answer is fairly complex. That said, there is some evidence that
wealthier countries that strongly embrace a long-term orientation also tend to be high
on power distance and low on individualism (South Korea being a good example).32
Limitations of Hofstede’s Cultural Dimensions
Like Ronen and Shenkar, the Hofstede model misses some key countries in its clustering
effort. For example, countries in Eastern Europe are missing, as are developing Asian
nations such as Vietnam. To help rectify this, Hofstede’s more recent work includes cultural
value estimates for emerging economic powers such as China and Russia. For instance,
145
he views China as a country that is long-term oriented, low on individualism, and moder-
ate on uncertainty avoidance and masculinity. Russia, on the other hand, is seen as short-
term oriented, high on power distance, strong on uncertainty avoidance, moderate on
individualism, and low on masculinity. Nevertheless, certain regions of the world remain
underrepresented even in the most recent efforts to cluster countries by culture.33
Another limitation of Hofstede’s work is that it ignores differences that exist between
countries within a specific cluster or quadrant. Research suggests, for example, that cultural
differences exist between the U.S. and Australia despite their similar scores on Hofstede’s
cultural dimensions. For example, Americans tend to be more interested in intrinsic rewards
like responsibility and recognition, while Australians tend to be more interested in having
job security and a good income.34 Hofstede’s approach has a hard time explaining these
results. Finally, some have been concerned that the wide generalizations made of Hofstede’s
work are not tempered or qualified enough. Those critics note that the results were based
on employees of one large multinational (IBM) at one point in time (most in mid to late
1970s). One study recently reviewed nearly 500 separate studies, conducted among 50 dif-
ferent countries and comprising nearly 500,000 participants across decades on Hofstede’s
dimensions and found support for their validity. But, they also noted that the support
degraded over the last three decades, suggesting that cultures may be converging more
toward one another as the world becomes “flatter.”35 Finally, others have noted that
Hofstede’s approach doesn’t consider major subcultures within a country.36
Despite these limitations, however, Hofstede’s work continues to have tremendous
impact on the field of international management and remains a valuable guide for inter-
preting the effects of culture.37 Plus, some recent research has reinforced both the value
and applicability of Hofstede’s cultural dimensions.38 One study, for instance, found that
business leaders were seen as prioritizing their goals in ways that reflected their national
cultures. Specifically, business leaders in countries with high power distance are perceived
to value personal honor, family interests, and power more than business leaders in
countries with low power distance.39 Take a look at the following International Insights
feature which shows how the Walt Disney Company developed practical solutions, in
part based on an appreciation of some of these cultural values.
It’s a Small Park After All: Queuing Up at the House of the Mouse
Anyone who has ever been to a Walt Disney theme park has learned how to maximize time
for the next visit—and there is a next time for many, many people! Rookies learn about which
rides to avoid, what time is best for the most popular attractions, and how the “fast pass”
system (the Disney “reservation” approach to avoid waiting in lines at popular attractions) works.
Whether you are an experienced visitor or not, you are bound to spend some time
waiting in lines. How you line up at the “House of the Mouse” can have some cultural
underpinnings. In addition to the U.S. theme parks, Walt Disney has locations in Europe,
146
Japan, and Hong Kong. Like they had done elsewhere, Disney put the new Hong Kong theme
park through its paces in several weeks of trial runs prior to its official opening. Disney felt
that they had a good handle on operations, partially because it was a far smaller park (only
300 acres) than others that had already been established. Yet, Disney was smart to prototype
as a number of “flaws” were found, several of which could be traced to cultural differences.
The long waits for rides were problematic. The wait time was so bad that Hong Kong
officials (and social media participants) lobbied Disney to reduce the daily guest limit of
30,000, citing the two-hour waits at some rides, unclear traffic patterns, and more. Interestingly,
research on cueing behavior found that Asians and other guests from collective cultures tend
to compare their situations with others around them. This makes it more likely that they will
stay in really long lines more readily than a Westerner would. The study found that it is the
people behind a person in line—rather than the number of guests waiting in front of a
person—that determines an individual’s staying power in the line for a collective society. The
chance of a Chinese visitor leaving an attraction line is lower when they see more people
after them. Researchers said that, in Hong Kong, this could make lines grow even bigger:
“the longer the line, the more people think it’s worth it.” This view contrasts with Americans
and other individualistic cultures that are likely to focus on who’s in front of them in line—
the longer the line, the less likely an individualistic guest is to join in.
This does not necessarily mean, however, that the Chinese or other cultures are completely
patient. Mr. Jay Rasulo, chairman of Disney Parks and Resorts, said that the (mainland) Chinese
are “not as impulsive” as some customers in Europe, but that the more experienced Hong
Kong Chinese “seem a little more respectful” than most. Yet, according to Rasulo, neither
are as patient as the Japanese. Europeans have yet a different view about how long they
will wait. At Disneyland Paris, the British visitors are orderly and know how to properly cue,
whereas the French and Italians “never saw a line they couldn’t be in front of”, says Rasulo.
They then improvised at their Paris theme park by making lines narrower by moving handrails
closer together to prevent cutting ahead. This was not necessary at Tokyo Disney, where mats
spread out by people along parade routes to reserve space (unattended) were respected for
hours before the parade.
Disney, however, is ever the innovator and their designers (“Imagineers”) have put their
renowned attention to customers into play, such as with the handrail solution at Disneyland
Paris. In China, they discovered that wait times were increased by the Chinese penchant for
taking photos of the characters just before entering the rides, which in turn slowed “traffic”
to a standstill. To adjust, they installed other life-size figures, such as stationary Mad Hatter
tea cups from Alice in Wonderland throughout the wait line for this ride in order to help
speed loading of the ride—guests can take pictures while waiting for the ride, as opposed
to only having one opportunity for pictures just before boarding the ride itself. Park additions
were assisted by a feng shui master out of cultural respect, despite keeping the strong
American Walt Disney themes, because these are features that Chinese visitors say they want
to see. There will be more problems, especially as a new Shanghai theme park begins
construction in 2015. But, as Disney officials say, other parks where people do not have to
wait in lines are the failures. Nobody has to wait at Walibi Schtroumpf (a Smurf-themed
French park)—“you don’t wait because nobody’s there.”40
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Trompenaars’s Alternative: Another Look at

Cultural Dimensions
Fons Trompenaars’s recent work represents a unique and ambitious attempt to identify
cultural dimensions. Focusing on values and relationships, Trompenaars surveyed more
than 15,000 managers over a ten-year span. These managers represented 28 countries,
and Trompenaars was able to identify a variety of bipolar cultural dimensions as a result.41
Outer vs. Inner Directed

Outer-directed employees tend to accommodate their behavior to their situation in life.
Why? Because they feel that life’s outcomes are not under their control. Such employees
may desire stability as well as have a strong need for harmonious relationships. In con-
trast, inner-directed employees tend to believe that they control their own destinies.
Consequently, they are likely to be more willing to change their environment. According
to Trompenaars, Americans tend to be inner-directed, while at the other extreme, Chinese
tend to be outer-directed. Similarly, research comparing managers from the U.S. and
four Arab countries found that inner-directed values were endorsed most by the Americans,
while outer-directed values were more dominant on the Arab side. Because of outer-
directed concerns, business in Arab countries often functions on a more relationship-
oriented basis than it does in Western nations.42 Several of the most important cultural
dimensions identified by Trompenaars focus on relationships with others. A brief discus-
sion of some of these additional dimensions along with examples of countries most
representative of each polar extreme follows.
Universalism–particularism
This refers to the extent to which people usually believe that one set of rules and prac-
tices should apply to everyone (universalism) or whether the rules should be adjusted
depending on the person or situation (particularism). Many countries stress good rela-
tions with family and friends (particularism) rather than focusing just on the performance-
based considerations (universalism) that are more common in the U.S. Countries as
diverse as Venezuela, Indonesia, and China, however, tend toward particularism. Overall,
managers from cultures that embrace particularism are more likely to take an employee’s
personal family troubles and job demands into account when deciding on rewards than
are managers from cultures that embrace universalism.
Neutral–emotional
Cultures in which emotions are suppressed and stoicism is important are the neutral end
of this dimension. The Japanese are well known for their reserve and composure. The
flip side is an emotional culture, where feelings are expressed with gusto, such as in
Mexico. You can imagine some of the challenges that might occur if employees from
neutral cultures find themselves in an emotional culture or vice versa. Adapting to the
“rules of the game” that you are in is probably a safe guide for behavior (e.g., by being
more expressive in an emotional culture or more reserved in a neutral culture).
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Specific–diffuse
In specific cultures, such as within the U.S., life tends to be compartmentalized. Work
and family roles, for instance, are kept relatively separate—behavior that you see, titles
that are used, and the level of formality displayed will all vary depending on what role
an individual happens to be in (for example: boss, personal friend, co-worker, husband,
mother, etc.). Thus, having a relationship with someone carries little risk because that
relationship is limited to a specific role (e.g., you can be very friendly with people on
the job but never see them outside of the workplace). But in diffuse cultures, such as in
China, the lines between roles are fuzzy. A person’s job title might affect the way that
person is treated and viewed outside of the office and in many other spheres of life. The
Chinese therefore tend to be somewhat cautious in dealing with others for the first time,
especially since access to one area of life may mean access to all.
Achievement–ascription
In achievement cultures, your status depends on how you have performed and the goals
that you have been able to reach (e.g., a degree from a top university or landing a
prestigious promotion). “Being the best” at whatever it is that you do carries a lot of
weight. In ascription cultures, by contrast, status depends on things such as age, social
connections, class, or gender. For instance, social connections are likely to have a larger
impact on hiring and other business decisions in ascription cultures such as in China or
Indonesia than in achievement cultures such as the U.S.
Individualism–communitarianism
This dimension is similar to the distinction that Hofstede draws between individualism
(thinking of yourself as an individual first) and collectivism (thinking of yourself as part
of a group first). A comparison of the two frameworks, however, reveals some differ-
ences. For instance, Argentina and Mexico are described as relatively group-oriented by
Hofstede but as individualistic by Trompenaars. Why this is the case is not completely
clear. One possibility is that each researcher has defined his terms somewhat differently.
Another possibility could be that Trompenaars’s newer data may be revealing shifts in
cultural values that have occurred over the years. As stated earlier, cultures are constantly
evolving and changing. Trompenaars’s work may help underscore that point, as might
the last classification system to be discussed.
Spanning the GLOBE: One Final Classification System
One of the most recent attempts to classify countries based on their cultural orientation is
the Global Leadership and Organizational Behavior Effectiveness study—GLOBE.43 Over
200 social scientists from over 60 countries/cultures around the globe are involved in this
cooperative effort to collect data. This team of researchers studied roughly 20,000 middle
managers from nearly 1,000 companies in the financial, food service, and telecom industries.
Researchers worked to select countries so that every major region of the globe was repre-
sented. Note that these study features represent efforts to deal with the problems raised by
149
critics of the Hofstede and to a degree Trompenaars’s research. That is, many different
companies were studied (in contrast to just one in Hofstede’s research), various industry
sectors were sampled (only IBM was sampled in Hofstede’s research), and many research-
ers around the world weighed in. The study was originally designed in order to measure
cross-cultural views of leadership (discussed further in Chapter 10). But, the results have
since been extended to general differences across countries and, again, clusters of countries.
Researchers began by developing a questionnaire with items that would measure
nine different cultural dimensions. They derived these dimensions from their reading of
the existing research (including that of Hofstede and others), and through interviews
and focus groups in various countries. In Figure 4.8, we present these GLOBE dimen-
sions, their similarity to Hofstede’s research, and some sample countries that rank high
and low on these dimensions.
Six of the dimensions either overlap with the Hofstede dimensions directly or were
improvements on those.44 Even though there is overlap, the GLOBE researchers believe
Dimension and Definition Countries Countries

Ranked High Ranked Low
1. Uncertainty avoidance (Hofstede) Switzerland, Guatemala,

Sweden, Singapore Hungary, Russia
2. Power distance (Hofstede) Morocco, Nigeria, Denmark,
El Salvador Netherlands, Israel
3. Collectivism I, Societal (Hofstede) Sweden, South Argentina,
Korea, Japan Germany, Hungary
4. Collectivism II, In-group—the degree to Philippines, Iran, New Zealand,
which people are loyal and close to families India Sweden, Denmark
or organizations
5. Gender egalitarianism—does society Russia, Poland, Egypt, Kuwait,
minimize gender role difference and promote Denmark South Korea
gender equality? (Hofstede’s Mas–Fem)
6. Future orientation (Hofstede’s LTO) Singapore, Poland, Argentina,
Switzerland, Russia
Netherlands
7. Assertiveness—are people generally Albania, Germany, Switzerland,
assertive in their relations with others? Hong Kong New Zealand,
Sweden
8. Performance orientation—degree to Switzerland, Russia, Venezuela,
which society encourages and provides Singapore, Hong Greece
rewards for performance and excellence Kong
9. Humane orientation—does society Philippines, Ireland, Germany,
encourage and reward for being fair, altruistic Thailand Singapore, Greece
generous, and caring, and kindness to others?
Figure 4.8 GLOBE Cultural Dimensions.

Note: US ranking: 1 (middle), 2 (low), 3 (middle), 4 (low), 5 (middle), 6 (high), 7 (middle), 8 (high), 9 (middle).
Source: Adapted from House, R. J., Hanges, P. J., Javidan, M., Dorfman, P. W., and Gupta, V. (eds) Culture, Leader-
ship, and Organizations: The GLOBE Study of 62 Societies. Thousand Oaks, CA: Sage.
150
that their study improvements, as well as their sharper way to measure all the dimensions,
are great benefits—not to mention that a few additional distinctions across cultures were
found. Figure 4.8 shows the first three dimensions in detail under Hofstede, and readers
should be familiar with these. The fourth dimension is a separate type of collectivism
dealing with pride in, loyalty to, and closeness of family and work groups, not necessar-
ily society as a whole (see Globe dimension #3/Hofstede). So, for example, ties of this sort
are very important in business dealing in countries such as the Philippines, India, and
South Korea. South Korea in particular is known for major companies tied to families.45
In Figure 4.8, Dimensions 5 and 6 are also derived from Hofstede. The final three
dimensions in the figure are new and offer measurement and conceptual clarity over the
other existing models discussed. For example, the performance orientation dimension
could be a particularly useful way to understand motivation across culture. This refers
to the importance of improving performance, the value of good performance, and the
degree to which people in a society are encouraged to strive to be better (similar to
Trompenaars’s achievement–ascription dimension and related to Hofstede’s masculinity–
femininity dimension). Singapore, Hong Kong, and Switzerland scored the highest among
the 62 countries on this behavioral dimension. The U.S. scored in the middle third of
countries on this dimension in the GLOBE study. Russia, Venezuela, and Greece scored
the lowest in the sample on this dimension. This does not mean that these countries are
not, or cannot be, great economic successes (indeed, Russia is doing quite well as of this
writing); instead it suggests that other factors such as background, loyalty, family are
more important.
The final dimension listed in the table is called humane orientation and refers to
the degree to which society encourages and rewards its members for being fair and
considerate of others. Figure 4.8 shows that countries such as the Philippines, Ireland,
and Thailand all score very highly relative to other countries around the world. The
GLOBE researchers suggest that people in these countries have a greater focus on the
less privileged and powerless in their societies. Taking care of others, including at work,
and friendly relations and tolerance are very important. Contrast this with the countries
of Germany and Singapore, where more importance is attributed to obtaining power
and material possessions, as well as improving the individual self.
Summary of GLOBE
Overall, the GLOBE study is the most contemporary approach and offers the best mea-
surement features and study scope. This bodes well for future uses of these dimensions,
scales that measure those dimensions well, and their findings. All of this suggests that the
GLOBE clustering approach may overtake Hofstede’s model as the most cited and
researched. For our purposes in this book, however, findings across models might be help-
ful to managers as they stand right now. For example, those in or about to enter the
international arena can be made aware of these general differences and can potentially
capitalize on them. At the minimum, classification approaches allow for one to be sensitive
to behavior that is appropriate to local societal norms and expectations. This is something
that the social media website Facebook did recently, as it tried to expand the global use
of its platform. See the following Global Innovations feature for more information.
151
Global Innovations
Sharing Is Caring (about Market Penetration): Facebook in Unfamiliar Places

With over 900 million members worldwide, Facebook is a social networking giant. While the
U.S. has the most users (estimated at over 160 million as of this writing), international growth
of users has been phenomenal. In 2008, there were only about 35 million users outside the
U.S., but this figure ballooned to over 400 million by 2011, and continues to grow like crazy
in many countries still.
But, some have suggested that it is not really a global brand—at least not yet. Indeed,
despite the popularity of the internet in China, Facebook has a low profile in some countries.
In China, for example, there are only about 500,000 users in an Internet-hungry nation of
roughly 1.3 billion—many millions more of whom use Tencent and other Chinese social media
products. Still, as the growth rates for Facebook show, underestimating the website would
be a mistake. The company has made some impressive strides in two nations—Russia and
Indonesia—that might not strike people as great markets to leap into. Yet, Facebook has
done exactly that, armed with an understanding of the culture of both countries and how
that culture impacts customers’ willingness to use the firm’s services.
In Russia, local networking sites are quite popular—an important signal to Facebook.
Indeed, Facebook launched its Russian site in 2010 and saw its user base jump nearly 400
percent in the first eight months. One of the factors that attracted Facebook to the country
is the fact that Russians average almost ten hours per month on social networking sites—more
than twice the global average. Many parts of Russia are isolated and frigid for much of the
year, making online interaction an attractive option.
But a bigger reason for the pull of social networking is the Russian cultural tradition of
using informal networks as sources of information, often for sheer survival. Given Russia’s
long history of closed institutions and opaque systems that cannot be trusted or relied on,
informal networks can be a powerful substitute. Plus, with historically limited press and civil
freedoms, Russians often feel hemmed in personally. Yet, unlike in China, Russian authorities
allow pretty much anything to happen online. Moreover, Facebook gives its Russian customers
a measure of control, allowing them to create and then vote on Russian names for various
website features. Finally, Russia is a very relationship-oriented society, one in which connec-
tions are key for everything from securing good jobs to “fixing” problems with officials. This
also bolsters the attractiveness of social networking online. Even though there are only about
6 million Russian Facebook users now, this understanding of the market could pay off in
much larger numbers of users from this nation of 150 million people.
In Indonesia, many citizens of the world’s largest Muslim country love to converse and
share stories and, increasingly, they want to do it online. Thanks to skyrocketing growth,
Indonesia has already become Facebook’s fourth-largest market in the world, despite the fact
that less than 20 percent of the over 250 million Indonesians have Internet access. The
country trails only the U.S., Brazil, and India as the largest markets for Facebook. Interestingly,
Facebook recognized that certain elements of Indonesia’s culture make citizens there especially
open to using social networking. First, friendships are very important in Indonesian society.
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Combined with a tendency to embrace trends, a desire for publicity, and relatively little
concern about privacy, Indonesians are ideal customers for Facebook.
That said, however, Indonesia does have some peculiarities as a market for social
networking. Few Indonesians have bank accounts or credit cards, so the advertising model
that Facebook uses to make money in the U.S. (i.e., where people routinely buy something
after clicking on ads) does not apply to nearly the same degree. Instead, Facebook is trying
to construct partnerships with other firms in ways that will allow Indonesian customers to
barter for goods or use online “currency”—while still making money somehow on these
transactions. In any case, another unusual aspect of Indonesians’ social networking behavior
is their tendency to use avatars—often with completely different physical characteristics—instead
of their own photos to represent themselves on Facebook. Indonesians who interact online
about their real lives while using idealized avatars as self-images underscore why Facebook
cannot take foreign markets at face value. Instead, Facebook and other companies need to
better understand how culture impacts social networking complexities in different markets.46
The Implications of Culture for International

Management
Up to this section, a brief and general commentary about the implications of culture for
management has been discussed. We have also noted that culture can potentially impact
just about everything—from how international business strategy is formed, to encourag-
ing Facebook use. We will explore these topics and more in greater detail in chapters
to follow. For now, however, let’s turn our attention to an examination of how culture
may affect what people want from their jobs, as well as how individuals view leadership.
The chapter concludes with some specific, practical suggestions for moving beyond the
kind of “sophisticated stereotyping” that often comes with the limitations of current
culture frameworks.
Culture and What People Want from Work
Work Centrality
How central is work in the lives of employees? Do employees work primarily for rela-
tionships, money, or for the job itself? The answers have important implications for how
managers should approach their jobs in various cultures. Research suggests that what
we want from work may, to an extent, depend on our culture. For instance, a survey
of 14,000 employees from eight countries (Belgium, Britain, Germany, Israel, Japan, the
Netherlands, the U.S., and the former Yugoslavia) found that work centrality (how
important work is in the lives of employees) varied across countries. Americans fell in
the middle of the pack, while the British had the lowest work centrality scores and the
Japanese the highest. In fact, the Japanese not only had the highest centrality score, they
were also significantly ahead of the other seven countries as a group.47
153
Some have suggested that work centrality in Japan may have eroded in recent years.
While this may be true, the tendency to view work as a critical part of life will undoubt-
edly persist at some level in Japanese culture. Why? One reason is that it is hard to imag-
ine long-standing Japanese traditions being completely undercut in just a decade or two.
For centuries, Japan was a society made up of small, isolated farming communities. This
isolation required hard work and cooperation to ensure community survival. This agrarian
system began changing significantly only within the last 80 years. The legacy of this system
in modern industrial Japan is the value placed on hard work and group solidarity.48
Other Work Features

But what about other aspects of work? Figure 4.9 summarizes the importance of 11
different work goals across eight countries. You will notice that employees in most
countries ranked interesting work first or second in importance. Good pay was also an
important goal for most employees, although Dutch and Japanese employees ranked it
lower. Substantial differences across countries were found for most of the remaining
work goals. For example, job security was very important to Germans, but not very
important to Israelis. Japanese felt that achieving a good match between job demands
and their talents was the most important work goal, while most countries rated it fifth
or lower. Finally, while having autonomy was the most important work goal for Dutch
employees, British employees rated it near the bottom.49
Work Goal Country Studied
Belgium Germany Israel Japan Netherlands U.S. Former U.K.

Yugoslavia
Interesting work 1 3 1 2 2 1 2 1
Good pay 2 1 3 5 5 2 3 2
Interpersonal 5 4 2 6 3 7 1 4
relations
Job security 3 2 10 4 7 3 9 3
Match of job/skills 8 5 6 1 6 4 5 6
Lots of autonomy 4 8 4 3 1 8 8 10
Opportunity to learn 7 9 5 7 9 5 4 8
Work variety 6 6 11 9 4 6 7 7
Good hours 9 6 7 8 8 9 10 5
Safe working 11 11 9 10 10 11 6 9
conditions
Opportunity for 10 10 8 11 11 10 11 11
promotion
Figure 4.9 Rankings of the Importance of Work Goals by Country.

Note: Ranking of work goals ranges from 1 = most important to 11 = least important.
Source: Adapted from MOW International Research Team. (1987). The Meaning of Working, 123. London:
Academic Press.
154
Nevertheless, these results suggest that providing interesting work will have a posi-
tive effect on workers in all eight countries. If these findings offer generalization for
other nations and cultures, managers could view “interesting work” as something that
employees universally want from their jobs. The results also suggest that managers need
to adjust their approach to match the values of specific cultures. Of course, this adjust-
ment must be made cautiously. After all, cultures change. Moreover, individual values,
needs, and goals may diverge from existing cultural norms in any case.
Other studies have produced similar findings and implications. One survey, for
example, found that both American and Asian executives valued hard work. But
Americans tended to value personal achievement much more than the Asians, while the
reverse was true for respect for learning. Also interesting was the fact that there was
considerable divergence in values among Asians managers. Executives from Japan, for
instance, were more concerned with harmony than their counterparts from Singapore
and Hong Kong.50
Value Convergence?
There has been considerable interest in discovering whether cultural perspectives on
values and various work features and behavior are converging. One clever investigation
compared the relationship between personal characteristics and evaluations of manage-
rial effectiveness in Canada, Hong Kong, and China. The characteristics examined tend
to be valued in Anglo countries (e.g., achievement motivation, interest in realizing your
highest potential, intellectual ability). The idea was that if cultural values affect the
importance of managerial characteristics, then executives in Canada, Hong Kong, and
China should differ in terms of how they rate the effectiveness of the managers that
work for them. Chinese executives, for instance, might not see a relationship between
“Western” criteria and managerial effectiveness. On the other hand, if attitudes toward
leadership are converging as industrialization proceeds worldwide and countries like
China become more “modern,” then the criteria for effective management should be
similar in all three countries.51
The results painted a mixed picture about the convergence/divergence issue. Canadian
executives, for example, felt that interest in realizing your highest potential was most
important for managerial effectiveness. Chinese executives, however, felt that a man-
ager’s intellectual ability was most important. These results support the idea that culture
continues to effect which characteristics are seen as critical for effective management.
That said, although the rankings were different, many of the characteristics were viewed
as signs of effectiveness by all executives.
This supports the convergence idea since only “Western” characteristics were included.
In fact, the Chinese executives in the study all worked for large, modern firms in urban
areas and had been exposed to North American management techniques. So the results
may reflect the ongoing evolution of Chinese leadership, with “traditional” values being
slowly eroded by Western philosophies. An evolution in values has also been observed
in many former communist countries such as eastern Germany over the last several
decades.52 Nevertheless, it would be a mistake to assume that local values will be com-
pletely supplanted by “Western” values in China (or elsewhere) anytime soon—if ever.
155
Indeed, research continues to suggest that convergence forces are typically slowed or
offset by aspects of the local cultural environment. We will return to this in later chap-
ters on work behaviors such as decision making, leadership, and negotiation.53
How Individuals and Corporations

Can Make Better Sense of Culture
This discussion underscores the complexities associated with culture, a point that has been
touched on throughout the chapter. So far we have presented a series of cultural frame-
works and dimensions and also discussed their limitations, including the broad-brush
portraits they often paint of cultures around the world. Even if we view these “sophisticated
stereotypes” as helpful and useful, they may, at least to some extent, already be outdated.
After all, cultures may be stable most of the time, but they are certainly not static.
Yet, sometimes managers carry around cultural stereotypes about different parts of
the world that can derail effective decision making. Fortunately, Flextronics CEO Michael
Marks avoided this problem when he considered whether to build a manufacturing plant
in Mexico. Some of the people around him advised against building the plant, suggest-
ing that the cost savings of manufacturing in Mexico would be eaten up by local
employees and their “siesta culture.” Mr. Marks ignored this stereotype-driven advice
and built the plant anyway, a facility that ended up producing over $1 billion in revenues
inside of five years. Indeed, Mr. Marks felt that the experience highlighted the “corrosive
effect of stereotypes” on the ability to make good international business decisions. Of
course, cultural stereotyping is typically more subtle than the Flextronics example. As
Mr. Marks put it, “[m]anagers often pick up the impression that the Chinese are good
at this, the Germans are good at that, and so on. But I have learned that in every place
that we operate, in every country, the people want to do a good job . . . This isn’t to
say that we approach every region with a cookie-cutter uniformity. We may need to
train workers differently in different parts of the world.”54
To be able to effectively train workers in various parts of the world, managers must
understand employees—including the ways in which their culture and context impact
how they learn as well as what they need to learn. So how can managers working in a
new country—or international corporations, for that matter—do a better job of accu-
rately figuring out the cultures they have to operate in? Let’s start with some suggestions
for international managers:
■ Approach other cultures with the idea of testing your “sophisticated stereotypes.” In
other words, be aware of any cultural stereotypes that you might possess and treat
them not as “truths,” but as hypotheses to be tested. The most effective international
managers change their stereotypes about people from other cultures and countries
during the course of interacting with them.
■ Find cultural informants and mentors to help. Look for someone who: (1) can really
make sense of cultural nuances, paradoxes, and internal logic; and (2) is willing to
share his or her insights and information. After all, the more you understand a cul-
ture, the more tolerant and effective you will become.
156
■ Carefully assess information that seems inconsistent with cultural stereotypes. Man-
agers can “plateau” in their learning about another culture without realizing it. This
may occur when managers have done pretty well, at least initially, in other cultures
and, as a result, become less open to deeper learning. In doing so, managers may be
more likely to make bad decisions based on faulty assumptions or a superficial under-
standing of the culture. Managers can avoid this trap by seeking deeper meaning and
by looking for and analyzing behavior that seems paradoxical to a culture’s basic
values (e.g., why are many U.S. executives autocratic if Americans pride themselves
on equality and egalitarianism?).55
■ Learn mental maps that will increase effectiveness in different cultures. This does not
mean trying to uncover all of the rules of a different culture. What it does mean is
that understanding the core values behind the mental maps used in a culture will help
you behave more appropriately in that context. And doing so will increase both your
effectiveness and self-confidence.
As an example of many of these points (especially the last) consider profiles of Thai
culture compared with the profile of their largest trading partner, the U.S. While some
of these values (presented in Figure 4.10) can be developed from an understanding of
where each country falls on the Hofstede or GLOBE dimensions, sometimes the core
values can surprise. Likewise, as we noted earlier, divergence within a culture seems to
be occurring in Thailand. Traditional values of respect for elders and reluctance to
express emotion are being challenged by the latest generation.56
Thai Culture U.S. Culture
Traditional Buddhist values of giving more Need for achievement and material
than taking, resisting material attachments reward as sign of success
Desire to have trust in business relations built Need for rules, regulatory procedures,
through traditional social networks built and laws
over time
Desire for face-to-face business contact, based Need to use the increased productivity
on the above trust of e-commerce via the web and public
displays of data/performance
Need to take care of employees, avoid lay- Need to accelerate restructuring (e.g.,
offs and protect investors from taking a cutting ration of non-performing loans
“haircut” (and thus losing face) through bankruptcy laws)
Taught to be humble and very considerate of Not inconsiderate of others, but taught
others’ feelings to stand out, speak up and be yourself
A strong sense of hierarchy in government Less position-driven respect accorded to
and business alike (knowing one’s place) those in power
Figure 4.10 A comparison of U.S. and Thai Business Practices/Approaches.

Source: Adapted from Niffenegger, P., Kulviwat, S., and Engchanil, N. (2007). Conflicting cultural imperatives in
modern Thailand: global perspectives. In C. Rowley and M. Warner (eds) Management in South-East Asia. Routledge:
New York.
157
Finally, what about suggestions at a broader level? Here are some ideas for inter-
national corporations to consider if they want to make better sense of culture:
■ Put people who have cognitive complexity in international positions. The last thing
that international companies should want is a black-and-white thinker. Instead,
experts suggest they should select people based on their ability to handle alterna-
tive viewpoints as well as plenty of ambiguity. Employees with such skills are best
equipped to make sense of the complexities and paradoxes inherent in all cultures.
■ Emphasize in-country training for people going overseas. Too often, cultural training
takes place in a classroom environment in the home country and emphasizes con-
cepts and facts rather than hands-on experience. If at all possible, put people on the
ground in the culture where they will be going to work and challenge them to figure
out answers to actual cultural problems. That is likely to produce more motivation to
figure out what is going on.
■ Assess cultural expertise among personnel posted in foreign countries. The idea here is
that not everyone will be on the same page from a cultural learning perspective. There
will be different levels of understanding. Part of this variation may reflect individual
differences in skills as well as the amount of time spent in the country. In fact, a good
reason to assess cultural expertise is to help the firm figure out how long personnel
should stay in a country to achieve the cultural understanding needed to function well.
■ Become a learning organization when it comes to cultural understanding. In short,
put mechanisms into place that will help share and disseminate knowledge about dif-
ferent cultures. For example, have expatriates report their insights and understanding
about a culture once they return home. This type of sharing can both increase the
firm’s collective know-how about different cultures and help expatriates make sense
of their cross-cultural experiences.57
Chapter Summary
We started by claiming that culture has a pervasive impact on the management of interna-
tional business (decision making, negotiation, leading, and more). The importance of under-
standing culture, at least for management, has never been higher because of the ongoing
growth of international business.
But, culture is a complex concept that can have roots in historical events, geography,
shared traditions, economic developments, language, and religion, among other things. Plus,
cultures are constantly evolving, presenting something of a moving target for managers.
Thus, managers need to be careful not to oversimplify culture.
The chapter reviews several efforts to cluster countries by their shared cultural values.
Ronen and Shenkar found eight major country clusters. Geography, language, and religion
158
are all factors that contribute to shared cultural values across specific groups of countries.
Hofstede’s effort significantly added to the ability to cluster countries on work-related
cultural dimensions. Hofstede argued that all cultures could be described in terms of four
basic dimensions: individualism–collectivism, masculinity–femininity, high–low power
distance, and high–low uncertainty avoidance. By crossing pairs of these dimensions,
Hofstede produced some valuable cultural maps that allow international managers to
identify countries in terms of various combinations of cultural dimensions and how they
cluster together.
Other recent efforts have tended to support Hofstede’s views and have also added to
our knowledge about developing countries. In particular, the GLOBE dimensions provide a
more contemporary view. The dimensions were validated using managers from many different
countries and companies across several different industries. The findings validated some of
Hofstede’s research. GLOBE also uncovered its own unique dimensions as well, such as
humane orientation and performance orientation, which are predictive of behavior across
cultures.
The chapter concludes with practical suggestions for managers to move beyond the
kind of “sophisticated stereotyping” that comes with the limitations of current culture
frameworks. Some of these include testing one’s viewpoints and finding cultural mentors
to help understand cultural differences. It is important to rely on people who have “cogni-
tive complexity” in global assignments and to provide in-country training for people going
overseas.
1. Describe the basic cultural dimensions proposed by Hofstede and the GLOBE research team.
What are their similarities, differences, and limitations?
2. How might international managers use information about cultural dimensions? Why is
understanding culture such an important part of success in international business?
3. Are there any work-related goals that appear to be universal? Which work-related goals vary
significantly across countries? How might cultural values impact these work-related goals?
4. How can companies and international managers go beyond the “sophisticated stereotyping”
that a superficial understanding of cultures might produce? What are some of the challenges
or difficulties associated with doing so?
159
The Steady Rise of the World’s Largest Democracy

At the beginning of this chapter we described some of the many challenges that India faces
as the country tries to nurture its economy. There are many concerns, to be sure, but these
may be more than offset by a variety of factors that may encourage growth. One of those
encouraging factors is the set of cultural values that seem to stimulate entrepreneurship as
well as the prevailing conditions that support entrepreneurs.
In a nutshell, entrepreneurs really function in a social context. Consequently, societal
culture can play a role in inhibiting or enhancing the kind of entrepreneurial problem-solving
seen in India today—all of its challenges notwithstanding. Specifically, cultural values that
encourage helpfulness, cooperation, relationship building, and bootstrapping—particularly as
mechanisms for overcoming obstacles in society—seem to help spur entrepreneurial innova-
tion. India generally scores high on these attributes—including what GLOBE refers to as
“humane orientation.” Likewise, India scores highly on in-group collectivism, where strong
family connections and ties are reflected in some of India’s most prominent and entrepreneurial
companies. Moreover, when entrepreneurship is held up as being socially desirable in a
country—by the media and educational institutions—it can, over time, strengthen and support
cultural values that encourage entrepreneurial activity.
But, India is a complex place, one with plenty of built-in contradictions. Because of
bureaucratic barriers and increasing domestic competition, some of India’s best companies,
such as Godrej Consumer Products, are looking abroad to places like Africa to growth their
revenues—where their efficient and inexpensive business models are well suited to create
products tailored to local demands. Indeed, many companies, including foreign multinationals,
feel that India remains a very challenging place to do business. Many Indian roads are abysmal
and slowed by checkpoints where officials demand bribes from truck drivers, adding to busi-
ness costs.
Likewise, companies often must maintain their own backup power and sanitation systems
because of unstable utilities in the country. Moreover, while India has plenty of innovative
entrepreneurs, it is woefully short of engineers and other trained professionals, has too few
outstanding universities, and lacks a strong primary education system. The government is
also somewhat unpredictable and laws are routinely challenged in court, making it difficult
for businesses to predict what will happen next. One Western businessperson noted that
China was much easier to operate in compared to “the freewheeling chaos of India.”
The big question, of course, is whether India’s cultural support for its unique, problem-
solving “frugal innovators” can continue to lift the country up faster than its challenges and
weaknesses hold it back. It remains to be seen whether the optimists or the pessimists are
right in the end about India.58
160
Understanding Your Orientation toward Individualism–Collectivism

Purpose
To develop a greater understanding of your own attitudes toward individualism and collectivism.
Instructions
Assume that you are in the U.S. or Canada and want to have a good career in an American or
Canadian corporation. Answer the following questions about your behavior in the workplace. Using
the accompanying scale, please place the appropriate number in the blank before each question.
5 4 3 2 1
Strongly agree Agree Not sure Disagree Strongly disagree
1. ___ I would offer my seat on a bus to my supervisor.

2. ___ I prefer to be direct and forthright when dealing with people.
3. ___ I enjoy developing long-term relationships with the people with whom I work.
4. ___ I am very modest when talking about my own accomplishments.
5. ___ When I give gifts to people whose cooperation I need in my work, I feel I am indulging
in questionable behavior.
6. ___ If I want my subordinate to perform a task, I tell the person that my superiors want
me to get that task done.
7. ___ I prefer to give opinions that will help people save face rather than give a statement
of the truth.
8. ___ I say “no” directly when I have to.
9. ___ To increase sales, I would announce that the individual salesperson with the highest
sales would be given the “Distinguished Salesperson” award.
10. ___ I enjoy being emotionally close to the people with whom I work.
11. ___ It is important to develop a network of people in my community who can help me
when I have tasks to accomplish.
12. ___ I enjoy feeling that I am looked upon as equal in worth to my superiors.
13. ___ I have respect for the authority figures with whom I interact.
14. ___ If I want a person to perform a certain task, I try to show how the task will benefit
others in the person’s group.
Now, imagine yourself working in one of the following countries. Choose the country about
which you have the most knowledge because of actual overseas experience, reading, having
friends from that country, classes that you have taken, and so forth.
Japan Mexico Brazil

Philippines Hong Kong Thailand
Taiwan Peru Venezuela
India Argentina Greece
161
If you do not have enough knowledge about any of these countries, imagine yourself working
on a class project with three foreign students from any of these countries.
The next part of the exercise is to answer the same 14 questions, but to do so while
imagining that you are working in one of the countries listed above or working on a class
project with three students from that country. Imagine that you will be living in that country
for a long period of time and want to have a good career in a corporation there. Use the
same scale and numbers as before.
5 4 3 2 1
Strongly agree Agree Not sure Disagree Strongly disagree
1. ___ I would offer my seat on a bus to my supervisor.

2. ___ I prefer to be direct and forthright when dealing with people.
3. ___ I enjoy developing long-term relationships with the people with whom I work.
4. ___ I am very modest when talking about my own accomplishments.
5. ___ When I give gifts to people whose cooperation I need in my work, I feel I am indulg-
ing in questionable behavior.
6. ___ If I want my subordinate to perform a task, I tell the person that my superiors want
me to get that task done.
7. ___ I prefer to give opinions that will help people save face rather than give a statement
of the truth.
8. ___ I say “no” directly when I have to.
9. ___ To increase sales, I would announce that the individual salesperson with the highest
sales would be given the “Distinguished Salesperson” award.
10. ___ I enjoy being emotionally close to the people with whom I work.
11. ___ It is important to develop a network of people in my community who can help me
when I have tasks to accomplish.
12. ___ I enjoy feeling that I am looked upon as equal in worth to my superiors.
13. ___ I have respect for the authority figures with whom I interact.
14. ___ If I want a person to perform a certain task, I try to show how the task will benefit
others in the person’s group.
Scoring
The scoring of this exercise is different from most in that it involves comparison of the two
sets of numbers: your set of numbers for imagining a career in the U.S. or Canada and your
set for imagining a career in one of the other listed countries.
Let’s call the first time you answered the questions the “first pass” and the other time
the “second pass.” In scoring, give yourself 1 point according to the following guidelines.
1. Give yourself a point if your number in the second pass is higher than in the first pass.
2. Give yourself a point if your number in the first pass is higher than in the second pass.
3. A point if number is higher in the second pass.
162

5. A point if number is higher in the first pass.
If you scored 6 or more points, it means that you are sensitive to the cultural differences
summarized by the concepts of individualism and collectivism. You are sensitive to the fact
that different behaviors are likely to lead to the accomplishment of goals and to success in
one’s career depending on the emphasis on individualism or collectivism in the culture.
Source: From Brislin, R. W., and Yoshida, T. (eds) Improving Intercultural Interactions: Modules for Cross-Cultural
Training Programs. Copyright © 1994 by Sage Publications. Reprinted by permission of Sage Publications, Inc.
The Cultural Minefield of International Gift Giving

Purpose
This activity explores cultural differences in the gift-giving process. You will have the oppor-
tunity to learn something about the complex historical, religious, and linguistic factors that
have shaped gift giving in particular countries.
Instructions
Read the background material provided. Your instructor will give each group a specific country
to research outside class. A variety of websites are available that offer additional detail and
resources about international gift-giving issues. For instance, you may want to consult Expat
Exchange, an online forum that is full of advice about working and living abroad. And of
course, that includes gift giving (see www.expatexchange.com/).
Your group should be prepared to present your findings in a subsequent class (10–15
minutes per group) and/or prepare a group report. Alternatively, your instructor may make
this an individual assignment and have you write a report. Be prepared to take part in a
163
general class discussion on the specific countries assigned. In any case, you should focus on
answering these gift-giving questions for the country assigned:
1. What gifts might be appropriate for the country in a business context or business relationship?
2. When should gifts be given, generally speaking?
3. What about gift giving if you are visiting the country in question on business?
4. How should gifts be wrapped? What gift wrap colors are appropriate or inappropriate?
5. What presentation issues come into play (e.g., when should a gift be presented during a
visit)?
6. What other delivery issues might come into play?
7. What gifts should be avoided altogether?
Some Background on Gift Giving in an International Context
Differences in cultural values around the world can make managing an international business
a tricky proposition. Even behavior that has the best of intentions—like gift giving—can be
complex and have great potential to give offense. In many countries, it is appropriate to give
foreign clients, contacts, customers, and employees a gift as a sign of appreciation. What
constitutes an acceptable gift, however, can vary widely. The failure to understand local rules
can create hard feelings or even lead to the loss of overseas business.
This begs the question of what you should give as gifts in other countries. Many experts
recommend giving something that is unique to your own country or that would otherwise
be difficult for the recipient to obtain. For an American, this might mean giving Native
American handicrafts if you are from the American southwest, or books about the U.S. in
general. But in other cases, it might be best to research the cultural, religious, and holiday
traditions of a particular country to figure out what might make an appropriate gift. Better
yet, get to know your foreign contacts well enough so that you begin to understand their
individual hobbies, tastes, and so on.
Giving gifts overseas, however, means more than just finding an appropriate item. In
many countries, there are fairly elaborate rules regarding how gifts should be wrapped and
presented. For instance, yellow and red have positive connotations in India. Likewise, white
is a bad choice for many Asian countries (it’s associated with death) while gold or red would
be better selections. Then there is the presentation of the gift itself. In many Asian countries,
using both hands to give and receive gifts is a sign of courtesy. If you find yourself in an
Islamic country, however, you would want to present a gift with just the right hand since
the left hand is viewed as unsanitary.
Timing gift giving is also important. The Christmas season is generally pretty safe because
most countries celebrate a major holiday around this time period. Usually, giving gifts in
private is the best bet. Japanese, however, typically engage in gift giving after business is
concluded, while the Chinese usually present gifts at the beginning of a visit. In any case,
do not necessarily expect Asians to praise aspects of the gifts you give; it is considered
impolite to open gifts in front of the giver. Finally, it should be obvious that we are just
scratching the surface here on gift giving overseas. If you have a foreign trip coming up and
164
you are looking for specific gift-giving advice, do your homework and call the embassy of
the country that you will be traveling to.
For a brief snapshot of what we have been talking about, take a look at some recom-
mendations of what to give, when to give, and what to avoid giving for the four countries listed
here.59
Country Good Gifts When to Give Gifts Gifts to Avoid

(with explanation)
China Ties, pens, Chinese New Year Clocks (the Mandarin

modest items (January or February) word for clock is similar
to “final resting place”)
India Sweets, nuts, fruit Hindu Diwali Festival Leather goods (cows
(October or November) are sacred to Hindus)
Japan Americana, liquor Oseibo (January 1) Four of anything
(associated with death)
Saudi Arabia Compasses, cashmere Id al-Fitr (December or Liquor (Islam prohibits
January) alcohol consumption)
Notes
1. The Economist. (2011). Chasing the dragon: How the Asian superpowers compare on
measures of economic development, October 3, available at: www.economist.com/blogs/
dailychart/2011/10/comparing-india-and-china (retrieved May 12, 2013).
2. The Economist. (2010). A bumpier but freer road, October 2, 75–77.
3. Hofstede, G. (1993). Cultural constraints in management theories. Academy of Management
Executive, 7, 81–94; Triandis, H. C. (1996). The psychological measurement of cultural syn-
dromes. American Psychologist, 51, 407–415.
4. Adler, N. J. (2002). International Dimensions of Organizational Behavior (4th ed.).
Cincinnati, OH: South-Western; Thomas, D. C., Au, K., and Ravlin, E. C. (2003). Cultural
variation and the psychological contract. Journal of Organizational Behavior, 24, 451–472;
Shenkar, O. (2001). Cultural distance revisited: Towards a more rigorous conceptualiza-
tion and measurement of cultural differences. Journal of International Business Studies, 32,
519–535.
5. Earley, P. C., and Singh, H. (2000). New approaches to international and cross-cultural man-
agement research. In P. C. Earley and H. Singh (eds) Innovations in International and Cross-
Cultural Management, 1–14. Thousand Oaks, CA: Sage.
6. Gupta, V., and Fernandez, C. (2009). Cross-cultural similarities and differences in characteris-
tics attributed to entrepreneurs: A three-nation study. Journal of Leadership & Organizational
Studies, 15, 304–318; Begley, T. M., and Tan, W. L. (2001). The socio-cultural environment
for entrepreneurship: A comparison between East Asian and Anglo-Saxon countries. Journal
of International Business Studies, 32, 537–553.
7. Granato, J., Inglehart, R., and Leblang, D. (1996). The effect of cultural values on economic
development: Theory, hypotheses, and some empirical tests. American Journal of Political
Science, 40, 607–631.
165
8. Newman, K. L., and Nollen, S. D. (1996). Culture and congruence: The fit between manage-
ment practices and national culture. Journal of International Business Studies, Fourth Quarter,
753–779.
9. Gupta, A. K., and Govindarajan, V. (2002). Cultivating a global mindset. The Academy of
Management Executive, 16(1), 116–126.
10. Osland, J. S., and Bird, A. (2000). Beyond sophisticated stereotyping. Cultural sensemaking in
context. Academy of Management Executive, 14, 65–79.
11. Ronen, S., and Shenkar, O. (1985). Clustering countries on attitudinal dimensions: A review
and synthesis. Academy of Management Review, 10, 435–454.
12. Ronen and Shenkar, Clustering countries on attitudinal dimensions.
13. Shenkar, O. (2001). Cultural distance revisited: Towards a more rigorous conceptualization and
measurement of cultural differences. Journal of International Business Studies, 32, 519–535.
14. Alston, J. P. (1989). Wa, Guanxi, and Inhwa: Managerial principles in Japan, China, and Korea.
Business Horizons, March–April, 26–31.
15. Alston, Wa, Guanxi, and Inhwa; Bond, M. H. (1991). Beyond the Chinese Face. Hong Kong:
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Korean Styles of Business. London: Routledge.
16. Balfour, F. (2007). You say guanxi, I say schmoozing. BusinessWeek, November 19, 84–85.
17. Balfour, You say guanxi, I say schmoozing.
18. Ihlwan, M. (2008). Samsung under siege: Allegations of governance abuses help shed light
on how the founding family maintains its grip on the conglomerate. BusinessWeek, April 28,
46–50; also see Japanese example: Taylor, A. (2009). Toyota’s new man at the wheel: Akio
Toyoda, the new president and a grandson of the founder, outlines his vision for the company’s
future. Fortune, July 6, 82–85.
19. Chen, Asian Management Systems.
20. Bass, B. M. (1990). Stogdill’s Handbook of Leadership: A Survey of Theory and Research. New
York: Free Press; McFarlin, D. B., Sweeney, P. D., and Cotton, J. C. (1992). Attitudes toward
employee participation in decision-making: A comparison of European and American manag-
ers in a U.S. multinational. Human Resource Management, 31, 363–383.
21. Egri, C. P., Khilji, S. E., Ralston, D. A., Palmer, I., Girson, I., Milton, L., Richards, M., Ramburuth,
P., and Mockaitis, A. (2013). Do Anglo countries still form a values cluster? Evidence of the
complexity of value change. Journal of World Business, 47, 267–276; Lenartowicz, T., and
Johnson, J. P. (2003). A cross-national assessment of the values of Latin American managers:
Contrasting hues or shades of gray? Journal of International Business Studies, 34(3), 266–281.
22. Adler, International Dimensions of Organizational Behavior; Cox, T., and Blake, S. (1991).
Managing cultural diversity: Implications for organizational competitiveness. Academy of
Management Executive, 5, 45–56.
23. Kumbula, T. S. (1993). As apartheid falls, black education becomes (at last) a serious issue.
Black Issues in Higher Education, 10, September 23, 15–18.
24. McFarlin, D. B., Coster, E. A., and Mogale-Pretorius, C. (1999). Management development in
South Africa: Moving toward an Africanized framework. Journal of Management Development,
18, 63–78; Thomas, A., and Bendixen, M. (2000). Management implications of ethnicity in
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25. Sivakumar, K., and Nakata, C. (2001). The stampede toward Hofstede’s framework: Avoiding
the sample design pit in cross-cultural research. Journal of International Business Studies, 32,
555–574.
26. Hofstede, G. (1980). Motivation, leadership, and organization: Do American theories apply
abroad? Organizational Dynamics, Summer, 42–63; Hofstede, G. (2001). Culture’s Consequences
(2nd ed.). Thousand Oaks, CA: Sage; Hofstede, G. (1984). Culture’s Consequences. Newbury
Park, CA: Sage; Hofstede, Cultural constraints in management theories; Hofstede, G. (1991).
Cultures and Organizations: Software of the Mind. London: McGraw-Hill U.K; Hofstede,
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Organizational Studies, 17, 525–537.
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27. Imada, T. (2012). Cultural narratives of individualism and collectivism: A content analysis of
textbook stories in the U.S. and Japan. Journal of Cross-Cultural Psychology, 43, 576–591;
see also Morling, B., and Lamoreaux, M. (2008). Measuring culture outside the head: A meta-
analysis of individualism–collectivism in cultural products. Personality & Social Psychology
Review, 12, 199–221. (Note: but also see Lamoreaux, M., and Morling, B. (2012). Outside
the head and outside individualism–collectivism: Further meta-analyses of cultural product.
Journal of Cross Cultural Psychology, 43, 299–327, where the authors find less support for
other Hofstede dimensions such as power distance being manifested in actual products such as
books, and more.)
28. Gelfand, M. J., Erez, M., and Aycan, Z. (2007). Cross-cultural organizational behavior. Annual
Review of Psychology, 479–514; Triandis, H. C., and Gelfand, M. J. (1998). Converging mea-
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Social Psychology, 74, 118–128.
29. Morris, M., Podolny, J., and Ariel, S. (2000). Missing relations: Incorporating relational con-
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Cultural Management, 52–91.
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Times, September 18, Section 4, 4; Bradsher, K. (2005). Hong Kong Disneyland faces over-
crowding. The New York Times, September 8, Section 4, 6; Fan, M. (2006). Disney culture
shock. The Hong Kong Standard, November 22, 6.
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and E. G. McGoun (eds) Advances in International Comparative Management, Vol. 3, 151–170.
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Leadership, and Organizations: The GLOBE Study of 62 Societies. London: Sage.
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ness leaders pursue? A study in fifteen countries.
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Psychology, 37, 42–59.
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Routledge: New York.
57. Osland and Bird, Beyond sophisticated stereotyping: Cultural sense-making in context.
58. House, R., Hanges, P. J., Javidan, M., Dorfman, P. W., and Gupta, V. (2004). Culture,
Leadership, and Organizations: The GLOBE Study of 62 Societies. London: Sage; Srivastava,
M. (2010). The untold wealth of unknown cities. Bloomberg Businessweek, October 4–10,
9–11; Srivastava, M., and Sharma, S. (2010). Corporate India finds greener pastures—in Africa.
Bloomberg Businessweek, November 8–14, 61–62; Stephan, U., and Uhlaner, L. M. (2010).
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chapter 5
perception,
interpretation, and
attitudes across cultures
PERCEPTION, INTERPRETATION, AND ATTITUDES ACROSS CULTURES 171
INTERPRETATION OF PERCEPTIONS 179
ATTITUDES 183
THE EFFECTS OF ATTITUDES AND STEREOTYPES 196

Learning Objectives
recognize the impact of culture on your perceptions, interpretations, and resulting

attitudes;
diagnose some of the important ways that perceptual effects can affect our interactions
with people from different cultures and then better understand their ways of interacting;
classify and distinguish cultures along several important perceptual dimensions;
recognize the importance of, and be able to explain, some of ways that cross-cultural
attitudes are formed and the impacts they have.
Desperately Seeking Latin Culture

The TV show Desperate Housewives was a Disney Company production that ended a successful
eight-year run, with Emmy Awards, Golden Globe Awards, and critical acclaim to its credit.
If you have never seen it, you will have plenty of opportunity to catch up, as the complete
series has been made available on DVD, and it will likely be shown in syndication. This hit
show follows the lives of a group of women, seen through the eyes of a dead neighbor. The
characters slog through domestic struggles on Wisteria Lane, a street in the fictional city of
Fairview. The idyllic suburban neighborhood setting belies what really goes on: secrets, crimes,
and mysteries, much of it happening behind closed doors. If you like dark comedy that
focuses on relationships, you would probably like Desperate Housewives.
For the 2006–2007 TV season, Disney announced that it would begin production of the
show for South American audiences. Mr. Fernando Barbosa, a senior vice-president for Buena
Vista (Disney) Productions was in charge of the production and had high hopes, partially
because telenovelas, the region’s counterpart to American soap operas, dominate the prime-
time ratings. Housewives would thus be likely to resonate with this audience. “Barriers are
breaking down . . . Housewives shares certain characteristics with the telenovela, but it’s
based on more real life and isn’t as dramatic . . . Latin American audiences want alternatives
and we’re responding to that,” said Mr. Barbosa.
Buena Vista set to making three versions of the series, each tailored to a different area
of Latin America, and all three of which were different from the U.S. version. It was felt that
in order for Housewives to succeed, it must win over demanding Latin viewers, such as
29-year-old receptionist Maria Jose-Garcias. “I’ll watch this Spanish version, but I don’t know
if I’m going to like it,” Ms. Jose-Garcias said in Spanish. “They are all great actresses in the
170
P E R C E P T I O N , I N T E R P R E T A T I O N , A N D A T T I T U D E S
cast and that’s definitely an attraction. But the U.S. and Argentina are two totally different
societies, each with their own customs, and I wonder if it will translate.”
Ms. Jose-Garcias laid out the task for Buena Vista/Disney—and for you here. As you read
this chapter, try to think of some of the ways that perception, interpretation, and attitudes
might differ between U.S. and Latin cultures. What might Buena Vista do differently in the
Spanish versions of the show? We do not expect you to identify all the subtleties that Disney
used—that is why they make all the money here! At the end of the chapter, we will review
some differences between the two versions and we hope that you will be able to flag some
of these as you read through this chapter.1
Perception, Interpretation, and Attitudes

Across Cultures
In the first four chapters, we looked at topics that are wide in scope and effect. Among
these were differences in legal structure, political systems, and ethical behaviors. Differences
in how countries approach these issues are relatively easy to see and have direct connec-
tions to how business is done across borders. Yet, there are many more subtle processes
that, while tougher to pinpoint, can help businesspeople interact more effectively in an
international environment. One of the most important of these processes is that of per-
ception. The term perception refers to the selective mental processes that enable us to
interpret and understand our surroundings. These include attending or selecting the events
in the first place, processing and evaluating the information that is selected, and then
making sense of what we attended to and processed. As it turns out, culture can have
an impact on all these processes—in many cases, without us even knowing it or without
any second guessing. This is because we almost always take perception for granted and
give our perceptions and observations great credibility. We know what we saw and heard
and we trust those perceptions. As well, we should do so in order to function in our
various cultures. Yet, in the definition above, a key description is the word selective.
We know a good deal about perception and one key finding is that we do not per-
ceive all that is going on around us at any one instant. What you are doing right now
is a good example. In addition to processing the words on this page, many other things
are also occurring around you. You may be listening to music, someone might be walk-
ing and talking out in the hallway, noises could be coming from outside, etc. We do not
commonly attend to all these various events. Instead, we selectively attend to stimuli
that are important to us or that help us make decisions. And, we certainly do not per-
ceive things at random, but instead we impose order on what we are exposed to and
what we see. In fact, you may know that a defining symptom of schizophrenia is the
inability to organize and selectively process one’s perceptions. So, being selective is a
good thing and functional for us.
If our job is to impose order on an inherently chaotic environment, how does this
happen, and what role does culture play? It is likely that members of a culture teach us
171
what is important to perceive in our interactions with others. Experts say that some of
what people in one culture select and perceive may be different from what is needed in
other cultures. These “needs” are explicit and out in the open sometimes, such as when
an Asian business partner spends a lot of time asking you about your family, your
interests and your work experience—things you may find extraneous to your need to
complete a negotiation and get back to work. Or, they may be much more subtle or
“automatic,” occurring without you being completely cognizant of their operation. Have
you ever been to a crowded and noisy party, maybe completely engrossed in a conversa-
tion with someone, relatively inattentive to all the talking going on? But, then, out of
nowhere among all the noise you hear your name spoken. How did you attend to your
name among all the noise but not to other noise? Likely, your name is important to you
and of the people talking, you heard this above the rest—as they say, “your ears were
burning.” This so-called “cocktail party” effect may apply to culture as well. Perhaps
there are subtle filters operating just below the surface that help us process culturally
useful information, such as what it means to be a leader or something as basic as the
use of first names among business partners. In other words, culture may subtly sensitize
us to the information and behavior that is important for effective interaction. We do
not perceive things at random.2
Differences in Perceptions of People and Events
Does research support our conjecture about perceptual differences across cultures? And
even if there are differences in perception, are there also some similarities in what
people look for in forming impressions of others or making sense of events?
Perception of Others
One group of researchers provided a partial answer to our question about culture and
perception.3 They asked groups of Chinese and Australians to read detailed descriptions
of a fictitious person, including how conscientious, outgoing, and sensitive they were.
Participants were then asked to predict how these people might behave. The goal was
find out which specific pieces of information would be selected and emphasized by the
two groups—defining features of our definition of perception.
The two cultural groups were chosen deliberately: the Chinese because their culture
is more group oriented and the Australians because their culture is individually oriented
(see Chapter 4). It was expected that the Chinese would selectively pick out trait descrip-
tions that involve the consideration of others, whereas the Australians might emphasize
more person-centered qualities when forming impressions. The researchers found this
exact pattern. When forming an impression, the Chinese were more influenced by a
person’s conscientiousness toward others, whereas the Australians focused on outgoing-
ness in forming their impressions. Of all the information that was presented, the Chinese
and Australians selectively used culturally relevant traits to form impressions. One lesson
to learn here is that it would benefit us to understand how other cultures form opinions
of people with whom they negotiate, communicate, and otherwise do business, a topic
we will turn to in Chapter 7.4
172
There is plenty of other evidence for this culture effect on perception. In other stud-
ies, these same researchers argued that some cultures are more naturally conscious and
respectful of power differences among people, whereas other cultures give less weight
to authority.5 Participants were again chosen from cultures in which the importance of
status varied dramatically. Americans were chosen because they accord relatively little
importance to status, whereas Chinese were chosen because they value status highly. The
researchers predicted that the Chinese would be more careful in their treatment of higher-
status persons than would Americans, so much so that a high-status Chinese might be
able to even insult another person with little recrimination.
Of course, it is difficult to observe a personal insult firsthand. Instead, researchers
had people read a story about a business meeting during which a manager publicly
insulted an employee. There were two different versions of the story: in one version, the
“insulter” was a high-status manager, while in the other, he was of low-status. Participants
were asked to read one version and then provide their perceptions of the “insulter.”
Neither group liked the insulter. But, interestingly, Americans made no distinctions
between the high- and low-status managers who insulted others. Their perceptions were
generally negative. The Chinese, however, were less critical of the insulter when he was
a high-status manager.
These results demonstrate that culture allows (or directs) one to moderate perception
and interaction depending on a person’s status. These results have wide-ranging implica-
tions for leadership. A case in point is the shusa role (chief engineer) at Toyota. Each
of the 38 shusas had tremendous power, including complete responsibility for a vehicle
from design through sales life, and accountability for the vehicle’s success. They were
highly respected and granted almost absolute authority. When the Toyota president told
the shusas to drive up profitability by cutting costs in 1996, they did so with gusto. Yet,
feedback did not emerge when it was clear that these cuts were too deep, nor even when
customers began to raise questions about the vaunted Toyota quality. Industry observers
and Toyota executives alike believe that the shusa system was responsible for the com-
pany’s lack of attention to feedback and public defensiveness and resulting decline in
sales. Fortunately, Toyota learned from these mistakes and recently eclipsed its competi-
tion to become the largest company in the world.6
Perception of Events
Do these findings extend to how we perceive everyday work events?7 One study addressed
this by again using Chinese and Australian subjects because of their contrasting group
and individual orientations. All participants read a list of common, everyday social events
(such as arriving late to class, going out with friends, eating lunch) and then rated the
events on nearly 30 different scales (e.g., boring–interesting, pleasant–unpleasant, etc.).
A complex statistical technique was then used to reduce all of these responses to
just a few common dimensions. The results showed that there were different dimensions
found for the two groups. The Chinese, for example, organized their perceptions of these
events mainly along an individual versus group dimension. Said differently, the Chinese
were attentive to events involving other people. They were more sensitive to these types
of events and thought that they were more important than everyday actions that did
173
not include other people. The Australians, however, rated these events involving others
as more enjoyable than the Chinese. Apparently, group events imply more “fun” to
Australians, whereas to the Chinese they conjure up the perception of social obligation.
Studies using different methods in different cultures also show variation in how we
interpret events.
Implication of Research on Perceptions of People and Events

Overall, this research suggests that culture shapes perceptions about life events and the
people involved in those events. An important point to mention here is that perceptions
often seem to operate “automatically.” But, automatic does not necessarily mean neutral
or unbiased. In fact, these studies suggest that we use filters and organizing tools that
reflect key aspects of our culture (i.e., how group-oriented is another person?).
One unintended effect is that we might quickly form impressions of business partners
that are based on our own cultural filters, with little appreciation of the filters of others.
As an example, Westerners seem to prefer abstract and universal principles, whereas
East Asians are more likely to seek rules that are specific to the situation at hand—these
views can clash. One study asked managers what they would do about a subordinate
whose work had been below average for about a year, after 15 years of above average
service. About 75 percent of Canadians and Americans said they would let the employee
go, whereas this figure was only 20 percent for those from Korea and Singapore. It
appears, therefore, that those in Eastern cultures are more likely to take extenuating
factors, such as years of service, into account when making decisions. Westerners empha-
sized more analytic and absolute views (“performance is down and must be addressed”).
These were more detached from the actual person and his or her background.8 In prac-
tice, reactions and opinions such as these may be “automatic”—done with little thought.
Yet, this does not mean that they are unchangeable. Research has shown that Asians
who live in the West (and Westerners who live in the East) can understand and adopt
these different cultural patterns and tendencies. The following International Insights
feature discusses the relatively mindless act of exchanging a business card and what that
act might mean in different cultures.
Getting “Carded” in Japan: Perception and Business Card Ritual

Business cards in the U.S. show little variation. Most are ordered and constructed via a
template with little thought devoted to the card style. The same is true about the actual
exchange of those cards with others. Maybe this is because the exchange routine is well
known to all—an introduction is made, small talk follows, and business cards are exchanged.
This is so familiar that you are probably wondering why we even bother describing it.
We do so because other cultures exchange business cards differently. In fact, if you are
174
unaware of cultural rituals and the resulting perceptions, you may be committing a terrible
faux pas. In Japan, the meishi (business card) is accorded much greater significance than in
the U.S. It starts with the construction of the card itself, typically printed on the finest paper.
The layout subtly accentuates the importance of the company rather than that of the (less
important) individual. An American card will list one’s name first, with a title underneath in
smaller print, and the firm’s name and address below or in a corner. The Japanese meishi
always presents the company name first and most prominently, then the employee’s rank,
followed by his or her name—reflecting this decreasing order of importance. The meishi is
usually bilingual, with Japanese on one side and English on the other.
The actual mechanics of exchanging cards is an elaborate and meaningful act in Japan.
First, individuals carry plenty of cards with them. Not having a card is equivalent to refusing
a handshake in the U.S. The cards should be presented, not passed, with both hands. The
employee name should be facing the receiver as the card is presented. A quick, small bow,
is given as the card is presented. (Japanese employees must practice the “house style” bow
during training they receive after joining the firm.) Finally, a card is taken with both hands
and time is spent studying it. The card should not be shoved into a pocket, and it is impolite
to write on the card itself. The meishi represents an individual’s identity and should be treated
respectfully. If a meeting is starting, the card (or cards) should be placed in front of you and
left there until the meeting is over, when they should be picked up and placed within a specific
business card holder (never just casually within a pocket). When the time comes to exchange
business cards, take the business card holder out and place the new card within the holder
in order to protect it. All of this is done to show that the business card is truly valued.
Some time ago we travelled to Japan, having read in advance about this business card
exchange custom. We were relieved that we had practiced, but we also made a mistake in
a later trip, not realizing how far it extended. After a long flight with delays (about 25 hours
total), we arrived exhausted at our hotel outside Tokyo, ready to check in and to get some
sleep. Instinctively, McFarlin took out his credit card to pay and he tossed it out on the counter
(as we all may have done in the U.S.). Unfortunately, this act offended the hotel clerk who
perceived it as a sign of disrespect. We should have presented the card as we would have
a business card. The clerk glared at us thereafter when we strolled through the hotel lobby.9
Differences in the Perception of Time
If you are still not convinced that cultural differences in perception are important, you
are not alone. Some people feel that perception—like beauty—is in the eye of the beholder.
In other words, they believe that the study of perception is too subjective to be of great
value. Researchers in international management answered this criticism with a series of
studies on the perception of time. They chose to study time because of its objectivity.
Everyone has a watch, waits for a bus or plane according to a timed schedule, arranges
a meeting for a given time, and is worried about being five minutes late for an interview.
Ten minutes is ten minutes, time is time—right?
175
The answer to this question is an emphatic no! Even though we all use a globe-wide
time standard (Greenwich Mean Time), there are wide differences in perceptions of this
most objective of things. To start, consider how time is perceived in some cultures. In
Western cultures, time is perceived as a commodity (“time is money,” “you are losing/
saving time,” “time is running out,” etc.). In many Eastern cultures, however, time is
seen as more flexible and fluid. Westerners commonly refer to strict scheduling of events
according to the clock, whereas in some Eastern and Muslim cultures, views revolve
around events and people. “Event” time in Arab cultures has been characterized by the
following: “There are not precise hours for meals; they are eaten whenever the prepara-
tion is complete and eating is leisurely. The notion of an exact appointment is unknown;
they agree only to meet ‘at the next market.’”10 Researchers have systematically studied
this topic in much more detail.
Research on Time Perception Across Cultures

Researcher Robert Levine became interested in culture and time when he took a teach-
ing position in Brazil for a year.11 On the way to his first class meeting he began to
worry about his watch since many of the clocks he glanced at (on public buildings, other
people’s watches) showed varying times. He did, however, arrive in his classroom a few
minutes before the start of his class. But no one was there! Instead, many of his students
came late, several after a half-hour, a few around an hour late, and even a few others
later than that. Interestingly, no one seemed to be bothered by being late—all wore
smiles and gave friendly hellos as they entered class. Because he had been a U.S. profes-
sor for years, Levine was very surprised by this behavior. Students are expected to arrive
on time in the U.S. He also noticed that his Brazilian students did not get up and leave
when class was over. Levine was used to being told when class time was over (the ubiq-
uitous shifting of books, backpacks, etc.). In Brazil, however, few people left on time
and many lingered to ask questions and interact—some actually staying a half-hour or
more, leaving Levine to do the signaling that it was time to go.
These anecdotes led Levine to conduct a study of American and Brazilian students’
perceptions of time. In one study, he asked both groups what might be considered “late”
for a lunch appointment with a friend. The average American defined “late” as 19
minutes or more, whereas the Brazilians were more forgiving, defining lateness as about
34 minutes or more. He also found that these perceptions affect impressions of people
who were late. Brazilians were less likely to blame others than were Americans—they
typically felt that unforeseen circumstances were important causes of lateness. Americans
were more likely to blame the individual and to attribute the lateness to a lack of car-
ing. Even more interesting, Brazilians believed that people who were consistently late
were more successful than those who were on time, reasoning that they were late because
they had more friends to talk to, more partners with whom to do business, etc., and
therefore the lack of punctuality “equals” success. Americans generally felt that punc-
tuality was critical and that lateness is something definitely to be avoided.
Levine was not completely satisfied with this study of time. He wanted to show that
the effects were not the result of a language barrier or translation problems, and he
wanted to study several more countries. The problem clearly facing Levine, however, was
176
Country Measures of Time Perception
Bank Clock Accuracy Walking Speed Post Office Speed
Japan 1 1 1
United States 2 3 2
United Kingdom 4 2 3
Italy 5 4 6
Taiwan 3 5 4
Indonesia 6 6 5
Figure 5.1 Measures of the Pace of Time.*

* Numbers are the ranking of each country on the measures of pace of time (1 = top ranking).
Source: Adapted from Levine, R. V., and Bartlett, K. (1984). Pace of life, punctuality, and coronary heart disease in
six countries. Journal of Cross-Cultural Psychology, 15, 233–255.
exactly how to study time without relying on language and/or self-reports. He solved this
problem in a very clever way by devising several objective indicants of time, ones that
did not rely on language or self-report.12 First, he checked the accuracy of bank clocks
by taking a sample of 15 city banks in various countries and comparing their times with
the time provided by the telephone company (Greenwich Mean Time). Banks were of
special interest because of their relative formality and because they are tied closely with
activity in other countries (e.g., monetary exchange) and thus an industry where time is
closely monitored. Results showed that bank clocks in Japan were the most accurate—
averaging only about 30 seconds off—with U.S. clocks not far behind in accuracy. Clocks
in Indonesia were the least accurate, averaging over 3 minutes late (see Figure 5.1).
Figure 5.1 also shows that walking speed was another way that time perceptions were
measured. In a sample of large cities in these countries, Levine measured out a 100-foot
stretch of a busy downtown street and then clocked how long people took to walk that
distance. He was careful to randomly choose people who were walking alone in order to
add control to the study. Once again the Japanese were at the top of the list—they took
about 21 seconds to walk the distance (a pretty good clip if you try it!), with the British
and Americans tied as very close seconds (about 22 seconds each). The Indonesians took
about 27 seconds on average to traverse this distance. The difference among countries
doesn’t seem that long, but if you consider that the whole “trip” only took about 20–25
seconds, then the difference is significant (6 seconds is a 30 percent difference).
Finally, he measured how long it took a postal clerk in these countries to serve a
customer. In each country, including the U.S., the researchers presented a clerk with a
handwritten note, in his or her native language, requesting a stamp for a normal letter,
and gave each clerk an equivalent of a $5 bill. Once again, there was wide variance in
the service times, which ranged from a low of 25 seconds in Japan to a high of 45 sec-
onds in Italy.
So what does all this mean? We think it shows that very subtle processes operate
within cultures that affect our perceptions of the world, even about very objective
177
features, such as time. And, research shows these differences extend to other “objective”
topics such as profit and other business priorities.13 Chinese appear to pay more atten-
tion to history when thinking about events, whereas English speakers seem more atten-
tive to recent events, moving away from the past (e.g., common phrases such as
“looking forward” or “putting the past behind us”). These may be tied to the structure
of each language.14 If we can understand these different views, there is less potential for
conflict. One way to better understand these differences is to classify cultures on this
time dimension.
Classifying Countries by Their Emphasis on Time

The studies shared so far illustrate how far culture extends into perception, but effects
are not restricted to just clocks and walking speed. We can classify groups of countries
around their conception of time. And, this can help predict how people in those cultures
make purchases, view advertisements, and negotiate.15 It appears that there are at least
two different ways that time is generally experienced across cultures: monochronic time
and polychronic time.16 Roughly, this distinction refers to paying attention to (and doing)
one thing at a time versus doing many things at once. Like most concepts we will discuss
in this book, there is considerable variation within cultures and countries in how people
view time. Nevertheless, let’s focus on cross-national mean differences.
In a monochronic culture, time is divided up precisely, with certain slots reserved
for certain activities. A schedule is sacred and to violate it is to face considerable irrita-
tion because of the monetary value placed on time. Researchers suggest that the choice
of economic language (“saving” or “losing” time) to describe it is no accident—it reflects
their monochronic view of time. This view is common in most business conducted in
the U.S., and probably in many European countries as well. It has been observed that the
Swiss and Germans, for example, are monochromic and that they are also known for
their expertise in timepieces.
Polychronic cultures, in contrast, take a more flexible view of time and this seems
very unfamiliar and difficult for Americans and others from monochromic cultures to
understand. Experts point out, for example, that some Latin cultures (typically poly-
chronic) would much rather finish an impromptu conversation on the street rather than
abruptly and rudely terminate it in order to get to an appointment. Polychronic cultures
do not have a strictly economic view of time and translations of phrases such as “time
is money” often do not make complete sense. In Spanish, for example, the closest say-
ing might be the phrase “to pass time.”
Time seems to bounce around in a polychronic culture, and “interruptions” are
often not seen as such. The word interruption implies an unscheduled and unwanted
derailing of an activity. In a polychronic culture, however, the unscheduled is not unusual
and so naturally fits in with the way life flows. Two or more activities can be engaged
in concurrently or intermittently. An American businessperson in Spain, for example,
may resent sitting in a lobby beyond her appointment time while her polychronic contact
entertains several other people at once. Since time is so valuable in a monochronic
culture, to be kept waiting is a sign of rudeness and disrespect. A monochronic American
might want an apology. In turn, the polychronic Spaniard may feel that the American
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Monochronic Time Polychronic Time
• Does one thing at a time • Does many things at once

• Task oriented • People oriented
• Comfortable with short-term relations • Prefers longer-term relations
• Sticks to plans • Plans subject to change often
• More internally focused • More externally focused
Figure 5.2 Differences between People Who Have Monochronic or Polychronic Time Orientation.
has an overly demanding and self-important attitude. Experts contend that cultural
misunderstandings have been very costly for business, as shown in the following:
A French salesman working for a French firm recently bought by Americans found
himself with a new American manager who expected instant results and higher
profits. Because of the emphasis on personal relationships, it can take years to
develop customers in polychronic France, and, in family-owned firms, relationships
with customers may span generations. The American manager did not understand
this, and ordered the salesman to develop new customers within three months. The
salesman knew this was impossible and had to resign, asserting his legal right to
take with him all the loyal customers he had developed over the years. Neither side
fully understood what had happened.17
Figure 5.2 presents some characteristics of people in monochronic and polychronic

cultures, some of which have been researched empirically.18 Americans generally are very
monochronic relative to others and are widely viewed as having less patience than they
should. In fact, one expert quotes a Japanese businessperson as saying “You Americans
have one terrible weakness. If we make you wait long enough, you will agree to any-
thing.”19 To give you a better sense of this dimension and to help identify your time
orientation, we include a scale you can complete at the end of this chapter.20
Interpretation of Perceptions
Our discussion shows that culture can predispose us to selectively focus on some things
(e.g., the use of time), and place less weight on others (e.g., past performance). We do
not mean to imply, however, that all we see is fraught with such perceptual bias. Many
times what we see in others is what is really there. Yet, even though we may “see” the
same thing as others, we must still interpret what we saw. We have to make sense of
what caused certain behavior and what that means. Consider a manager who completes
a project successfully and is presenting the results in a meeting. It is possible that nearly
everyone at the meeting perceives that the project is a success. Yet, to take action, we
likely need to interpret why the manager succeeded. If we see this success as resulting
from a lucky break or the fact that it was a plum project destined to succeed, it will
have different implications for the future than if we believe that the performance came
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from hard work and lots of skill. The topic of how we answer “why” questions like
this is the purview of attribution theory.
Attribution Theory
This theory has been tested extensively in the U.S. and more recently in many other
countries. It predicts that we have a driving need to figure out what makes other people
tick. We can never really know the answer to this question since we cannot get inside
someone’s head to truly read his or her motives. So, our next best method is to use
behavior to infer what he or she is really like. Accordingly, we spend a lot of time scan-
ning and evaluating behavior to figure out others. Said differently, because we cannot
ever really know what other people are like deep down, our best proxy is to use their
behavior to infer or attribute characteristics they may have.
SelfAttribution Effects
One of the most reliable findings in the hundreds of studies done on this topic is known
as the self-serving attribution bias. This refers to our tendency, when making attributions
about our own behavior, to take credit for success (internal attribution) and to blame
failure on other causes (external attribution). This finding underscores our recognition
of the importance of perception in management and a study illustrates what we mean.
Researchers interviewed nearly 700 people from five countries—the U.S., India,
Japan, South Africa, and the former Yugoslavia.21 Participants completed a form that
measured their attributions about a variety of life events widely viewed as a success or
failure (e.g., performing well at a job). Americans showed the typical self-serving bias:
they took more credit for success than (blame) for failure. In fact, to an extent, this
self-serving bias was observed in all the countries in this study. In comparing across
countries, however, the researchers noted several interesting differences. First, the causal
attributions of the Japanese were more internal for failure than were the attributions of
people from any other country. The Japanese were more likely to take responsibility for
a failure. If these results are accurate, then the stereotype of the American as the “step-
up, take-charge, buck-stops-here” manager is not supported by these data.
The Japanese were also the least likely to take credit for success. In fact, this latter
effect was dramatic: while the scores of Indians and Americans were over 8 on a 10-point
scale and the remaining country scores were over 6.0, the Japanese average score was
only 3.9. The results of this research were also at least partially supported by another
more recent study.22
This study showed two important things. First, the self-serving bias has some cross-
national applicability. People from countries as diverse as India, South Africa, and the
U.S. have a tendency to take credit for success and to externalize failure. Second, the
effect is not universal. The Japanese showed a strong tendency toward responsibility for
failure and modesty regarding success. Clearly, the Japanese are strongly concerned with
themselves as members of a group, more so than as individuals per se. Accordingly,
self-effacing behavior as well as a strong sense of duty toward the work group is com-
180
mon. We might conclude, therefore, that in group-oriented cultures modesty is valued,

whereas in individually oriented cultures (such as the U.S.) a bolder assertion of com-
petence and credit is common. One recent study took this a step further and looked at
the corporate reports of U.S. and Japanese firms. These documents often include expla-
nations for the previous year’s performance, something these researchers looked at closely.
Overall, the U.S. reports tended to provide a much more positive view of firm performance
than did the Japanese reports. American executives who authored these highlighted their
successes and provided less information about disappointing results than did their Japanese
counterparts. The researchers also meticulously went through a sample of those reports,
coding the explanations (attributions) that were made. No difference was found in the
explanation of positive events—both groups tended to take credit for their success. And,
in contrast to earlier studies, the Japanese were more likely to externalize blame for
negative performance. The researchers suggested that because of the anonymous nature
of these reports, the norms of humility among Japanese were not as strong as they may
be in face-to-face interactions. Besides suggesting that these reports may not be a great
source of real information, they also point out that even when performance is in black
and (red), it is subject to attributional interpretation.23
Attributions about Others

A subsequent set of studies looked at the attributions or causes we assign to others’
behavior.24 In one study, Japanese university students read a story about a man who had
worked nearly two years for an organization. There were, however, several different
versions of the story. Even though most details about the story were the same for every-
one, about half were then told that the man was demoted to a lower position after these
two years (the “failure” condition). The other half were told that he was promoted to
a higher position (the “success” condition). The nationality of the man was also varied
in the stories. Equal numbers of subjects were told that the man was either (1) a Japanese
citizen working in Japan, (2) a U.S. native working in the U.S., or (3) a citizen of a
developing country who also worked in that country.
After reading the materials, the Japanese students made attributions about the cause
of the success or failure. It was predicted that the Japanese would make self-serving
attributions for people from all three countries. The researchers also predicted an even
stronger effect, however, when people were asked to interpret the cause of behavior for
someone within (as opposed to outside of) their own group. This in-group bias is
similar in form to the self-serving effect. An in-group bias occurs when an individual is
more self-serving for members of his or her own cultural group. But, the predictions
were not supported—the Japanese students did not show the in-group bias when inter-
preting the behavior of someone from Japan. In fact, if anything, there appeared to be
a pattern that showed a more generous pattern of attributions for people from the other
countries (the U.S. or a developing country). These findings are consistent with the
earlier study showing that Japanese were less self-serving than those of several other
countries. Japanese tended to be modest; they were more likely to assign responsibility
to themselves for failure and to deemphasize credit for success.
181
In this study only the Japanese made attributions about others. In a follow-up study,
researchers compared people from other countries.25 Americans and people from several
developing countries also read and reacted to the same descriptions of the man just
discussed. Americans were more likely to give credit for success (internal attribution)
than were subjects from developing countries. Another study also found a similar effect
in Japanese and American views of their political and corporate leaders.26 Taking both
studies into account, we can say that Americans are more likely to attribute success to
the individual—especially compared to the modest Japanese.
In fact, researchers have found similar effects in other group-oriented cultures, including
Chinese participants.27 They were asked to rate another person who was either self-effacing
(did not take personal credit for success) or was self-serving (took credit for success). The
self-effacing person was much better liked by the Chinese. This effect is not always found,
but it is robust enough that it seems to explain attributions about very bad events. One
study found that English-language newspapers were more personal and that Chinese-language
newspapers were more situational in their explanations of the same crime.28 One story, which
attracted press attention in both the U.S. and China, dealt with a Chinese graduate student
in the U.S. who murdered his Ph.D. advisor and several others after losing an award com-
petition. Researchers assembled all of the articles that were written on the topic in the U.S.
and China and then coded the “attributions” about the student’s crime into internal (personal)
or external (situational) categories. American newspaper reporters were more likely to
emphasize internal attributions about the student (quotes included: “very bad temper,”
“sinister edge to his character well before the shooting,” “darkly disturbed man”). The
Chinese reporters, however, were more likely to emphasize situational causes of the murder,
including relationships (“did not get along with his advisor,” “isolated from the Chinese
community”) pressures in Chinese society (“a victim of the Chinese educational policy”)
and aspects of American society (“murder can be traced to the availability of guns”).29
Implications of CrossCultural Attribution
In general, Asian cultures are more likely to explain the behavior of others in terms of
situational factors, whereas Westerners have a penchant for attributions about people
as the root cause. But, what happens after people offer their explanations? Asians seem
to be more attuned to the consequences of events compared to Westerners. Consider
how Japanese and Americans react to car accidents. Americans took more responsibility
for damage to their car than did the Japanese. But, interestingly, the Japanese thought
more about the consequences of the accident: they felt badly about delaying traffic and
were worried about causing another accident further back in the line of traffic. Clearly,
the Japanese showed more concern for interrelationships than did Americans, which is
expected given their cultural backgrounds.30
So, even when many people agree about what they saw, culture can affect the inter-
pretation or assignment of causes as to why something happened. Each study we reviewed
made it clear that someone succeeded or failed; there was no ambiguity about these
events in this set of studies. Yet perception still had an effect on the interpretation of
outcomes that occur to the self and others. The International Insights feature discusses
this topic by examining a well-known TV interview.
182
Attributions on TV
An interesting story highlights the significance of the attribution process better than the
research we reviewed.31 Barbara Walters is famous for her interviews of notable people from
many walks of life. Several years ago, she interviewed Muammar al-Gaddafi, the leader of
Libya at the time. Tensions between the U.S. and Libya were quite high during this time (prior
to the Libyan revolution) and the interview centered on this friction. After the interview, there
was little media about the interview content itself and much more about Mr. Gaddafi’s
behavior. During much of the interview, Mr. Gaddafi shifted his eyes away from Ms. Walters
and appeared reluctant to look her in the eyes at all. Ms. Walters herself remarked, “he
wouldn’t look me in the eye. I found it disconcerting that he kept looking all over the room
but rarely at me.” The prevailing view was that Mr. Gaddafi was shifty and evasive and that
the behavior was indicative of someone who was, at best, not telling the whole truth.
It is likely that he was not, but that is beside the point here. Our point is instead similar
to that made by the attribution researchers. Here we have a case in which people saw the
same thing: eyes shifting, an unwillingness to look someone in the face, etc. But the inter-
pretation of the same event—the attribution—could vary dramatically across cultures. Had
we asked an Arab, for example, to explain Mr. Gaddafi’s behavior, it probably would be at
variance with the negative opinion of Americans. To an Arab, Mr. Gaddafi would have been
perceived as showing proper respect to another person, especially to a woman. To stare at
a woman is considered very rude in Arab culture. Thus, instead of attributing an unwilling-
ness to look at Ms. Walters eye-to-eye as shifty and untrustworthy, the very same behavior
is interpreted as the height of politeness by another culture. This story demonstrates that
attributions are important—especially across nations and cultures.
Attitudes
If your perceptions occur over and over again, this might be one way you’d form an
attitude. An attitude is a learned tendency to react emotionally toward some object or
person. According to social psychologists, we can have attitudes about nearly everything,
including ourselves, others and groups. Many such attitudes have been studied cross-
culturally.
Attitudes Toward the Self
We have views about many aspects of our lives, including how much control we feel
over our lives and how much we like ourselves, among others. In this section we will
focus on attitudes toward the self that are work-related or have direct implications for
management.
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Interdependent and Independent Selves

The broadest difference in self-attitudes deals with our degree of autonomy or unique-
ness. The Western view of the self as independent and individualistic can be seen in
cultures that emphasize uniqueness, self-reliance, and individual achievement.32 American
culture is a good example because it highlights independence in so many different ways:
parents encourage their children very early on to be independent, school is by and large
structured to foster independent activity, and performance on the job is typically evalu-
ated at the individual level. In contrast, many non-Western views of the self are difficult
to separate from others and from situations. Great emphasis is put on qualities such as
paternalism, interdependence of people, solidarity, and group cohesion. Viewed from
this perspective, the self is not a standalone entity but instead is changeable and deeply
affected by others. Long-standing proverbs or sayings provide insight into this difference.
The Japanese saying that “the nail that sticks out gets hammered down” refers to the
need for people to fit in well with others.33 In contrast, a common Western saying is,
“The squeaky wheel gets the grease.” Figure 5.3 provides a summary of these differing
attitudes about the self.34
Self-Descriptions
How do people describe themselves in various cultures? If the preceding distinction is
accurate, we should see widely varying self-descriptions between Western and non-
Western cultures.35 To examine this, researchers used a simple approach: they asked U.S.
and Japanese students to describe themselves in a very unstructured way. The students
were asked to respond, in any way they wished, to the question “Who am I?” and were
allowed up to 20 responses to this question.
Then the researchers had some hard work to do. They took all of the responses and
placed them into categories. One category was how often the students mentioned abstract
versus concrete self-descriptions. Abstract self-descriptions included general responses
Interdependent Self Independent Self

(non-Western) (Western)
Defines self as part of the group Defines self apart from group
Focuses on similarity to others Focuses on uniqueness of self
Encourages efforts to sublimate self Encourages “finding oneself”
Teaches children dependence on/to others Stresses independent children
Fears exclusion from others/group Fears inability to separate from
group/stand up
Can “read the mind”/intentions/feelings Believes in importance of
of others “saying what’s on your mind”
Figure 5.3 Two Views of the Self.

Sources: Adapted from Markus, H. R., and Kitayama, S. (1998). Culture and the self: implications for cognition,
emotion, and maturation. Psychological Review, 98, 224–253; Triandis, H. C. (1989). The self and social behavior
in differing cultural contexts. Psychological Review, 96, 506–520.
184
such as “I am extroverted” or “I am sensitive,” whereas concrete descriptions would

include statements such as “I am happy when I work with my friend” or “In social
situations, I tend to hold back.” If it is true that Westerners have more independent
views of the self, then their self-descriptions should be more abstract and devoid of
specifics or qualifiers.36 Likewise, non-Westerners should describe themselves in ways
that are specific and embedded in the social situations. This is exactly what was found:
Americans were more likely to use general trait descriptions of themselves and less likely
to use situational descriptions than were the Japanese.37
Studies in different countries show similar results. In one, participants from India
and the U.S. were asked to describe several close friends.38 Nearly 46 percent of the
descriptions made by Americans were the abstract, context-free variety (e.g., “he is a
tightwad”; “she is selfish”), with only 20 percent of Indians making general statements
like these. The Indians were much more likely to make situation-specific descriptions
(“he is hesitant to give money away to his family”). Other studies found that Americans
were more than twice as likely as Indians to attribute the behavior of others to abstract
dispositions (“he is dishonest”) than to situational circumstances (“it is not right, but
in this situation, she needed the money”).39
Why Are Self-Views Important at Work?

If some cultures emphasize fitting in rather than standing out, we should also see dif-
ferences in job-related variables such as performance evaluations. In the U.S., self-ratings
of job performance are typically higher than corresponding ratings by supervisors or
outside raters. This “leniency bias” had led some experts to express misgivings about
the use of self-ratings in annual evaluations.40 But, we would expect that this leniency
bias might be more common in the U.S. than in more interdependent cultures.
This was the premise for a study of nearly 1,000 employees of various organiza-
tions in Taiwan.41 Supervisors and employees were asked to make a variety of ratings
of the employees’ performance. The ratings for each employee–supervisor pair were
then compared. As predicted, the Taiwanese did not show a leniency bias—they were
more modest in their self-ratings. Given that there is pressure not to stick out from the
group in this interdependent culture, this modesty in self-ratings might be expected. It
is important to note that ratings were done anonymously, so the modesty effect is not
due to some impression management effort, but instead probably does reflect an inter-
nalized attitude.
A wider-ranging study looked at workers and supervisors from two Asian (e.g.,
Korea, Japan) and two Western countries (e.g., the U.S., Mexico).42 This study also
included nearly 1,000 employees and an elaborate set of controls (e.g., gender, age,
religion) but still found the modesty effect in self-ratings by Asians. Mind you, we
should not lump all Asian cultures together here.43 Perhaps it is a specific set of attitudes
in a culture (such as those stressing order and respect for social hierarchy), not East
vs. West per se, that produces the modesty effect.44 As a result, at least some Western
countries might also show modesty effects in self-ratings and other work-related out-
comes. The next section discusses some of these attitudes that may directly affect
performance on the job.
185
Attitudes about Work
People spend a lot of time at work and getting ready to go to work. Accordingly, it
should be no surprise that attitudes toward work are one of the most studied issues in
the field of international management.
Job Satisfaction
The single most studied attitude is job satisfaction. Thousands of studies exist, mostly
featuring American employees, most of which show that Americans are relatively happy
about their jobs. Yet, a common shared opinion is that Americans rank woefully low
in job satisfaction when compared to other countries. And, because of this dissatisfac-
tion, Americans are portrayed as fickle and fidgety, not committed to a company but
instead ready and willing to move to a new job at the drop of a hat.
Yet, the research on differences in job attitudes shows a very different effect and
some other surprising ones as well. Accordingly, we should put more confidence in
research studies that systematically examine attitudes and beliefs—especially those con-
ducted on representative samples from two or more countries. Systematic studies based
on large, representative samples in different countries are in short supply. They are just
plain hard and expensive to collect. Nevertheless, there are some, including one such
project conducted by researchers at Indiana University in conjunction with colleagues
in Japan.45 They selected companies randomly so that the sample represented a wide
range of industries; many other studies surveyed workers in only one or two specific
industries, such as the auto or electronic industries. Next, a representative sample of
employees from organizations reflecting these varied industries was chosen. Again, a lot
of previous research included non-representative samples of workers. All in all, this study
surveyed over 8,000 employees from over 100 randomly selected factories in central
Japan (51 factories) and in Indiana (55 factories).
The results of this study contradict what many believe about Japanese and American
workers and underscore the value of such elaborate and complete studies. For one, it
was found that U.S. workers were much more satisfied with their jobs than were the
Japanese. The researchers went to great lengths to deal with cultural and language dif-
ferences that might have affected the results. One important potential problem they
controlled for was a tendency for Americans to be overly positive and for the Japanese
to underplay positive attitudes as neutral, if not bleak. Several patterns in the data,
however, eliminate this as a problem. For one, the responses by both groups to different
types of job satisfaction questions jumped around. Responses to the question, “All in
all, how satisfied would you say you are with your job (1 = not at all, to 5 = very
much)?” showed that Americans were much more satisfied than the Japanese. By itself,
this result could be explained by the Japanese tendency to be modest. But responses to
the question “If your good friend told you that she was interested in working at a job
just like yours at this company, what would you say?” The pattern here was the same,
as U.S. respondents were more likely to recommend the job to their friends. This ques-
tion is behavioral and it focused on others. As a result, it would be less subject to the
modesty explanation. Finally, an even stronger pattern of effects was found on another
186
question: Nearly 70 percent of Americans said they would take their job again compared
to only about 24 percent of the Japanese.
A set of other relevant studies show similar results—studies that use a variety of
measures and methods.46 One important one, for example, showed that again the Japanese
were less satisfied than workers in several other countries. Yet, the specific pattern of
Japanese responses (to their pay level, working conditions, co-workers, etc.), varied
considerably.47 In some cases, they indicated low satisfaction, but in other cases they
were among the most satisfied. Thus, the tendency for Japanese to be either systemati-
cally bleak or modest in their self-evaluations is less of an issue than was suspected.
After all, if bleakness is the driving force, why does it come into play for some aspects
of job satisfaction, but not for others? These findings tell us that many Japanese are
willing to state their level of satisfaction, and some might be more willing to do so than
others. In fact, older, more senior workers—the very people most likely to hold tradi-
tional Japanese values of modesty and self-deprecation—are the ones most likely to say
they are happy with their jobs. Newer research has expanded upon these conclusions
for both of the countries of study and the approaches used. One study compared the
degree of job satisfaction across countries that vary in their cultural values. The responses
of nearly 130,000 employees (across 39 countries) of a multinational company were
collected. It was found that job level (blue vs. white collar) was positively related to
satisfaction in individualistic cultures, but not collective ones. This is especially true for
jobs that allow for a real opportunity to use one’s skills.48
Overall, culture appears to influence job satisfaction and other related measures such
as pay satisfaction as well. Existing research shows that, in general, employees from
Western (and capitalist/developed) cultures have higher job satisfaction than those in
Eastern (and Communist/Socialist/less-developed) cultures. It also shows that the mean-
ing of job satisfaction to employees across cultures is similar, suggesting that the purported
“modesty” effect we discussed may not play a large role.49 Finally, extrinsic job features
(e.g., pay) seem to predict job satisfaction across cultures, while intrinsic characteristics
(e.g., responsibility, growth potential) were more important in wealthy countries who
were high in individualism and low in power distance. Finally, it is important to know
that other factors such as one’s religious affiliation, education level, age and more are
also important predictors of work values and attitudes across culture.50
Organizational commitment
Another important work attitude is commitment to one’s organization, yet there are far
fewer systematic studies of commitment across country and culture. As for job satisfac-
tion, most existing studies have been conducted within the U.S., Canada, and other
Western countries.51 One exception to this trend is a survey of over 1,600 employees
from a wide variety of firms within the U.S., Japan, and Korea.52 Workers in these coun-
tries were asked to read and complete a standard measure of organizational commitment
(e.g., “I am willing to work harder than I have to in order to help this company,” and
“I would turn down another job for more pay in order to stay with this company”).
U.S. workers showed significantly higher levels of commitment than either Japanese
or Korean employees. The commitment levels of the latter two groups were not different
187
from one another. This finding is similar to those for job satisfaction in that it contradicts
the popular belief that Japanese or Koreans have higher commitment to their firms than,
for example, Americans. Other studies that employ even more controls have found
similar effects.53 For questions such as “I am willing to work harder to help the company
succeed” and “I am proud to work for this company” (among others), U.S. employees
scored higher than the Japanese. Finally, it is important to note that there is a distinction
between organizational and work commitment. The former refers to allegiance to one’s
company, whereas work commitment refers to the importance of work in one’s life
(regardless of the firm you work for). There, different results are found. In fact, it looks
as though culture is not nearly as strong a predictor of work commitment as it is for
organizational commitment. Instead, a far more important predictor was a person’s
occupational level. Work commitment by occupational level was “remarkably similar”
across the 20 countries. In particular, as an employee rises in the ranks within an
organization—whether that firm is in Korea, the U.S., South Africa, or Israel—so did
his or her work commitment.54 These results also show that sometimes variables (such
as occupational level) can be more important predictors than culture or nationality. In
this case, there was more commonality among people in the same occupation across
country than among those in different occupations within a country. Indeed, a recent
statistical summary of research on commitment shows that macroeconomic variables
(e.g., unemployment rates) may be a better predictor of commitment than cultural ones,
although culture still exerts an impact.55
Conclusions about Job Attitudes

It does appear that there are culturally tied differences in job-related attitudes, even
if there are also other predictors as well. A promising and relatively new approach
to this is the concept of employee engagement—a concept developed by Gallup and
used in the U.S. for years. Engagement is measured by 12 factors that are strongly
related to productivity and other work outcomes. While others use this term, Gallup
has the most reliable and sophisticated view of it and research to support it. The 12
factors are in some ways a combination of satisfaction and commitment (e.g., quality
of co-worker relations, personal alignment with firm’s mission, support by company
in job, etc.). Gallup recently completed yet another large-scale study, this time across
borders. Nearly 47,000 employees in 120 countries participated in the study and we
provide a sample of their results in Figure 5.4. Gallup sets a high bar for their defi-
nition of an employee to be engaged and emotionally connected to their work and
may explain why only 11 percent of employees around the world fit this definition.
A whopping 62 percent are not engaged; they may be emotionally detached, perhaps
doing little more than the minimum job requirements. And, 27 percent are actively
disengaged. These are employees who view the workplace negatively and are likely
to spread those views to others. This measure is documented as an important predic-
tor of many organizational outcomes such as turnover, absenteeism, and productivity.
We present results, by a sample of countries, of degree of engagement in Figure 5.4.
This measure may be the key item used to monitor international differences going
forward.56
188
Country Engagement Levels
% Engaged % Not Engaged % Actively Disengaged
Australia 18 61 21
Brazil 29 61 10
Canada 20 64 16
China 2 67 31
Costa Rica 31 60 9
Egypt 13 55 32
Germany 11 66 23
India 8 55 37
Israel 14 72 14
Kuwait 25 60 15
Mexico 23 58 19
Russia 7 56 38
Saudi Arabia 13 75 12
Sweden 20 66 14
Turkey 11 58 31
United Arab Emirates 25 67 8
United Kingdom 20 58 22
U.S. 28 54 18
Global Mean 11 62 27
Figure 5.4 Employee Engagement Around the World.

Note: Engagement is based on the use of the extremely well-validated Q12 measure devised by Gallup. This
research is based on national samples in 120 countries, n = over 47,000; only sample countries shown above.
Source: Data adapted from Gallup Consulting. (2010). The State of the Global Workplace: A Worldwide Study
of Employee Engagement and Wellbeing, 1–32; available at: www.gallup.com/strategicconsulting/157196/state-
global-workplace.aspx.
Attitudes about Others and Groups
Attitudes about the self and work are one thing, but our attitudes toward other groups
and cultures might be even more important. A rising number of managers now interact
with colleagues from different cultural groups and countries, with many working and
living as expatriates in foreign countries. So it now may be more essential than ever to
understand other groups.
What are our attitudes toward other countries and people? Most of us have views
about people from other countries. Some of these views are undoubtedly incomplete
and inaccurate and more like thumb-nail sketches or stereotypes. Stereotypes are
inferences about what other people must be like based on group membership, includ-
ing racial, religious, and cultural or national groups. A notable percentage of Americans
may think the French are romantic, that Germans are technically oriented, and the
189
Japanese good at details. Of course, we even have stereotypes about people from
other regions, provinces, or states in our own country, so cross-country stereotypes
are hardly a surprise.
Attitudes Toward Other Countries

People around the globe have attitudes about Russians, Chinese, Germans, and
Americans, among many others. These attitudes are undoubtedly acted upon at times.
For example, let’s say that Americans are widely viewed as inventive, perhaps because
many features of American pop culture and technology are popular around the world.
Indeed this is true—large national surveys of many countries show that significant
portions of many countries do have this view. For example, 85 percent of Indians, 76
percent of Germans, and 72 percent of Chinese view Americans as innovative. Some
of these same nations may believe that Americans are self-focused and make little or
no effort to understand other perspectives.57 These negative attitudes may be harder
for Americans to accept, but either way (and more than ever), it is necessary to under-
stand those views.
Toward that end, several ongoing surveys have been undertaken, the most com-
prehensive of which is the Pew Global Attitude Project. Figure 5.5 presents some data
on favorability ratings for six different countries collected by this group. First, please
note that ratings of these six countries are shown for ten other countries, as well as
those from the target country itself. For example, in the upper left of the figure you
will see that Americans give themselves an 80 percent favorability rating. Traveling
Rating given by . . . Favorability Ratings of . . .
U.S. Germany France Japan China Russia
U.S. 80 66 52 66 40 37
Germany 52 65 72 70 29 33
France 69 89 68 83 40 36
Japan 72 78 72 77 15 22
China 43 54 59 21 94 48
Russia 52 62 85
Egypt 19 62 60 63 52 31
India 41 47 46 60 23 30
Pakistan 12 31 25 43 85 20
Spain 58 72 66 65 49 36
Turkey 15 43 18 46 22 16
Figure 5.5 Favorable Opinions of U.S. and Four Other Countries by Other Nationalities.
Note: Table entries reflect the percentage of respondents in each country expressing favorable attitudes toward
their own and other countries; missing cells indicate data not collected.
Source: Adapted from Global Public Opinion (2012/2008). Pew Global Attitudes Project. Washington, D.C.: Pew
Research Center.
190
down that first column, however, you will see that other countries vary considerably
in opinions of the U.S., from a high of about 72 percent by Japanese to a low of only
12 percent for the Pakistanis. Americans do not seem to harbor illusions about their
reputation: in 2006, nearly 7 in 10 Americans said that the U.S. is “generally disliked”
by other countries. This is the most negative self-view of any country surveyed. This
view is overly negative, however, since about 52 percent of people from other countries
have favorable views of Americans (with wide regional differences between Muslim
countries and Western European countries). This positive view of one’s home country
is common. Most believe that their country is popular around the world. For example,
nearly nine in ten Canadians say that their country is generally liked, and they are
joined by Indonesia (86 percent), Jordan (84 percent), India (83 percent), France
(80 percent), and China (68 percent) where natives believe that others hold very
positive views of their country. These negative views that Americans believe others
possess is apparently water off their back. As noted, 80 percent of Americans hold
their own country in high regard, second only to the Chinese at 94 percent (see Figure
5.5). Finally, please note that the favorability ratings of the other countries also vary,
although the Germans, French, and Japanese are generally viewed positively by people
in these ten countries.58
Do these general favorability ratings extend to other, more specific characteristics
of people in each country? The answer seems to be yes. Since your authors are Americans,
we present the U.S. as one example of this in Figure 5.6. There, data collected on large
and representative samples of people in 16 different countries a few years ago, also by
the Pew Global Attitudes Project, are summarized. Respondents were asked to rate
several positive traits (e.g., hardworking, honest) and several negative ones (e.g., greedy,
rude). Americans generally rate themselves better than do people from other countries,
and very highly on the positive traits of honesty (68 percent) and hard-working (85 per-
cent). Others did not necessarily share this view. In fact, people in all but four other
countries saw Americans as less honest and hard-working than Americans rated them-
selves. To be fair, however, other nationalities do see Americans as hard-working, with
all but China providing ratings over 60 percent. On the negative side, fewer countries
would use the word “honest” to describe Americans, with some countries, including
allies such as the Turks, providing the lowest ratings of all (only 16 percent). Americans
are viewed as “greedy,” especially by other Americans, but are not often seen as “rude”
by others.59
Stereotypes and International Management

As you well know, most people who complete these surveys have never interacted with
individuals from other countries—these views and stereotypes are formed from news
outlets, television, online media, and other methods. But what if you had actual contact
with individuals from these other nationalities? Would your interaction with them reduce
their stereotypes and generally improve their attitudes? To address this “contact” ques-
tion, researchers studied managers from different cultural backgrounds who did work
together.60 Four different groups of managers—British, Japanese, Singaporean, and
American—were asked to rate themselves and the other groups on two main dimensions:
191
Positive Characteristics Negative Characteristics
Hard-working Honest Greedy Rude
Country % Agree Country % Agree Country % Agree Country % Agree
France 89 U.S. 63 U.S. 70 Jordan 64

U.S. 85 India 58 Turkey 68 Indonesia 58
Indonesia 84 Britain 57 Netherlands 67 Turkey 55
Netherlands 84 France 57 Lebanon 66 Canada 53
India 81 Germany 52 Britain 64 Pakistan 51
Jordan 78 Lebanon 46 Jordan 63 Lebanon 50
Canada 77 Netherlands 46 Canada 62 Russia 48
Britain 76 Spain 45 Indonesia 61 China 44
Spain 74 Poland 44 Russia 60 Spain 38
Russia 72 Canada 42 Pakistan 59 France 36
Lebanon 69 Jordan 37 Spain 58 U.S. 35
Germany 67 China 35 China 57 Britain 29
Poland 64 Russia 32 Poland 55 India 27
Pakistan 63 Pakistan 27 Germany 45 Netherlands 26
Turkey 61 Indonesia 23 India 43 Poland 21
China 44 Turkey 16 France 31 Germany 12
Figure 5.6 Positive and Negative Features Associated with Americans by Other Nations.
Source: Table based on data collected by Pew Global Attitudes Project (2006), available at: http://pewglobal.org.
(a) expectations about typical performance levels (high or low), and (b) ratings of
management style (open vs. closed).
The study found that U.S. and Japanese managers saw themselves as better perform-
ers than they were seen by any of the other groups. Another interesting finding was
that expatriates highly rated their host nationals, people with whom they had a lot of
contact. This was not true, however, if interaction was minimal (e.g. if there was no
employment relationship). The results on the management style measure were also
provocative. U.S. managers perceived themselves as being much more open (e.g., extro-
verted, frank, decisive) than the other groups. And, in this case, the opinion was shared
by the other nationalities since the U.S. group was rated higher by all other groups.
The Japanese managers saw themselves as slightly closed (e.g., introverted, cautious,
secretive), but actually are regarded as considerably more closed by all the other
managerial groups.
So, perhaps contact with another group can help tackle these stereotypic views
of others. As we saw in Figure 5.5, some of the most negative opinions of Americans
reside in Muslim/Arab countries. A huge number of students from these countries
come to study in the U.S. each year and many of the colleges they attend work hard
to make sure that this cross-cultural contact improves understanding of each
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culture.61 For their part, some in Saudi Arabia are also trying to tackle negative
attitudes of Americans with a new reality TV show. The Middle East Broadcasting
Center (MBC) show called On the Road in America tracks Arab students traveling
across the U.S. on a ten-week trip and their encounters that portray Americans in
a more appealing light. The show was produced in 2007 and it is too early to gauge
its effort but it would be naïve to believe that views formed over centuries could
be reversed in such a short period of time, particularly as the U.S. continues to
react to security threats post–September 11, 2001. Nevertheless, the effort to bring
people in contact with one another is laudable, even if that contact is through the
usual medium of television.62
Overall, the results of this study of managerial contact suggest that firms need to
be aware of these attitudes and the effect they may have on relations among various
managerial groups (e.g., nationals and expatriates). Likewise, it might point to the
need to do your cultural homework when studying in another country or working
with or for a foreign national. Understanding that other culture and conveying that
information could “earn you points,” especially if that foreign national is your boss. In
the accompanying International Insights feature we provide an interesting look at this
very situation.
Making the Right Impression on your Chinese Boss or Partner63

China is now the world’s second largest economy, having gotten there faster than any country
in history. You hardly need to visit China to see all of the impressive effects of their economic
affluence, although if you did travel there you would see gleaming cities, bullet trains, and
cranes dotting the horizon of most cities. You do not have to visit because the impact of
this prosperity can be seen in the magnitude of Chinese investment that is flowing into many
countries, including the U.S. Right now, the U.S. is not only heavily indebted to China, but
Chinese investment in U.S. firms could top $2 trillion in a decade. Thus, you could be working
for a Chinese boss sooner than you think (if not already).
To help prepare people for this reality, Businessweek consulted a set of China experts
for advice on how to impress your Chinese boss. They provided suggestions about how
to better understand Sino-American attitude differences. Here are a few to know and
embrace:
1. Greetings: You are the employee—it is your obligation to greet the boss first. “A high-
ranking person should never, never initiate a handshake.” Extend your hand to that of your
boss. Do not use a Western “killer” grip. It should be a limp grip to express respect and
humility. Most Chinese view handshaking as a form of excessive touching anyway. Do a
light bow and move on.
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2. Business cards: Get a lot of them and use them—the Chinese still do. But, do not use
ones that you make on your home printer. Make sure that they are professionally done.
When you receive someone else’s card, read it over, show that you are impressed, and
place it on the table in front of you during the meeting where you can continue to show
respect.
3. Gifts: There is a lot of good advice out there that you can fetch easily. A few tips, however,
are: do not give clocks, even if you have a stock of them with the firm’s logo to share.
They conjure up thoughts of death and are not considered in good taste. Do not go over-
board with a fancy watch, as “too much ‘bling’ is garish and embarrassing to the recipient.”
Get a Western-brand watch such as a Disney character watch, as those would be appropri-
ate and appreciated.
4. Gestures: Big, bold Western (American) type waves, signals, and movements are not
something to shoot for; think more subtle and rounded. Pointing with one finger is rude,
as it implies a demeaning “hey you . . . come here” attitude. To get someone’s attention,
one expert suggests gesturing with the entire hand, not like a karate chop, but more of
a graceful orchestra conductor with hand pointed down and all fingers moving back and
forth.
5. Food: All of what you know or think is familiar is not. Acquaint yourself with the regional
delicacies. For example, be ready to eat your weight in “offal” (called “variety” meats or
“organ” meats in the West) in some provinces. One expert relayed a business meal in
China that included raw pig groin and chewy donkey penis. Another meal also included
pig bladder, pig tongue, and jellyfish.
6. Smoking and drinking: To gain your boss’s or partner’s respect, “channel your inner Don
Draper” (the character from the hit AMC TV show Mad Men). Smoking remains popular
in China and cigarettes are exchanged freely. Even if you declare that you do not or cannot
drink (because of personal or health reasons), you will be forced to anyway unless there
is physical evidence that demonstrates you cannot. The notion is that it is easier to talk
business over baijiu, a Chinese distilled alcoholic beverage. As the saying goes, “if we are
good friends, then bottoms up; if not, then just take a sip.”
The “In-Group” as a Cause of Stereotypes

In addition to cross-cultural contact and media portrayals, research shows that humans
have a tendency to rate our “in-group” higher than an “out-group.” Group members
tend to emphasize their own positive characteristics and accentuate the negative traits
of other groups, findings observed in studies of perceptions between Americans and
Russians, Arabs and Israelis, and Catholics and Protestants.64 In some cases, these
stereotypes can manifest themselves in a pattern called mirror imaging. This occurs
when each group perceives similar positive traits for themselves but opposite negative
traits in the out-group. Americans, for example, may recognize and perceive wide dif-
194
ferences among themselves while seeing all Russians as relatively similar. Some point
out that this contrast is only natural since we have lots of experience with our in-group
and are relatively inexperienced with the out-group. This pattern is especially likely to
occur between groups under conflict (e.g., Arabs and Israelis; Indonesians and Chinese-
Indonesians).65
If true, then once again, increased contact and interaction with people from dif-
ferent cultures (out-groups) should result in a more articulated perception. This notion
was tested with a sample of Americans and Chinese.66 Researchers assessed the actual
amount of contact that each group had with the other, including both primary contact
(actual experience in China/U.S.) and secondary contact (number of Chinese/U.S.
friends, how often they read about China/U.S., etc.). The perceived similarity of the
other cultural group was also measured with questions such as “The more I know
Chinese, the more similar they are to each other” and “In the U.S., all people tend to
behave alike.” Results showed that increased contact with the out-group did result in
greater heterogeneity of opinions. For example, the more contact the Chinese had with
Americans, the more likely they were to see variety in the Americans’ attitudes, behav-
ior, and dress.
Familiarity gained through inter-group contact not only resulted in a more varied
set of attitudes, it also increased the accuracy of group perceptions.67 Ratings of
Japanese and U.S. managers working together for a Japanese-owned commercial bank
were compared.68 These managers were asked to rate themselves and the other group
on various traits. If accuracy is defined as ratings by others that are similar to one’s
own, then a good deal of accuracy was found. For example, both the Japanese and
U.S. managers perceived U.S. employees to be more extroverted, outspoken, and less
patient than the Japanese. Similar effects were also found among Chinese and U.S.
exchange students who had a good deal of interaction with one another.69 This was
replicated in another study that found Chinese perceived Americans to be as hetero-
geneous as a group of Chinese, in contrast to the usual in-group/out-group effect noted
earlier.70
The authors suggested that this result reflects the greater variety in Americans than
in the Chinese and that the ratings were rightfully influenced by this “reality.” If so, we
might expect similar results in Japan, where the non-Japanese-born population is only
about 2 percent. This view reflects the “kernel-of-truth” hypothesis: that stereotypes of
another group may partially be based on some objective characteristics of that group.71
More recent evidence, however, suggests that this may apply only to general or
abstract features of groups (e.g., heterogeneity). After all, most of us know that stereotypes
are oversimplified judgments that may or may not accurately characterize a specific
person, set of people, or a country for that matter. In a National Institutes of Health
study, over 80 other researchers from around the globe looked at this issue. They wanted
to see if there was a correlation between the supposed features of a national character
and the specific features of personality or character of people from that country. They
obtained the views of nearly 4,000 people from 49 different countries. As shown previ-
ously, they also found that national character stereotypes or attitudes were pretty
195
consistent across countries, but they were not closely correlated with average ratings of
individuals from those countries. In other words, specific views about people from other
countries (their outgoingness, warmth, etc.) seem to be unfounded stereotypes that don’t
well describe their actual features.72
The Effects of Attitudes and Stereotypes

One reason to understand these attitude differences across countries is that they may
impact whether, and how, business might be conducted. Take advertising as an example.
It is very difficult to customize ads to individuals (web tools aside). Instead, most tra-
ditional ads are more likely to gain traction, if not market share, by appeals using
abstract values or attitudes. Indeed, some research shows that good ads are tailored to
central features about a country’s culture. One study collected over 400 web-based ads
for a variety of different products in the U.S. and Korea and then coded themes high-
lighted in the ads. Korean ads were much more likely to feature relationship and family
themes as opposed to an American focus on individuals. More generally, ads seem to
conform to basic cultural values. Anti-smoking ads in nine countries were examined and
it was found that ads in individualistic countries typically portrayed the negative con-
sequences to the person. In collective countries, however, messages were oriented toward
the bad effects on other people around them.73
Tracking ads and their stereotypic themes can provide insight into general trends of
a country. Marketers in China, for instance, claim that macho attitudes among men,
which many thought had long since passed, have reemerged in droves. One study in
Shanghai and Chengdu, conducted by ad agency Leo Burnett, suggested that Chinese men
do not relate to males that they often see in TV ads. One participant put it best by say-
ing, “they lack male qualities and it seems that they are just playing supporting roles to
women.” Burnett now recommends that its clients emphasize power and “face” to exem-
plify Chinese machismo, rather than brawn or physique. “Brands should suggest or
reinforce a feeling of control.” Surveys also show that more and more Chinese men believe
their focus should be on their career and that a woman’s place is at home. One observer
noted this about traditional socialist values of gender equality: “now those values have
really become a joke. If you are making the same money as your wife, you are a loser.”
Chinese men mentioned Harrison Ford as their prototype male, saying that Ford often
plays “a steady, decisive leader.” Some authors have traced these attitudes to the history
of humiliation that the Chinese have perceived—something that also helped explain the
importance and tremendous pride taken in the Beijing Olympic Games in 2008.74
Another interesting example of such effects concerns India, where color TV trans-
mission was first broadcast in 1982.75 Because there were no Indian manufacturers, the
government allowed domestic firms that produced black-and-white TVs to import
“knocked-down” sets (kits with all the parts, but unassembled) to be assembled and
sold in India. Identical kits from German, Japanese, and Korean suppliers were imported
and put together with Indian brand names. The German and Japanese TV sets com-
manded much higher prices than did the Korean sets. It was common for Indian consumers
to bring along a screwdriver to a store in order to open the back of the set to determine
196
the country of origin. These views go both ways and also change over time. Indian
consumers are now very wary of the “made in China” label. And, finicky Japanese
consumers are notoriously wary of low prices or discounters, equating this with low
quality. Yet, Japan is the world’s largest market for luxury brands. As a result, Wal-Mart
has had great trouble expanding in Japan.76
Those in marketing have long known about country-of-origin stereotypes and still
try capitalizing on those. Even well-known brand names carefully monitor their image
and even signature products across countries. McDonald’s, the beef-centric largest fast-
food franchise in the world, has dropped pork and beef from its menus in India, adding
the McVeggie burger and McSpicy Paneer. Its competitor, Yum! Brands (e.g., KFC, Pizza
Hut), leads in some countries, such as China, where it earned 44 percent of its revenue
in part because of early adaptation to Chinese tastes. This included adding fried shrimp
and egg tarts to KFC’s offerings, and seafood pizza and Thai fried rice in Pizza Huts.
Many have learned this lesson and domestic options abound, so Yum! and others are
experiencing revenue declines for the first time in China. Kraft has customized its iconic
Oreo to have an orange/mango flavor for the Asia Pacific market and a peanut butter
one for Indonesia. The green tea version in China was developed recently after its
unchanged U.S. recipe languished for years. While Chinese consumers found Oreos too
sweet, Indian ones were the opposite, as they thought the cookies were too bitter, so
these were successfully adjusted too. To help, Kraft included the Cadbury name on the
package (they bought the firm in 2010) taking advantage of the brand recognition in
India.77
Country of origin effects can be seen clearly on electronic, word-of-mouth product
recommendations. Comparisons of Chinese and U.S. online discussion boards found that
the Chinese were much more likely to engage in country-of-origin discussions, often
requesting this information from others. Discussions included intense anti-Japanese
threads, strongly advising that consumers purchase indigenous Chinese equipment and
avoid Japanese products. The resulting advice was not correlated with independent
measures of product quality.78 Indeed, the opposite can occur, as shown in the Global
There is No “i” in Havana

A Businessweek reporter accidentally dropped her iPhone into the toilet. She pulled it out
quickly, but the phone was dead. She was leaving for Cuba the next day so stopped by the
Apple store to get it repaired, only to hear Grant, the Apple store associate, say “it’s toast . . .
we don’t deem it really, like, worth it to replace the inner parts.” The reporter did not take
Grant’s advice to buy a new one ($650) right away, as it would not work in Cuba anyway.
While in Havana, however, she passed by a small electronics store and on a whim asked for
repair advice. She got the name and address of an individual who said he could fix it—he
197
does every day. He took the phone completely apart and within 20 minutes had resuscitated
it. But, it now would not hold a charge. The individual who worked on it, however, would
not accept payment and could not be convinced to accept anything for his work. The next
day in the hotel, the reporter approached the porter for advice, as he was using his i3
processor. The reporter explained her problem and was pointed to a well-dressed young man
named Roberto at the bar. Roberto went up to his apartment, returning with a new, sealed
iPhone battery that he installed, putting her back in business. Roberto, a student, took an
8gb flash drive as payment. The repair market in California technology, which is better than
from Apple, is reminiscent of how the previous generation capitalized on Cuban ingenuity
by repairing cars from Detroit.79
Summary of Attitudes and Stereotypes

The insidious thing about stereotypes is that it is easy to forget that they are specious
ways to make predictions about individuals. We can be “right” by chance if we are
“right” at all. One great example of this is a study of characteristics believed to be
associated with liars. Across 75 different countries one clear, pan-cultural result that
emerged was that people believed that liars avert their gaze when lying. Yet, a body
of research clearly shows that gaze aversion has little to no association with lying—
some avert their gaze, others do not.80 So, seeing someone avoid looking at you (as
in the Muammar al-Gaddafi example provided earlier within this chapter) might not
“confirm” that he or she is lying. Worse yet, instead of real and substantial contact
with someone from another culture, we may be more likely to have a brief personal
encounter and use that as further evidence that all group members are very similar
(homogenous). A reasonable perspective on this problem is to recognize that our per-
sonal knowledge is very limited, perhaps to a handful or even only one or two persons
of another culture. Therefore, to categorize a whole group of people (e.g., Arabs,
Americans) as having a single trait is a huge and specious leap of inference. Yet, these
perceptions and attitudes can have a real impact, regardless of their veracity. For
example, some American expatriates report difficulty obtaining a job in a foreign
country, even though they are very qualified and successful in the U.S. This can occur
even in a country and culture similar to the U.S., as in Great Britain where some job-
seekers are advised to “temper your American eagerness” and to be “more like the
Brits, more reserved.”81
One objection to all of this is that the field of international management itself
engages in this stereotyping. After all, in this chapter thus far, we have tried to distin-
guish Japanese from Americans, Brazilians from Germans, and so on. Although this is
generally true, please note that we have usually emphasized relative differences. We
certainly are not saying that all Japanese are dissatisfied with their jobs or that all
Brazilians do not care about punctuality. We instead refer to observed statistical differ-
ences between groups. As you probably know, most statistical tests involve a difference
(American vs. Japanese job satisfaction scores, for example) over a pooled variance.
The fact that there is variance or differences within groups proves our point. In this
198
book, moreover, we have taken an empirical approach—one based on data, not just
opinions of a few people.82
Chapter Summary
In this chapter, we highlighted the importance of our perceptions and the important role
they can play in cross-cultural interaction. Culture affects the way we process information
about people and events. Interestingly, these perceptual differences even extend to cultural
views about time—one of the most objective factors in our lives. We saw that monochronic
cultures perceive time as an economic commodity that should be carefully monitored and
measured, in contrast to polychronic cultures, which view time as fluid and flexible.
Perception is one thing, but we also have to make sense of our perceptions and we
discuss the topic of attribution next in this chapter. Attribution theorists say that humans
are obsessed with asking why something happened. Just because an event catches our
attention, doesn’t mean that we all interpret it the same way. Indeed, research shows that
some cultures make typically more modest attributions about their successes. Other cultures,
however, seem to encourage a self-serving attribution, in which people take credit for success
and externalize blame for failures.
If a perception tends to occur over and over again, we may form an attitude about
that topic. Accordingly, we next discussed the topic of attitudes—both about the self and
about others. Again, there seem to be some cultural determinants of how we view ourselves
as well as a tendency to view out-groups (e.g., those from different cultures) in common
ways. The chapter concludes with a discussion of national differences in work attitudes and
how stereotypic views play a role in interacting with others.
1. Compare the effect of cultural background on the tendency to perceive events, people,
and groups. Can you think of examples of such an effect?
2. Think of the ways that your attributions could affect your perceptions in cross-cultural
interactions. What might be the effect in performance evaluations, in meetings, and for a
firm’s human resource practices as a whole—especially when managing cross-culturally?
3. Reflect on the differences—if any—between the stereotyping process within and across
cultures and the process of classifying and distinguishing cultures that we have been
engaged in throughout this book. What are your perceptions toward another nation (e.g.,
France) and why do you have these attitudes? Do you think cross-cultural contact and
interaction hold promise for breaking down stereotypes?
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Putting the Culture Back into Housewives

At the beginning of this chapter, we introduced Disney’s recent venture: a South American
version of the popular U.S. TV series Desperate Housewives. Recall that Disney officials thought
that the existing popularity of the South American telenovelas boded well for the success of
Housewives in this market. But, remember what a potential Argentine customer said—that
“the two societies have their own customs . . . I wonder if [Disney is] going to be able to
translate that.”
What are some of the things you may have picked up throughout this chapter that could
help Disney “translate” the series for a Latin audience? There is no doubt that cultural differ-
ences in perception were very much on the minds of producers of Amas de Casa Desesperadas,
the Spanish translation of the show, despite Disney’s demands that they stick to the original
American version. Marcos Carnevale, one of the Argentine writers (and directors) acknowl-
edged that “the Mouse” was watching closely, but also declared that certain details in the
original script did not make sense when transferred to a Latin setting. For instance, the U.S.
show featured a hunky plumber who lives on swanky, upper-middle-class Wisteria Lane—
someone unlikely to make enough money in Latin America to afford such a house. For
credibility in the Latin audience, this character was changed to a wealthier plumbing supply
company owner who had more “airs” about him. Also, scenes involving burials or wakes (an
occasional show subject) had to be altered because funerals are different in Latin America
than in the U.S. Features about status, wealth, and power are more important in Latin cultures
and the producers thus had to be careful in considering this.
A variety of other seemingly small details had to be considered and changed in order
to add cultural credibility as well. For example, the death penalty has been largely outlawed
in South America. Reference to it in the script was altered. Ditto for things such as Thanksgiving
(changed to Easter) and other country differences. There were also some challenges with the
characters themselves. Bree Van de Kamp is a hyper-uptight WASP character, played in the
American version by Marcia Cross. She was written out of the Latin script and substituted
by Vera, the daughter of a military officer and fervent Catholic with extreme leanings. Likewise,
the nouveau riche couple in the U.S. show, Carlos and Gabrielle Solis, played by Ricardo
Chavira and Eva Longoria, were changed to Ecuadorians so that they could serve as the
corresponding ethnic couple on the block (the equivalent of Hispanics in the U.S. show).
The appearance of some characters also had to be modified to better fit the culture. In
the U.S. version, Eva Longoria became a star and sex symbol by playing a “bantam Latin
spitfire” type—a cultural cliché that would not make sense in Latin America. Instead, her
character was changed to one that more closely reflected an icon of beauty there. Mr.
Carnevale, the director of the Latin version of the series, encouraged these changes and
instructed his cast to “not merely imitate the original characters” and “not to flee from
typically Latin American body language.” Even when the narrative remained the same,
Carnevale still said “but we are Latins, and we have to communicate as Latins. We touch
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more, kiss more and cry more, and our version had to reflect that.” Thus, many topics
discussed in this chapter and book played a role in Disney’s cultural fine-tuning. To improve
effectiveness in doing business in another culture, you probably need to recognize and consider
accommodations for differences—in Latin America or elsewhere.
Measuring Your Perceptual Orientation to Time

Purpose
To get a feel for your views about time in order to better understand different views across
cultures.
Instructions
In this chapter we documented the importance of studying perceptions. One area on which
we focused our discussion was the perception of time. Some cultures may be relatively
monochronic in their perception of time, whereas other cultures may be more polychronic.
A scale has been developed to measure monochronic and polychronic perceptions of time.
We present the brief four-item scale here so that you can fill it out. Read each item and then
choose a number from 1 to 5 that reflects your feeling about the item.
1 2 3 4 5
Strongly agree Neutral Strongly disagree
1. ___ I do not like to juggle several activities at the same time.

2. ___ People should not try to do many things at once.
3. ___ When I sit down at my desk, I work on one project at a time.
4. ___ I am comfortable doing several things at the same time.
Now simply add up all your four scores to create a total. The lower your score (below 12),
the more monochronic your orientation; the higher your score (above 12), the more poly-
chronic you probably are. How does your score compare to the average for U.S. students
(3.03) and for students in Brazil (4.15)?
We also encourage you to think about the experience you might have interacting in a
business setting with someone who is very mono- or polychronic in orientation. As experts
suggest, we might interpret extreme monochronic behavior as pushy and overly demanding
and extreme polychronic behavior as unconcerned or reflecting a tightly knit group that is
difficult to join or enter. Furthermore, people with a monochronic orientation share some
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characteristics. For one, they are very task oriented and they tend to stick with their plans—
sometimes at all costs. The task orientation also tends to make them more oriented toward
the short term in their relations with others. The polychronic person, in contrast, tends to
emphasize relations over tasks and thus is more open to changing plans and schedules. When
these two types of people meet in a business setting—either within or across cultures—there
is great potential for frustration and conflict.
Source: Bluedorn, A. C., Kaufman, C. F., and Lane, P. M., (1992). How many things do you like to do
at once? An introduction to monochronic and polychronic time. Academy of Management Review, 6,
17–26. Copyright © 1992 by The Academy of Management. Reprinted by permission.
Conducting a Cultural Audit of China

Purpose
To familiarize yourself with attitudes toward another culture and to get experience preparing
to deal with cultural patterns and attitudes in that country
Instructions
For this project, you should consider yourself an employee of a smaller firm in western Ohio
who has little or no experience in China. Yet, the firm—that who grows and manufactures
silicon—is seeking to move some of its operations to China in order to be closer to some of
its customers and to capitalize on the resulting cost savings.
Your assignment is to produce a “cultural audit” that will better prepare your company
for this move. Your goal here is to produce a short manual that will provide an overview of
what it is like to do business in China—to provide a “how to” approach that will allow your
representatives and executives familiarity with some cultural protocol. You are encouraged to
touch on the topics that you have covered thus far in the book (Chapters 1–4) as well as
this chapter. If your instructor has asked you to read chapters in a different order, then he
or she will advise you on what to eliminate or to add in this report. Almost certainly, however,
this will include some treatment of Chinese perceptual tendencies as well as their attitudes
toward the U.S. and ours toward them.
Resources
• CIA World FactBook (https://www.cia.gov/library/publications/the-world-factbook/index.

html): This widely referenced document provides a wealth of information about nearly
every country in the world. While most of this information deals with basic economic,
governmental, and demographic data, it will provide useful information for this exercise.
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• China–Britain Business Council—CBBC (www.cbbc.org/): This site offers some very useful
background information on understanding basic Chinese business practices. You will find
detailed information on any number of different issues that may arise in doing business in China.
• The Embassy of the PRC in the U.S. (www.china-embassy.org/eng /) and the Embassy
of the PRC in the U.K. (www.chinese-embassy.org.uk/eng/): These sites, the Chinese
embassy in the U.S. and in the U.K., offer a lot of background information on the topics
that are the subject of this exercise.
• U.S. State Department Information on China (http://travel.state.gov/travel/cis_pa_

tw/cis/cis_1089.html): As the title of this page shows, the U.S. State Department offers
information on China that you might find helpful.
Global Innovations
Online and at the Head of the Line for Internet Business in China
Web commerce continues its tremendous growth, with the U.S. leading the way ($180 billion,
2010). Business is also growing in China ($70 billion, 2010), in part because of the size of
the online population, already the world’s largest at about 485 million in 2011—that is with
two-thirds of the population not yet online. It is easy to see why predictions show that online
revenues in China will eclipse those of the U.S. by a good margin in 2015. Another reason
for growth seems to be the distinctly Chinese flavor that the Internet has taken on there.
Online companies in China began, like many others around the globe, by copying Western
models of structure and function. But, they seemed to have really blossomed by coming up with
clever, country-specific innovations. In fact, Western Internet firms have struggled to replicate
their domestic success in China (notwithstanding success as investors). Experts seem to point to
a reason why: “the beauty of the Internet is that it easily adapts to local conditions.” And,
apparently it has done just that, growing more Chinese by the year. Indeed, The Economist
recently went as far as to say, “the Chinese Internet is the best example of the argument that,
far from creating uniformity,” networks are shaped by local conditions and forces.
One such force is the young but relatively less well-off Chinese consumer who is hungry
for hip products, services, and apps. And, Tencent is a firm catering to them. It started out
by replicating AOL’s chat service, called ICQ, and then quickly grew (actually to the point of
bidding to purchase ICQ in 2010). Growth resulted in part from adding appeal to the very
large, young audiences in China who use their phones, homes, and Internet cafés to cheaply
communicate with each other and generally have fun. Tencent now has over 500 million free
(active) user accounts and other offerings, just invested $300 million in Facebook, and purchased
a 10-percent stake in the Russian Digital Sky Internet service. This makes Tencent the third
largest Internet company in the world behind Amazon and Google and the biggest social
network in China. It makes money not just from advertising but from sales of virtual goods
203
and social games. They developed micropayment memberships (about $1.50/month) that allow
users to dress up their avatar for face-offs against others in online shows, to buy a tool in an
online game, or more. A whopping 10 percent of Tencent’s active users pay for such member-
ships, over three-quarters of the firm’s total revenue. Meanwhile some of the biggest Internet
players, Facebook and Zynga, are nowhere in China.
Another good example of Internet business with Chinese features is Taobao Marketplace,
an Internet auction site similar to eBay. For years, eBay has spent lots of money in China but
has not gotten very far. Meanwhile, Taobao is China's biggest C2C marketplace. Taobao was
started in 2003 by Alibaba (another Chinese giant). In response to eBay’s purchase ($180
million) of Eachnet, the Chinese leader at the time, Taobao started offering free listings to
sellers. Plus, they added other features desired by Chinese consumers, including an IM tool
for buyer–seller communication, and a trustworthy, escrow-based payment tool (Alipay) that
pays after delivery (most deals are still cash on receipt). Taobao became the undisputed market
leader in mainland China within two years: market share jumped from 8 percent to 59 percent
between 2003 and 2005, while eBay dropped from 79 percent to 36 percent during this
time. Apparently, many dorm rooms in China now double as warehouses, stored full of goods
waiting to be sold. These part-time entrepreneur/students work extremely hard.
Similarly Baidu, which has 75 percent of China’s search engine market, is different than
its U.S. counterpart, Google. Google appears to be engineering dominated (they tape math
problems to restroom doors to busy idle minds). Baidu, no technical slouch itself, says it is
“focusing more on products and satisfying our users’ needs.” On its website, Baidu declares
that “our deep understanding of Chinese language and culture is central to our success and
this kind of knowledge allows us to tailor our search technology for our users’ needs.” One
example mentioned is that there are about 38 ways of saying "I" in the Chinese language. It
is important to “recognize these nuances to effectively address our users’ requests.”
China has its online challenges, to be sure, especially for foreign firms—including regula-
tion, censorship, and other state-related issues. But, the industry is also poised to grow even
bigger for a variety of economic and industry-related reasons.
Sources: The Economist. (2011). An Internet with Chinese characteristics, July 30, 71–72; www.businessinsider.
com/the-10-asian-tech-companies-that-are-putting-american-ones-to-shame-2010-12?op=1#ixzz2JOFgzaTa;
also, the websites of Tencent, Taobao, and Baidu provided information used in this section.
Notes
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204
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study. Columbia Journal of World Business, Summer, 29–38.
76. Banjo, S. (2012). Japan, ready for Wal-Mart? Wall Street Journal, September 28, B6; Einhorn,
B., and Mehrotra, K. Made in China makes India uneasy. Bloomberg Businessweek, February
27–March 4, 14–15.
77. Burkitt, L. (2012). China loses its taste for Yum! The Wall Street Journal, December 3, B9;
Gasparro, A., and Jargon, J. (2012). In India, McDonald’s plans vegetarian outlets. Wall Street
Journal, September 15, B7; Einhorn, B., and Winter, C. (2012). Want some milk with your
green tea Oreos? Bloomberg Businessweek, May 7–13, 25–26.
78. Fong, J., and Burton, S. (2007). A cross-cultural comparison of electronic word-of-mouth and
country-of-origin effects. Journal of Business Research, 61, 233–242; Guth, R. A., and Chang,
L. (2002). Sony finds it’s a small world. The Wall Street Journal, December 18, B1.
79. Becque, E. B. (2012). “The Havana genius bar.” Bloomberg Businessweek, September 17–23, 98.
80. DePaulo, B. M., Lindsay, J. J., Malone, B. E., Muhlenbruck, L, Charlton, K., and Cooper,
H. (2003). Cues to deception. Psychological Bulletin, 129, 74–118; The Global Deception
Research Team (2006). A world of lies. Journal of Cross-Cultural Psychology, 37, 60–74.
81. Skapinker, M. (2004). The myth of national stereotypes. Financial Times, March 8, 12; Dunne,
N. (2003). Plugging into European jobs no easy task: American executives may find cultural
differences a barrier to workplace success abroad. Financial Times, August 22, 7; White, E.
(2003). Europeans take a satiric jab at the U.S. The Wall Street Journal, August 28, B1.
82. Osland, J. S., and Bird, A. (2000). Beyond sophisticated stereotyping: Cultural sense-making in
context. Academy of Management Executive, 14, 65–77.
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chapter 6
communicating
effectively across
cultures
COMMUNICATING EFFECTIVELY ACROSS CULTURES 213
COMMUNICATING IN FOREIGN LANGUAGES: PLENTY OF ROOM

FOR ERROR 222
NONVERBAL COMMUNICATION 236

Learning Objectives
explain the value of communications savvy in international business.

recognize the options you have for getting across your message, as well as the cultural
pluses and minuses associated with each.
pinpoint communication barriers and understand that even language proficiency is no
guarantee that miscommunication will not occur.
analyze the sources of communication problems across cultures and potentially fix them.
A Small Firm Needs a Communication Boost to Get the Chips Off Their
Shoulders . . . and Off Their Shelves
In late 2006, the board of California-based chip designer Teknovus, Inc., began looking for
a new chief executive. The firm was only four years old but was in need of a boost in order
to expand, let alone hold onto, what were seen as finicky customers from their primary
customer base—Asia. Plus, if they wanted to become an attractive target for purchase by
some of the big players, they knew they needed to get moving. As a first step, they hired
Greg Caltabiano as their new CEO.1 Mr. Caltabiano is an engineer by training, but also has
an MBA from Stanford and post-graduate studies under his belt at University Center, Tokyo,
as well as at the world-renowned INSEAD graduate business school in France. Plus, Mr.
Caltabiano spent 14 years based in China and Japan, most recently as a general manager
for a telecom firm. Mr. Caltabiano seemed to fit the position qualifications well because the
firm sold most of its semiconductors to customers in Asia from its northern California offices
in Petaluma (a city just north of San Francisco). The firm really needed someone who under-
stood and could manage across different cultures.
Several years ago, it was not uncommon for Teknovus’s customers to interact mostly
with sales managers assigned to their region and only occasionally problem-solve with their
engineers. Yet, because of the nature of the product application (fiber-optic communication
networks), it was necessary for the Asian telecom staff and the local carriers that operate
the networks to seek help from Teknovus’s engineers. When overseas customers requested
new features or bells and whistles, Teknovus engineers sometimes balked at these requests.
For example, when Japanese customers apparently sought detailed reports for problems they
were experiencing, U.S. engineers were both confused and frustrated by the request. Likewise,
when Teknovus’s engineers at the home office in California complained about repeated
requests from the Seoul, Korea, office to change the technical specifications of some chips,
explanations were slow in coming.
212
C O M M U N I C A T I N G E F F E C T I V E L Y A C R O S S C U L T U R E S
What should Mr. Caltabiano have done? Ironically, he was leading an advanced telecom-
munications systems company but messages from key customers abroad were slow in coming
and confusing to the Teknovus engineers, who needed clarity. Think about these problems
and try to jot down some advice for Teknovus to make necessary adjustments. Then, at the
end of the chapter, cross-check those with some of the steps actually taken by Mr. Caltabiano.
You may be surprised at some of his solutions to these communication challenges.
Communicating Effectively Across Cultures

We studied cultural differences in perception and attitudes in Chapter 5. There is good
reason to believe that there are noticeable effects of culture on what we see and the
resulting attitudes we form. This can be very functional for interaction with members
of a culture, but these perceptual filters can present bigger challenges across cultures. In
Chapter 6, we pick up right where we left off because once you perceive and interpret
others, you often need to communicate your feelings or reactions. That is where your
prowess and insight into different ways of thinking is critical, especially in an interna-
tional environment. Communication can help clear up shortcomings in your perceptions
or it could also obfuscate them as well. Both sides are discussed in this chapter.
The Value of Communications Savvy in International Business
While it may seem obvious that communication occurs in many different forms, manag-
ers sometimes get into trouble by operating as though communication is the same
everywhere, language differences aside. To an American, for instance, a gap in conversa-
tion can be seen as an opportunity to respond. Long pauses are uncomfortable and
create a desire to fill in the silence. But in Finland and Japan, longer periods of silence
in conversation are normal, even expected. Pauses may be used to carefully consider
what has been said; responding too fast may create offense.2
So, in negotiation situations with the Japanese, unprepared Americans may be
uncomfortable with silence, perhaps seeing it as dissatisfaction with the offer they put
on the table. For their part, Japanese negotiators may feel it is important to consider
offers seriously and signal that consideration by pondering matters in silence. They may
not understand signs of German impatience. Even worse, some experienced negotiators
may be aware of another party’s tendency to fill in silence and could use this as an
effective negotiating ploy. Miscommunication can cause firms to lose potential partners,
to fail to deliver their product or service, and generally distort and damage relationships.
These problems underscore the importance of effective communication in international
business.3
But, even speaking the “same” language has pitfalls, such as what can happen when
Americans are posted to places such as Australia or the U.K. Not only is the “English”
different, but so is the communication style. There are differences in the use of the same
213
terms, of sarcasm and understatement, irony and emotion. And, differences like these
can cause problems if not properly understood. Likewise, nonverbal communication
matters too. Leaning back low in your chair might be acceptable in the U.S., especially
if you want to convey a relaxed and familiar atmosphere. In other countries, though, it
might be viewed as irritating, inattentive, and offensive. The bottom line, as one expert
put it, is that “what blows deals is a failure to understand communication styles.”4
Here then, we will review various forms of personal communication, both verbal
and nonverbal. We will also examine some barriers to good communication across cul-
tures and suggest ways to overcome them.
Spoken and Written Communication
The single most important way that we communicate is through language, both spoken
and written. As we saw in Chapter 5, language can shape our perceptions, but it can
also provide important insights into our cultural values. Let’s look at the role that lan-
guage plays in international communication.
Languages of the World

Experts believe that there are at least 3,000 distinct languages currently spoken in the
world, not to mention many more thousands of off-shoots or dialects. Only about 100
of these have more than 1 million speakers. And, only a handful of languages account
for most of our communication on the planet (see Figure 6.1). This figure shows that
there are over 1.1 billion Mandarin speakers, only a fraction of whom reside outside of
China, whereas many of the estimated 500 million English users are second-language
speakers. Keep in mind that experts disagree on the numbers presented in this figure.
Language Approx. Number Language Approx. Number of

of Native Speakers Native and Secondary
(in millions) Speakers (in millions)
Mandarin Chinese 1,100 Mandarin Chinese 1,120

English 330 English 480
Spanish 300 Spanish 320
Hindi/Urdu 250 Russian 285
Arabic 200 French 265
Bengali 185 Hindi/Urdu 250
Portuguese 160 Arabic 221
Russian 160 Portuguese 188
Japanese 125 Bengali 185
German 100 Japanese 133
Figure 6.1 Widely Spoken and Influential Languages Used Around the World.
Source: Weber, G. (1997). Top languages: The world’s 10 most influential languages. Language Today, 3, 12–18.
214
For instance, some believe there might be upwards of 0.5 billion English speakers in
China and India over the last 20 years.
Mandarin is largely limited to China, and a few other languages are also limited
mostly to only one nation (e.g., Polish, Japanese, and Greek). Others are spoken across
many borders (e.g., English, Spanish). The reverse is true as well—there are several
languages spoken within the borders of one country. English and French are both com-
monly spoken in Canada, for example, and are more prevalent in some provinces than
others. Likewise, India officially recognizes 16 languages.
We would expect greater cultural similarity within a country that has one dominant
language (e.g., France) whereas borders may be less important proxies for culture in a
multilingual society. Nevertheless, the dominant language in any one country or region
can affect (and even define) a particular culture. Consider the Chinese government’s
efforts to continue to promote Mandarin as the official national language in a country
that arguably has the most linguistic diversity on Earth. But, Mandarin is difficult for
people from Shanghai and its surrounding provinces to understand. There, various dia-
lects of Wu are common. Some have said that the eight languages of China are as dif-
ferent as Spanish is from French.5
While language usage certainly speaks to its impact, in Figure 6.2 we present data
that more directly addresses language influence on business. The figure shows several
measures of the role of language in world business. These data show that English, Japanese,
Language Economic Language Gross Language Language Traded GLP

Strength Product (GLP)
English 4,271 English 7,815 English 2,338

Japanese 1,277 Japanese 4,240 German 1,196
German 1,090 German 2,455 French 803
Russian 801 Spanish 1,789 Chinese 803
Spanish 738 French 1,557 Japanese 700
French 669 Chinese 985 Spanish 610
Chinese 448 Portuguese 611 Italian 488
Arabic 359 Arabic 408 Portuguese 138
Italian 302 Russian 363 Malay 118
Portuguese 234 Hindi/Urdu 114 Arabic 85
Figure 6.2 English in Business: Indices of Global Language Impact.

Notes
1. All figures are in billions of U.S. dollars.
2. All measures are estimates: Economic strength is the rank of the economies of the countries where native speak-
ers live; gross language product takes into account all countries in which a language is spoken and allocates the
GDP of each proportionate to the languages spoken there; traded GLP is based on the notion that language
popularity follows markets, with the “merchant” speaking the customer’s language; this is thus more of a
measure of native speakers’ trade internationally.
Source: Graddol, D. (2000). The Future of English: A Guide to Forecasting the Population of the English Language
in the 21st Century. London: The British Council and The English Company (U.K.), available at: www.britishcouncil.
org/learning-elt-future.pdf. (retrieved January 29, 2013).
215
French, Spanish, and German are especially influential.6 These data are a decade old and
undoubtedly Chinese would be among the most influential in today’s economy.
Language Fluency
The large number of languages throughout the global community presents several chal-
lenges to international managers. One self-evident challenge is that in order to be effec-
tive, you need to communicate in the common language spoken where business is
occurring. Alternatively, you must be willing to place trust in a translator. This seems
to be a special challenge for Americans, especially relative to foreign competition, because
Americans speak few second or third languages. Roughly 80 percent of U.S. households
speak only English at home. This figure is even higher in Britain—about 90 percent
speak only English.7 Some suggest that Americans’ relative lack of interest in other
languages results from being relatively isolated geographically and, as a result, there is
no great need to learn additional languages. This explanation, however, does not hold
up well in the face of the large numbers of immigrants and ethnic minorities in the
U.S.—numbers that have only increased during the last four decades. Plus, technology
has made the rapid transmission of information much easier, rendering geographic iso-
lation more illusory than real. The old adage that you “sell in a customer’s language”
also argues against this point.
Instead, critics suggest that part of the reason for Americans’ lack of foreign language
proficiency may be ethnocentricism—the tendency to be more inwardly focused on one’s
own culture. This may result in a relatively low value placed on learning other languages.
Again, the same can be said about the British, who in 2004 dropped the requirement
that all 14–16-year-olds should study at least one foreign language.8 The effects were
quick—the number of British students studying foreign languages went into free fall.
There are, however, some promising signs within the U.S. Nearly 1.4 million college
students are studying a foreign language (over 50 percent study Spanish) and more
U.S. students are traveling abroad than ever before.9
One factor that has made it easy for Americans to be complacent about being
monolingual is that the rest of the world increasingly uses English in business interac-
tions. English is the language for international air traffic, regardless of city of departure
or arrival. It is also the most commonly used language in academic research. Peruse
French job ads and you will find that most management and professional positions
require anglais courant (fluent English). English is the official language of oil firm
Totalfina, the second largest company in France—this in a country that ferociously
protects its language.
But why is English becoming more pervasive in international business circles? First,
a good deal of business on the Internet is conducted in English and U.S. firms were early
adopters. In the process, the Internet is exposing people everywhere to English more
than ever. Even though estimates of web content in English have dropped over the last
decade (from 75 percent in 2001 to 27 percent in 2011), English is still the most com-
mon web language. Other languages are well represented (24 percent in Chinese, 8
percent in Spanish, and 5 percent in Japanese in 2011), with Chinese content having
proliferated—from only 9 percent in 2007 to the current figure of 24 percent. Likewise,
216
the number of Chinese-speaking Internet users has mushroomed by 1,500 percent in the
last decade (compared to a 300 percent increase in English-speaking web users during
that time). Overall, however, nearly 80 percent of the Japanese and German populations
are on the web—the highest percentage on the planet (with others far behind).10
A second reason for the widespread use of English in international business is the
sheer size of the American economy, and the global reach of U.S. multinationals. These
effectively make using English “good business sense,” at least in the minds of some.
Moreover, English is fairly simple, grammatically speaking, and makes for an easily
learned “common tongue” in business. So, for instance, when French pharmaceutical
firm Rhone-Poulenc merged with German competitor Hoechst a few years ago, English
was made the common language of the merged companies.11
There are many different languages spoken throughout the European Union (EU).
Yet today, more than half of the people in the European Union claim to be reasonably
conversant in English. In fact, a survey of 16,000 people living in EU countries found
that almost 70 percent agreed with the statement “everyone should speak English.”
And the Dutch are closest to already being there, with more than 80 percent indicating
that they speak English. English has also been weaving its way into local languages
around the world, with Europe no exception. The French term for a self-service restau-
rant is le self and the Russians call denim pants dzhinsi (roughly pronounced “jeansy”).12
Germany has become so beset with English phrases that some now refer to it as Denglisch.
German executives may conduct media interviews in a pressebriefingraum (press briefing
room) and then go work out their stress at a Businesssportcenter. But like the French
before them, some German officials worry about the intrusion of English into their
culture. One member of the German parliament decried the trend, calling it a “flood of
Anglicisms descending on us from the media, advertising, product description and tech-
nology.”13 In China, estimates are that over 350 million people are learning English,
with perhaps 150 million already speaking.
This global trend seems likely to continue. English is the most common language
studied in schools in the EU. And, countries such as South Korea have reemphasized
their already strong commitment to English, with plans to recruit 23,000 new English
teachers. Some Koreans have even raised the issue of making English the country’s
official language to strengthen national competitiveness.14 In Singapore, the percent-
age of households speaking Mandarin and local dialects at home has steadily declined
over the last two decades, whereas those speaking English have dramatically
increased.15 If you add up all of the people who speak English with some competence
as a second language to those native English speakers, English speakers have become
among the most numerous in the world.16 Overall, English is the most popular sec-
ond language in Europe, Africa, Japan, and China, among other places. Consequently,
it is probably no exaggeration to consider English the language of international
business.17 Lots of data suggest that this is likely to continue, including in Japan,
which has long had a reputation of having a relatively closed culture. Yet, even in
Japan there are some firms providing elaborate training in English, with a few even
making English the required language for business transactions. Read about what
Rakuten, the giant online retailer, is doing about English within its firm in the Global
217
Global Innovations
They Have Ways of Making You Talk: A Japanese Firm Requires English
English is the most popular second language to study in the world. Many people already
speak it, and millions more are studying it. Japan is considered relatively isolated, and not
quick to adopt the conventions of other cultures, including language. Yet, in corporate Japan
there is a huge move to the adoption of English in the conduct of commerce.
Consider the Rakuten Corporation, the largest online retailer in Japan. Every Monday
morning, about 2,000 employees in the company’s Tokyo headquarters meet for an asakai
(company meeting). Since March of 2010, those meetings as well as corporate officer
meetings and board meetings have been held in English. Megumu Tenefusa, Vice President
of Public Relations, said that the firm is increasing the number of foreign nationals. And,
“in order to globalize the company, everyone from top management to regular employees
should be able to speak English.” Most current employees are Japanese, although hiring
will likely increase the number of non-Japanese now employed by the firm. Despite this,
even if the meeting included all Japanese, soon even those meetings will be held in
English.
This Japanese rival to Amazon has big plans. It is already a nearly $4 billion company,
and recent acquisitions in the U.S. and Europe will be followed by more. Rakuten says
that its English-only policy is “crucial to its goal of becoming a global company.” The
firm’s employees seem to be OK with this move, or are at least taking it in stride. Rakuten
provides in-house English lessons for employees. They declined to say what Test of English
for International Communication Exam (TOEIC) score is required for employees. The TOEIC
is an exam required by foreign students studying in the U.S. and other countries.
Management did say, however, that English proficiency is necessary for promotion. In the
meantime, the company has even changed signs in the cafeteria to English; they need to
be able to know and order “tofu hamburg steak curry” in English if they want the
company-provided free meals. More significantly, CEO Hiroshi Mikitani (who has an MBA
from Harvard and is fluent in English) recently gave the earnings report entirely in English.
Japanese reporters asked questions (in Japanese) and Mr. Mikitani answered in English,
with an accompanying translation.
A few Japanese firms in addition to the Rakuten Corporation have more or less adopted
English. Sony, for example, conducts many meetings in English, as does Nippon Sheet Glass
Company, but each has no official language policy. Nissan Motor Co., and some other firms
that have been acquired by foreign companies, have made English a common language. But
it is rare for a company such as Rakuten, that is dominated by Japanese management, to
take such a step. The extreme approach by Rakuten has resulted in some rare public criticism,
by observers and by other Japanese firms. At a recent press conference, for example, Takanobu
Ito, CEO of Honda, said that forcing Japanese workers to speak to each other in English is
“stupid.” Others lament that this policy is the first step toward the disappearance of the
mother tongue—and ultimately, the fall of Japan.
218
These arguments do not faze Mr. Mikitani, CEO at Rakuten—nor even do criticisms
that his own English leaves something to be desired. Instead, his reply is that lack of
English speaking is a huge problem for the country: “Japan is the only country with many
well-educated people who can’t speak English.” Indeed, data supports his statement.
According to the International Monetary Fund, Japan had the lowest scores of the TOEFL
test (Test of English as a Foreign Language), out of all 34 of the advanced economy
countries. The last word, however, might be Mr. Mikitani’s if their tremendous growth is
any judge!18
When people adopt a second language it is often because that language is useful in busi-
ness interactions. English is the medium of business, finance, science, the Internet, broad-
casting, and even the government in South Africa and other African countries.19 In China,
for instance, speaking English means better jobs, better pay (often double), and foreign
travel opportunities. It is no wonder that teaching English is big business, with up to
$3 billion annually spent on English-language training in Asia alone.20 Some businesses
are there to help. A slew of small- to medium-sized firms have been created to handle
the international demand for learning English. McKinsey & Co. estimates that more than
300 million Chinese are studying English and that foreign-language business there is
worth $2.1 billion annually.21 One such business with millions of Chinese customers
features Li Yang, the “Elvis of English,” who teaches a program called “Crazy English.”
Part teacher, preacher, and drill instructor, he teaches English to groups of 10,000 or
more in football stadiums. Through his bullhorn, he screams “How are you?” and the
crowds yell that back to Mr. Yang. “I’m in the pink,” he answers the crowds, who again
repeat that back. The company’s tag line of “Conquer English to make China Strong”
is appealing to millions.22 Another strong sign of the importance of communication is
the entry of Disney into the foreign-language instruction business. Parents in China spend
$1,000 to send their kids to twice-a-week (for a year) English classes held by Disney
because they “want their kids to be international” and because Disney is a “familiar and
trustworthy brand.”23
That said, other languages really are not going away, in business or otherwise. For
instance, the World Trade Organization’s costs related to language have soared over
120 percent since it was founded in 1995. Language service to the more than 140 WTO
members eats up 22 percent of its budget. The same is true in European Union meetings
in Brussels. Although there are three “procedural” (working) languages, with English
being the lingua franca, there are in fact 23 official EU languages. For example, Maltese
is one of those, even though it is only spoken by about 400,000 people. About 1.4 mil-
lion speak Estonian and nearly 6 million speak Catalan in Spain. This creates significant
problems. Consider the need to translate 23 official languages into each other: it results
in 506 different combinations. Even when there were only ten official languages, the EU
could not find interpreters for some pairs of languages. A “relay” system needed to be
219
developed. For example, if a Finnish document needed to be translated to Portuguese,

the Finnish might first be translated into French, then a Portuguese translator fluent in
French would complete the relay. The need for translators cannot keep up with the
demand of some 12,000 EU meetings that take place every year. In 2002, the EU cost
for interpreters was $143 million, and translation costs were $465 million—even as
English becomes more and more common in the EU.24
What does “competence” in English, or any other language that you might speak,
really mean—regardless of whether you are in the EU or not? There is no one definition,
but there is little doubt that many people overestimate their language skills. And, as
noted, perception and decision making may be linked to cultural values regardless of
what language is spoken. So communication in international business is likely to have
plenty of rough edges to it, even when a “common” language is used. Those rough edges
can often create real problems and even great danger, as illustrated in the following
International Insights feature.
The Best Care in the Air Is Cross-Cultural: Miscommunication Can Be Dangerous to

Your Well-being
Seconds before a Korean Air Lines (KAL) flight landed in a storm in South Korea, First Officer
Chung tried to abort the landing by grabbing control of the plane from Captain Barry Woods.
The aircraft’s black box recorded what happened when the plane was only 30 feet above
the ground and about to land. Captain Woods shouts: “Get your hand . . . get off. Get off!
Tell me what it is . . .” Seconds later loud, terrible sounds are heard over the grunts of Mr.
Chung and an alarm bell. The plane crashed and burst into flames. Astonishingly, all 157
people aboard escaped with their lives.
The crash reflects a rising occupational hazard—language obstacles. As fast-growing
Asian airlines scour the world for pilots, cockpit crews have become more culturally and
linguistically diverse. The problem in Korea, say foreign pilots, is acute. “It’s like an air show
up there, and it’s hard to tell where everything is because the Koreans are all speaking
Korean,” said an American who flew for Asiana Airlines for years before taking a job with
a U.S. firm. “There are a lot of opportunities to get hurt.”
Under Korean law, foreign pilots must be matched with a Korean first officer so that
communication with the control tower is effective. Unfortunately, Korean first officers receive
only a rough familiarity with English as they go through flight school. Worse yet, communi-
cation may be further hindered by the hierarchical Korean culture that discourages co-pilots
from asking questions or volunteering information. This value placed on high power distance
makes it difficult for Korean flight officers to be proactive enough in providing information
to pilots. Likewise, asking questions is often regarded as disrespectful. Showing lack of expe-
rience or knowledge, even in an airline cockpit, may be considered a loss of “face” or
220
reputation. In fact, one American who trained many Korean pilots said that in the hundreds
of preflight briefings he gave, trainees did not ask a single question.
These cultural factors make flying in Korea more risky than should otherwise be the
case: Korea’s airlines have higher fatal accident rates than other airlines. Investigators acknowl-
edged that miscommunication contributed to this particular KAL accident. During the final
approach, Captain Woods asked First Officer Chung to turn on the windshield wipers. Because
he did not respond, the captain repeated the request. A few seconds later, Mr. Chung replied:
“yeah . . . wind shears.” Apparently, Mr. Woods’ order to “get off the controls” also caused
confusion. Experts say that a clearer command would have been “do not touch the controls.”
Both pilots were charged with criminal neglect—all were thankful for no loss of life. Another
Korean Air Lines flight, however, was not so lucky. The airplane crashed, killing all 228 people
on board. The recovered black box revealed that even after altitude alarms sounded, the
co-pilot and flight engineer did not bring this up with the pilot; only 6 seconds before impact
did the co-pilot make mention of the problem.
This is a wider issue, as shown in a crash of a Saudi 747 and Air Kazakhstan jumbo jet.
Over 350 people died in this mid-air collision over New Delhi, India. This collision occurred
after Indian air controllers ordered the Saudi jet to climb and hold at 14,000 feet and the
Kazakhstan jet to descend to, and hold at, 15,000 feet. These instructions, however, were
misinterpreted by the Kazakhstan crew—among other communication problems, they
converted the feet to meters. Many airlines now train crew members on culturally based
safety features. One is to actively voice concerns and to repeat them if the pilot does not
respond. Fortunately, KAL’s more recent safety record has been outstanding. With over 70
percent of air travel accidents due to pilot/crew error, safety in this case is in part tied to
language competence.25
Competence in another language pays dividends in international business, including in

air travel. Yet, even as English remains the lingua franca of world business, great reli-
ance on English as the only language spoken by many Americans represents a com-
petitive disadvantage—one that will continue to cause problems as the ferocity of foreign
competition escalates. Unfortunately, many American firms continue to underplay the
value of having managers who are fluent in other languages. In one survey, American
managers felt that while cross-cultural understanding was valuable, foreign language
skills were not as important. The general belief was that language problems could be
overcome by using translators or by hiring foreign nationals.26 Not surprisingly, studies
show that American businesspeople have the lowest foreign language proficiency of any
major trading nation in the world.27 And as shown in Figure 6.3, the U.S. has received
poor grades for knowledge of foreign cultures and languages. In a survey of over 10,000
business people from around the world, the results show that the U.S. had the lowest
rating of any country. This latest data, while nearly a decade old, might still provide a
similar picture about Americans’ standing given the information we have reviewed here
and earlier.
221
Country Language and Culture Country Language and Culture

Knowledge Knowledge
Belgium/Luxembourg 7.7 Korea 5.5

Switzerland 7.7 Indonesia 5.3
Netherlands 7.5 India 5.2
Denmark 7.3 Canada 5.1
Hong Kong 7.3 Japan 4.9
Sweden 7.2 Pakistan 4.9
Malaysia 7.2 France 4.8
Turkey 6.8 Brazil 4.8
Chile 6.8 Australia 4.2
Taiwan 6.8 U.K. 4.1
Germany 6.8 South Africa 3.5
Mexico 5.8 U.S. 2.8
Figure 6.3 Knowledge of Foreign Languages and Cultures: Executives’ Views of Other Countries.
Note: Ratings provided by a large sample of executives from over 40 countries across the globe of these countries
(1 = intercultural understanding is often lacking in the business community to 10 = management has understand-
ing and knowledge of foreign cultures and languages).
Source: Adapted from The World Economic Forum. (2002). The Global Competitiveness Report, 2002. Geneva,
Switzerland: The World Economic Forum.
Communicating in Foreign Languages: Plenty

of Room for Error
The lack of foreign language skills can put you at a clear disadvantage in international
business. Just because you speak Mandarin, English, or Russian, however, your problems
are far from over. Even with great proficiency, many snags can arise in verbal commu-
nication, including dialect variations, accent problems, regional usage differences, and
more—even when speaking the same language.
Because of these challenges, international managers must be sensitive to the possibil-
ity that what they intended to communicate was not what was heard or understood by
other parties involved. This was learned by a large U.S. telecom company that replaced
its expatriate managers in Thailand with American-born Thais (ABTs) and American-
born Chinese (ABCs). The company’s belief was that the replacements would be more
culturally attuned to doing business in Asia. Yet, in actuality, those new managers often
automatically assumed that they were communicating well. They were less likely to make
any special efforts to check with their colleagues and subordinates to see if this was in
fact true. This was not arrogance, but just an assumption that their messages were get-
ting through. As experienced managers have said, often these problems cannot be solved
by expanding your vocabulary list. Instead, employees on cross-national teams should
work to clarify a discussion of items such as deadlines and requests, rather than assume
222
that nuances will be understood. American managers at Reuters Group, a financial

information provider, told their Thai employees that they would “like” a project to be
done by a certain date. When it was not finished by that date, the managers were upset.
The problem here was not vocabulary, but instead a cultural interpretation. The Thais
had taken this request as a preference rather than a demand or order (as in “I’d like
some water” as opposed to “Please get me some water”). Similarly, after his presentation
to employees of a recently acquired Estonian bank, a Swedish banker was advised that
he should be more forceful. The banker’s presentation (in English) was fine. Estonians,
however, expect leaders to show a more authoritative/forceful style, which is not as
common in Sweden. One piece of advice was to change use of the phrase “it is good”
to “it is vitally important” and to directly address the fears of the Estonians rather than
to sidestep their feelings. Similarly, some Japanese firms are training employees to actu-
ally be more “rude” (i.e., more direct, less formal). Interestingly, they have found that
English helps accelerate this effect. A Japanese manager reported that instead of conduct-
ing interviews in Japanese, he does some in English. He says that ordinarily, answers to
even mundane questions tend to be veiled in courtesies, whereas in English the Japanese
feel more comfortable answering directly. As one expert put it, “a lot of people arrive
[in another country] thinking they need grammar practice, when what they need is
management skills.”28
Along the same lines, there are many native speakers who do not interact with
foreigners and thus have rarely needed to be crystal clear. Consequently, they may
struggle to accommodate to different usage of English by many non-native speakers. In
some cases, those non-native speakers may be better at using English with one another
than native speakers.29 This even includes conversations between British and American
managers—individuals who share the “same” language. Consider, for instance, the phrase
“let’s table the proposal.” To Americans, it means that the proposal will be put aside
indefinitely. To the British, however, it means that the proposal needs action immediately.
There are many other examples of differences (e.g., an American flashlight is a British
torch, American band-aids are British plasters, the American subway is the British tube,
and the American toilet is the British loo), that it is easy to see why Irish playwright
and co-founder of the London School of Economics, George Bernard Shaw, said that
the U.S. and Britain were “a people separated by a common language.”
Misunderstandings between British and Americans are likely to be cleared up fairly
quickly given that the core language is the same. Resolving problems is much more dif-
ficult in conversations involving distinct languages, especially if managers are not fluent
enough to check any translations provided. Consider an Indian who speaks no Spanish,
talking with a Spaniard who speaks no Punjabi. They may understand each other well
by speaking in a streamlined, simplified English—a watered-down form without gram-
mar or structure, but understandable nonetheless. Talking in this so-called “Easy English,”
or “Globish,” with a vocabulary of about 1,500 words, is becoming more and more
common.30
Even if managers can avoid some of these communication problems, they can still
make major errors that can harm their international business. For instance, Swedish
manufacturer Electrolux once used the phrase “nothing sucks like an Electrolux” to
promote their vacuum cleaners. Besides being vaguely obscene, this phrasing could be
223
interpreted as something less than a rousing evaluation of the product—a chancy ad

even if the double entendre was deliberate! IKEA has found that some of its Swedish
names for products do not go over well in Thailand, such as the Jatterba vase and pot,
which among Thais sounds like a crude term for sex. IKEA turns new product names
over to a set of Thai employees who work to modify them to avoid such problems,
while keeping the same Swedish charm that you will see in Seattle, Orlando, or
Cincinnati.31 Figure 6.4 presents additional communication blunders committed by
companies as they tried to do business internationally. It shows two main types: errors
in translation and errors that violate local norms and culture.32 Even mighty Microsoft
tripped up on an earlier, Spanish version of the thesaurus in its popular Word© program.
Apparently, the program likened Indians to man-eating savages, “lesbian” was equated
with “vicious” and “perverse,” and “cannibal” and “barbarian” were suggested substi-
Examples of Translation Errors
• The Redalen is the name of a bed sold by IKEA in its stores around the world. In Thailand,
however, it is very similar in meaning to a sexually suggestive term.
• A foreign airline operating in Brazil advertised plush “rendezvous lounges” which in Portuguese
implies a room for making love.
• One German translation of the phrase “Come alive with Pepsi” literally meant “Come alive out
of the grave with Pepsi.”
• A memo from an African subsidiary of Dutch electronics giant Philips referred to “throat-cutting
competition” instead of “cut-throat competition.”
• A sign on the elevator in a Romanian hotel read: “The lift is being fixed. For the next two days
we regret that you will be unbearable.”
• A sign in the window of a Paris dress shop said: “Come inside and have a fit.”
• A sign in a Japanese hotel read “You are invited to take advantage of our chambermaid.”
• A Bangkok dry cleaner tag line read: “Drop your trousers here for best results.”
Examples of Failing to Appreciate Local Norms and Cultural Values when Communicating
• A U.S. firm in Europe handed out fake coins with “$1 billion” emblazoned on them. Instead
of spreading goodwill, this was widely seen as American pomposity and superiority. Europeans
wondered why the dollar sign was used instead of local currency.
• In Britain, a General Mills breakfast cereal package showed a clean-cut child saying, “See kids, it
is great!” Although a prototypical American ad, the product received a poor reception; it failed to
reflect that English families are less child-centered when making food purchases.
• A foreign appliance company used an ad in Middle Eastern markets that showed a refrigerator
full of food, including a large ham. At the minimum, the ad was insensitive since Muslims are
forbidden to eat pork.
• A Listerine ad in Thailand showed a boy and a girl, obviously enthralled with one another. After
Listerine learned that the public depiction of romantic relationships was in bad taste, the ad was
adjusted to show two girls discussing bad breath, to a better reception.
Figure 6.4 Language Blunders Abroad.

Source: Adapted from Ricks, D. A. (1983). Big Business Blunders: Mistakes in Multinational Marketing. Home-
wood, IL: Dow Jones Irwin.
224
tutes for the Spanish word for black people. “Occidental” was matched with “white,”
“civilized,” and “cultured.” The Mexican press, among others, was merciless in its
criticism. For its part, Microsoft was very apologetic and sheepish.33 Consider also that
Microsoft, as well as the companies discussed in Figure 6.4, likely hired professionals
to develop and translate their ads but still had problems. Face-to-face and other “real-
time” communications are likely to produce even more problems.
Imagine a meeting between American and Japanese managers. In Japan, it is gener-
ally considered inappropriate to say “no” in a blunt or direct fashion. The Japanese
tend to avoid explicitly saying “no” to the other party so that both sides retain face
(reputation). Instead, they rely on a variety of indirect ways to decline an offer, proposal,
or invitation. A person not savvy about such cultural norms may not understand that
“I will consider your proposal” could actually mean “no.” It is so common for the
Japanese to avoid direct negatives that the Japan Export Trade Organization provides
a pamphlet to foreigners to help them understand the difference between a “yes” and
a “no.”34 In Figure 6.5 we present some common phrases that mean “no” but which
allow for the bad news to be cushioned. Even the structure of the language itself seems
to be designed in part to preserve this harmony. The verb in Japanese comes at the end
of a sentence. A communicator can present the subject and object first, then alter the
verb after gauging reactions. Further, the speaker can add a sentence ending that changes
the overall meaning in order to preserve harmony.35
Some researchers have gone even further with this point, suggesting that language
might be a good indicator of underlying cultural values, such as individualism or col-
lectivism. As a case in point, consider that languages vary in the freedom that they give
Phrase That Really Means “No” A Common but Incorrect American Interpretation
“That would be very hard to do.” Some adjustments are needed, but the deal is still
possible.
“It is very difficult.” The matter is difficult but not impossible.
“I will consider it.” The issue is under consideration for future use.
“I shall give it careful consideration.” Even more attention will be given to the proposal.
“We shall make efforts.” Energy will be put into exploring options.
Silence/delay in response The other party is thinking about the topic or they are
offended by our message; time is being wasted.
A change of subject The new topic is more important now.
“I’ll think about it.” The issue is still alive and under consideration.
“I’ll do my best, but I’m in a delicate It will be extremely tricky, but he or she will give it a
position.” shot.
“Yes, but . . .” Conditional agreement
Figure 6.5 Ten Ways to Avoid Saying No in Japanese.

Sources: Adapted from Imai, M. (1975). Never Take Yes for an Answer. Tokyo: Simul Press; Ueda, K. (1978). Six-
teen ways to avoid saying “no” in Japan. In J. C. Condon and M. Saito (eds) Intercultural Encounters with Japan.
Communication—Contact and Conflict, 185–195. Tokyo, Japan: Simul Press.
225
to drop pronouns in a sentence. In English, for instance, it is not proper to drop the
subject in a sentence such as “I went to a movie last night.” “Went to the movie last
night” is not a complete sentence and does not inform the listener who went to the
movies. In Japanese and other languages, however, communicators are likely to drop
the subject: “Went to the movie last night” is an acceptable sentence. In a study of 39
languages spoken in over 70 cultures, it was found that when the main language permit-
ted pronoun drop, those countries were much more likely to be individualistic. The
authors suggest that dropping pronouns deemphasizes the importance of the person or
subject of action. Conversely, requiring the pronoun (for example “I,” “he,” or “she”)
makes the individual the prominent focus of attention, taking the focus away from the
context in which they act.36 In general, it seems that everyday conventions (such as
dropping pronouns) in collectivist societies keep the values of interdependence salient in
people’s minds. Other common practices in individualistic cultures (such as a focus on
specific people) keep those independent values at the forefront.37
In most cultures it can be tough to confront someone directly, but easier if they are
approached indirectly and with subtlety. To a degree, therefore, it is probably universal
to try to cushion bad news to some degree. But Americans in particular are often irritated
when they feel that they are being “strung along” or not given a “straight answer” when
the news is bad.38 Going back to our Japanese example, the problem is that Americans
should be hearing a “no” but they are not. In other words, the Japanese are probably
working very hard to maintain harmony and to show consideration for the feelings of
others when they need to communicate a “no.” A flat-out refusal would certainly be
the worst option to take for many Japanese. Conversely, many Japanese perceive the
communications of Americans as “blunt,” “too insensitive,” “overly critical,” or just
plain “prying.” Of course, it would behoove both sides to gain a better understanding
of the other.39
Compliments as Communication
Communication is not all about confronting or avoiding. Sometimes it is best to listen,

watch, and acknowledge features about others that you admire—probably a good com-
munication tool in any culture. Yet, it is interesting to observe that methods of smooth-
ing interpersonal interaction, such as the use of compliments, differ across cultures. For
instance, research shows that Americans praise each other much more frequently than
do the Japanese. That is, they directly provide critical and complimentary feedback. In
the process, Americans are also much more likely to praise physical appearance and
personal traits than are Japanese. Why do researchers find effects like these? It could be
that the great value placed on the individual self in U.S. culture may lead Americans to
be especially solicitous of compliments that make them feel better or stand out, so much
so that there is great difficulty in accepting a mistake and apologizing.40
There are wide differences across cultures in terms of how often praise is given, what
is praised, and how people respond to praise. For instance, Egyptians tend to have a
“complimenting” culture. While they may not compliment as much as Americans, their
salutations tend to be longer and have more depth. On one occasion, a host complimented
226
an Egyptian dinner guest on his necktie. The Egyptian promptly took off the tie and gave
it to the person who offered the praise. The host politely refused the gift several times
but found it neatly folded on the couch after the party was over.41 Generations of American
children have been told that “sticks and stones may break my bones, but names will
never hurt me.” Interestingly, Egyptians have a nearly opposite saying: “A sharp tongue
cuts deeper than the sword.” Clearly, there are differences in the types and frequencies
of compliments (and insults) given across cultures. Some cultures are very stingy with
their praise, while others may be willing to give you the ties off their shirts. This behav-
ior, like other communication, can be linked to underlying cultural norms.42
Criticism as Communication
The opposite of compliments are criticisms. Once again, differences across cultures exist.
One study found that Americans and Japanese tend to use distinctly different styles when
criticizing. The Japanese are more likely to use “passive” forms of criticism, such as
references to a third party, as well as humorous or ambiguous comments. Americans
are much more apt to criticize directly, sometimes with overt anger that might also be
accompanied by constructive suggestions. It appears that the need for group harmony
in collectivist cultures and an effective self in individualistic cultures may impact how
people deliver critical comments. This can be important in the area of performance
evaluations where feedback is often shared among those differing in cultural background.
It is easy to see how an American could be communicating in a much more negative
and blunt way than they may have intended.
Having said this, people in all cultures can, and sometimes do, lose their temper,
even in a work setting. Then, criticism can spill over into verbal abuse—something that
unfortunately occurs too often in American work settings.43 Even then, however, the
form of “verbal abuse” doled out by others seems to be culture-driven. In one study,
researchers reasoned that if communication and attention is focused on specific people
in individualistic cultures, then verbal insults should also be focused on the person (e.g.,
“You are stupid,” “I hope your project fails.”). This is exactly what they found. Insults
in collective cultures showed more concern with the person in relation to other/in con-
text (e.g., “I wish a financial failure on you and your firm.”).44 These are still certainly
insults, just ones contextualized in other non-personal ways.
As suggested previously, this could help explain why it is difficult to directly say
“no” in some cultures. Many foreigners have been irritated by the apparent “unwilling-
ness” of many Chinese to say “no” directly to a request or question. Instead, they may
say that the request is “complicated” or that “the responsible person is busy at the
moment.” Similarly, some feel that many Spaniards might sooner take a business loss
than openly admit that they made a mistake. These are common observations in more
group-oriented cultures, and ones that can be seen in individualistic cultures as well,
perhaps just not as commonly. Yet, studies show that collective cultures take social
rejection to heart more than do those from individualistic cultures.45 Nonetheless, caus-
ing someone to lose face by admitting mistakes and through publicly expressed hostility
or rejection are things to be avoided.
227
Russian culture is a variant on this—a so-called practical interdependence. Russians

are very free with their advice to other Russians, as well as others from different cultures.
Because advice can help foster practical interchange, Russians generally view this prac-
tice as useful and even an obligation. Research comparing native Russians with Russian-
Americans and other cultures shows they give advice freely, and found it tough to change
this even when the advice was not solicited. Likewise, similar Russian directness and
frankness was also observed in parental discussion boards.46
Embarrassment as Communication
It might take a lot of advice to embarrass or offend a Russian, but what happens once
offense is given or a loss of face or reputation does occur? Again, there seem to be
cultural differences in people’s responses to these situations. In one study, again among
Japanese and Americans, participants were asked to describe recent embarrassing situ-
ations that they had experienced. The Japanese tended to mention predicaments involv-
ing in-group relations (e.g., interactions with family, a spouse, friends, and co-workers);
Americans were more likely to mention relations with out-group members (e.g., acquain-
tances, friends of friends, strangers, etc.). Also interesting were the reactions to these
social predicaments. Most of the Americans (65 percent) felt embarrassment, but only
a small portion of the Japanese had this reaction (5 percent). On the other hand, the
Japanese were much more likely to feel shame (42 percent) in response to the loss of
face than were Americans (4 percent). These findings are supportive of the perspective
that communication patterns of Japanese and Americans reflect very different points on
the individual–collective dimension of culture.47
Apology, Regret and Forgiveness as Communication
An interesting follow-up issue is how people resolve their embarrassments, regardless of

whether they caused the problem or were the “recipient” of the embarrassing moment.
One option is to apologize for creating the problem or at least for playing a part in the
social mess. As a general default strategy, it might be the best thing to do. Instead, Japanese
and Americans (among others) tend to react differently in situations where one person
harms (either physically or psychologically) another person. Earlier in the chapter we
presented the communication errors that occur and contribute to commercial airline
accidents. When accidents occur, there is always a systematic effort made to determine
the cause. Some years ago, a Japan Airlines (JAL) flight crashed into Tokyo Bay at Norita
International Airport. Twenty-four people died and many others were hurt. After the
accident, the president of JAL publicly apologized, bowing deeply to all those affected
during a press conference, showing his respect and sympathy. In addition, he personally
visited each family affected by the tragedy and offered up his resignation and a promise
of consideration from the company. It is difficult to imagine the management of a Russian
or American airline engaging in the same course of action in a similar situation.
Researchers have examined how apologies such as these are communicated across
cultures. In one study, Japanese and Americans were asked to describe a recent incident
228
in which they had apologized to another individual. The Japanese preferred to apologize
directly and extensively (as in the airline example), without offering explanations and
reasons for their actions. Thus, Japanese can be direct in their styles. Interestingly,
Americans, while not quite as direct as the Japanese, also generally preferred to apolo-
gize directly. American apologies were not as intense, however, and they offered many
more justifications and attributions to explain their behavior. The Japanese were highly
sensitive to lapses in their social obligations and went to great lengths to try to make
amends. The American tendency to provide many explanations may reflect the higher
value placed on the self in an individualistic culture, which may make the admission of
failure or guilt more difficult. The concern for the collective or group may in turn make
it easier to express such feelings for the Japanese. A large-scale review of similar reac-
tions suggests that East Asians score highly on the willingness to accommodate the needs
of others.48
Experts suggest that international companies should help their employees understand
that the type of apologies and explanations provided by people may have a cultural
basis different than their own. Managers who fail to adjust their communication strat-
egies risk provoking conflict and creating misunderstandings in cross-cultural situations
such as negotiations, cross-cultural teams, and performance appraisals, to name just a
few.49 Several years ago, Japan’s largest milk company, Snow Brand, produced and dis-
tributed milk that made thousands of people very sick. The firm developed a program
of apology. The firm asked 2,000 of its employees to personally visit and apologize to
the more than 14,000 customers affected. As an example, two employees visited Yumi
Ito, a woman whose young daughter got sick, and they profusely apologized (bowing
in respect so deeply that their heads touched the floor). Even Mrs. Ito thought the
spectacle was “too painful to watch” and she refused the cash and gift certificates they
presented. She did finally accept them when told by the bowed employees that “we
won’t be able to go back to our company if you don’t take these.”50
While Mrs. Ito accepted the company’s detailed apology, how well are such regrets
generally accepted? Like many of the other communication concepts discussed here,
there are big individual differences. The authors of this book are both parents, with
children who would rather visit the dentist or give up an iPhone for a week than
apologize to their siblings, let alone forgive and forget a transgression. So it is within
any culture, but there are also broad cross-cultural differences that have also been stud-
ied. Some collective cultures, such as that of the Congo, think of forgiveness as inter-
personal, whereas individualistic cultures (such as in France) emphasize personal
responsibility. One study that looked at views of forgiveness in these two countries found
that the willingness to forgive was more common in the Congo. Likewise, the views of
forgiveness in individual cultures such as France were less encompassing (e.g., “forgive-
ness is basically approving of what someone did”) than in the Congo. The authors
explained the findings as resulting from the Congolese view of the harm doer as being
cut off from society because of the damage they caused. A big goal of the justice system
is to reintegrate the offender back into society.
In France, the personal sanction or punishment is at the core of the judicial system
(with neither apology nor forgiveness a requirement or special concern). Similarly, many
Americans were surprised by the actions of the Truth and Reconciliation Commission
229
conducted in South Africa after the end of apartheid. There, people who were arrested
and found guilty of many terrible things publicly asked for, and were granted, forgive-
ness by the tribunals. The Commission did receive its share of criticism, including from
the three main ethnic groups, and from both apartheid supporters and those in opposi-
tion (e.g., the African National Congress).51
Finally, the study found that when people from many different cultures (e.g., China,
Japan, Russia, the U.S.) reflect on common events in their lives they are more likely to
regret things that they did not do rather than things that they did do. Likewise, these
varying cultures did not differ in the type of regret that they expressed—their regret was
mostly focused on the self as opposed to the social group, with little difference found
among countries. So, even though responses to transgressions and offense are different,
there seems to be a more general tendency to ruminate on the things we didn’t do or
should have done.52
Written Communication
One way to avoid all these potential problems is to communicate via letter or e-mail.
If you do not speak the language well, you can at least hire someone with writing
expertise to carefully craft the message before sending it. But neither option is as simple
as it seems on the surface, for several reasons. For one, this can be expensive. Also,
costs aside, hiring writing help is impractical much of the time, given the volume of
written communication businesspeople have to deal with.
According to one estimate, the average corporate e-mail user can expect 50 to 75
new messages per day, a figure that many think is grossly underestimated! For interna-
tional managers, the e-mail volume is likely to be much higher. In fact, the growth of
international business may account for a good chunk of the rising use of e-mail. Believe
it or not, some managers may spend upwards of 50 percent of their office time on e-mail.
After all, the convenience of e-mail is seductively attractive—a manager in Dayton, Ohio,
can quickly fire off a memo to a counterpart in New Delhi, India, without having to
think about what time it is on the other side of the world.
On the other hand, research shows that there may be different rates of use and
preferences for communication media, including e-mail, texting, tweeting, and more. In
one study, for example, researchers found that students (a group often at the vanguard
of new tech applications) varied in their willingness to experiment with technology.
Those from high uncertainty avoidance countries were less willing to adopt newer com-
munication methods. The same is true of executives and managers—those from high
uncertainty avoidance and power distance countries perceived various information systems
as less useful and rated them less favorably than their counterparts from countries low
in these dimensions.53 A similar finding was also reported for internet adoption rates in
the U.S., Japan, and a number of other countries. While most of these countries now
have high rates of internet usage, their rate of adoption was negatively correlated with
degree of country collectivism, uncertainty avoidance, and power distance.54 These data
show some cultural hesitation in adoption of new communication technologies, something
we might predict would extend to even newer social media methods that are developed.
230
Finally, a more recent study compared the preferences of Chinese and Australian
managers for texting, e-mail, phone, letters, and more. Because of the Chinese tendency
toward higher power distance and avoiding uncertainty, researchers predicted, and found,
that they preferred using the phone and texts over the other methods. Australians,
however, were more comfortable with more “lean” communication methods, such as
e-mail. E-mail offers few, if any, nonverbal cues. Importantly, though, while culture did
play a big role in the results here, the researchers found that other variables present in
all cultures (e.g., gender, age, and experience) were more important than culture in
predicting communication preference. Younger people in both cultures, for instance, were
more comfortable with most methods. Likewise, some have suggested that because of
increased culture exchange and knowledge, business communicators have been taught
to understand and adopt communication strategies from other cultures. Nevertheless,
the research still underscores the point that extensive communication, even if only virtual,
has cross-cultural complications.55
Nearly 70,000 people from 238 global companies were asked the question “What
method of communication is the hardest for you to handle in English?” Even though
the phone is a rich form of communication and preferred by some, if English was the
language of communication, it still presented significant problems. In fact, the phone
was cited as the hardest to handle in English by 77 percent of the respondents, with
face-to-face meetings (64 percent) and e-mails (63 percent) also being mentioned.56
But volume of communication and convenience of sending it does not necessarily
make for good communication.57 How could you construct a letter, or an e-mail to get
your point across, make your order clear, or request some key information? If you are
an American, you probably would: (1) use English, (2) keep the letter short and to the
point, (3) stress the use of the personal tone (personal pronoun), and (4) avoid flowery
or exaggerated language.58 If you were French, however, you would probably be less
concise (maybe the letter would spill onto a second page), and your introductions and
conclusions would be much more formal and polite. Americans might perceive these
parts of the letter to be “old fashioned” or “too formal.”59 Japanese writers often pre-
fer to hint at something, partly because their language itself is ambiguous and partly
because, as noted previously, being overly direct could be seen as condescending or an
affront to one’s face.
Figure 6.6 illustrates this difference in writing style across two versions of a letter
that was actually sent to Chinese companies by an American firm looking for business.
The first version, written by the company owner (an American) is simple, clear, and
direct. Yet, it received no response from the potential customer. The letter was rewritten
by a Chinese employee of the firm and is also presented in Figure 6.6. Note that it
incorporated relevant cultural conventions. For example, it is typical to begin with set
phrases about one’s family, the season or weather, and also to close with comments that
are similar in form. Likewise, further paragraphs present the purpose of the letter, also
appropriately couched in cultural norms (comments about the seasons and demonstrat-
ing a humble attitude). Even bad news would be presented very indirectly. This longer
letter did receive replies from the customer and inquiries from other customers.60 This
letter shows that there are differences in writing styles among countries and cultures.
Clarity, for example, is not a universally valued feature. In fact, in some cultures, this
231
Dear Sir: Dear Mr. Qui:
Your name and address were I hope you have had a safe journey home and
referred to me by the Ohio that you and your family are in good health.
Department of Agriculture, Asia Here in the middle part of the U.S., where you
Office. They stated that you graciously visited, continues to have wet weather.
had expressed an interest in our We are thankful for the rain, however, after our
products and requested further two years of drought.
information. Our company, Midwest Equipment, wishes to
thank you very much for your participation in our
I am therefore enclosing a brochure state Department of Development Trade show
that lists our products and services. and for stopping by our booth.
Please let me know your specific Our firm is located in Springboro, Ohio, in the
requirements and I’ll be happy to heart of a fertile agricultural area of the country.
provide you with further details. We have over 35 years of experience in selling
agricultural equipment. Our company has trade
Thank you for your participation relations with more than 15 countries around the
in the Ohio Department of world. And, we are well known for our excellent
Development Trade Show. I look service and good quality products.
forward to your reply. Several years ago, we sold over a dozen
machines to a Chinese firm. We wish to establish
Sincerely, relations with China on a regular basis. We would
like to know whether our agricultural equipment,
Fred Pestello such as tractors and combines, could benefit you
Director of Sales in any way. I will be very happy to provide you
Midwest Equipment Company with further information.
I am also enclosing two price lists of our
Enclosure equipment, one is the regular prices, the other is
the pricing for demonstrators.
May your seasons be fruitful and plentiful.
Sincerely,
Tan Wen-lan
Figure 6.6 Examples of Two Different Versions of a Letter to a Potential Asian Customer.
Note: The letter on the left is the original version, written by the company V.P. The revised version on the right was
written by a Chinese employee of the firm.
Source: Adapted from Boiarsky, C. (1995). The relationship between cultural and rhetorical conventions: Engaging
in international communication. Technical Communication Quarterly, 4, 245–259.
style can be viewed as simplistic, even patronizing. Other cultures use ambiguity and
indirectness as a tool to save face and to give instructions politely. People in those cul-
tures view the simple version as a bit unsophisticated.61
People learn these styles early on in life and they are imparted for functional
reasons—the styles tend to convey basic values. A recent study demonstrated this by
looking at the stories presented in children’s textbooks in Japanese and U.S. schools.
Those stories were carefully coded on several different dimensions. An analysis showed
232
Writing Element Foreign Letters Received Using U.S. Letters Sent Using
Writing Element (percent) Writing Element (percent)
Use of personal tone 25 37

(personal pronouns,
informal language, etc.)
Impersonal tone 25 6
(formal, passive voice)
Exaggerated courtesy 44 19
Obvious compliments 16 6
Words omitted from 38 6
sentences
Figure 6.7 An Analysis of Letters Written to and Received from Foreign Countries.
Source: Adapted from Kilpatrick, R. H. (1984). International business communication practices. Journal of Business
Communication, 21, 33–44.
that the stories in American textbooks highlighted themes of individualism (e.g., self-
direction and personal achievement). The Japanese textbooks, however, emphasized
themes of collectivism, including such topics as conformity and group harmony.62
It should be of little surprise, then, that when these students later become business-
people, similar effects are observed. One elaborate study of business writing involved
asking 100 major U.S. corporations for copies of letters that they sent to foreign com-
panies, as well as letters that they received from those foreign firms. Samples of letters
were collected from over 20 countries (e.g., Brazil, Mexico, Italy, Thailand, India, and
Caribbean countries). The results are summarized in Figure 6.7. As you can see, American-
written letters tend to use an informal, casual tone, especially in contrast to the more
formal third-person letters that they often receive from other countries. Likewise,
Americans appear to avoid “exaggerated” courtesy and compliments that other cultures
are likely to consider important. Perhaps one lesson to be learned is that if you want
to impress someone from another culture, do your best to imitate that person’s written
communication style.63
That said, keep in mind our earlier warnings about the pitfalls inherent in what you
might be conveying when sending written communications abroad. You may be success-
ful at trying to be more subtle or being more elaborate than you normally would, but
you could still create communication problems in other ways. Suppose for a minute that
you send an e-mail to a Japanese business partner about projected profits. Even if you
have done everything else right, the use of the word “profit” may imply something about
long-term collective growth to your Japanese counterpart. To Americans, however, the
meaning of the word tends to be multifaceted, with a core theme of personal gain.
Managers from Singapore and Malaysia, particularly those of Muslim faith, may be
more oriented toward profit as a bottom-line concept in contrast to Australian manag-
ers where profit also stirs awareness of corporate social responsibility.64 If your letter
had been sent to a Russian, it is possible that the word “profit” (prybl) could even
conjure up a less than positive vision.65
233
When people define the same words or objects differently and think that their mes-
sage is getting through, it is called bypassing. Consider the meaning of “Mickey Mouse.”
In the U.S., it might be reflective of some “all-American” values, as the Walt Disney
Company is considered wholesome and family-focused. In Japan, the character conjures
up images of something safe and reliable, whereas in France it may not activate many
images at all. Likewise, the concept of souvenirs for visitors invokes a fun part of a
travel experience for Americans, a legitimizing memento for Japanese, and a tacky waste
of money to the French.66 Because bypassing is so common, you may not even know it
is happening until well after the communication process is over.
You may wonder if it is possible to come to grips with these problems on a system-
atic basis. Difficulties abound, no doubt. Some occur simply because we fall into our
more common and comfortable way of talking and acting—then we believe we’re getting
through to the other party. One example is the use of sports analogies, words that have
seeped into our business language—as illustrated in the following International Insights
feature. In practice, these words are often amplified by our nonverbal communication,
which is the subject of our next section.
Many Americans “Strike Out” When Communicating Cross-Culturally

From air traffic control, to TV programs, to business meetings, English seems to be the ticket.
Yet, while English may be the preferred tongue of international business, even experienced
and fluent foreign managers sometimes find themselves tongue-tied with Americans. Oddly,
but increasingly, this seems linked to Americans’ strong preference for sports idioms. In fact,
U.S. executives use so many of these idioms that they do not know when they are “striking
out” with their communication.
Paula Shannon, a seasoned executive at a large Boston-based offshoring services firm
with offices in 25 different countries, has experienced this a lot. One of her “favorite” sports
expressions used in business is a reference to the “hail Mary pass”—a long-shot effort that
needs to be done. Yet, without a working knowledge of American football, few foreign
execs would understand the saying. If anything, by using it you might establish your “American
centricity and risk a religious offense” at the same time, says Ms. Shannon. Many other
sayings from American football are used in the boardroom, including “red-zone selling”
(when the stakes get higher as the sale is about to close . . . or when you are close to the
end zone in football), as well as “going long” (being bold) and “throwing a screen” (bringing
help). The CEO of a Fortune 500 electronics company that does business in over 50 coun-
tries remembers wanting to change the meeting agenda at a global retreat in Italy. When
he stood up and announced, “I’m calling an audible” (being spontaneous), only the Americans
understood.
234
There are hundreds of baseball euphemisms; if we mentioned more than a handful we

would be “running up the score” (being selfish/bragging). While the game is played more
widely than football, many still need to translate what it means to “hit a home run” with
their presentation. If not, they may have to “manufacture some runs” (smaller victories) by
“choking up” (being careful) and “playing small ball in the late innings” (going with the
odds). Dieter Zetsche, until recently the CEO of DaimlerChrysler, is a German national, born
in Turkey and fluent in English. Once during an interview with an American newspaper, a
reported told him that he was about to get a question from “left field.” After pausing a
second, the savvy Zetsche responded that it was “okay . . . as long as you don’t throw me
a curve ball” (be unpredictable). Not everyone is like Mr. Zetsche and can “hit one out of
the ballpark”; many seem to have “two strikes against them” (are behind) to start with. Ms.
Shannon from the Boston offshoring firm noted that these sayings are not just reflective of
the American “man-cave” where flat-screen TVs, clickers, and sports are king, but that
American women do not “need a raincheck” or someone to “pinch hit” as they are also
capable of “stepping up to the plate” (taking a chance) with sports language. Both men or
women can “throw this idea around the horn” (brainstorm) or “hit one in the bleachers”
(have a great idea/win). So, women are hardly “throwing smoke,” “covering all the bases,”
or going “the whole nine yards” with their communication (all mean to get something done).
Neither men nor women appear to be “taking one for the team”—instead it is up to those
foreign partners to “steal the signs” (predict competition) of real communication so the
conversation can “move from the catbird seat” to the “peanut gallery.” All this makes non-
native English speakers feel like they are “out in left field” (away from central activity) and
“right off the bat” too. Maybe Americans are “playing hardball” (being tough), leaving others
“off base” (out of sorts).
Just when a foreigner thinks that he or she has got a lot of these terms mastered, the
Americans come up with more—covering even more sports. Maybe basketball season will
open just in time for your next meeting. It did for one CEO of a recruiting firm who was
meeting with executives of an Indian company in London. One of his colleagues tried to
convince the Indian partners to remove a clause in a contract because it would benefit neither
side by characterizing it as a “jump ball” situation. They had discussed this for about 10
minutes when one of the Indians said, “I’m not quite clear what you mean by the jumping
ball.” Obviously, this is not a language problem per se—Indians are, and have been for
hundreds of years, widely fluent in English. It just shows that knowing the same language
does not make for a “slam dunk”—mistakes are “par for the course.”
Some experts say that sports jargon is common in business because both share and
feed on competition. And, increasingly, foreign executives understand these euphuisms,
although the same might not be true for American’s understanding of foreign sports (as
in the use of the terms “own goal,” “hitting a six,” in “the pit,” and a “sticky wicket,”
which are terms from soccer, cricket, and rugby). Either way, if you want to “hit a grand
slam” with your international communication efforts, be aware of your use and overuse
of these terms.67
235
The advice for written documents used across culture is first to keep things simple.
Complex word choice, use of acronyms, and idioms invite confusion. Avoid local expres-
sions and try to use the most common meaning of a word. Finally, but not exhaustively,
invite questions or comments—before you send the document as well as from the
recipient afterward. One very interesting example is how Caterpillar, the world’s largest
maker of tractors and excavators, dealt with these problems. They developed their own
language program, called Caterpillar Fundamental English (CFE), to be used overseas
in operating and repair manuals. The CFE is a greatly condensed, 800-word version of
English. The 500 nouns, 70 verbs, 100 prepositions and remaining words are taught in
30 lessons. A similar approach was also taken by EADS, the European Aircraft Consortium
(it makes Airbus commercial jets) for its repair manuals.68
Nonverbal Communication
As if the challenges linked with verbal and written communication are not enough, we
also need to consider the role of nonverbal communication. Nonverbal communication
is the transmission of messages without the use of words or writing. Above and beyond
what is being said, often how it is said carries plenty of information value. How you
stand (e.g., slouching vs. standing up straight) and what you wear (e.g., a business suit
vs. jeans and an untucked shirt), for example, can add (or take away) credibility from
your presentation. So can your facial expression, eye contact (or lack of it), physical
movements, and any hand gestures that you use (or do not use).69 These are all exam-
ples of nonverbal communication, which can vary across countries and cultures. First,
however, it should be noted that much of this research has been overly popularized. It
is important to know that nonverbal behavior is complex, easily misinterpreted, and
often situation specific. So, we need to be as careful as the researchers discussed in the
coming sections were in drawing conclusions about nonverbal behavior.
Interpersonal Space and Gestures
One important nonverbal behavior has to do with the amount of interpersonal space
we prefer to have between ourselves and others in social interaction. We regularly make
very subtle choices about this distance, but that space varies dramatically depending on
the activity and with whom you are interacting. For instance, women tend to have a
closer interpersonal space than men do, and friends are physically closer than strangers.
Americans and northern Europeans prefer about 2–3 feet of personal space when con-
ducting business. Asians prefer closer to 1½–2 feet, whereas Latinos and Arabs might
even choose a much closer personal space. You can imagine the effect of these differences
in a cross-national business interaction. If an American likes about 3 feet between him-
self and another individual, and an Arab businessperson likes about 1 foot between
individuals, what is likely to occur? The Arab could perceive the American as stuffy and
standoffish, whereas the American businessperson might see the Arab as pushy. Many
experts believe that knowledge of cultural space differences can avert a negative percep-
tion that could otherwise interfere with a business transaction.
236
While interpersonal space is a choice, it is more often than not a habit, based on
little or no thought. Gestures, however, are usually more direct and deliberate and
designed to amplify a message or to act as a stand-alone form of communication. Such
gestures might include a shoulder shrug, a thumbs-up sign and many other, sometimes
country-specific, gestures. Native speakers have an ability to rapidly size up these valu-
able signals and their meaning. But, for someone trying to interact well in a different
culture, or doing business cross-culturally, it is much tougher. One recent study videotaped
a series of real and fake gestures and then asked a group of non-native students in the
U.S. to rate their meaning. The results showed that an accuracy in judging the gestures
was positively associated with length of stay within the U.S. and with ratings of inter-
cultural competence provided by observers and friends. The latter result shows that those
who can accurately read gestures are seen as more culturally aware and able to decipher
communication nuances in a more sophisticated way.70
Emotions and Touch
Closely related to interpersonal space and gestures are the emotions that people express
or project across their interpersonal space. Interestingly, behavior (such as emotion shown
through facial expressions) can be a common communication method across cultures.
Research shows that facial expressions of anger, happiness, and sadness can be recognized
reasonably well across cultures.71 On the other hand, studies also show that our accuracy
in figuring out the various emotions gets worse as the cultures become more dissimilar.72
There may even be the equivalent of nonverbal “accents” among cultural groups. Just
as linguistic accents (e.g., pronunciations) can provide clues about someone’s ethnic or
country origin, various features of nonverbal behavior such as emotions can be clues to
those same origins. For instances, one study demonstrated that when Japanese Americans
and Japanese nationals expressed emotions in photos, observers were able to detect these
subtle cues and more accurately identify the person’s culture (American or Japanese).
When Australians and Americans were photographed showing happy expressions, and
when videoed while walking or waving a greeting, observers were also able to correctly
peg their respective nationalities.73
These studies suggest that we might observe subtle traces of nonverbal accents that
can point others to features about us. Consider some key values that Thais learn early
in their childhood. There is sam ruam, which reflects a need to be moderate and neutral
in one’s emotions and to strongly avoid a demonstration of anger. Likewise, Thais are
also taught kreng jai, the need to refrain from offering opinions that could offend out
of respect for others. Outward expressions of emotions are viewed as inappropriate and
crude. So, for example, the use of a more Western “in your face” method of negotiation
is not well received by a typical Thai, although you’d have to watch closely for the
cultural “accent.” Likewise, a Thai would likely not tell you to take off your shoes as
you enter their house nor express angst, even though it might be important to them.
That would be impolite. Instead, you’ll get respect, even if it’s not deserved.74
Likewise, the extent of the use (or misuse) of touch is called haptics and can be a
communication tool. In general, Americans tend not to use touch all that much, except
237
with people with whom they are very familiar or intimate. Touching in some cultures,
however, is a natural and expected part of social interaction and communication. One
interesting study looked at differences in touching by observing people as they sat in
outdoor cafés in four different countries. During a one-hour timed period, there were
180 touches in San Juan, Puerto Rico, 110 in Paris, 1 in Gainesville, Florida, and none
in London.75 Another study showed that Americans had two to three times greater
physical contact with their parents and about two times the amount of contact with
friends than do the Japanese.76
Arabs tend to use a lot of touching, eye contact, and other nonverbal behavior.
The British, however, are the opposite in their nonverbal style, generally avoiding
touch and prolonged eye contact. After interacting with each other, many Arabs might
feel that the British are aloof and distant, while many British might wonder why
Arabs are so interpersonally aggressive and invasive. But, can this be overcome by
preparing before one goes overseas? This was the basis for a study that examined the
effect of nonverbal training on impressions of people from other cultures. A group
of Britons were trained to perform nonverbal behaviors appropriate to Arab culture
(such as extensive touching, closer distance, etc.). Next, this group and a control
group that did not receive training interacted with Arabs. Later, the Arabs expressed
more liking for the Britons who had received the training than those who had not.77
This study underscores that nonverbal communications do differ across cultures and
can have an impact on relationships but that training can help mitigate unintended
effects on partners.
Vocal Qualities as Nonverbal Communication
Vocal qualities such as speed of speech and the loudness of your voice can also project
an image and add credibility to a message. This topic has been the subject of a consid-
erable amount of cross-cultural research. One study compared the impression conveyed
by a message that was delivered either quickly or slowly, even though the message
content was the same. This was done by having Korean and American participants watch
a videotaped speech about the perils of smoking. Although the content of the informa-
tion presented was always identical, the presentation was varied so that the message
was delivered at either a slow, normal, or fast speech rate using a technology that retained
natural sound.78
After listening to the message, the Koreans and Americans rated the speaker and
the speech on a number of characteristics. Americans thought that a relatively fast voice
conveyed power and competence. For the Korean subjects, however, a slow delivery was
more effective in increasing the credibility of the speaker. One explanation for this dif-
ference is that Koreans live in a more collective culture and, as a result, are more con-
cerned with measuring their words carefully so as not to offend others.79 Likewise,
Egyptians and many Middle Eastern/Arabic countries use phrases that reflect a more
colorful and emotional stance toward others (e.g., “my most esteemed colleague,” or
“my honored guest”). These emotional and complimentary communication patterns are
reflective of a value placed on creating a sense of warm friendship and personal relations
238
among business partners. In the Muslim faith, readings of the Koran aloud in mosques
reflects great oratory skill and is considered a profound occasion. Likewise, the public
“cry” for prayer in this faith, not seen in some other faiths, is another example of
emotionally laden communications.80
Context
Our discussion of non-verbal behavior so far reminds us that how something is

communicated carries importance above and beyond what is being said at times. Yet,
while nonverbal behavior can provide “background” for understanding them, an
even more subtle form of communication is that due to context. Almost all of our
interactions occur within some kind of context. For instance, an identical statement
could mean dramatically different things, depending, of course, on the context. Many
of us know this intuitively but others, such as those quoted “out of context,” have
learned firsthand the value of proper context. So, you could say that the need for
context is relatively universal. Nevertheless, many experts claim that some cultures
are more or less reliant on context in their communications and other interactions
with others.
Figure 6.8 shows how some cultures and countries differ in the general reliance on
context. In low-context cultures, such as in the United States or Australia, our interpre-
tation of people’s behavior importantly depends on what is actually said or written.
These messages are often precise, with the words themselves carrying most of the real
message. If you did business in such cultures, it would be common for communications
to be explicitly stated, discussed, and mutually agreed upon and written down before
any deal could go forward.
Culture/Country Example Degree of Context
Chinese HIGH
Korean ● What is unsaid but understood carries more
Japanese weight than written/verbal.
French ● Relies on trust for agreement.
Arab ● Personal relations add to business.
Greek
Spanish
Italian
English
LOW
American ● A focus of specifics of what is written or said.
Scandinavian ● Handshake is insufficient.
German ● Trust secured with legal agreement; personal
Swiss relations can detract from business.
Figure 6.8 Comparing High- and Low-Context Cultures.

Source: Adapted from Hall, E. T. (1976). Beyond Culture. Garden City, NY: Anchor Press.
239
High-context cultures often approach a business event very differently. The context
itself often provides people with information that can be used to interpret what might
otherwise be an ambiguous message. Put plainly, people may not require or expect much
detailed, explicit information. Instead, verbal or written information can take a back
seat to what is generally understood via the context. Consequently, high-context cultures
tend to be concerned with long-term relationships, a person’s word or reputation, and
establishing trust over time. High-context cultures, such as Japan, prefer face-to-face
communication because this mode allows for more subtlety than the written messages
preferred by low-context cultures.
The Japanese and similar cultures tend to worry that spelling everything out would
be a condescending putdown. Of course, the flip side is that Japanese sometimes say
that Americans do not want to take the time to understand their business environment
and are overly focused on the short term. If the Japanese understood the low-context
culture embraced by many Americans, they would know that Americans’ insistence on
detailed contracts is a business necessity rather than an indicator of a lack of trust.
Those documents allow for a permanent and explicit record of a message. This rational,
fact-based style contrasts with the more indirect, intuitive style that is valued in high-
context cultures. As an example, consider the well-crafted ad by the Nice Company, a
Chinese detergent producer. China is a high-context culture. The company’s understand-
ing of the Chinese consumer showed in an ad which depicted a young girl helping her
mother, who had just been laid off, do the laundry. It strongly connected with the Chinese
concept of dongshi, which is the appreciation of family and societal responsibilities, and
it sought after the aspect of parenthood in China.81
Researchers argue that differences in context may explain common cross-cultural
problems that arise in international business. For example, a German manager working
for a French company was terminated within a year because his performance fell short
of expectations. The German was shocked, especially because “nobody told me what
they wanted me to do.” A French employee who resigned from a German company had
the opposite experience. The French employee became fed up with being constantly told
what to do by his German boss. He felt both his pride and his intelligence were threat-
ened. Both examples are failures due to context. The French tend to be high context and
typically would expect the German employee to pick up on a message or requirement.
The low-context German employee, in contrast, would expect intervention and explicit
direction by the French manager. Unfortunately, that intervention came way too late.82
This interesting difference in expected verbal input carries across cultures and also
exemplifies the notion of context. Research found that people who were extremely verbal
were perceived as more attractive by Americans (low context), but those who were less
verbal were seen as more attractive by Koreans (high context).83 At the same time, it is
not wise to “beat around the bush” in those low-context cultures. While being more
verbal is desirable, low-context communication will be more effective if concrete, specific,
and logical statements are made. It is rare to see a message that is simultaneously trans-
lated well to both cultures. One writer, however, described a sign that he saw in Switzerland
that was presented in three languages—German, English, and French. The words were
modified to reflect the varying context of these three countries. In German, the sign read
“Walking on the grass is forbidden”—a direct, unambiguous message for this low-context
240
Communication Feature Degree of Context
Low High
General approach direct/explicit indirect/complex

Degree of precision literal/exact approximate/relative
Dependence on words high low
Nonverbal dependence low high
View of silence negative; poor/no positive; good
communication communication
Attention to details high low
Value placed on intentions low high
Figure 6.9 Characteristics of Communication in Low- and High-Context Cultures.

Source: Adapted from Victor, D. A. (1992). International Business Communication, 153. New York: Harper Collins.
country. The English version read “Please do not walk on the grass”—a message leavened
a bit from the German to reflect the somewhat higher context. Finally, the French version
read “Those who respect the environment will avoid walking on the grass”—a much
higher-context message reflective of that cultural tendency in France.84 Figure 6.9 presents
more communication characteristics of high- and low-context cultures
Chapter Summary
This chapter discussed the pivotal topic of communication across cultures. Communication
comes in many different forms, yet managers sometimes mistakenly assume that is interpreted
the same everywhere, actual language differences aside. The single most important way
that we communicate is through the spoken word. Some countries, such as the U.S., are
largely monolingual and thus foreign-language skills rank among the weakest in the world.
Yet, some U.S. firms feel that these “deficits” are not a big problem because English tends
to be the de facto language of world business. Native English speakers, however, still run
the risk of communication problems across borders and cultures.
Differences are also apparent in written communication styles. Americans tend to keep
their letters and memos informal, short, and “to the point,” generally avoiding flowery or
exaggerated language. Other cultures have written communication norms that require back-
ground information and other social customs. Even if you understand the communication
style of an international business colleague, you could still experience bypassing—a miscom-
munication that occurs when the same words are defined differently. Nonverbal communica-
tion is the transmission of messages without the use of words or writing and can help people
better interpret what is being said, but is hardly foolproof. Overall, global firms are getting
savvier about their communication processes, especially those who use training.
241
1. Explain why both spoken and written communication presents many challenges to cross-
cultural communications.
2. How might various dimensions of culture (e.g., collectivism, power distance, and uncertainty
avoidance) affect the types of communication discussed in this chapter?
3. How would a country’s position on the context dimension affect its communication pat-
terns? Have you seen differences among your international peers at your university?
Advances in Intercultural Communication—the Low-Tech Way

At the beginning of this chapter we described challenges facing Greg Caltabiano, a newly
hired chief executive of a small, privately held, California-based telecommunications firm. It
appeared as though, at the minimum, his U.S.-based engineers needed a better understanding
of the firm’s Asian customers, because Asia was the location of the majority of their sales.
For their part, the engineers felt that they were being given confusing, and sometimes
conflicting, messages from customers, as well as feedback that came late in the design process.
Overall, this important communication left something to be desired, at least from a cross-
cultural communication standpoint. Mr. Caltabiano’s experience fit the position requirements
well and it was hoped that his 14 years in Japan and China working for another telecom firm
and his understanding of cross-culture communications would greatly benefit the firm.85
Mr. Caltabiano spent the next two years building communication bridges between his
Teknovus employees and their customers and staff overseas. One of his first actions was to
start sending employees on short visits to Asia so they might better understand, on a first-
hand basis, the cross-cultural challenges faced at home. Over a relatively short period of time,
70 of the firm’s 95 engineers traveled and met customers and others with whom they only
previously communicated with via long-distance. In turn, Teknovus’s new hires overseas are
required to visit the U.S. Both sets of employees say that this increased contact has resulted
in much greater responsiveness to customer needs—something that is overlooked too often
in even domestic engineering firms. The effects seemed to have taken root. In just three
years, sales more than doubled to $50 million. New market shares in China and the addition
of Japanese customers now included in their product-planning are very positive signs.
Experts such as Professor Mary Brannen, a professor at the prestigious INSEAD business
school in France, applaud these and related efforts. “International operations are often plagued
by mistrust and frustration . . . [In order] to build mutual understanding, employees must
learn about different customers and the reasons for those differences,” says Professor Brannen.
It was not uncommon several years ago for Teknovus’s customers to interact mostly with
sales managers assigned to their region, and only occasionally to problem-solve with their
242
engineers. Yet, because of the nature of the product application (fiber-optic communication
networks), it was necessary for the Asian telecom staff and the local carriers that operate
the networks to seek help from Teknovus’s engineers. Previously, when overseas customers
requested new features or bells and whistles, Teknovus engineers sometimes resisted when,
say, a Japanese customer wanted detailed reports for problems that they encountered.
Mr. Caltabiano attacked communication problems by first elevating the status of the
foreign offices. He eliminated the U.S.-based sales director and instead had the country direc-
tors report to him. Likewise, he had U.S. employees become liaisons that represent overseas
offices at meetings and more, and their role was to defend their interests—even to skeptical
colleagues. Recently, when the engineers became frustrated because of so many changes to
technical specs by Teknovus’s Korean office, the liaison was able to soothe concerns by
showing this was a big customer and capable of being even bigger. Employees were also
urged to phone their counterparts, rather than only e-mail them, in hopes of improving
communication. This helped the engineers learn, among other things, that Japanese customers
want detailed reports for problems because they in turn are often asked by their partner
companies to explain those issues. “It’s not torture . . . it’s how they do it,” said a Teknovus
employee. The overseas visits continue to pay dividends and are in part what has led those
Japanese firms to include Teknovus early in their (sensitive) development plans. Headquarters
engineers now visit the Japanese office monthly to demo new products and to network. As
the General Manager in Japan said, “until now, I’d mostly felt that I was explaining the local
market” to the California-based engineers. “Now, each person experiences it for themselves.”
So, apparently, good old-fashioned face-to-face communication and attention to customers
still works these high-tech dominated days.
In a recent Wall Street Journal article, Mr. Caltabiano offered some communication tips
to others trying to bridge the overseas divide:86
• Try to go beyond what is actually said—the words—to a larger meaning.
• When you are experiencing a lot of conflict, look for communication problems first as the source.
• Encourage more direct interaction between U.S. employees and foreign-based employees
and customers; make sure that voices are heard at headquarters.
• Assign someone to monitor and improve international communications.
Moshi, Moshi : Overcoming Cultural Barriers to Communication

Purpose
To understand how culture can impact verbal communication in a telephone conversation

and to suggest alternative ways to conduct telephone conversations effectively in a given
cross-cultural context.
243
Instructions
Read the following telephone transcript. John Smith, an American marketing manager from
Weyerhaeuser, is trying to speak with his Japanese counterpart at Rising Sun Company, a
Mr. Yamamoto, about a possible business deal.
The conversation
The phone rings and a woman answers.
Woman: Moshi, moshi [“Hello, Hello”].

Smith: Hello, this is John Smith. May I please speak with Mr. Yamamoto?
Woman: Oh, I’m sorry. Who is calling, please?
Smith: This is John Smith calling for Mr. Yamamoto.
Woman: I’m sorry, what is the name of your company?
Smith: I’m calling from Weyerhaeuser.
Woman: I’m sorry, could you spell that, please?
Smith: W-E . . .
Woman: I’m sorry, “W-Z”?
Smith: No, W-E-Y-E-R-H-A-E-U-S-E-R. Is Mr. Yamamoto there?
Woman: Oh, Weyerhaeuser. Thank you very much. Your name please?
Smith: John Smith.
Woman: And who do you wish to speak to?
Smith: As I said, Mr. Yamamoto.
Woman: I’m sorry, which department? We have many Yamamotos.
Smith: Uh . . . of course. Mr. Yamamoto in the international marketing department.
Woman: Thank you very much, wait just a minute please.
(Smith is put on hold. Music plays in the background. Meanwhile, a phone rings in a
big room where many employees are working at their desks. Someone passing by picks up
the phone.)
Man: Moshi, moshi.

Smith: Hello, Mr. Yamamoto?
Man: Oh no, this is Suzuki. Who is calling, please?
Smith: This is John Smith calling for Mr. Yamamoto.
Man: I’m sorry, what is the name of your company?
Smith: Weyerhaeuser.
Man: Could you spell that, please?
Smith: W-E-Y-E-R-H-A-E-U-S-E-R.
Man: Thank you very much. Just a minute please.
(On hold again. Music plays).
Man: I’m very sorry, but Mr. Yamamoto is in a meeting. Could you call again later?
(Intensely frustrated, Smith hangs up the phone after “wasting” an international call.)
Your instructor will divide the class into small groups of three to six to answer the following
questions (15–20 minutes). Your group can present its answers, followed by a general class
244
discussion about international communication and its implications (30 minutes). Alternatively,
your instructor may lead a general class discussion about the following questions:
• Why is Smith so frustrated? Would you be in this situation? What cultural factors explain
Smith’s reaction (and perhaps yours)?
• What mistakes did Smith make, in your opinion? Why? How do Japanese culture and
business practices fit in here?
• How would you recommend that Smith approach the call if he had to do it all over again?
What specific advice would you offer? Why?
• What if the cultural context was different? For instance, what if Mr. Smith was trying to reach
a counterpart in Cairo? How might that shape Mr. Smith’s approach to the conversation?
Source: Elashmawi, F., and Harris, P. H. (1993). Multicultural Management: New Skills for Global Success,
108–111. Houston: Gulf. Reprinted by permission.
We Have Ways of Making You Talk: Researching a Foreign Language

Purpose
To examine a few basic elements of a language with which you are not familiar and to
appreciate a few of the problems that foreign nationals might have as they take their basic
language tools and apply those to English.
Instructions
Step 1
Select a language with which you are not at all familiar. Research some basics about this
language and prepare a few statements and greetings from the language to present to class
(more detail on this is provided below). Your instructor might want to assign individual
students or groups to various languages in order to make sure that several different ones
are covered and to make sure that the groups have no familiarity with the language basics.
Either way, we recommend looking at the following website that provides briefings on many
different languages spoken throughout the world: http://123world.com/languages/index.html.
It is unlikely, for example, that many students (or professors!) are very familiar with languages
such as Afrikaans, Arabic, Dutch, Farsi, Hindi, Japanese, Russian, Swahili, Turkish, or many
others, and this site will provide many such choices.
Step 2
Once you have chosen a language, you should begin to gather information that will give
you a bit of insight into some basic features of the language and those speaking it. In
245
particular, we recommend that you discover the following (with possible supplements provided
by your instructor):
• Where is the language spoken as the primary one, and how many people speak it? Where
else has it been adopted (if at all)?
• What are the origins of the language and how is it related to others and other families of
language?
• What is unique or specific to the language (e.g., its grammar, syntax, accent marks, etc.)?
• Present several basic phrases in that language to the class/in your report. If the report is
given verbally, you should try to pronounce those phrases or use some of the sources below
to present the phrases to the class (several sites offer .wav files that most any class computer
could read so that the phase could be heard in a native tongue).
• What types of challenges might native speakers of this language face when communicating
to English speakers? That is, what are some transfer issues if they tried to speak in English
(e.g., their tones, accents, sounds that are wildly different) and if their communication was
translated into English by others?
• Do you have any recommendations for communication training or a possible set of guidelines
or advice to give speakers of this language?
Step 3
Once you have chosen a language and considered the questions from Step 2, you can begin
your research. There are several good sources to begin your work on this assignment, using
the following suggestions as a starting point.
Resources
• The Linguist List (http://linguistlist.org/sp/Dict.html): this super site, run by Eastern Michigan
and Wayne State Universities, presents an amazing number of bilingual and multilingual
dictionaries and translation tools. Some of the nearly 200 such dictionaries offer complete
translation of phrases that you enter in English.
• The Linguist List Subpage (http://linguistlist.org/sp/LangAnalysis.html#25): this page is

also part of The Linguist List, but it could be missed in all the wealth of information provided
on the site. Presented here are a large number of links to language families and many
language meta-sites. Some of these will be helpful for the background research required in
this assignment.
• Other sources for your research:
º http://globaledge.msu.edu/global-resources/language-resources
º www.ethnologue.com
º http://www.ilovelanguages.com/index.php?category=Languages
º http://babel.uoregon.edu/.
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Notes
1. Dvorak, P. (2009). Frequent contact helps bridge interaction divide. Chip-designer Teknovus
improves Asian ties by raising status of overseas offices, encouraging staff visits. The Wall Street
Journal, June 1, B4.
2. Adair, C. (2000). Don’t get into cultural hot water. The Toronto Star, August 9, G6.
3. Damerow, R., and Bailey, K. M. (2011). The language of business. BizEd, September/October,
70–71; Jandt, F. E. (2001). Intercultural Communication: An Introduction. Thousand Oaks,
CA: Sage.
4. Adair, Don’t get into cultural hot water.
5. The Economist. (1999). Chinese whispers, January 30, 77–79.
6. Graddol, D. (2000). The future of English. A guide to forecasting the population of the English
language in the 21st century. The British Council: The English Company (UK), Ltd, available
at: www.britishcouncil.org/learning-elt-future.pdf (retrieved January 29, 2013). Note that these
data are a decade old and that there are disagreements about these numbers. For example, the
National Language Commission of China itself questioned these numbers. They estimated that
only 53 percent of China could speak Mandarin, and even many of those people actually prefer
to speak a more familiar Chinese language. See Taipei Times (2005). Half of all Chinese people
cannot speak Mandarin: Report, May 23.
7. U.S. Census Bureau. (2007). Factfinder, available at: http://factfinder.census.gov; The
Economist. (2006). They all speak English: As bilingualism becomes the norm worldwide, the
future of English has moved. December 13, 4–6; U.S. Government. (2009). Americans breaking
out of their English-only shells: Better resources, opportunities encourage U.S. foreign language
students, available at: www.america.gov/st/washfile-english/2006/March/20060302142421aje
srom0.4190485.html#ixzz0JBQD0RQn&C.
8. The Economist. (2006). God’s worst linguists. If the world is learning English, why on earth
should the British learn the world’s languages? December 13, 1–3; The Economist, They all
speak English; Dulek, R. E., Fielden, J. S., and Hill, J. S. (1991). International communication:
An executive primer. Business Horizons, 34, 20–25.
9. Anon. (2004). 1.4 million students studying foreign language. MLA Newsletter, Winter–
Spring; Commission on the Abraham Lincoln Study Abroad Fellowship Program (2005) Global
Competence and National Needs: One Million Americans Studying Abroad. Washington, DC:
Lincoln Commission.
10. Graddol, D. (2008). English Next: Why Global English May Mean the End of English as a
Foreign Language. London: British Council, available at: www.britishcouncil.org; Financial
Times. (2001). Multilingual website widens the way to a new online world, February 7, 1;
Miniwatts Marketing Group. (2011). Internet world users by language. Internet world sta-
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2013).
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also: Charles, M. (2007). Language matters in global communication. Journal of Business
247
18. Matsutani, M. (2010). Rakuten to hold all formal internal meetings in English. The Japan
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to ceremony: The Japanese are having to learn to be more rude and are using English to help
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251
Case 2: Chiba International, Inc.

Ken Morikawa, the general manager for distribution, the characteristics of the
administration of a Japanese manufac- local workforce, their “Japanese” work
turing plant under construction in rural ethic, had been one of the primary rea-
Georgia, was troubled. This morning his sons for establishing the plant here. He
American personnel manager, John believed that the training costs involved
Sinclair, had walked eagerly across the in transforming very “green” workers
temporary open-plan office and were well worth it, to avoid people who
announced: “I’ve found a professor of had picked up “bad habits” or had had
Japanese at Georgia State University their morale lowered in previous indus-
who is willing to help translate our cor- trial jobs. In Japan, teaching company
porate philosophy. I would like to hire philosophy is an important part of the
him for the job.” company’s introductory training pro-
Ken felt pressured. He thought that gram. But will it work here?
John Sinclair, like many Americans, was Ken wondered if his new adminis-
expecting too much of Japanese compa- trative duties were lowering his concern
nies. The company philosophy that he, for personnel matters. Ever since he had
Ken, had learned to live by in Tokyo had to read Alfred Sloan’s My Years with
would continue to guide him, but he did General Motors during the company
not feel that Americans would welcome training program and had written a
or even understand a Japanese company review that focused on human resource
philosophy. issues, he had held positions related to
Ken had a very large task to do in his field. Even though he had majored
supervising the building of a plant that in mathematical economics in college,
might ultimately provide jobs for up to his first assignment had been in the per-
2,000 employees in an area where very sonnel “design center,” which controlled
few workers had had any industrial training and salary administration for
experience. He wished to show that his white-collar employees. After two years
was a company that cared about the he was sent to a district office as a sales-
welfare of its workers and their job secu- man. He returned after 13 months to
rity, and could be trusted to treat them the employee welfare section of the per-
fairly and not lay them off. He believed sonnel department at the head office,
that such a philosophy, if it could be administering such programs as house
properly explained to workers and care- loans and recreational activities. Eight
fully implemented, would help to build years with the company had passed by
high morale among the employees and the time he was sent to an American
consequently improve productivity. college to study personnel-related sub-
Ken also wanted to ensure that high jects and improve his English.
morale be maintained as the workforce After receiving his MBA he returned
expanded to full capacity. Indeed, aside to the head office. His most recent
from issues of ease of transportation and assignment before coming to Georgia
252
I N T E G R A T I V E C A S E 2 : C H I B A I N T E R N A T I O N A L , I N C .
was in personnel development research, tion to integrating the employees into the
planning new wage systems. It was company. He answered comfortingly,
expected that in his new job in Georgia “Ken, I know you hate conflict. But I
he would eventually hand the reins over also know that you think it important to
to an American general manager and gather information. One of our purchas-
remain only in an advisory capacity. ing agents, Billy, told me about a Japanese
However, he felt that it was at this vital company that he recently visited, Chiba
stage that the corporation depended on International. Apparently, they already
his human relations expertise to set the have a fully developed company philoso-
scene for future success. Was he neglect- phy and I understand that they are doing
ing an area in which he had been trained very well with it. Why don’t we go out
to be sensitive? to California and talk with their manage-
He brought the subject up at lunch ment and try and understand how and
with John Sinclair. “Let me tell you why they concentrated on communicating
something, John. I have a hunch why their philosophy?”
the Japanese are more successful in “And soak up some sun, too,”
achieving high quality and productivity beamed Ken. “You’re on!”
than Americans have been recently. It
has to do with application, rather than
The Company
ideas. Many great ideas have come from
the United States, but the Japanese con- Chiba International Inc. in San Jose,
centrate on applying them very carefully. California, makes high-precision,
Americans emphasize creating some- sophisticated electronics parts used in
thing new and then moving on. The the final assembly of customized and
Japanese meticulously analyze a problem semi-customized integrated circuits—
from all angles and see how a solution particularly the expensive memory chips
might be implemented. used in computers and military hard-
“As they say, Rome wasn’t built in ware. In such products, reliability is
a day. I’m not sure our American work- everything, price a lesser consideration.
ers will understand what it really means The similar but cheaper parts that man-
to have a company philosophy. Let’s take ufacturers use once a product reaches a
is slowly and see what kind of people high volume are left for others to make.
we hire and then see what best meets Chiba International is a subsidiary
their needs.” of Chiba Electronics Company. Nihon
John, who had worked at a rather Keizai Shimbun, Japan’s preeminent
traditional U.S. company for 11 years and business paper, recently ranked Chiba
had become increasingly interested in Electronics as one of the foremost com-
how Japanese companies managed their panies in Japan on the basis of its
U.S. employees, had been eager to join a management earnings stability and per-
Japanese company. He wanted to see in formance, ahead of such better-known
action such “Japanese” strategies as long- giants as Sony, Matsushita Electric, and
term employment, the expression of a Toyota Motor. Chiba Electronics Co. has
company philosophy, and careful atten- 70 percent of the world market for its
253
products. Chiba International likewise “What about when you acquire a

has a 70 percent share of the U.S. market. company as you have done over the past
Chiba International started in the few years?” asked John.
United States 12 years ago, with a small “The same thing. It’s very gradual.
sales office. A manufacturing plant that If we force it, it causes nothing but indi-
had been losing $100,000–200,000 a gestion. Here it has been easy, the work
month was acquired from an American is very labor intensive, repetitive, tedious
competitor. The American management assembly. In other places the soil is dif-
was terminated, and a team of Japanese ferent. At one, for example, almost all
headed by a Canadian-born Japanese- the employees are exempts. They under-
reared executive succeeded in turning it stand the philosophy but won’t neces-
around within two years. sarily go by it. Engineers and technical
Today 14 out of the 24 top execu- people also seem to be less receptive than
tives and 65 out of 70 salesmen at Chiba people in sales, personnel, and adminis-
are Americans. All of the employees in tration. In other sites, though, where the
other categories are also American. technology is more similar to this, we
have had no problem at all.”
One of the other managers present
Chiba’s Philosophy in the group, this one American, inter-
As the sun rises brilliantly in the sky, rupted to show Ken and John a copy of
Revealing the size of the mountain, the the leaflet. It was quite rhetorical in tone,
market,
Oh this is our goal.
but a few paragraphs struck them as
With the highest degree of mission in particularly interesting.
our heart
we serve our industry,
Management Philosophy
Meeting the strictest degree of customer
Our goal is to strive toward both the
requirement.
material and spiritual fulfillment of all
We are the leader in this industry and our
employees in the Company, and through
future path
this successful fulfillment, serve man-
Is ever so bright and satisfying.
kind in its progress and prosperity.
“That’s a translation of our company

song,” said a high-ranking Japanese exec- Management Policy
Our purpose is to fully satisfy the needs
utive, one of the group of Japanese and
of our customers and in return gain a
American managers who had agreed to just profit for ourselves. We are a fam-
meet with Ken and John. “But we haven’t ily united in common bonds and singu-
introduced it to our employees yet. That’s lar goals. One of these bonds is the
typical of the way we brought the company respect and support we feel for our fel-
philosophy to our employees—slowly and low family co-workers.
carefully. Every line worker gets a leaflet
explaining our company philosophy when Also, the following exhortation:
he or she starts work. We don’t have a
When there is a need, we all rally to
specific training session on it and we don’t meet it and consider no task too menial
force them to swallow it. It’s up to them or demeaning; all that matters is that it
to digest and understand it.” should be done! We are all ready to
254
sweep floors, sort parts, take inventory, annual company bonus, which is based on
clean machines, inspect parts, load profitability and usually equals about one
trucks, carry boxes, wash windows, file
month’s salary or wages.”
papers, run furnaces, and do just about
anything that has to be done. Another Japanese manager contin-
ued, “Years ago, there were complaints
about having so many meetings, but I
Meetings
haven’t heard any for a long time now.
“Daily meetings at the beginning of each The employees like to hear important
shift are held in the courtyard,” explained announcements and even less important
the group. “All the workers stand in ones, such as who is selling theater tick-
lines (indicated by metal dots in the ets, bowling league reports, and tennis
asphalt). Each day, a different member match dates.”
of management speaks for about five The American personnel manager
minutes. On Mondays, executives speak, chimed in: “I was the one who came up
on Tuesday, personnel and administra- with the idea of exercises. I saw it on
tion are represented, Wednesdays are my visit to Japan. They are just a part
about safety concerns, and on Thursdays of the rituals and symbols that you need
and Fridays, members of production and in order to get better mutual understand-
sales speak. They all are free to say what- ing. The atmosphere was right and the
ever they like. The shift workers tend to timing was good. Even so, because they
develop favorites, especially among the weren’t mandatory, it took about one-
more extroverted sales managers. and-a-half years until everyone joined
“Then a personnel coordinator in. Now most people understand the
delivers news about sports events and so meaning behind it. If we were to stop it
on, and perhaps a motivational message, now, we’d get complaints.”
and goes on to lead the group in exercises “Besides the morning meeting, we
for one minute. These calisthenics are have several other meetings. On
voluntary, but most of the employees Mondays, we have a very large liaison
join in. After that, the large group breaks meeting for information sharing. All the
up for brief departmental meetings.” executives attend: sales managers and
“Again, in the departmental meet- staff managers, the plant manager and
ings, a speaker is chosen for the day the assistant plant manager. On Tuesdays,
and speaks for about five minutes. Even we have a production meeting attended
people at the lowest exempt level find by the production managers and any
themselves speaking. Then the depart- staff involved with their problems. On
ment manager discusses yesterday’s per- Monday at four o’clock every second
formance, today’s schedule, and any week we have a supervisors’ meeting,
other messages, such as that housekeep- mainly for one-way communication to
ing is inadequate or that certain raw them. On the alternating weeks we have
materials are in short supply.” a training meeting. The whole personnel
“Once a month, there is an announce- department also meets every week.”
ment of total company performance versus “Less formally, we have many sales
plans. This is important, as all company meetings about, for example, new
employees share at the same rate in the products. We have combination sales
255
and production meetings, which are customer. You must have energy because
called on an as needed basis. Team meet- at the end of the day it’s always the case
ings on the production line are also that you could have done one more thing
called whenever needed.” or made one more sales call. Finally, the
“All these formal meetings are sup- mentality of serving the customer is the
plemented by many company-sponsored most important.”
activities. We have a company bowling “We communicate that to our sales
league, tennis matches, softball, fishing, force and they like it, especially when
and skiing. We often organize discount they don’t have to tell white lies to cus-
tickets. We’re planning the Christmas tomers or put up with harassment from
party. Each employee can bring a guest, customers. We also want them to be hon-
so it costs us about $40,000. Our com- est with us, even about their mistakes.
pany picnic costs $29,000.” Quite often we depend on the salesmen’s
“It sounds very well worked out for input for our understanding of customers,
the nonexempts,” commented John. so an objective daily report by telex or
“How about for the exempts?” phone is very important to us.
“No one in our company works on
a commission basis, not even salesmen.
Sales Force We would lose market share for products
They started with the largely American that are difficult to promote. Also, the
sales force. nature of different sales territories would
“They’re a very different species. make commissions unfair.
They have tremendous professional “We don’t really have a marketing
pride. Most of the American sales engi- department. We feel that it is an expen-
neers have a very arrogant take-it-or- sive luxury, and, while we have a vice-
leave-it attitude. Our attitude is almost president in charge of marketing, his is
the complete opposite. We try to serve almost a corporate sales staff function.”
our customer’s needs, almost like a gei-
sha girl, who makes her customer feel
U.S. Management
that he is the only one served by her.
“We try to communicate the follow- John was curious about how American
ing motto to them: line managers reacted to working in a
Japanese company.
S incerity A Japanese manager explained:
A bility “When Americans join us, they expect
L ove the usual great deal of internal politick-
E nergy ing. They scan people in meetings, look-
S ervice ing for those with real power, looking,
to use our expression, for whose apple
“Sincerity is the basic attitude you need he should polish. It takes time for them
to have, as well as the ability to convince to realize that it’s unnecessary.”
the customer. You must love the products “When we interview American exec-
that you sell or you can’t convince the utives for a job, we do it collectively, so
256
five to ten interviewers are present. This think about the future of the company.
usually puzzles the interviewee. He won- So long as I have challenging assignments
ders whom he will report to. We reply and job opportunities, I will put the com-
that he will be hired by the company, pany before my personal happiness.”
although he may report to one individ- “What do American interviewees
ual. As in Japan, the company will take feel about all of this?” asked John.
care of him, so it does not depend on “One problem is that they ask,
his loyalty to one individual.” ‘What’s my real future? Can I be con-
“What about your company criteria sidered for President?’ There’s no real
for hiring managers?” asked John. answer because it probably will be a
“His way of thinking, not necessarily Japanese. However, we don’t like to close
his ability. Although a Harvard MBA is the doors to a really capable American.”
welcomed, it is not essential. In fact, no “The issue of communication
one here has one. We don’t provide an between Japanese and Americans is still
elegant fit to his social elite. There are no a problem. After the Americans go home,
private offices. Salary and benefits are up the Japanese get together at seven or
to par for the location (and industry) but eight o’clock and talk in Japanese about
not especially high. We work long hours.” problems and make decisions without
“We’re looking for devotion and the Americans present. Naturally this
dedication as well as an aggressive atti- makes the Americans feel very apprehen-
tude. We conduct two or three long inter- sive. We’re trying to rectify it by asking
views for an important position. We ask the Japanese managers not to make deci-
questions like, ‘What is your shortcom- sions alone and asking the Americans to
ing?’ We’re interested in not the answer stay as late as possible.”
itself but in the kind of thinking behind “More important, if we could really
it. We do make mistakes sometimes, but have our philosophy permeate the
our batting average is good.” American managers, we Japanese could
“Sometimes there’s a very deep com- all go back to Japan and not worry about
munication gap between Japanese man- it. Our mission is to expedite that day
agement and U.S. management because by education and training.”
we believe in dedication and devotion “So far, however, there is a gap.
to the company. They do, too, but only Americans are more interested in indi-
to a certain point. We often tell them vidual accomplishment, remuneration,
that the joy of working for the company and power. When they are given more
can be identical to personal happiness responsibility, they don’t feel its heavy
with the family. I ask my wife for her weight, rather they feel it extends their
understanding of that, and I work six sovereign area so that they have more
days a week from seven o’clock to ten of a whip. That creates power conflicts
o’clock. Their wives place demands on among U.S. managers.”
them to come home at six o’clock. U.S. “Let me tell you, though,” summa-
executives put personal and family hap- rized the American personnel manager,
piness first. I’m not telling you which is “I like it. I was recruited by a headhunter.
right. But it is second nature for me to Now, I’ve been with the company five
257
years and the difference from my former and raw materials for tomorrow. Only
employer is astounding. I don’t have to then does he count profits. That’s also
get out there and be two-faced, fudging why we don’t have a marketing depart-
to keep the union out, hedging for the ment. The successful peddler doesn’t
buck. In general, it’s hard to find an have time to examine opportunities in
American employer that really sincerely the next town.”
cares for the welfare of the low-level “This is the way a division manager
employee. This company went almost too has to operate. In order to maximize
far in the opposite direction at first. They output with minimum expenditure, every
wanted to do too much for the employees effort is made to keep track on a daily
too quickly, without their earning it. That basis of sales, returns, net shipment
way, you don’t get their respect.” costs, and expenses.”
Financial People Open Communication

“Our financial people throughout the “I understand all that you’ve said so
company are proud because of our far,” mused John, “but how exactly do
impressive company performance. Only you take all these abstract philosophical
20 percent of our financing is through ideas and make them real?”
debt, in contrast to many Japanese com- “Oh, open communication is the
panies. We also have a rather unique key. We have a fairly homogeneous
way of treating some of our raw materi- workforce. Most are intelligent, some
als internally. We try to expense every- are even college graduates. Most are also
thing out. It’s derived from our founder’s very stable types with dependents or
very conservative management. We ask elderly parents they send money to.”
the question: ‘If we closed down tomor- “We’re lucky, but of course it’s not
row what would our liquid assets be?’ as homogeneous as in Japan where
In line with that, for example, internally everyone has experienced one culture.
we put our inventory at zero.” So here, the philosophy has to be backed
“We follow the ‘noodle peddler up by a great deal of communication.”
theory.’ The noodle peddler is an entre- “We mentioned the meetings. We also
preneur. He has to borrow his cart, his have a suggestion box and we answer all
serving dishes, and his pan to make the suggestions in print in the company
ramen. He has to be a good marketer newspaper. Also, one person from person-
to know where to sell. He has to be a nel tours the plant all day, for all three
good purchasing director and not over- shifts, once a week, just chatting and get-
buy noodles, in case it rains. He could ting in touch with any potential problems
buy a fridge but he would need a lot as they arise. It’s kind of a secondary griev-
of capital, the taste of noodles would ance system. We’re not unionized and I
deteriorate, and he would need addi- guess we’d rather stay that way as it helps
tional manpower to keep an inventory us so much with flexibility and job changes
of the contents of the fridge. The suc- among our workforce.”
cessful noodle peddler puts dollars aside “In the fall, when work is slow, we
at the end of the day for depreciation have many kompas. You may not know
258
about this, John. A kompa is a small cut and he knows he wouldn’t be taken
gathering off-premises after work. Eight off his job if it weren’t important.”
to eighteen people participate and the “We don’t hire outside, if we can
company pays for their time and refresh- avoid it,” added the personnel manager.
ments. They’re rarely social, they have “Only if the skill is not available in-
an objective. For example, if two depart- house. The bulk of our training is on-
ments don’t get along and they need to the-job. We don’t utilize job postings.
work together, they might hold a kompa. We promote when a person’s skills are
A kompa can take place at all levels of ripe or when there is a need.”
the company. Those groups that do it “The job of a ‘lead’ or team leader
more frequently tend to move on from is the steppingstone to supervisor. It’s not
talking about production problems to a separate job status within our system,
more philosophical issues.” but the lead is given a few cents an hour
extra and wears a pink, not a yellow,
smock. The lead is carefully groomed for
Appraisal and Reward
his or her position, and although a lead
Systems might be demoted because a specific need
“It all sounds great,” sighed Ken, “just for them no longer existed, a lead would
as good as Japan. But tell me, how does rarely be demoted for lack of skills or
it tie in with wages and salaries, because leadership ability.”
people here are used to such different “Rewards are for service and perfor-
systems?” mance. Plant workers, unskilled and semi-
“Well, we don’t have lifetime skilled, are reviewed every six months.
employment, but we do have an explicit The lead completes the evaluation form
no-layoff commitment. We are respon- (see Exhibit C.1). This is checked or con-
sible for our employees. This means that firmed by the supervisor and the overall
employees also have to take responsibil- point score translates into cents per hour.
ity and have broad job categories so we There are two copies, one for the super-
don’t have to redo paperwork all the visor and one for the employee. Depending
time. We have tried to reduce the num- on the supervisor, some employees get a
ber of job classifications to the raw copy, some don’t.”
minimum, so we have two pay grades “The office clerical staff are all
covering 700 workers. At the higher lev- reviewed on April 1 and October 1. A
els, we have three pay grades for crafts- similar review form for managers is used
man and two for technicians.” to determine overall letter scores. All the
John ventured, “I guess an example scores are posted on a spreadsheet and
of your job flexibility in action is the compared across departments, through
mechanic you mentioned when we numerous meetings of managers and
toured the plant.” personnel people, until the scores are
“Yes, the person you spoke with was consistent with one another. Then the
a dry press mechanic. He’s doing menial scores are tied to dollars. Some manag-
labor this week, but his pay hasn’t been ers provide feedback, some don’t.”
259
EXHIBIT C.1 Evaluation Form.
Employee’s Name Clock No. Dept. Shift Over Last 6-Month Period
Days Number Number Work Days
Absent Tardies Early Exit Leave of
Absences
Employee’s Job Anniversary
Title
Rate on Factors Numerical Score
Below: L S M F
1. LOYALTY/ Faithful to the company
DEDICATION cause, ideals, philosophy,
& customers; a devoting or
setting aside for company
purposes.
2. SPIRIT/ ZEAL Amount of interest &
enthusiasm shown in work;
full of energy, animation, &
courage; eagerness & ardent
interest in the pursuit of
company goals.
3. A willingness & ability to
COOPERATION work with leaders & fellow
employees toward company
goals.
4. QUANTITY Volume of work regularly
OF WORK produced; speed &
consistency of output.
5. QUALITY OF Extent to which work
WORK produced meets quality
requirements of accuracy,
thoroughness, &
effectiveness.
6. JOB The fact or condition of
KNOWLEDGE knowing the job with
familiarity gained through
experience, association, &
training.
7. SAFETY The willingness & ability to
ATTITUDE perform work safely.
8. CREATIVENESS The ability to produce
through imaginative skill.
9. ATTENDANCE Includes all types of absence
(excused or unexcused), tardies,
early exits, leave of absences
from scheduled work.
260
10. LEADERSHIP The ability to provide

direction, guidance, &
training to others.
OVERALL EVALUATION OF EMPLOYEE
PERFORMANCE:
Supervisor’s Approval Personnel Dept. Approval
Do Not Write Below This Line — For Human Resource Department Use Only
Present Base New Base Rate Effective Date of Refer to instructions on the
Rate Increase back side of this paper.
“Exempt staff are reviewed on agers and supervisors get together and
April 1, and, as a separate process, the interview people.”
spreadsheet procedure just outlined is “The lack of available technically
carried out. At least two managers review trained people used to be a big problem,
any exempt employee, but feedback is but over the years we’ve developed the
usually minimal. The reason is that we expertise internally. Our productivity is
encourage feedback all year. If there are now almost as high as in Japan.”
no surprises for your subordinate at Ken and John asked what other
review time, then you’ve managed well.” aspects of the company they had not yet
“Agreements on reviews for exempt discussed. They were told that quality
personnel take place in many meetings and, hence, customer service was another
at various levels. The process is very central part of the philosophy.
thorough and exceptionally fair, and “Our founder, Mr. Amano, firmly
contributes to the levels of performance believes in zero defect theory. Doctor
we get.” Deming taught us the concept of quality
control. Unfortunately, many American
companies did not emphasize this.
Quality and Service
During World War II, the concept of
A question from John as to how Chiba acceptable quality level was developed
International was doing as a result of all in the United States. The idea was that
this elicited much pride. with mass production there will be some
“Turnover is two and a half percent defects. Rather than paying for more
a month, which is very satisfactory for inspectors on the production line, real
our kind of labor given a transient soci- problems, for example with cars, could
ety. We rarely have to advertise for new be identified by the consumer in the field
employees now. The community knows and repaired in the field.”
about us. But we do select carefully. The “We don’t allow that. We have 100
personnel department does the initial percent visual inspection of all our tiny
screening, and then the production man- parts. They only cost $50 per 1,000 units.
261
We inspect every finished package under Ken and John walked out into the
a microscope so we have 130 inspectors, parking lot. “Whew!” sighed John. “It’s
which is about one-sixth of our produc- more complicated than I had thought.”
tion staff.” “Oh, yes! You need a great deal of
“The company’s founder, Amano, has patience,” responded Ken paternally.
said to us, ‘We try to develop every item “So we’d better get started quickly,”
our customers want. Being latecomers, we enthused John. “Where shall we begin?
never say no, we never say we can’t.’ Older Perhaps I should call the translator.”
ceramic manufacturers would evaluate a
proposal on a cost basis and say no. Yet
Assignment Questions
we have been profitable from the start.”
As the interview drew to a close, 1. Can Japanese management practices
one Japanese manager reflected that Mr. work in the United States without
Suzuki has a saying: ability × philoso- adaptation? Why or why not? What
phy × zeal = performance. cultural values are relevant?
If the philosophy is negative, perfor- 2. How should Ken and John adapt
mance is negative because it’s a multi- Chiba’s California practices to their
plicative relationship. situation? What problems will they
“But in our company, which now run into (cultural and otherwise)?
numbers 2,000, we must also start to 3. What aspects of the Japanese
have different kinds of thinking. The approach used by Chiba are the most
Japanese sword is strong because it is interesting or unusual to you? Why?
made of all different kinds of steel
wrapped around one another. The
Chinese sword is also very strong, but, This case was written by Nina Hatvany and
Vladimir Pucik for class discussion only.
because it’s all one material, it’s vulner-
None of this material is to be quoted or
able to a certain kind of shock. We must reproduced without permission of the
bear that in mind so that we have dif- authors.
ferences within a shared philosophy.”
“We’re thinking of writing a book “Chiba International, Inc.” by V. Pucik &
on our philosophy, addressing such N. Hatvany. Copyright © 1998 by IMD—
International Institute for Management
issues as what loyalty is, by piecing
Development, Lausanne, Switzerland. All
together events and stories from our rights reserved. Not to be used or reproduced
company history. This would be a book without written permission directly from
that would assist us in training.” IMD, Lausanne, Switzerland.
262
part III
capitalizing on
international
opportunities
7 MANAGING CONFLICT AND CONDUCTING EFFECTIVE
NEGOTIATIONS 265
8 TAKING STOCK: DEVELOPING INTERNATIONAL STRATEGY 305
9 JUMPING IN: FOREIGN MARKET ENTRY AND

OWNERSHIP OPTIONS 347
chapter 7
managing conflict and
conducting effective
negotiations
A WORLD OF CONFLICT 268
THE ROLE OF “FACE” IN INTERCULTURAL CONFLICT 274
OTHER RESPONSES TO CONFLICT 277
UNDERSTANDING INTERNATIONAL NEGOTIATION 281

C A P I T A L I Z I N G O N O P P O R T U N I T Y
Learning Objectives
• identify several important causes of cross-cultural conflict;

• understand how other cultures commonly interpret and react to conflict;
• pinpoint some of the more effective methods of managing cross-cultural conflict, includ-
ing the critical role played by effective negotiations;
• identify the four stages of international negotiation and appreciate how cultural values
impact the progress through each stage.
Two Sides of a Common Border: Negotiations between Mexicans and Americans

Two companies, a Swedish firm and an American firm, were vying for a lucrative contract
from the Mexican government. Both had already passed several hurdles, leading to an invita-
tion to Mexico City in order to present their proposals to ministry officials. The American
team, made up of senior technical experts and lawyers from the New York office, put a lot
of effort into producing an impressive, high-tech, and hard-hitting presentation. Their tag
line was simple: “We can give you the most technically advanced equipment at a price others
can’t match.” This team met several times with senior management before they made the
trip to Mexico City. Agenda topics included several key points of emphasis and possible
concessions to make to the Mexicans in order to win the contract. The team also received
the green light from management to make needed decisions on the spot.
The American team flew down for a week, staying at one of the top hotels in Mexico
City. They had an elaborate conference room reserved so that they could deliver their best
possible presentation to ministry officials. In an effort to do their due diligence and to impress,
they brought all necessary equipment with them, instead of asking for material upon arrival.
They also express-mailed outlines of the presentation to Mexican officials two weeks before
the meeting and included a detailed presentation schedule and other activities in an enclosed
memo to the officials. For their part, the Mexican officials dutifully thanked the Americans and
said that they looked forward to meeting with the team and to finding out more about their
proposal and their firm. The ministry officials, in turn, provided the Americans with information
about the history of their agency, as well as the top members of the current ministry. The
Americans flew in a full day before the presentation to avoid any travel problems and met that
afternoon at the conference room to set it up and make sure all was a “go.” Finally, at the
agreed-upon time the next day, the Americans were all ready to present and to impress.
266
M A N A G I N G C O N F L I C T : E F F E C T I V E N E G O T I A T I O N S
Unfortunately, the Mexican ministry officials were not—in fact, no one from the ministry was
there yet when the agreed-upon meeting time arrived. Instead, various ministry officials arrived
to the room gradually over the next hour. They offered no apologies to the perplexed Americans,
but instead began to chat amiably about a variety of non-contract-related matters. The American
team leader was feeling some pressure from both the situation and his team members—should
he act “leaderly” and get the meeting going, or should he let the Mexican officials provide
the right signal? Finally, after nearly an hour of glancing at his watch and scanning nervously,
the team leader assertively suggested that the meeting should start. For their part, the Mexicans
seemed surprised, but politely agreed and took their seats.
The presentation began with informal introductions of the American team members by
the team leader. The presentation itself was flawlessly delivered, thanks to the endless practice
put in. But, about 20 minutes into the presentation, the minister himself with an entourage
of other officials, walked in. When he figured out what was going on, his demeanor turned
unpleasant. Angrily, he asked the Americans to start the presentation from the beginning
again. They complied and started over. Again, the presentation was going well until about
10 minutes later when an aide arrived with a message for the minister that he delivered to
him in hushed tones. Not wanting to anger him again, the American presenter stopped to
wait until the message was delivered, but the minister signaled for him to continue. He did,
but a few minutes later, a number of audience members were talking among themselves.
By this time, the Americans were very frustrated, but they slogged on and finished. At the
end, when invited to ask questions, the minister’s only comment was to wonder why the
Americans had focused so much on the technical details—why had they told the Mexicans
so little about their firm’s history?
Later, during lunch, the Americans felt that they had to be very forceful about keeping the
conversation focused on the topic at hand: the contract and any outstanding issues or problems.
Most of the conversation was (again) seemingly casual, having little or nothing to do with their
possible business—similar to what they had experienced before the presentation started. The
Americans were surprised by the many questions about their individual backgrounds and personal
experience, including their qualifications. The minister breezed in during the lunch, had a brief
but casual conversation with the American team leader and then left. He did not return.
Over the next several days during their time in Mexico City, the Americans repeatedly
contacted the Mexican officials for a follow-up conversation or meeting. Were there additional
questions about the specs? Could they provide more detail about the technical features of
their implementation? Were there any initial reactions or was more information needed? They
reminded ministry officials of the schedule that they shared ahead of time and the fact that
they needed to return to New York soon. In short, they wished to start the negotiation
process. The Mexican response was the same to each of these forays across the rest of the
week: “We need time to examine your proposal among ourselves here first.” The Americans
reached the end of the week extremely frustrated. After all, the ministry officials had had
the proposal for several weeks before the meeting even took place and had also had multiple
opportunities for elaboration of the specs and other elements. The Americans left Mexico
empty-handed, only to later find out that the contract was awarded to the Swedish firm
with whom they were competing.
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As you work on this chapter, you will learn how cultural values can impact conflict and
negotiation. The tactics and methods used may have a cultural component that’s useful to
know. You will also read about how managers can overcome the challenges represented in
this and related negotiation situations. In the meantime, keep an eye out as you read for
cultural sources of conflict between the groups. Think about the characteristic negotiation
tactics and strategies that might be used by the Mexican and American negotiators. Then,
take a look at the Up to the Challenge? feature at the end of this chapter for some insights
into this exchange.1
A World of Conflict
In the previous chapter, we provided lot of examples of why and when communication
in a global business setting can be a formidable challenge. There are many ways in which
a message can be distorted, confused, or missed altogether across cultures, leaving the
door wide open for potential differences and disagreements. Miscommunication can lead
to conflict. In this chapter, we will review some of the causes of conflict and follow up
with how to manage it effectively in an international context. One important conflict
management tool is the skill needed to work and negotiate with your partner or adver-
sary. As you will see, the general view of negotiation (as well as the tactics that are
used) is the result of many factors. One of the most prominent factors is culture.
Not all conflict is bad, even though it may seem so when you are in the middle of
it. Actually, conflict can have positive results. For one, it can help focus attention on
critical tasks. It also allows for different perspectives to be put on the table and can
clarify issues. Positive or not, conflict is incredibly common: American managers spend
about 20 percent of their time at work dealing with conflict situations.2 Combined with
cross-cultural communication problems we reviewed in the previous chapter, we would
have to believe that conflict occupies an even greater portion of time for those with
international responsibilities.
Cultural Causes of Conflict
Conflict occurs when disagreements and friction arise in the course of social interaction
because of opposing interests. Cultural differences in communication styles and the
resulting confusion can contribute to these causes. Compounding the challenge for today’s
managers is the need to act more like diplomats than ever before, with an increasingly
burdensome set of “missions” to carry out that can stir up serious disagreements. For
example, international managers may have to handle foreign labor strife, negotiate with
overseas vendors, tend to unsatisfied clients, deal with partners, manage suppliers, lobby
governments, soothe relations with outside groups over environmental or other issues,
and somehow convince employees with conflicting interests to work together.3 That is
a plateful of duties.
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Given the stakes, though, international managers need a good understanding of the
basic causes of conflict. We have already addressed some of these, at least indirectly.
For instance, language difficulties are one major cause—a mix-up due to a poor transla-
tion can cause confusion and anger on both sides of the negotiating table. We also know
that differing cultural norms may give rise to conflict, especially when each side lacks
an appreciation or understanding of the other’s frame of reference. Many an American
has been greatly offended to be kept waiting well beyond a scheduled appointment time
in a foreign country, with individuals even storming out at this “offense.”4 The resulting
conflict in this example could have been avoided had the American been aware that she
was bringing her monochronic perspective of time into business done in a polychronic
culture.5 Additionally, had the meeting actually taken place, different norms about the
directness of communication (e.g., low vs. high context) might have been a source of
further conflict.
Different decision-making methods can be yet another potential source of conflict.
Some international firms are highly centralized, with power concentrated among a few
people at the top. Others operate in a more dispersed fashion, with decision-making
control decentralized and pushed down into lower ranks. In Chapter 4 we showed that
employees in high power distance cultures may have a preference for centralized and
hierarchical decision making. In such cultures, attempts to spread out decision making,
such as involving employees in goal-setting, can backfire. An example of this is in Fig-
ure 7.1. It is possible that this conflict between an American manager and a Greek
employee could have been avoided if the American manager had understood the Greek
preference for centralization.
Words Spoken Interpretation by Each Party
American: How long will it take you to finish American: I asked him to participate.
the report? Greek: His behavior makes no sense. He is the
boss. Why doesn’t he tell me?
Greek: I don’t know. How long should it take? American: He has refused to take responsibility.
Greek: I asked him for an order.
American: You are in the best position to American: I press him to take responsibility for his
analyze the time requirements actions.
Greek: What nonsense—I’d better give him an
answer.
Greek: Ten days. American: He lacks the ability to estimate his
time; this estimate is totally inadequate.
American: Take 15. Is it agreed? You will do it American: I offer a contract.
in 15 days? Greek: These are my orders: 15 days.
Figure 7.1 The Road to Conflict Is Paved with Interpretation: A Conversation between a Greek and
an American.
Source: Triandis, H. C. (1977). Interpersonal Behavior. Pacific Grove, CA: Brooks/Cole Publishing Company, a divi-
sion of International Thomson Publishing, Inc. Reprinted by permission.
269
Finally, the propensity for people in a given culture to be involved with conflict in
the first place can drive disagreement. Some cultures go to great lengths to avoid friction
between individuals and groups. In collective cultures, various social mechanisms are in
place to prevent direct conflict from occurring in the first place. For example, in the
previous chapter, we discussed the Japanese practice of using alternate ways to say “no”
to avoid confrontation and smooth interpersonal relations. Ironically, this tendency can
be extremely frustrating and conflict-provoking when it is used across cultures.
The risk of damaging conflict may be highest when a cultural mismatch occurs.
When an American, who has a tendency to value open and lively discussion, interacts
with a less outspoken Japanese, styles can clash. Although a tendency to be blunt may
be seen as laudable and effective within American culture, few traits may be more off-
putting to the Japanese. The same can be said about the Thai culture, where kids are
taught at a young age to be sam ruam—to keep their feelings inside. Conflict in the
form of outward expression of anger is seen as ignorant, crude, and immature. In fact,
one study found that the Thais are so sensitive to others’ negative comments that they
downgrade their ratings of interaction with others (feel they’re less supportive, helpful)
more than do Americans viewing the same behavior.6 A wider view of this is provided
in Figure 7.2, where you will see features about conflict across five different countries.
Views of Country
Conflict
China Germany Japan Saudi Arabia U.S.
Avoid Yes No Yes Yes/no No

conflict?
Degree of Indirect Direct Indirect/subtle Indirect; Direct
directness? face-related
concerns are
high
Use of Preferred (but Not first choice, Can be used, Yes; go- Not first choice/
third party/ a familiar but as a way to but not between can but when
mediation mediator) break deadlock common often smooth used, mediator
relations and unfamiliar
air difficulties with parties to
conflict
Face-saving High Low High High Low
tendency?
Common Discomfort, Can disagree Discomfort, Discomfort; Initial
reaction to embarrassment, openly and be embarrassment, undaunted discomfort, but
conflict redirection blunt. Initial silence by lack of not reluctant
discomfort, but progress to mix it up/
not reluctant due to social represent
to mix it up/ issues; will stay themselves
represent the course
themselves
Figure 7.2 Examples of Differences in Approaches to Conflict in Five Different Countries.
270
Keep in mind that these are general tendencies; you could easily meet a Thai who is
comfortable with out-and-out conflict and an American who shies away from a tussle
like it is the plague.
Managing Conflict Effectively
Conflict Styles
If a manager spends a decent amount of time each day dealing with conflict, then how
does she typically react to this strife once it raises its head? The quick answer to this
question is that there seem to be common and characteristic ways that all of us use to
resolve conflict once it occurs. The more effective international managers use those styles
to minimize any damage or lingering effects, if not capitalize on the conflict to make
positive change. Figure 7.3 shows a layout of these styles.7 Basically, this approach bal-
ances concern for your own outcomes against concern for the outcomes of others with
whom you interact. Various combinations of concern for self and the needs of others
result in the five distinct styles that are portrayed in the figure. There has been plenty
of research done on these styles, although most studies focus on American organizations.
The research shows that, even within a culture, there are individual differences in style
preferences. You can probably think of someone whose common approach to conflict
is to confront it head-on (competition), and another who prefers to try to ignore conflict
altogether (avoidance). The same can be said about accommodation (giving in to the
other during conflict) and compromise (each gives a bit to reach a mutual resolution).
High
Accomodation Collaboration
(concern with outcomes of others)
Cooperativeness
Thailand Sweden
Compromise
U.S.
Japan
Brazil
Russia
Low Avoidance Competition
Low
Assertiveness High
(Concern with own outcomes)
Figure 7.3 A Typology of Conflict: Examples of General Styles by Country.
271
The collaboration style is the most difficult style to enact and the least common style
to possess. This integrative approach is often called a “win–win” where both parties
gain (without great compromise) because someone thought of a new, inventive solution.
Once people learn or choose a style, they tend to stick with that approach—it becomes
part of their personality. For our purposes, however, research does show that some
general, culture-based tendencies exist that can distinguish how sets of people tend to
handle conflict.
Culture and Characteristic Style

Overall, it appears that, relative to some other nationalities, Americans like a good
argument. One study compared Japanese and Americans on a scale that measured the
tendency to either embrace or avoid arguments. The results showed that the Japanese
were less inclined to argue in the first place, but even once they were involved, their
degree of argumentativeness was less than that of the Americans’.8 Based on this and
other studies, some experts have gone so far as to say that Americans feel stimulated
by an argument and enjoy the intellectual challenge that it provides.9 Whether or not
that is true, the same cannot be said for the Japanese or some other nationalities. The
Japanese are not fond of open conflict, may even feel mortified that it has occurred,
and worry that it could disturb group harmony. Based on these findings, it is reasonable
to conclude that Americans tend toward the competitive conflict management style while
Japanese tend to fall in the avoidance area shown in Figure 7.3. That said, we remind
you that these generalizations may not apply to individual Americans or Japanese who
may use different forms of conflict resolution, but rather to these nationalities as a
whole.10
Other studies have compared the conflict styles of people from many other countries
and cultures. In general, this research finds that people from collectivist cultures tend
to prefer an avoidance style while people from individualistic cultures tend to prefer a
direct, competitive style of dealing with conflict. Examples of countries with a collectivist
orientation include China, Japan, Korea, and Mexico, while the U.S. has been the pri-
mary individualistic culture studied.11
From a Western, and specifically an American, viewpoint, a basic assumption is that
conflict is something that should be approached. A manager who “ducks” conflict situ-
ations, or fails to approach conflict head-on, can be labeled as passive aggressive by
colleagues. Yet, in many cultures, avoiding conflict is the better part of valor—at least
among one’s own in-group. One researcher examined this issue in a study of young
adults in Hong Kong and the U.S. They were asked to read about a conflict situation
and then to make judgments about what actions they might take if they were involved.
Members of both nationalities indicated that they would be more likely to pursue the
conflict if the stakes were large and/or if the other party was an “out-group” member.
Importantly, though, the Chinese participants were less likely to engage in conflict with
an “in-group” member and more likely to engage with an out-group member than were
the American respondents.12 So, as suggested earlier, Americans prefer more active,
confrontational approaches, while Koreans, Chinese, and Mexicans tend to use more
avoidance-type approaches when handling conflict.13
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The Meaning of Conflict

We need to understand, however, that avoidance does not necessarily mean the same
thing across borders and cutlures.14 For instance, in a collective culture the basis for the
value of avoidance is a high concern for others, whereas in individualist (typically
Western) cultures it is believed to reflect low concern (compare with Figure 7.3). One
study, for example, found that Australians (individualists) rated the competitive style
higher and the avoidance style lower than did Chinese students. But, at the same time,
when their reputation (or “face”) was threatened, respondents from both countries
preferred to use direct, assertive approaches to defend themselves.15 So, it may be that
it is the type of conflict that distinguishes cultures.
Plus, more recent research suggests that the reason for the conflict is also a differ-
entiator of cultures. Consider, as an example, if someone asked you to do something
but did not offer a good reason for the request. What if you were making photocopies
and someone came in and, nearly out of breath, asked, “Can I use this machine because
I have to make copies?” Of course they have to make copies—that is why you are there
too! Why should you stop and let the other person step in? What would you do in this
situation? Would you say no? Would you sidestep the request? Or would you let the
individual cut in before you finish?
Researchers set up an experiment that looked at this very situation. Across a series
of four studies, Americans and Chinese rejected requests from others when they were
not provided with a good reason. Both groups agreed to the request when it was pre-
sented with a very good reason (e.g., when a co-worker explained that their boss urgently
needed a memo copied to meet an unexpected deadline). It was only when the request
occurred in the context of a moderately good reason for needing to jump ahead that
differences between groups were found. Then, Americans were more assertive in rejecting
the requests than were the Chinese. It appears that under these conditions, Americans’
sense of self and the Chinese sense of others are more likely to be activated. This seems
to account for the pattern of responses that were observed.16
Parties Involved in the Conflict

Experts in conflict resolution also say that preferences may vary depending on who is
party to the conflict. Managers from Turkey and Jordan, for example, tend to use an
overall conflict-handling style that is not much different from their American counter-
parts. But when peers are involved, Turkish and Jordanian managers tend to avoid
conflict; with subordinates, they take a much more forceful approach when conflict
erupts.17
A similar finding was observed in another study, this time with Chinese, Japanese,
and U.S. managers. Researchers studied how these managers might react to a disagree-
ment from the role of a third party—a role that is common in dispute resolution. A
simulation was used whereby an argument between two managers occurred and in which
a third manager (the study participant) became involved. Respondents were then asked
to predict features of the conflict resolution (e.g., What was the final outcome? Who
decided it?, etc.). While the results are complex, they do point to the contribution of
cultural values in third-party conflict resolution. Briefly, the researchers found that U.S.
273
and Japanese managers acted in ways we might predict from their typical cultural values
(Japan being more hierarchical and traditional than the U.S.). The Chinese managers,
however, were much more sensitive to situational cues (e.g., the status of those involved)
as evidenced by their deference to those of higher status in their resolution decision. So,
while the studies do highlight the impact of culture, they also suggest that culture may
be only part of the answer in working through cross-group conflict. A detailed under-
standing of norms and context can also help predict effective conflict resolution
behavior.18
Yet, this effect goes both ways: norms can actually emerge from cultural preferences
in the first place. Conflict preferences are deeply rooted in culture and extend to many
different settings. Consider a ubiquitous business process such as dividing up resources
(e.g., raises, promotions) that can be conflict laden. Employees in individualistic cultures
often prefer an equity norm.19 In determining pay raises, for example, individual con-
tributions should drive the size of a raise for these individualistic cultures such as
American and Australian—“people should get what they have earned or deserve”. In
these cultures equity is the natural way of doing business. This is the norm for figuring
out who deserves what. In collective cultures, however, people have a tendency to prefer
an equality norm (every group member gets a more or less equal share of rewards).20
These preferences may in part result from inherent cultural differences in dealing
with conflict. The Japanese say “the nail that sticks up gets hammered down”—a direct,
out-in-the-open conflict style is a “nail” that sticks out in Japan and some other col-
lectivist cultures. In the U.S., however, there are many myths and stories that celebrate
rugged individualists (the “nails”) who oppose and conflict with the majority (“the
squeaky wheels who get the grease”). Finally, the tendency to engage in conflict in
the first place is also related to the cultural dimension of uncertainty avoidance. Those
cultures high on this value tend to avoid conflict. Clearly, then, there are cultural pre-
scriptions about how to deal with conflict. While individualism may be a virtue for
Americans, it can have negative connotations (e.g., selfishness) in other cultures.21
The Role of “Face” in Intercultural Conflict

What Is “Face”?
While we have said that conflict may be inevitable across cultures, this does not mean
that it occurs with equal frequency across borders. In fact, we have already docu-
mented that some cultures generally avoid conflict if possible. More importantly, however,
is that cultures typically have mechanisms in place to stifle conflict from happening in
the first place. One of these is the notion of “face” or reputation.
This concept is a prime example of the contrasting issues of interpersonal conflict
on the one hand and decorum among people on the other. “Face” has a lot to do with
the need to obtain and maintain both self-respect and the respect of others. One expert
sets this squarely in the area of conflict and negotiation by defining it as “the interaction
between the degree of threats or consideration one party offers to another, and the
degree . . . of respect put forth by the other party.”22 If there is any behavioral concept
274
that might cut across most cultures, it could be that of face. After all, pride and the
respect of others are of great important to most people.
Face can be lost in many ways, including via personal insult (whether intended or
not), being forced to make unnecessary concessions, highlighting a failure, mocking
cultural values, or damaging a relationship that has been cultivated over time (among
many other causes). But, the processes and dynamics of how face plays out in and across
cultures are different. Some cultures place more value on the importance of respect for
others. One of the sharper contrasts that can be drawn is that between some Asian
cultures and the general American set of behaviors associated with face. The accompa-
nying International Insights feature demonstrates this and provides some advice to all
about being careful and respectful to those in other cultures.
Get Out of My “Face”: The Importance of Respect Across Cultures

There is little doubt that concern for the respect of others is important in all cultures. But,
this notion of “face” is especially important in many Asian cultures. One expert has gone as
far to say that “to speak or act in a way that causes an Asian to lose face is tantamount to
physical assault in the West.” While this statement might be hyperbole, it underscores what
many see as an important factor in business communication in Asia. Face is not one-sided
here though—it’s important to maintain face for others. All 100 Chinese managers in a recent
study, for example, said that face was mutual—that it should be returned when it is given.23
For example, if you were to ask an Asian for directions to the post office, they might actually
take you there, even if it is out of the way. If they do not know where it is, they may still
point and say, “That way.” To not know is to potentially lose face. Conversely, you may not
receive valuable and much needed feedback if that information has the potential to be critical
of you because doing so may cause you to lose face.
The concept of face can explain why some Westerners may perceive Asians as indirect.
Americans pride themselves on how direct, frank, and honest they are, and they expect
similar behavior when dealing with others. Asians are also very honest people, yet directness,
frankness and related features can be prime sources of face loss. Conflict can occur based
on how each culture expresses these values, with social norms in Asia often favoring concern
for reactions and feelings of others. Schooled in these social demands of face, however, many
Asians understand the tacit rules about if and when to covey overt feedback or bad news.
These “rules” might sometimes lead to more directness for Asians as well. For example, how
do Americans and Chinese react to an angry business partner? As a business partner became
more angry (in a negotiation) Chinese reacted by stating higher demands; Americans compro-
mised to the angry partner. The same is true for Americans who know how to decode their
rules: feedback should be delivered quickly and directly to those affected. 24
How does one resolve this culture clash? The solution for Americans is somewhat complex
and difficult to enact. One technique is to try to use a more indirect approach to conveying
275
information or resolving conflict. For example, a Western product engineer might ask for any
suggestions regarding product design that an Asian may be asked to build. That way, the
Asian does not feel compelled to avoid discussion of problems or issues with the design—
something that he or she might otherwise do to preserve the reputation of the American.
Then, the face of all parties is preserved. Another option might be to work through a third
party to convey or solicit news that affects the face of others. The third party could be care-
fully chosen to be of appropriate status and can have time and background to craft the
feedback.
Regardless of the tactics used, the general rule to follow is: do not mistake a smile as a
solid connection with your business contact. Quite the contrary—it is actually easy for an
American to create resentment and even not pick up on it. If you did offend, it is not likely
that you will be told, since no one wants you to lose face. Alternatively, you might be told in
such a subtle fashion that you would miss the message anyway. For example, you will find that
things will slowly become more difficult, no one will seem very cooperative, and not much will
be accomplished. We present a good set of advice within the text itself, but here we will share
one suggestion for Westerners that will go a long way toward helping all maintain face and
smooth interactions. This expert says, “go slow, be calm, never loud. Listen more than you
talk.” This is probably good advice for doing business anywhere, especially in Asia.
Social Complexities of Face
To be sure, we have simplified here. For one, face may be different from concepts such
as dignity. It appears that face effects result from information provided (or inferred)
from others, whereas dignity effects emanate from internal judgments are more impervi-
ous to outside impacts. Likewise, the effects of culture on face can be more complex
than first assumed, including the involvement of certain social triggers that can make
face more important. A recent study looked at one of those triggers—the impact of
status in an accounting firm, a setting in which information sharing is vital. Researchers
compared Chilean and Chinese managers, countries chosen because of their similar
ranking on the Hofstede dimensions (e.g., collectivism, power distance). The study com-
pared the amount of information shared about errors committed by staff accountants
when a supervisor was or was not present at a meeting. The results showed little dif-
ference between countries when supervisors were not present at the meeting, but much
less information was shared by the Chinese when their managers were at the meeting.25
Accordingly, we might say that the presence of a superior activates a stronger need to
maintain face for Chinese.
Practice Advice about Face
Overall, research provides a complex picture about what face is, and how to give it and
keep it. This is understandable since so much is wrapped up in this concept (status,
276
personal worth, family, work success, etc.). For a Westerner not used to doing business
in Asia, for example, navigating in and around face-related issues can be daunting and
full of mistakes. Fortunately, experts have provided some general suggestions to keep in
mind when navigating around problems with face in conflict and negotiation
situations.26
■ In parts of Asia, there is a very fine line between being frank and being rude; subtle,
high-context communication is the norm.
■ As a rule, you should compliment but never criticize—even if asked for criticism.
Your host may test you on small things, saying, “People here are poor workers, aren’t
they?” If you say “yes,” you will fail the test and should start packing. Some go so
far as to say that if you cannot think of the correct answer—one that saves face for
everybody—then you should not even try to do business in Asia.
■ Asians may laugh if you say something that causes loss of face or indirectly demeans
their culture or country. Do not mistake the laugh for anything other than defensive—
as a way to save face.
■ If you ask a question in Asia and do not get an answer, don’t push it. Save it for a later
time and different (private) setting. Or, put in more blunt Western terms, if you want
to maintain face for all, then keep the lower half of it shut!
■ Avoid public displays of strong emotions. Never show anger, even if you feel it. It will
do you no good and you will be labeled a “peasant.”
■ Do not be in a rush, as it is an attack on the face of others. To Asians, your sense of
urgency says that they are not important enough to spend time with and that you have
better places to be.
Taking your time and showing respect to others is good advice in any culture, because
it displays consideration of others. But, some claim that obeying these social rules is
akin to capitulating to the demands of an Asian partner. Parts of both positions are
likely true. But, acknowledging differences does not mean you have to be a pushover.
In fact, Westerners could use face to their advantage. Sometimes simply saying, “I would
lose face at home if I were to agree to this deal” will carry more weight than a rational,
numbers-based argument. Nevertheless, one expert advises those doing business in Asia
to “be firm, but avoid obstinacy and rudeness. A calm and relaxed stubbornness is
advised. Be persuasive in a gentle way.”
Other Responses to Conflict

Taking time to understand the values and needs of a business partner from a different
culture is certainly of value. And, this can help one avoid or minimize conflict that gets
in the way of doing business. Some experts, however, think that some conflict is ubiq-
uitous, and it’s hard to argue when we look around the world today. So, if conflict is
inevitable, how do we deal with it once it raises its head? If the conflict is egregious
enough, it will be tough to completely look the other way. Instead, people might hold
a grudge and/or look for ways to get back at the offending party. To examine this,
277
researchers compared Chinese and American managers of real firms. They read a brief
story that asked them to imagine themselves in conflict with a colleague who had taken
their idea and presented it to their shared boss as his or her own. Both the American
and Chinese managers expressed a desire to get back at the perpetrator. There were
differences, however, in their approach to this revenge. Americans were more likely to
choose a direct approach, such as confronting the colleague or reporting them to the
boss. The Chinese more commonly chose an indirect approach, such as criticizing the
colleague to others. The Chinese were also more bent on teaching a moral lesson and
shaming.27
Instead of getting even or ‘filing away’ a slight, we may go through a formal process
our organization has set up to resolve conflicts. For example, a disinterested third party
might be able to approach conflict with a more level head. Earlier in this chapter, we
mentioned a study that looked at how third parties might react to disputes brought to
their attention, based on their traditional cultural values (and prevailing norms). This
reliance on typical values in a culture brings up related questions here. For instance, is
it more likely for someone to seek out third parties or mediators in individualistic as
opposed to collective-type cultures? Given our discussion, this is a reasonable prediction.
After all, consider the degree of attention paid by third parties (labor mediators and
arbitrators) in many Western countries. In combination with the tendency to underplay
conflict, why would we expect a Chinese employee to draw more attention to conflict
by involving other people?
Yet, despite this logic, research shows that Chinese do rely on third parties to help
resolve conflict. In fact, there is a long social tradition of using mediation. But, not all
mediators are the same. It appears that the Anglo-American tradition is to seek third
parties who are dispassionate and disconnected from disputes, what one American
observer stated should be “a eunuch from Mars.” At the heart of this preference is that
people with no interest or connection to the conflict would render the best judgment.
This approach is exactly opposite to the Chinese tradition—they prefer mediators who
are/were involved and knowledgeable about the specific conflict and situation.28
Work–Family Conflict
One area in which traditional values seem to produce conflict is in the area of work–
family interchange. In many cultures, people work hard and put many hours into their
work. Sometimes, this comes at the expense of time with family and creates a well-
documented set of problems that you are probably all too familiar with, given the
emphasis on technology and constant communication capabilities. So while it is reason-
able to expect that while employees will experience work–family conflict, its nature may
be quite different across borders—a topic that researchers are starting to explore.
One study suggested that individualistic cultures such as the U.S. may place a higher
value on personal family time than do more collectivistic societies. This prediction seems
to run counter to our image of Americans as career-obsessed and our perception of
Chinese as intensely family-oriented. But the basic idea is that when push comes to
shove, individualistic Americans will put self-interest (for example, time with family)
278
above collective interest (work). The more collectivistic Chinese may do just the opposite,
putting work before family. Another perspective on this issue is that in the U.S., careers
are viewed as vehicles for personal achievement. A “good family person” will not let
personal ambitions harm the family. In contrast, Chinese employees often view work as
a vehicle for bringing prosperity and honor to their families. So, working 70 hours a
week and thus not seeing much of your family, even if that extended family lives with
you, would be considered a personal sacrifice that you are making for the family rather
than a selfish statement about your career objectives.
In short, family demands may cause greater conflict in the U.S. than in China, while
the reverse may be true for work demands. And that is exactly what the study found.
Of course, more research needs to be done to tease out the exact role of culture and
other factors such as economic development. Plus, we also have evidence that the latest
generation of wealthy, young, urban professionals in China (an explosively growing
segment) is increasingly challenged by the balance between work and family. We illustrate
this with a story about the Fan family in the accompanying International Insights feature.
Like so many other issues in international management, one size may not fit all when
it comes to work–family conflict. Managers should first try to identify the source of
work–family conflict before pouring effort and money into trying to design “balanced”
workplaces that reduce employee strain and stress.29
Conflict in the Middle Kingdom: The Fan Family Feud

In Confucianism (an ethical and philosophical system developed from the teachings of the
Chinese philosopher Confucius), a deep respect for parents and ancestors known as filial
piety is a virtue to be held above all others. Taking care of one’s parents and bringing a good
name to them and to other ancestors are key values taught to all. For thousands of years,
extended families have lived together, with the younger family members deferring to the
older ones. China’s dramatically expanding economy, however, is testing those long-held
beliefs. Cracks in the social structure are beginning to show, including in the Fan family from
Nanchang.
Life followed the traditional guidelines for the Fans when the children were young. The
father, Hamlin Fan, now pines for those old days. Qun, his oldest son, looked after his two
younger siblings while his parents were at work. The Fans worked hard and had big dreams
for their children: they would do well in school, land good jobs, marry well, have children,
and support them as parents into old age. Unfortunately, times got the best of all this filial
duty. The children came of age when economic reforms in China began to bloom—new
opportunities, lifestyles, and jobs. Qun jumped in head first, opting for a job with a Western
pharmaceutical firm where he learned marketing techniques. He used this experience to start
his own consulting business, providing advice to drug companies in China. Now his firm has
12 employees, and generates more than $1.3 million of sales.
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As the business grew, relations with his parents became strained, in no small part because
he relocated to Beijing. Now when he talks with his parents on the phone, he does not share
many life details because they do not approve of his choices. He and his wife drive their own
cars, eat out often, employ housekeepers (including one for their dog), and grab Starbucks
on the run to and from their new two-story house in a wealthy Beijing neighborhood. They
spend more money on luxuries such as imported foods, Coach bags, and dog treats than
Qun’s parents’ monthly income. “If my parents saw me spending this kind of money, I’d be
embarrassed,” said Qun. Qun bought his parents a new apartment and takes them sightseeing
when in town a few times a year, but his first priority now is to his xiao jiating—his marriage-
based family. He and his spouse have ignored “suggestions” by his parents to have a baby.
Qun’s younger brother, Jun, in another reversal of tradition, is living with his parents
after a divorce. Jun and his ex-wife had a son, and Jun’s mother spent a long time living
with them and caring for the child when it was born. His ex-wife regarded Mrs. Fan’s pres-
ence as an intrusion: “it would be better if the older generation didn’t live with us, but I
couldn’t refuse,” she said. She eventually left Jun and their son and is now living with her
boyfriend, running a business that teaches English. Jun spars with his parents over how he
raises the now 9-year-old boy. The elder Mr. Fan says, “I talk and no one listens.” Jun says
that it is important to show love to your children and that his father did not do that for him
when he was a child. Jun did move to Beijing at one time and spent a year working for his
older brother. But, his performance was weak and he missed his son (left in his parents’
care). He left the job and returned to his parent's’ home. His brother said that Jun was not
cut out for the job, and instead approached it as though he was still at a state-run company.
“He drank a cup of tea, and then did only what I told him to do.”
The Fans’ youngest child, Min, similar to her two older brothers, went against tradition.
Instead of settling at home in Nanchang after college, she left for the big city. Now Min lives
in Guangzhou, is married, and has a child and a successful career with an insurance company.
She too does not return to Nanchang often because of work demands.
The elder Fans are at a loss. Their oldest son has a social standing that they never
dreamed of and which far exceeds their own; their younger son is struggling financially and
personally yet does not listen to advice; and their daughter is 1,000 miles away with a blos-
soming career of her own. Mr. Fan often spends time alone in his bedroom and Mrs. Fan
escapes by playing mahjong every afternoon. Their experience is not isolated. Increasingly,
younger Chinese are seeking privacy from their extended family. Some, like Qun Fan, can
buy their parents apartments. Others violate Chinese filial obligations by putting their parents
in nursing homes (occupancy is up 40 percent the last decade).
Time might be the biggest casualty in today’s China. Some do not understand the latest
generation and have turned to TV for an answer. A popular series in China is a show called
Chinese-Style Divorce, and it gets plenty of attention. The producer said that the impetus for
the show was his view that families suffer as people fight to get ahead financially and profes-
sionally. “Everyone is focused on making money; it destabilizes society.” For centuries, outsiders
have tried changing China and all have failed. Perhaps this latest change, coming from inside
and centering on work–family conflict, may finally do that. For the Fan family, it has already
happened.30
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Understanding International Negotiation

Culture can play a role in creating and dealing with conflict, thus dealing with conflict can
be especially valuable in a cultural negotiation setting. There has been quite a bit of research
about how the negotiation process unfolds and the factors (including culture) that impact it.
Knowing how to manage conflict, in order either to stop it from occurring in the
first place or to suppress any negative effects after it does arise, is a valuable asset. One
very important tool to accomplish this is the ability to negotiate well. Negotiation is the
process of communicating back and forth with another person or group to work toward
a joint decision or agreement. All negotiations have four key elements:
■ multiple parties (two or more) are involved;

■ mixed motives typically exist (i.e., areas of disagreement or conflict, but also some
interests in common);
■ movement of positions held by the parties often occurs over time;
■ there is a goal of reaching an agreement.
Negotiation is such a common feature of life, let alone business, that it has been studied
a great deal and via a number of different perspectives. This section focuses on an
approach to international negotiations called the comparative perspective. The primary
emphasis of this approach is on what happens between negotiators during face-to-face
interactions and how those interactions shape the outcomes that result (as opposed to
country-to-country negotiation or other forms). Accordingly, attention is paid to how
cultural factors may affect the way the negotiation process unfolds between individuals
or small groups of negotiators.31 Consider the Global Innovations feature on how culture
plays a role in negotiations that literally have life or death consequences.
Global Innovations
Getting to “Yes”: Negotiating Safely in a Hostage Crisis

Terrorism is a worldwide menace that has only recently been studied in depth. Officially, most
governments and companies say that they do not negotiate with terrorists. Yet, in practice
most do.32 Data suggest that more should. While a few successful assaults on terrorists come
to mind—for example, the 1976 Entebbe raid in Uganda, which freed Israeli and Jewish
hostages from Popular Front for the Liberation of Palestine (PFLP) captors—they are unfor-
tunately not common. These are more than offset by tragedies resulting from such actions,
such as the 2002 raid in a Moscow theater, where Chechen rebels held roughly 900 individuals
hostage—over 200 hostages were killed. Data show that more people die from raids by
authorities than at the hands of terrorists. So, it can be of great value to negotiate. Conse-
quently, rules have been developed to improve success in freeing hostages, including some
culturally based suggestions that could help in those negotiations.
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Consider the 2002 kidnapping of a Dutch medical aid volunteer in Dagestan, a Russian
Federation Republic. Dutch negotiators talked with the Russian kidnappers for nearly two
years before the hostage was released. Although it was ultimately successful, the negotiation
process used by both parties was complicated by varying culture styles. Dutch authorities said
that the Russian criminals were oblique and ambiguous, and the Russians reacted negatively
to the characteristically direct style of the Dutch.
An important recent study looked at this issue further by meticulously coding transcripts of
25 different crisis negotiations in which police interacted with perpetrators from a different
culture. The sample was unique in that many audiotapes about the incidents were available,
including statements made by the criminals who had held the hostages. All in all, nearly 7,000
separate conversations across the 25 crises were coded, with an equal number seen from the
police and the perpetrators. The hostage-takers were classified as being from low- or high-context
societies. Remember that low-context (LC) cultures prefer direct communication methods—ones
that rely on what people say or write. High-context (HC) cultures are more likely to rely on
indirect messages—ones best interpreted within a cultural framework. Most cultures use both
HC and LC communication, with one type perhaps being more common (e.g., in individualistic
cultures, LC is more common; in collective cultures HC messages are more common).
These researchers found that across the hostage situations (some involving kidnapping,
extortion, etc.), LC perpetrators of the crime were more likely to use more direct, persuasive
arguments during negotiations (e.g., “You just said you have the money available . . . go
bring it to us right away.”). These LC criminals were more likely themselves to respond to
persuasive arguments of negotiators with compromises. LC perpetrators were also more likely
to communicate direct threats than were HC criminals, especially early in the negotiation
time period (e.g., “I will kill the hostage if I don’t get the money soon.”). Overall, though,
the effect of culture in this negotiation situation was more likely to occur in the later phases
of negotiation, when the initial crisis mode had passed, providing opportunity for more
common cultural styles of those involved to surface. Finally, there was some evidence that
HC perpetrators were more flexible in their styles and may have adapted more to their police
counterparts. The same was true for police, who tended to compromise more when they
negotiated with a HC criminal versus one from an LC culture.
What sort of touch points might come into play between Western (LC cultures typically) and
Asian (much more HC) negotiators? We know that Westerners are more likely to value direct
messages and will reciprocate with definitive replies. They will likely spend less time on background
information and instead they will get right to a persuasion phase and likely take a “win–lose”
orientation. Asians, however, are more likely to be reticent and cautious during negotiations. We
know from research that the Japanese (at least) are more likely to be seeking a win–win or a
long-term approach in their negotiations, something accelerated by collection of background
information on the other party. We also know from Hofstede’s research in Chapter 4 that Asians
might be less receptive to risk than would Westerners. All these differences could impact the
course of negotiations, a prediction confirmed by this hostage negotiation research.
Above all, we know that crimes are committed by criminals! That means these situations
are volatile and complex and infused with violence—with luck regularly playing a role in
success. Nevertheless, this research suggests that negotiators who are sensitive to the cultural
backgrounds of those involved in the crisis might end up with better outcomes for all.
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Preparation for International Negotiations
This section presents a four-stage model of how international negotiations unfold. First,
however, it is best to consider all of the planning and preparation that should go into
a negotiation prior to beginning those four important steps—and often before any face-
to-face interaction even begins. In many cases, work done in preparation of negotiation
could smooth your movement across those four important stages.
Experts have long advised that negotiators put more thought and work into prepar-
ing for negotiations, rather than focus solely on the back and forth banter that is really
only the end portion of negotiation. Yet, for many, some of this advice still goes unheeded.
Over 30 years ago, one expert cautioned American executives to pay close attention to
the Japanese negotiating style. He reasoned that if Americans did a good job of studying
Japanese customs and negotiation tactics, the U.S. would be much better off. He thought
that this kind of “homework” would help prevent the U.S. trade deficit with Japan from
rising to the then “impossible level of $4 billion” (the U.S. trade deficit with Japan was
$63 billion in 2011; the trade deficit with China was $295 billion).33
Cross-Cultural Advice
Much of this preparation advice is still sound, yet not heeded as much as one might
expect.34 Why don’t people typically take the advice? The answers apply to any negotia-
tion. First, few employees receive training in the art of negotiation, wherein preparation
can be emphasized. Second, employees are busy and thus put off preparation while
working on more pressing issues (such as an actual proposal, other work, attending
meetings, etc.). Therefore, when there is little opportunity available, preparation is given
a back seat. Third, many consider the essence of negotiation to be the ability to repel
efforts by the other side to improve their outcomes while assertively putting forward
one’s own across the table. Yet, those who practice negotiation often consider informa-
tion acquisition to be the key feature of good negotiators. Students applying for their
first jobs typically do not receive training in negotiation and also believe that negotiation
is simply the final process of a give and take over salary desires via a test of wills. But,
if they had done their preparation months before reaching a phone call or face-to-face
negotiation, research shows, they would have higher starting salaries.35
Consider the following general suggestions that experts say should be reflected on
before undertaking an international negotiation:36
■ Do not underestimate the complexity of international negotiation. It is replete with

opportunities to fail.
■ Take whatever steps are necessary to gain an in-depth understanding of the other
side—not just on contractual issues, but how negotiating styles, view of the process,
and values may come into play. It is a big mistake to think that everyone thinks the
same as you or your team.37
■ Seek outside help from consultants and trainers if the necessary expertise or knowl-
edge is missing inside the company.
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■ Use interpreters that are hired by your company if there is a language barrier between
sides. Do not rely on the other side to provide this resource.
■ Consider the use of an international negotiating team.
■ Be prepared to spend significant time and effort on the preparation process. You and
your team will undoubtedly pay later if you are impatient or cut corners.
Allowing Time
Americans in particular seem to face continuous challenges in allowing enough time for
proper preparation. An American manager leaving the U.S. for a negotiation in Asia
should be prepared for a stay that is longer than expected. It is possible to spend only
a few days on the ground in a location such as Japan or China and quickly wrap up a
negotiation, particularly if you have experience there or have worked with the other
party before. But, often this is not the case. For example, when the authors of this book
were in Shanghai a few years ago, we spoke with an executive from an American auto-
motive company. He groused that he had already “wasted” a week in the country without
getting anything done other than eating and drinking with officials. He was angry about
having to pick between spending an indefinite period of time in the country or simply
calling the effort a failure and going home. Businesspeople in some Asian countries
expect a good bit of time to be spent on establishing a rapport, whereas Americans want
to “get down to business.” Worse yet, some foreign negotiators are savvy to Americans’
time sensitivities and may end up using this against them.
Bringing Friends
One piece of advice provided is to use a negotiation team. Once again, however, some
employees and businesses ignore this advice because they believe that teams are cumber-
some and feel that they’re better off going it alone. American negotiating teams, for
instance, are small, in part because of the costs associated with larger groups. In other
cases, the team is small because of the negotiators’ confidence in their own abilities,
although that confidence can be misplaced. Either way, Americans may find themselves
“outnumbered.” The sheer number of details, let alone the language and cultural issues,
often reduces the odds of a successful outcome for an understaffed negotiation team.38
Even with a solid team in place, members may not be properly prepared or under-
stand how best to work with the team’s translator. Experts will often recommend plenty
of advance meetings with your interpreter and, ideally, including them from the start.
Companies that follow this advice have more success in negotiations. A survey of over
100 multinationals revealed that nearly 90 percent felt that the presence of a bilingual
team member improved the quality of their negotiation process. About the same percent-
age of firms thought that this helped speed up the process. Among those firms without
a bilingual team member, most indicated that they would include one in future negotia-
tions. Other experts suggest that negotiating teams should be multicultural, and ideally
consist of employees from both the home country and the country represented by the
other side. A multicultural team such as this could make bargaining perspectives, tradi-
tions, and tactics clearer for all sides and help resolve any culturally driven impasses.39
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Basic Familiarity with Customs and Norms

Regardless of the size and composition of the negotiating team, familiarity with the
prominent features of the host country’s culture and customs pays big dividends. When
asked about this, Japanese managers said that the most important factor for ensuring
success in negotiations with U.S. firms was the willingness of Americans to devote time,
effort, and patience to building relationships. Not far behind was “cultural awareness,”
which referred to familiarity with (Japanese) business norms, customs, and practices. It
is likely that an understanding of norms and practices is important in most all interna-
tional negotiations. Fortunately, these complex cultural factors can be studied and
understood well before the actual negotiation process begins.40
We do not, however, want to create the impression that preparation will automati-
cally lead to successful negotiations. As with any business venture, competition plays a
role, as do political considerations and various other factors. Yet, while these complexi-
ties make for no guarantees, preparation that is done correctly will only improve your
odds of success.
Even if you are well prepared and display behaviors and tactics that are customized
to your counterparts, those efforts to “adapt” will be viewed more positively in some
cultures than in others. Training may not always have the intended or desired effects. Even
after they went through identical training in negotiation tactics (separately), when Danish
and Spanish negotiators in one study met to discuss business, each team still stuck with
their own nationality’s bargaining styles, as opposed to working with the opposing team’s
style. The Spaniards tended to connect relationships to the issues at hand and were willing
to attack the other side, while the Danes preferred to focus on the issues and avoid direct
conflicts. Consequently, Spaniards were likely to view the Danes as being too focused on
the business issues while being emotionally distant, while the Danes were likely to view
the Spaniards as uncooperative and confrontational. This suggests that training alone,
while helpful, is unlikely to completely suppress deep-seated styles.41
Training in Advance
Finally, consider that whatever its drawbacks and limitations, more training is usually
going to be more desirable than less training. That is where large firms have an advantage
over small ones. Research has found that larger firms tend to do better and to find more
success in international negotiations than their smaller counterparts because of the resources
that often accompany size. Big firms are more likely to have the money for consultants,
trainers, interpreters, and an overall hands-on role-playing of negotiations.42 Larger firms
often also have the luxury of taking more time to prepare, as there are more employees
to cover the work and projects going on elsewhere within the company.43
Training in a high-context approach—or at least the flexibility to use this style—
would serve most Western negotiators well. While there is no direct research to support
our claim, some work does speak to this issue. For example, one elaborate study had
participants from high-context countries (Russia, Japan, China, and Thailand) and low-
context countries (Germany, Israel, Sweden, and the U.S.) participate in a simulated
negotiation. The researchers taped the interactions between group members and later
transcribed and coded all that was said during the 90-minute bargaining session. The
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findings show that the high-context negotiators used more flexible and complementary
tactics than did the low-context negotiators. This suggests that the high-context approach
allowed negotiators to pull more information from the low-context group without sig-
naling that they were completely cooperating or giving in. Additionally, the high-context
participants were better able to mimic the opposite approach; low-context negotiators
found it difficult to switch styles to the high-context approach.44
A FourStage Model of the Negotiation Process
Overview of the Stages

Regardless of the amount of preparation, or lack of preparation, eventually you must
begin interaction and negotiation. Experts suggest that the complete negotiation process
can be divided up into four main stages.45 The first stage is called nontask sounding.
This is often a relatively long stage, especially outside of the U.S. The basic purpose of
this stage is to establish a rapport with a potential business partner and to get to know
the other party. It is very much related to the preparation issues outlined previously.
Seemingly, interaction at this stage is not directly related to the task of negotiating but
instead involves “sounding out” the other party. Negotiating must be considered as a
wider process, however, encompassing preparation all the way to signing a contract and
following through on agreements made during the process.
The next stage involves the task-related exchange of information. This stage involves
an exchange of the two parties’ needs and preferences as well as an explanation of back-
ground issues. Following this is the persuasion stage of negotiations, in which, as the label
suggests, there are overt attempts to modify each other’s positions. All three of these stages
lead to the final agreement stage, in which bargains are agreed upon and contracts signed.
There is a good deal of research comparing cultures across these four stages.46
Stage 1: Nontask Sounding

First, consider nontask sounding—the effort to establish rapport and to get to know the
other party. This is common in a lot of social interaction across cultures, especially when
meeting someone for the first time. Importantly though, this does not mean that nontask
sounding unfolds the same way everywhere. In fact, there are often great differences
among negotiating parties as to how they approach this stage.
One important feature in the nontask sounding stage is the amount of time spent
on entertaining one’s guests in an effort to feel them out and establish a personal rela-
tionship. You may, for example, encounter people who want to know about you and
the company you represent in great detail. They may wish to know your company his-
tory, your personal qualifications, features about your family and much more. Knowing
where you fit within the company and your history with it can be of value too. In fact,
the other party may even center themselves within the company when first introduced.
For instance, in many Asian cultures we might introduce ourselves by saying, “We are
the University of Dayton’s Paul Sweeney and Dean McFarlin.” Obviously, in the U.S.
we would almost certainly introduce ourselves by saying, “Hi, I’m Paul Sweeney and
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this is Dean McFarlin; we’re with the University of Dayton.” This is a subtle difference,
but substantial in its underlying meaning. It reflects what we have already discussed—that
people in individualistic cultures such as the U.S. tend to give primary emphasis to the
person, while people in collectivistic cultures give primacy to the group (the organiza-
tion, in this case). In this example, the first introduction places emphasis on our university
of employment. The second introduction places emphasis on us, individually.
But nontask sounding goes well beyond this. What to an American might seem to
be discussions about irrelevant personal details or tangential issues can instead mean a
great deal to a Chilean or Philippine negotiator. In fact, it might be vital from their
perspective to have these discussions early on. Those from low-context cultures like the
U.S. often do not want a lot of personal “background” before undertaking negotiations.
Generally, their goal in negotiations is a “context-less” agreement (one that is explicit
and in writing). Spending enormous amounts of time to get to know the other party,
therefore, is relatively unimportant and possibly an impediment to reaching that goal.
The perspective of people from high-context cultures such as Chile and the Philippines
is often very different. These negotiators commonly find it very important to spend a
significant amount of time on nontask sounding. The personal and organizational infor-
mation that they seek provides the perspective that is critical for understanding messages
in their culture. Figure 7.4 summarizes this and other differences that might be observed
between high- and low-context cultures in the nontask sounding stage.
Stage of Negotiation Low-Context Culture High-Context Culture
Stage 1: Nontask • Briefly exchange social niceties • Will want to know all about you
sounding • Will get to the point (i.e., and your company
Stage 3) quickly • Long presentations, meetings in
• Not especially concerned with order to get to know you
status of other group • Give careful attention to age,
rank, status of other negotiators
Stage 2: Task- • Relatively brief stage • Among the longer stages
related exchange of • Young, ambitious, likely to do • Advantage given to older,
information well higher-status team member
Stage 3: Persuasion • Argumentative • Declarative
• The most important stage • The least important stage
• “To the point” negotiating style • More guarded style
• Cost–benefit approach; face • Face saving very important
saving not very important
Stage 4: Concession/ • Favor or require detailed written • Less emphasis on long contracts
agreement contract • Deal is sealed on the basis of
• Decision/agreement is impersonal the contextual variables
• Profit motive determines • Good setting necessary for final
agreement agreements
Figure 7.4 Behavior in the Stages of Negotiation: Differences in Low- and High-Context Cultures.
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The amount of time spent on what Americans and other low-context negotiators
might consider “meaningless” interaction can vary across cultures. In high-context cul-
tures, it really does matter in ways that impact final outcomes. For example, one study
showed that for Brazilian and Japanese negotiators, interpersonal comfort was much
more likely to lead to outcomes that satisfied their negotiating partner than it was for
Americans. This finding highlights the role of nontask sounding in building the personal
relationships that are essential for successful negotiations in high context cultures.47
Another sign of a culture’s emphasis on this “getting to know you” stage is the
emphasis that negotiators place on status. The status of the participants involved in the
negotiation, while often not directly relevant to the issues being discussed, is important
to some. Once again, the distinction between high- and low-context cultures is useful
for explaining this point. Negotiation among equals is much more common in low-
context cultures such as the U.S. American negotiators often downplay status in any
number of ways (e.g., by using first names, dressing casually, and soliciting input from
all team members). In many other cultures and countries (especially high-context ones),
title and status are very important and interactions are more formal.48 It would be rare,
for example, for a high-context negotiator to address the other party by his or her first
name. The Chinese, for instance, are very aware of status differences among people on
negotiation teams and prefer to negotiate with the head of the foreign company.49 This
is also an apparent preference among Japanese, French and Mexican negotiators, among
others.50
One’s rank or position provides background for upcoming negotiations with high-
context negotiators, but it is less important in low-context cultures. One study had
groups of English, French, Germans, and Americans participate in a simulated negotia-
tion. The French (i.e., the highest context of the four groups) were most interested in,
and affected by, the status of other negotiation team members. Another study gathered
observations from more than 700 business people from 11 different cultures. The cultures
ranged from very low context (e.g., the U.S., Germany) to very high context (e.g., Korea,
China, Taiwan) and discovered that high status and personal relations mattered more
to people from high-context cultures. In Japan, status distinctions can be based on age,
gender, and relative position in the firm. So if you are an older male who is higher up
in the firm, the odds are that your status will impress a Japanese bargainer.51 In the
low-context U.S., however, Americans often want to establish equality between people,
even where it clearly does not exist.52
Stage 2: Task-Related Exchange of Information

This second stage involves the exchange of both parties’ needs and preferences. Negotiators
can also place different weight on this phase. In high-context cultures, long and in-depth
explanations of initial bargaining positions are expected. This exchange and the meetings
that go along with it will probably be drawn out and involve many questions about the
issues on the table. The long-term approach taken by high-context cultures also means
that you are likely to see an initial offer that is not very favorable. The belief is that a
poor initial offer will leave plenty of room to maneuver in later stages. This was verified
in research on groups of businessmen from the U.S., Japan, and Brazil who were asked
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to participate in simulated negotiations. The Japanese asked for higher profit outcomes
than their American and Brazilian counterparts in their initial offer. The American
negotiators, however, were more likely to offer a price that was closer to the eventual
terms agreed upon by both parties. And, both the Americans and Brazilians were irritated
at the Japanese for their “greedy” initial offers. A second study with the same three
cultural groups found that American bargainers could reduce their irritation and improve
their outcomes by stretching out this second stage. In particular, the more Americans
encouraged information exchange from their bargaining partners, the better their financial
outcomes were in the negotiation.53
This finding was accentuated by a more recent study of actual negotiation transcripts
of Japanese and American businesspeople. Early first offers generated higher gains for
the Japanese and lower ones for American negotiators. But, exchange of information
prior to the first offer resulted in a turnaround of this effect—U.S. negotiators received
higher gains.54 Overall, experts suggest that the probability of success in international
negotiation increases as the negotiators are motivated to search for new information and
are flexible in their approach during the process.55
Stage 3: Persuasion
While the earlier findings are clear and consistent, Americans are still often skimpy in
the attention that they pay to task-related information exchange. Sure, Americans may
spend some time talking about sports or their families and are willing to exchange
product and other information, but relatively little time compared to other cultures.
Instead, a slight glance at the wristwatch is enough to move an American onto the next
stage of negotiations. Persuasion involves explicit attempts to modify each other’s posi-
tions. To Americans, this is the most important step in the negotiating process. And it
is the stage during which they expect to spend most of their time. But how the persua-
sion stage unfolds in other cultures may end up surprising many Americans and others
who share their general traits.
First let’s examine the amount of time spent at this stage. As stated, Americans usu-
ally spend relatively little time and effort in the earlier two stages in order to spend
greater amounts of time in this third phase. Other cultures, such as the Thais, take the
time to sound each other out earlier and therefore they spend relatively less time engag-
ing in the kind of overt persuasion many Americans are used to.
Next, what about the actual tactics used to persuade? As you might expect, most
Americans believe that this stage is where the “real” negotiating takes place and therefore
pay very close attention to the interactions that occur here. Throughout the persuasion
phase, Americans will often compromise and make modifications to their initial bargain-
ing position. In fact, they commonly make concessions throughout all stages of negotia-
tions. Unlike American bargainers, however, Japanese negotiators tend to wait toward
the end of negotiations before making any concessions.56 Consequently, Americans may
go too far and give too much away in an effort to compromise in this persuasion stage.57
Interestingly, while Americans may be among the best in the world at compromising,
the meaning of the word compromise and related terms can differ dramatically across
cultures, as shown in the following International Insights feature.
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The Devil Is in the Details: The Meaning of Compromise Across Cultures

If you are wondering about how important language is in international business, consider
the language of negotiation. Take the word compromise, which generally has very positive
connotations for Americans. The U.S. was founded on compromise and many famous compro-
mises have made up its history. Americans may be among the world’s best compromisers. It
follows, of course, that compromise has been an essential part of American business dealings
as well. To be sure, for many Americans, a compromise or concession is a very strong sign
of good faith and fair play between parties.
Interestingly, however, the word compromise has some very different meanings in other
cultures. And many of those meanings are far more negative than those conjured up by
Americans. In the Middle East, for example, compromise carries with it many negative asso-
ciations, such as in the phrase “his virtue was compromised.” Similarly, the Persian word for
mediator translates to “meddler.” In many Latin American cultures, compromise presents an
issue of personal honor. There, compromise could connote giving in, and that raises many
issues of face and personal integrity for Mexicans which can be problematic in negotiations.
Russians typically see compromise as a sign of weakness. To concede even a minor point can
sometimes suggest a loss of control or the excessive influence of another’s will. As a result,
negotiations with Russians can be confrontational.
Likewise, many other terms that relate to the negotiation process are open to different
interpretation. The word aggressive may be an insult to the British or Japanese, while to
Americans such a characterization may indicate a tough, respected bargainer. We do not
mean to imply that words carry most of the weight in determining success of negotiations—
they do not. But, it may pay to become aware of national sensitivities.58
Another reflection of the American belief that persuasion is where the real negotiation
takes place is that they now are ready to “lay their cards on the table.” Basically, this
means that Americans often give, and expect to receive, frank information during this
stage of negotiations. It has been found that Americans often believe that the ideal posi-
tion for both parties should be put on the table, so to speak, at which time progress
can be made—often on an issue-by-issue basis—toward some kind of compromise. One
study reported that Americans were more likely to share information directly with
negotiation partners than were those from five other countries (Brazil, France, China,
Japan, and Russia). Negotiators from Russia, Japan, and China were more likely to use
indirect strategies to communicate in negotiations.59
In another study, which looked at the appropriateness of various bargaining methods,
Americans were less likely to endorse tactics such as bluffing, feigning threats, or mis-
representing information than were Brazilians.60 Setting aside the preference for being
“up front,” the American style often does not mesh well with the bargaining approaches
290
used in other countries and cultures. This American approach to negotiation stems
from an idealistic moral philosophy, rather than a focus on the relative consequences of
specific actions. Other cultures, such as the Saudis, embrace a more relativist philosophy
which affords more flexibility in their approach.61 An example is when a Chinese nego-
tiator makes sudden demands that are presented as non-negotiable. Such demands often
throw Westerners off if they are not well prepared and can provide an advantage to the
Chinese—a tactic not generally viewed as viable for some Westerners.62 Similarly, another
study using a simulated bargaining session found that Chinese negotiators used more
competitive approaches (persuasive communication, threats) and fewer cooperative meth-
ods (such as multiple offers or attempts, and a focus on long-term outcomes).63 With
sufficient patience and some more flexibility, research shows that Americans might find
that concessions will appear from the Chinese (and from others) occasionally at the last
minute.64
Figure 7.5 presents some elements of what might be considered the stereotypic
American negotiating style. Most of these elements play a role here in the persuasion
stage of negotiations, but also apply to other stages. Put simply, the quintessential
American style resembles that of the frontiersman or cowboy in the old West. This “John
Wayne” style of interaction may work well within the U.S., but these characteristics that
are key features of American individualism can be received very poorly on a foreign
stage. Even in the U.S., it pays to be flexible and it is rare for any one successful nego-
tiator to consistently use more than a couple of these behaviors presented in Figure 7.5.
After all, negotiation is by definition interdependent—some of the most successful nego-
tiation approaches used in Western countries are more long-term oriented and focus on
benefits for both parties. Consequently, a review of the behaviors shown in Figure 7.5
can benefit potential negotiators.65
Let’s take this a step further and consider what might happen when the prototypic
“John Wayne” negotiator meets a Japanese (or other high-context) negotiator. The
American might quickly present a complex set of arguments, concluding their presenta-
tion with an offer that is not too far from what they eventually expect. The Japanese
may be surprised by the abruptness of the offer but will probably consider it given that
she likely knows that Americans prefer to “get to the point.” What she may not know,
however, is that the American offer is pretty close to the final offer available to the
American to make. In fact, in many cultures and countries, bargainers leave themselves
considerable room to maneuver. Accordingly, the Japanese may counter by asking for a
lot. But Americans may show irritation, something that can harden positions and result
in less exchange of information.66 This is exactly what happened in a study based, once
again, on a simulated negotiation session. American negotiators initially asked for a
“fair” price—one closer to their final offer—whereas Japanese negotiators initially asked
for much higher profit options, a position that upset the Americans.67
Despite feelings such as these, Americans would press on by trying to deal with one
issue at a time, despite most likely experiencing more frustration and anger. The Japanese
typically do not like dealing piecemeal with issues; instead their concessions are com-
monly bunched toward the end of the process. Even if Americans are very persuasive,
they may receive a silent response—which the Americans may interpret as stonewalling
or stalling. A cultural analysis can pinpoint their source of frustration here.
291
American Style Prescriptions for Use in Other Countries
1. Just call me John: Americans downplay 1. Follow local customs: Our informality simply
status and titles, as well as other formalities out of place in most other cultures; foreign
like lengthy introductions. clients are more comfortable when we follow
their customs.
2. Get to the point: Americans, like no 2. Getting down to business: This is defined
others, want to dispense with the small talk differently across cultures; getting to know the
and get down to business. other party is important in many countries.
3. Lay your cards on the table: We expect 3. Hold something back: Foreign executives
honest information at the bargaining table seldom lay everything on the table; the
(“You tell me what you want and I’ll tell negotiating process is expected to take time
you what I want”). with concessions made along the way.
4. Don’t just sit there, speak up: Americans 4. Silence can be a powerful negotiating
don’t deal well with silence: we get into tool: Consider its use, but also be aware of its
trouble by feeling pressured to fill in silence use against you.
with possible concessions.
5. Don’t take no for an answer: We are 5. Minds are often changed behind the
taught to be persistent and not to give up; scenes: If an impasse is reached, ask more
negotiation is mostly persuasion. questions; take a recess; try a more subtle
approach.
6. One thing at a time: Americans approach 6. Postpone concessions: Until you’ve had a
a negotiating task sequentially (“Let’s settle chance to get all issues on the table; don’t
the quantity issue first, and then discuss measure progress by the number of issues that
price”). have been settled.
7. A deal is a deal: When we make an 7. What we take as a commitment: Means
agreement, we give our word. We expect different things in Tokyo, Rio, or Riyadh;
to honor the agreement no matter the deals—particularly new ones—are more
circumstances. uncertain than we’re used to.
Figure 7.5 Some Elements of the Stereotypic American Negotiating Style.

Source: Adapted from Graham, J. L., and Herberger, R. A. (1982). Negotiators abroad—don’t shoot from the hip.
Harvard Business Review, July–August, 160–168.
The Americans may have used their on-the-spot latitude to grant a concession. But the
Japanese may not have the same amount of discretion; their decision-making style is to
take time after hearing an offer to discuss it as a group and, ideally, reach a consensus.
This approach is more common in high power distance countries (e.g., Mexico and
India, and Japan to a somewhat lesser degree). Consequently, the Japanese negotiators
are not likely to react immediately to an offer.68
If they are frustrated enough at this point, Americans counter with a very aggressive
tactic. They might tell the Japanese, “If you can’t lower your price, we will have to go
with another supplier.” This may be the worst thing to do. The mere directness of this
approach will be off-putting to the Japanese. It would be much more appropriate if this
option were presented through a third party or, if it must be done directly, then in a
completely different way. For example, the American might say, “Lower prices on your
292
part would go a long way toward us not having to develop other options.” Additionally,
other tactics such as repeating the explanation of your position in more detail, asking
questions, playing dumb, or even silence, can go a long way.69
Indirect approaches, however, are not the first choice for Americans as they are in
many parts of the globe. Consider the following scenario presented by experts in inter-
national negotiation: You are a member of an American firm who has contracted with
a Chinese bicycle manufacturer. You have received convincing data that this manufacturer
has had some quality problems in the past and that the bikes in your order have an
annoying rattle. They are supposed to ship to Hong Kong next week. What would you
do? Would you (a) Go to the plant to see to the quality problem yourself, instructing
the plant manager that the rattling has to be fixed before shipping? Or (b) Go to the
plant and test some bikes yourself, taking the plant manager for a ride near the factory
and afterwards ask her if other bikes rattle, if the rattling will be a problem for buyers,
before leaving the plant?70 If you are like most Americans, your first instinct is to choose
the first option—many do. But, it may not be the best choice.
This brief story is true and had a happy ending when the actual American took the
indirect approach (option b). Gently asking for the plant manager’s view helped—the
bikes arrived on time with no rattle. The American ordered more, so both parties came
out of this well. This indirect confrontation is more common in collective cultures; it
does not imply blame or make the problem personal. The issue does not morph from
a problem with rattling bikes to the people who made the rattling bikes; the indirect
approach gets across the message without communicating disrespect. For this reason,
an intermediary or third party is often a useful way to fix a problem in Asia as well.71
Stage 4: Agreement
Many negotiations do come to a conclusion where an agreement is reached. Agreements
are the culmination of all the concessions and persuasion used in the earlier stages. That
said, an agreement is only as good as the follow through. In other words, all of the
considerable time and effort invested into the previous three stages could be wasted if
both parties involved in the negotiation do not behave in a way that is consistent with
the final agreement. Recognizing this fact, many American companies will insist that
elaborate formal contracts be signed that bind each party to specifics. In some parts of
the world, this preference is sometimes viewed as a negative or even something to resist
outright; those negotiators are loath to seal the deal with a final, written contract
that spells out responsibilities in great detail. Instead, they hope that the ties that they
spent so much time building and strengthening in the earlier stages of the process will
now pay off. They hope that the general trust established via an extended nontask
sounding phase will allow a much more general agreement to be drafted and acknowl-
edged by each party.72 Despite this inclination, most foreign firms nowadays expect a
lengthy formal contract to be requested if they are negotiating with U.S. companies.
The Chinese have similar views about the form of a good agreement. Instead of a
specific contract, they prefer broad agreement about general principles. Some say that the
Chinese want broad agreements because they believe that if all parties agree to the prin-
ciples, the details can be worked out later by people of good intention and trust.73 Of
293
course, Americans and other Westerners often take the position that if trust exists, then
the Chinese should be willing to make clear commitments. Who is “right” depends on
the specific case. One thing, however, is certain: Americans tend to slight the process of
establishing broad principles. To the degree that this impacts trust with partners, this can
be problematic. Regardless, it can pay to make an assessment of the degree of trust and
then adjust one’s actions accordingly. In fact, Figure 7.6 presents advice for negotiators
based on their judgment of the level of trust that exists between them and their partner.
These principles, however, are the standards that some use to evaluate future agree-
ments. In some cases, Americans and others consent to agreements with little input,
perhaps because they believe that since general principles can be interpreted to support
most positions, then there is no sense sweating over those. Nevertheless, experts recom-
mend that Western firms provide serious input into this process, including laying out
their ideas on business concepts such as quality products, profit, and shareholder return,
instead of just going through the motions.
Whether it is broad or narrow, however, even the very notion of a contract can have
different implications across countries. For example, in Russia a party to a contract can
only do what is expressly allowed. Generally, in the U.S. you can do anything that is
not prohibited by contract (provided it is legal).74 Again, an agreement is only good if
it is kept. Whether other parties live up to their end of the agreement depends on, at
least in part, the potential long-term impact. This impact, in turn, is determined by the
trust we have in the other parties and our satisfaction with the agreement. Making sure
the other party feels they also got a good deal, therefore, pays off in the long run.75
Global competition is so fierce today that general principles are probably worth abiding
by in order to communicate effectively and negotiate a lasting agreement.
Level of Trust in Relationship
Trust Exists Trust is Possible Trust Not Possible
• Operate as though trust • Put superordinate goals • Extend offers on multiple

exists. forward. issues at the same time.
• Work to understand • Point to a shared future. • Have your team look for signs
counterpart. • Separate people from issues and signals in negotiating
• Emphasize interests and and focus on the latter. partner behavior/discussion.
features in common with • Try to break an impasse by • Provide concessions in a
other party. taking breaks, suggesting reciprocal manner.
• Cross-check what was said other approaches. • When deadlocked, use
(restate what you heard). • Consider the use of a third emotion to communicate
• Keep the elements of the party/mediator. (apologize, sympathize, and
agreement open/tentative • Form an argument for a otherwise relate to partner).
until the end. common enemy. • Show expertise or authority to
improve effectiveness.
Figure 7.6 The Trust Factor in International Negotiations: Advice for Those in Short Supply.
Source: Adapted from Gunia, B., Brett, J., and Nandkeolyar, A. (2012). In global negotiations, it’s all about trust.
Harvard Business Review, December, 26–27.
294
Chapter Summary
Conflict occurs all too often in international business, and important causes include differing
cultural norms, decision-making styles, and the characteristic cultural tendency to engage
in or avoid conflict in the first place. We discussed different styles that cultures use to deal
with conflict issues once they arise. These approaches balance concern for your own personal
outcomes against concern for the outcomes of others. For instance, Americans tend to use
a competitive style (high in own concern/relatively low in other concern) whereas Thais use
a more avoidant style, shying away from overt conflict with others.
An important way to minimize, and possibly eliminate conflict is through negotiation.
We focused on four common stages of the negotiation process itself, and also highlighted
the importance of preparation. Preparation should include learning about the other side
(about their culture and how that impacts negotiation), seeking outside experts when neces-
sary, using translators and a multicultural negotiating team, and generally being willing to
prepare fully.
Once preparation is complete, the actual negotiations typically proceed through four
main stages and we showed how different cultures put more or less weight on each stage.
For example, Americans tend to undervalue the first stage of negotiating—nontask
sounding—relative to other cultures. This “getting to know one another” phase is viewed
by Americans as best kept brief and perfunctory, whereas it is a relatively long and important
stage for some other cultures. The final three stages, task-related exchange, persuasion, and
agreement, all have cultural ties as well. Finally, we examined some mistakes that can be
made in an international negotiation process as well as some techniques that may result in
more beneficial outcomes for each of these stages.
1. In our discussion of conflict we highlighted negative implications and effects. Explain some
positive effects that might result from intercultural conflict.
2. How might Asians, Latinos, and Americans (U.S.) characteristically deal with conflict? More
importantly, think through why each group’s typical style might create a sense of frustra-
tion when interacting with the others.
3. Reflect on how an American, a Mexican, and a Saudi might move through the four stages
of negotiation (you may wish to refer back to Chapter 4 to see each country’s standing
on Hofstede’s dimensions). How might each stage be approached and what areas might
each nationality emphasize?
295
The Mexican and American Negotiation Gap: Returning El Norte, Empty-Handed

At the beginning of the chapter, we presented a negotiation scenario between Mexican
government officials and American managers. The American team flew to Mexico City to
present their proposal with the hope of hammering out and negotiating the terms of the
large contract. The cross-cultural differences that they faced, along with plenty of anger,
frustration, and misunderstanding, are more common than we all might expect. What is your
take on this situation? What were the reasons for the breakdown? Compare your guesses
with ours that are presented just below here.
In a nutshell, the Mexicans displayed more concern for relationships and background
information than their American counterparts before and during negotiations. The Mexicans
tended to use stories and allegories to support their points before the presentation and during
the lunch afterward and they acknowledged the work done by the Americans. They also
tended to be more effusive in their early communication and during their informal meetings
during lunch. On the other hand, they also held some topics near and dear—such as the
importance accorded to their boss, the minister—something that was shared in response to
the receipt early on of the American proposal and schedule.
The Americans, in contrast, “played by their own rules,” or at least the rules that they
should use if they were dealing with other Americans. On the positive side, they approached
the presentation with due diligence—they prepared to the hilt and did their homework. But,
good technical preparation was not the problem here. In fact, the inclusion of a lawyer on
the American team was probably done to ensure that any contract might be free of threats
to the firm. This could suggest to the other party that if there are problems later, the first
stop might be Mexican courts. Yet, for many cultures, including Mexican, business is more
personal. Some go as far to say that you would just as soon bring a lawyer to the opening
of a business relation as you would during the opening of a romantic relationship. Business
“prenuptials” in many collective cultures are informal.
The Americans also tended to focus more on moving things along, with repeated refer-
ences to time and requests for more information. Indeed, even at the lunch afterward, the
Americans pressed for reactions whereas the Mexicans kept the conversation light. This busi-
ness during lunch emanated from different views about punctuality (late start of presentation
and late arrival of players). In Mexico, this is a lot less important than the cultivation of a
good atmosphere and relations. That said, the Americans were willing (to a point) to accom-
modate the Mexican officials, agreeing, if only because they did not know what else to do,
to wait around an hour beyond the appointed start time. The Mexicans were more concerned
with establishing a positive working relationship first, preferring to explore options jointly
rather than to consider specific details. This was signaled in their early communications that
confirmed the joint meeting with the Americans. These differences are common across indi-
vidualistic (U.S.) and collective (Mexican) cultures. Americans tend to worry less about rela-
tionships and are focused more about persuading and securing agreement in a negotiation.
296
And, while the Mexican officials accommodated the American team leader’s request to
eventually start the meeting, they were also a bit taken aback since their leader, the minister,
had not yet arrived.
The offense taken by the minister and his staff raises another cultural red flag. Power
distance between these two countries is great. Mexicans are relatively high on this
dimension—leaders carry significant power and are looked to for important decisions.
The U.S. is lower in power distance—differences between managers and subordinates
are less significant and lower-level managers enjoy more decision control. The U.S.
managers were empowered by their management back in New York to make decisions
on the ground in Mexico City. The questions raised by the Mexicans during the early
meetings might have been efforts to determine the seniority levels of the American team.
The Americans might have considered including the CEO, the president, or a board
member of the firm so that the Mexican minister may have felt that the negotiation was
conducted on equal terms.
In summary, the reactions of each side may have been influenced by cultural differences.
Do you have any suggestions about how each side might better respond and adapt to the
other, or have been better prepared to do just that? Could the Americans have done anything
to salvage the situation—even after the offense taken by the minister? As we noted in this
chapter, perhaps the biggest mistake a manager can make is to be unfamiliar with the norms
and typical behaviors of another culture. If the Americans had been better prepared for
potential cultural disconnects during the negotiations, things might have indeed gone more
smoothly.76
Assessing and Comparing Your Conflict Management Style

Purpose
To diagnose and assess your characteristic approach to conflict once it arises.
Instructions
You will complete a scale of conflict management and then compare your scores with those
from several different cultures. It is easy to complete this scale. For each of the 15 items,
indicate how often you rely on that specific tactic by circling the appropriate number. Your
instructor will then provide an easy scoring sheet that you can use to calculate your scores
on several subscales that measure approaches to conflict. After this, you instructor may have
you pair up with another person in class to discuss your scores and also to speculate how
your scores compare with those from different cultures. Alternatively, your instructor may
297
choose to make this a class exercise with open discussion. Data will be presented on scores
of college students from other cultures to provide comparison points. The instructor will draw
out implications of differing styles and what this could mean for cross-cultural interactions.
The Scale
Complete the scale by choosing a number that reflects your view about each item:
1 2 3 4 5
Rarely Sometimes Always
1. ___ I argue my case with my co-workers to show the merits of my position.
2. ___ I negotiate with my co-workers so that a compromise can be reached.
3. ___ I try to satisfy the expectations of my co-workers.
4. ___ I try to investigate an issue with my co-workers to find a solution acceptable to us.
5. ___ I am firm in pursuing my side of the issue.
6. ___ I attempt to avoid being “put on the spot” and try to keep my conflict with my co-
workers to myself.
7. ___ I hold on to my solution to a problem.
8. ___ I use “give and take” so that a compromise can be made.
9. ___ I exchange accurate information with my co-workers to solve a problem together.
10. ___ I avoid open discussion of my differences with my co-workers.
11. ___ I accommodate the wishes of my co-workers.
12. ___ I try to bring all our concerns out in the open so that the issues can be resolved in the
best possible way.
13. ___ I propose a middle ground for breaking deadlocks.
14. ___ I go along with the suggestions of my co-workers.
15. ___ I try to keep my disagreements with my co-workers to myself in order to avoid hard
feelings.
Source: Rahim, A (1989). Managing Conflict: An Interdisciplinary Approach. New York: Praeger.
298
Characteristic Features of Negotiation Behavior in Countries around the World
Purpose
To explore the difficulties that can occur when negotiating with people from other cultures.
Instructions
Divide into groups. Your instructor will assign each group one culture to study in order to
provide a wider sample of different countries and cultures. Outside of class, do research to
find three dominant cultural values and their corresponding behaviors for your assigned
culture. Several websites might be useful in your research. Your instructor might also suggest
other sites at which to find information. Consider the following:
• Global Negotiation Resources—This site provides a wealth of information on over 50

countries, including cultural perspectives and preferences—especially as they might apply to
negotiation: www.globalnegotiationresources.com/resources/countries/
• Negotiation.biz—This site is a resource for those interested in studying cross-cultural

negotiation. It provides a variety of specific information regarding characteristics and values
of various countries that might impact negotiation: www.negotiation.biz
• U.S. Department of State Country Background Notes—This site presents a wealth of

information about every country on the globe. This information is used by Foreign Service
Officers and others who spend considerable time overseas: www.state.gov
• The Economist Country Profiles—The Economist magazine is well known, but its Intelligence
Unit, while less well known, is an invaluable resource for anyone interested in international
business. Information can be obtained by country: www.economist.com/countries/
• The CIA World Factbook—This is a complete and detailed source of information about
all countries on the globe, useful for this exercise and others as well: https://www.cia.gov/
library/publications/the-world-factbook/
Based on your research, each group should:
1. meet with your group to discuss each cultural value and some of the behavior it produces;
2. next, make some predictions about how negotiators from that culture act as a result;
3. finally, come up with a strategic negotiating response for each of the predicted negotiating
behaviors.
In class, your group will have 10–15 minutes to present its research findings and suggested
negotiating strategy. The instructor will wrap things up with a discussion of cultural differ-
ences and their relationship to international business negotiations.
Source: Adapted from Whatley, A. (1979). Training for the Cross-Cultural Mind. Washington, D.C.: SIETAR.
299
Notes
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Mexico.pdf .
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the United States and Hong Kong. Organizational Behavior & Human Decision Processes, 85,
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Major, V. , Raver, J. , Nishii, L., and O’Brien, K. (2006). Negotiating relationally: The dynamics
of the relational self in negotiations. Academy of Management Review, 31, 427–451.
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Quarterly, December, 439–443.
24. Adam, H., Shirako, A., and Maddus, W. W. (2010). Cultural variance in the interpersonal effects
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31. Tinsley, C. H., Turna, N., Weingart, L. R., and Dillon-Merrill, R. L. (2012). How cultural ste-
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Review, March, 76–85; Graham, J. L. (1983). Brazilian, Japanese, and American business
negotiations. Journal of International Business Studies, 14, 47–62.
32. See: Special issue of the journal International Negotiation (2004, Vol. 8), Zartman, W. (ed.), that
was focused on terrorism and features about such crimes, including an article by Faure, G. O.
(2004). Negotiating with terrorists: The hostage case. International Negotiation, 8, 469–494;
Giebels, E., and Taylor, P. J. (2009). Interaction patterns in crisis negotiations: Persuasive argu-
ments and cultural differences. Journal of Applied Psychology, 94, 5–19; Salacuse, J. (2009).
Negotiating: The top ten ways that culture can affect your negotiations. Ivey Business Journal,
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behavior in simulated and actual crisis negotiations. Human Communication Research, 30,
443–478.
33. See: U.S. Bureau of the Census. (2011). Exports, Imports and Trade Balance by Country
and Area, available at: www.census.gov/foreign-trade/Press-Release/2011pr/final_revisions/
exh13tl.txt (retrieved February 10, 2013); Van Zandt, H. F. (1970). How to negotiate in Japan.
Harvard Business Review, November–December, 45–56.
34. Gulbro, R., and Herbig, P. (1996). Negotiating successfully in cross-cultural situations.
Industrial Marketing Management, 25, 235–241.
35. Fisher, R., and Ury, W. (1990). Getting to Yes: Negotiating Agreement Without Giving In. New
York: Penguin Books.
36. Weiss, S. E. (1994). Negotiating with “Romans”—Part 1. Sloan Management Review, 53,
51–61.
37. Financial Times. (2003). Avoid the trap of thinking everyone is just like you, August 29, 7.
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tional negotiations. Thunderbird International Business Review, 54, 625–637; Graham, J. L.,
and Herberger, R. A. (1983). Negotiators abroad—don’t shoot from the hip. Harvard Business
Review, July–August, 160–168; see also Sebenius, J. K. (2002). Caveats for cross-border nego-
tiators. Negotiation Journal, 18, 121–133.
39. Gulbro and Herbig, Negotiating successfully in cross-cultural situations; Tung, R. L. (1984).
How to negotiate with the Japanese. California Management Review, 26, 62–77; Volkema,
R. J. (1999). Ethicality in negotiations: An analysis of perceptual similarities and differences
between Brazil and the United States. Journal of Business Research, 45, 59–67.
40. Tung, How to negotiate with the Japanese; Van Zandt, How to negotiate in Japan.
41. Grindsted, A. (1994). The impact of cultural styles on negotiation: A case study of Spaniards
and Danes. IEEE Transactions on Professional Communication, 37, 34–38. Pornpitakpan,
C., and Giba, S. (1999). The effects of cultural adaptation on business relationships:
Americans selling to Japanese and Thais. Journal of International Business Studies, 30,
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of World Business, 36, 303–309; Graham, J. L., and Lam, N. M. (2003). The Chinese negotia-
tion. Harvard Business Review, October, 82–91.
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and Walls, I. (1994). Cultural differences in conducting intra- and inter-cultural negotiations.
Journal of International Business Studies, 25, 537–555; Volkema, R., and Fleury, M. (2002).
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sequences in negotiation. Organizational Science, 16, 33–51.
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46. Graham, J. L. (1985). The influence of culture on the process of business negotiations: An
exploratory study. Journal of International Business Studies, 16, 81–96.
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Negotiating with Chinese: Exploratory study of relationship building. Journal of Managerial
Issues, 13, 342–348.
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Intelligence and Planning, 10(2), 10–13.
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meets West. Mid-Atlantic Journal of Business, 25, 1–14; Tung, R. L. (1982). U.S.–China trade
negotiations: Practices, procedures, and outcomes. Journal of International Business Studies,
Fall, 25–37.
50. Campbell, N. C. G., Graham, J. L., Jolibert, A., and Meissner, H. G. (1988). Marketing nego-
tiations in France, Germany, United Kingdom, and the US. Journal of Marketing, 52, 49–62;
Tung, How to negotiate with the Japanese.
51. Trompenaars, F., and Hampden-Turner, C. (1998). Riding the Waves of Culture: Understanding
Diversity in Global Business. New York: McGraw-Hill.
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United Kingdom, and the United States; Graham, J. L., Mintu, A. T., and Rodgers, W. (1994).
Explorations of negotiation behaviors in ten foreign cultures using a model developed in the
United States. Management Science, 40, 72–95.
53. Graham, J. L. (1983). Brazilian, Japanese, and American business negotiations. Journal of
International Business Studies, 14, 47–62; Tung, How to negotiate with the Japanese.
54. Adair, W., Weingart, L., and Brett, J. (2007). The timing and function of offers in U.S. and
Japanese negotiations. Journal of Applied Psychology, 92, 1056–1068; Adair, W., Brett, J.,
Lempereur, A., Okumura, T., Shikhirev, P., Tinsley, C., and Lytle, A. (2004). Culture and nego-
tiation strategy. Negotiation Journal, January, 87–111.
55. Brett, J. M. (2000). Culture and negotiation. International Journal of Psychology, 35, 97–104.
56. Graham, J. L. (1988). Negotiating with the Japanese: A guide to persuasive tactics (Parts I and
II). East Asian Executive Reports, 10, November, 6, 19–21 and December, 8, 16–17.
57. Barnum, C., and Wolniansky, N. (1989). Why Americans fail at overseas negotiations.
Management Review, October, 56–57.
58. Herbig and Kramer, Do’s and don’ts of cross-cultural negotiations.
59. Adair, Brett, Lempereur, Okumura, Shikhirev, Tinsley, and Lytle, Culture and negotiation strat-
egy.
60. Volkema, Ethicality in negotiations: An analysis of perceptual similarities and differences
between Brazil and the United States.
61. Al-Khatib, J. A., Malshe, A., and AbdulKader, M. (2008). Perception of unethical negotiation
tactics: A comparative study of US and Saudi managers. International Business Review, 17,
78–102.
62. Stewart, S., and Keown, C. F. (1989). Talking with the dragon: Negotiating in the People’s
Republic of China. Columbia Journal World Business, 24, 68–72.
63. Liu, M. (2009). The intrapersonal and interpersonal effects of anger on negotiation strategies:
A cross-cultural investigation. Human Communication Research, 35, 148–169.
64. Sheer, V. C., and Chen, L. (2003). Successful Sino-Western business negotiation: Participants
accounts of national and professional cultures. Journal of Business Communication, 40, 50–85;
Weiss, J. (1988). The negotiating style of the People’s Republic of China: The future of Hong
Kong and Macao. Journal of Social, Political and Economic Studies, 13, 175–194.
65. Graham and Herberger, Negotiators abroad—Don’t shoot from the hip.
66. Liu, M. (2009). The intrapersonal and interpersonal effects of anger on negotiation strategies:
A cross-cultural investigation. Human Communication Research, 35, 148–169.
67. Graham, J. L. (1985). The influence of culture on the process of business negotiations: An
exploratory study. Journal of International Business Studies, 16, 81–96; Graham and Herberger,
Negotiators abroad—Don’t shoot from the hip.
303
68. Graham, Negotiating with the Japanese: A guide to persuasive tactics (Parts I and II); Graham
and Herberger, Negotiators abroad—Don’t shoot from the hip.
69. Graham, Negotiating with the Japanese: A guide to persuasive tactics (Parts I and II).
70. Negotiation scenario taken from: Brett, J. M.., and Gelfand, M. J. (2005). Lessons from abroad:
When culture affects negotiating style. Negotiation, January, 3–5.
71. Brett and Gelfand, Lessons from abroad: When culture affects negotiating style.
72. Oh, T. K. (1984). Selling to the Japanese. Nation’s Business, October, 37–38.
73. Banthin, J., and Steizer, L. (1988/89). “Opening” China: Negotiation strategies when East
meets West. Mid-Atlantic Journal of Business, 25, 1–14.
74. Pettibone, P. J. (1990). Negotiating a joint venture in the Soviet Union: How to protect your
interests. Journal of European Business, 2, 5–12; Choi, C. J. (1994). Contract enforcement
across cultures. Organization Studies, 15, 673–682.
75. Adler, N. J., Graham, J. L., and Gehrke, T. S. (1987). Business negotiations in Canada, Mexico,
and the U.S. Journal of Business Research, 15, 411–429.
76. Fox, C. (2006). International negotiator; Posthuma, White, Dworkin, Yanez, and Swift, Conflict
resolution styles between co-workers in US and Mexican cultures; Heydenfeldt, The influence
of individualism/collectivism on Mexican and U.S. business negotiation.
304
chapter 8
taking stock
developing international
strategy
INTERNATIONAL STRATEGY: DECIDING HOW TO

COMPETE ABROAD 307
CORPORATE STRATEGY OPTIONS IN INTERNATIONAL BUSINESS 316
THE PROCESS OF DEVELOPING INTERNATIONAL STRATEGY 326
ORGANIZATIONAL REQUIREMENTS FOR SUCCESSFUL

INTERNATIONAL STRATEGY 335
Learning Objectives
describe basic international strategic concepts and the theory of national competitive
advantage;
identify types of international strategies and the firm and industry factors that affect
them;
describe the steps involved in the process of creating international strategy;
identify the organizational features that help companies develop and implement their
international strategies successfully.
Localization and Integration: One Company’s Solution to the “Either–Or” Dilemma

Global behemoths such as GE have a tendency to segregate their corporate headquarters
from operations that they establish in other countries—particularly ones designed to capitalize
on low-cost labor and production in emerging markets. Of course, they are happy to sell
products to customers in those countries, and they like saving money by manufacturing there.
Ultimately, however, many such firms remain fundamentally unchanged despite this global
outreach. Corporate offices sometimes even have a palatable air of “we know best” which
is a mindset that features ideas and strategic directives that flow one way. All too often it
seemed as though Siemens remained distinctly German, Panasonic retained its Japanese
footprint, and GE remained singularly American, despite each company’s widespread global
presence.
At least, that used to be the case for these firms—GE in particular. For decades, GE (like
many multinationals from developed countries) favored a glocalization strategy for product
development. The essence of this approach is to create products at home and then push
them out to be made and sold to the rest of the world, with perhaps some adaptations
made for local markets. This was a terrific way to minimize research and development costs
while still allowing products to be tailored to local conditions after the fact. It also had the
positive effect of minimizing risks because key development and proprietary concerns were
under corporate control. Likewise, the multinational may have great confidence in its brand’s
ability to appeal to other markets, including emerging ones. Such was the case for GE.
Yet, change has a way of altering strategies. GE reasoned that with rich countries growing
slowly, in addition to the rapid rise of countries such as China, India, and Brazil, it needed
to start to back away from glocalization. The growth opportunities—and threats from rising
competitors—were often both coming from emerging markets. GE felt it needed to create
306
D E V E L O P I N G I N T E R N A T I O N A L S T R A T E G Y
cheaper products designed for those developing markets overseas. Failure to do this would
mean that local companies in developing markets would fill in the gap and then take their
cheap, innovative products into wealthier markets, interfering with GE’s existing business
there. In fact, this is precisely what happened to Panasonic’s healthy business based on its
glocalization strategy in China. The results for Panasonic were awful, including layoffs of over
10,000 employees before the company changed strategies. The bottom line is that products
created in rich nations are often too expensive and too feature-laden to penetrate deeply
into emerging markets. With much lower per capita incomes, a large set of customers in
emerging markets are often perfectly happy with technology that offers good, but not great,
performance at an extremely cheap price, with room to spare for those in the market with
more expensive tastes as well.
As some experts have observed, all too often “multinationals may be in global markets,
but they’re regularly not of them.”1 Instead, local initiatives are expected to stay local. But,
what is remarkable about GE, and is frankly surprising about any global giant, is when they
go to an emerging market in search of low-cost manufacturing and the like, yet come back
a different company. This seemed to be the case for GE. Consider the fact that some of its
newest and most exciting products were a portable ultrasound machine and a hand-held
electrocardiogram (ECG) device. Both devices are relatively inexpensive and very innovative.
Yet, the most unexpected aspect of both products is that they were developed in emerging
markets for emerging markets. The ultrasound was developed in China and the ECG in
India—both sold in their respective countries before being sold in the U.S. Think about this
reversal of business and how GE made the transformation. What strategic issues and tactical
options could it develop to move from a traditional glocalization approach to one where
innovation is fostered in those markets? As you read through the chapter, you will run across
some such options. At the end of the chapter, take a look at the Up to the Challenge?
feature to see what steps GE took to address this strategic challenge.2
International Strategy: Deciding How to

Compete Abroad
Business is about competition. Management’s job is to figure out how to outperform
competitors in ways that allows the firm to grow and to become more profitable. That
“how to”—the steps and actions that a company’s leadership pursues to accomplish its
objectives—is the essence of strategy. Developing and implementing company strategy
is tough going and gets tougher when borders are crossed. As seen already, multination-
als often face a diverse quilt of cultures, values, and practices. In addition, they typically
encounter an array of opportunities (e.g., promising markets) and threats (e.g., risk,
moves by competitors) in foreign locales. Determining the best way to operate in markets
around the world can be a very complicated task. Consequently, developing an overall
plan for competing abroad and choosing market entry options that make sense can mean
all the difference when operating internationally.3
307
This chapter focuses on basic strategies that firms can pursue abroad as well as how
to develop them. (Chapter 9 will cover specific foreign market entry options.) Generally
speaking, the process of formulating international strategy involves setting international
goals and then following through with whatever approach the company adopts. The
stakes are high. Today, more than ever, companies must be able to anticipate and react
quickly to competitors’ moves, while being nimble in the face of rapid changes in markets
and technology. Otherwise, they risk losing their ability to compete effectively.
For instance, while multinationals often see China as a great place to manufacture,
conduct product research, and sell (especially given China’s dramatically rising middle
and upper income groups), some experts consider it among the toughest markets in the
world because of the cultural, legal, and social differences with many other countries.
Increasingly, droves of aggressive local companies are emerging to challenge established
international firms. Ford Motor Company’s recent push into China offers a look at these
very issues. As is well known, China is large and rapidly evolving and Ford wants to
grow there in a big way—it has three plants in China (one with local partner Chonqing
Changan) that can collectively produce over 600,000 cars per year. Yet, Ford’s produc-
tion capacity lags that of key rivals Toyota and General Motors. Moreover, Ford is
nowhere close to being the top automotive brand in China’s tough marketplace. Indeed,
in 2009, Ford was behind three Chinese car companies (Chery, BYD, and Geely) as it
tried to climb up from eleventh place in sales. While it has had great success with its
Ford Focus (the largest-selling car in China), it has also dealt with supplier and manage-
ment problems. Nevertheless, it recently set a two-year goal to double market share to
6 percent by 2015.4 Figure 8.1 shows that Ford has made little progress relative to other
brands in China through 2012 and looks to jump production significantly.
Rank Auto Company Home Country Market Share (2011)
1st Volkswagen (includes Audi) Germany 15.9%

2nd GM (includes Buick, Chevrolet) USA 9.6%
3rd Hyundai (includes Kia) South Korea 9.4%
4th Toyota Japan 6.5%
5th Nissan Japan 6.4%
6th Honda Japan 4.5%
7th Chery China 4.3%
8th BYD China 3.4%
9th Great Wall China 2.8%
10th Ford USA 2.5%
11th Suzuki Japan 2.3%
12th Mazda Japan 1.7%
Figure 8.1 Race for the Top: Car Brand Sales Leaders in China.
Sources: Adapted from Focus2Move. (2012). Chinese Car Market, available at: www.focus2move.com/item
(retrieved November 25, 2013); Dolan, M., Shirouzu, N., and Bellman, E. (2009). Ford makes push to boost Asian
presence. The Wall Street Journal, September 23, B2.
308
China’s development underscores the point that companies need to respond to growth
opportunities wherever they exist. Moreover, advances in communication and transporta-
tion have made it easier for all companies to source the best parts, materials, products,
and labor from anywhere in the world in ways that best meet their needs. Consequently,
you might think that the importance of location as a competitive weapon isn’t what it
used to be. After all, if everyone can source globally (e.g., manufacture garments in
Bangladesh because labor is cheap), then there is no unique advantage to doing so. But
this overlooks how important it is to figure out where the best places are to manufacture,
to innovate, to buy supplies, and to sell products in the first place. It also overlooks the
challenges associated with managing globally distributed work once those choices are
made. Regardless, there is little doubt that when it comes to innovation and long-term
success, location still matters a great deal.5
For instance, the world’s best consumer electronics firms are based in Asia, the best
entertainment firms are in the United States and India, and the best in leather fashions
comes from Italy. Understanding how and why these clusters of excellence exist around
the world underscores why strategic planning may be the most important task facing
international managers.6 Despite the potential value of having a coherent international
strategy, a surprising number of companies enter overseas markets with goals but no
coherent strategy. This failure to plan can lead to a variety of problems, including
underestimating what is needed in a foreign setting (resources, key supplies); the inability
to predict foreign environment and adapt accordingly; and competing poorly.7 Regardless
of the level of competition or company overseas sophistication, all international strate-
gies should provide answers to the same basic questions, including:
■ What products or services will be sold abroad?

■ Where and how will services be delivered or products made?
■ What resources are necessary and how will they be acquired?
■ How can competitors be outperformed?8
In the past, developing international strategy was often the exclusive purview of top
executives. Some contemporary firms involve people who are closer to the marketplace
in the creation of international strategy. The idea is to react more quickly to specific
changes in an evolving international environment. For instance, line managers can some-
times be in a great position to spot trends, understand competitors, and test new ideas
than senior management. If the goal of strategy development is to stay agile and to
quickly take advantage of international opportunities, then involving people who under-
stand the marketplace best should help this process.9
In fact, some companies such as Hewlett-Packard even involve suppliers and customers
in strategic planning to help identify new business opportunities. Overall, research suggests
that the best strategic planning process is one that builds in flexibility and openness to
change. For those firms who are in rapidly changing environments (such as the dwindling,
low-margin laptop business), companies may have to modify, amend, and tweak their
international strategies as they go, or even dump them altogether if conditions warrant.10
Accordingly, the next section discusses some company-level international strategies
and outlines the strategy development process, including the special strategic challenges
309
facing small firms. The chapter’s conclusion examines some organizational features that
companies should have (or should cultivate) to successfully develop and implement their
strategies.
Basic Strategic Concepts for International Competition
Chapter 1 provided a snapshot of the economic powers that are emerging and challeng-
ing the dominance of established players such as Germany, Japan, and the U.S. The past
several years have seen dramatic increases in the growth of international business, much
of it fueled by rapidly developing countries such as Brazil, India, and especially China.
Moreover, developing markets are spawning multinationals of their own—companies
that are hungry to compete not just in their home markets, but everywhere. Often, these
emerging local giants (e.g., Chinese appliance maker Haier) have lower costs and inno-
vative ideas—a combination that should worry more established multinationals from
developed countries.11
Another important trend to mention is that small and medium-sized companies have
contributed greatly to the recent growth in international business. In fact, they actually
account for a bigger slice of international trade than do large firms. For instance, the
50 largest American exporters (e.g., Boeing) account for only about a third of exported
merchandise, with small and medium-sized firms producing most of the rest. And while
multinationals can be a threat to smaller firms, especially if they are poorly run, many
small companies are more nimble, more inventive, and more connected to local markets
than the globe-trotting giants.12
Nevertheless, large multinationals continue to be the focus of research on interna-
tional strategy because of their enormous influence and impressive global reach. The
Japanese giant Mitsubishi Corporation actually represents a family of companies with
interrelated ownership. This ownership structure, called keiretsu, is common in Japan
but is slowly fading away. One family member is usually a trading company (called a
sogo shosa) that helps market products from the rest of the corporate family to the
outside world. In this role, Mitsubishi at one point sold as many as 100,000 products
to some 45,000 customers around the world.13
General Business- Level Strategies

So, how do international companies actually compete? Fundamentally, all companies
make money through value creation. They offer products or services that customers
want. Everything else being equal, the more value companies create, the more profitable
they will be—because customers are more willing to buy their products or services, even
at a higher price. Naturally, things typically are not so simple. Competing products or
services from other firms often dilute the value that a company offers customers, putting
downward pressure on the price that can be charged. Consequently, profitability often
depends on whether companies can create value for customers in the face of competition
while also reducing costs.14
Generally speaking, there are three basic business-level strategies that companies can
pursue to create value, and ultimately, profitability—either alone or in combination. One
310
way companies can meet international customer demands is by differentiating their

products or services from those of competitors. In doing so, they provide unique or
superior products that customers are willing to pay for. That is what Mercedes-Benz
does in offering what it believes are the world’s most sophisticated production cars.
But a Mercedes is not cheap. Thus, another way to provide value is through cost
leadership—offering cheaper products or more efficient services than competitors. For
example, Asian computer manufacturers have done well by combining efficient manu-
facturing operations and inexpensive labor, allowing them to undercut competitors on
price (e.g., Taiwan’s Acer). Finally, firms embracing a niche strategy focus on a specific
line of products or services relative to competitors who operate more broadly. By serv-
ing a specific market segment, firms hope to do a better job of responding to customers
and meeting their needs (e.g., on price, differentiation, or both) than do competitors.
Italy’s Ferrari S.p.A. is an example of a firm that has pursued a niche strategy. The
company focuses exclusively on upscale sports cars, which offer superior performance
relative to competitors.15
Building the Value Chain

Regardless of the basic approach used to attract customers, companies can add value
by changing any of their primary activities (e.g., manufacturing or marketing of products)
or supporting activities (e.g., information technology), either alone or in combination.
As Figure 8.2 suggests, a firm can be thought of as a linked set of these primary and
Primary Activities
Value
Added
R&D Inbound Production Outbound Marketing After- What are

customers
Logistics Logistics & Sales Sales
willing to
Service
pay for
Design & Supply, Part Order Promotion, Customer firm’s
dev of new delivery, fabrication, procession advertising, training, products?
products & collect & assembly of & delivery customer service,
production store data products relations warranty
processes repairs
Supporting Activities
Firm Infrastructure
(planning, financing operations,
information systems)
Human Resource Management
(recruiting, training)
Figure 8.2 Understanding the Value Chain in a Manufacturing Firm.
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supporting activities, referred to as a value chain. Consequently, a company’s international

strategy also involves the choices it makes in terms of how value chain activities are
configured (e.g., where do value chain activities happen?) and coordinated (e.g., is there
tight control from headquarters or local control?).
Often, companies change value chain activities to improve their core competencies.
Core competencies are skills that are hard for competitors to imitate and can be located
anywhere in a value chain. For instance, one firm’s competitiveness might rest on its
logistical execution (e.g., Wal-Mart’s sophisticated distribution system), while another
firm’s competence is its ability to innovate (e.g., 3M’s history of creating unique prod-
ucts), and yet another’s is based on its manufacturing prowess (e.g., Toyota’s production
quality). If firms have a core competency that helps them outperform competitors, then
they possess a distinctive competence. Said differently, they attract more customers
because they have the best logistics, are the most innovative, or have the highest produc-
tion quality.
Because international business should continue to grow over the long term, one view
is that firms compete best by moving different value chain activities to wherever location
economies exist. For instance, if the cheapest and most productive labor for assembling
a certain product is in Vietnam, then that is where a company should locate its produc-
tion operations. If the best product designers are found in the U.S., then that is where
R&D activities should be located. Naturally, this is a bit of an oversimplification. For
instance, transportation costs may offset any savings from the use of cheap, but distant,
skilled labor. Balancing these tradeoffs and making the right decision in the end regard-
ing potential location economies is a big challenge for management.16
Indeed, locating certain value chain activities in places that offer positive benefits
gives companies a source of competitive advantage compared to firms that fail to do so.
For instance, software development and maintenance firms may gain an edge over rivals
by locating those activities in India, a source of inexpensive and well-trained program-
mers. Others use a complex patchwork of locations for various value chain activities.
Consider what Hewlett-Packard does in bringing a new server to market. The concept
for a server is hatched by the firm’s designers in Singapore, with managers in Houston
providing final approval. Next, parts and components are engineered in Taiwan. Final
product assembly then happens in many locations, including China, India, and Australia,
with most of the servers staying in those markets.17
The pros associated with dispersing value chain activities to various locations can
be offset by various cons, such as coordination difficulties due to cultural differences.
Thus, the goal is to capitalize on location while effectively integrating operations across
those locations. This is easier said than done. Location economies, such as low labor
costs or plentiful raw materials, only offer a sustainable competitive advantage if it is
hard for other firms to follow suit. In other words, there is nothing terribly unique about
moving plants to low-wage locations or sourcing materials from certain overseas loca-
tions. You may be at a disadvantage if your competitors operate in a low-wage environ-
ment and you do not, everything else being equal. But, jumping on the low-wage
bandwagon alone will not set you apart. Instead, locations that somehow help companies
continually improve their processes, marketing savvy, or capacity for innovation can do
more to provide a long-term competitive advantage. Put simply, it is the ability to
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constantly change and adapt that allows many international firms to outperform
competitors.18
Locations and Competitiveness
Our discussion to this point suggests that competitiveness is a complex concept involv-
ing industry features and the locations at which they do business. Of course, companies
compete. But in a sense, nations also compete to create innovations and provide goods
and services that international markets demand. What is at stake is nothing less than
whether countries can continue to offer a rising standard of living for their
citizens.19
How do nations become competitive and why is it that certain nations seem to
produce firms that are very successful in specific industries? For instance, why have
American companies tended to lead in computer software, but Asian companies have
tended to lead in consumer electronics? The theory of national competitive advantage
tries to answer such questions. It argues that four factors shape the competitive context
among nations and the firms based there. These factors, presented in Figure 8.3, represent
a combination of national and firm-specific characteristics. Understanding how they
interact can help explain why industries and companies tend to do better or worse in
particular locations. Each of these factors is considered next.
The Context for Firm Strategy and Rivalry

How does the domestic competitive
environment, and local laws, culture, and
practices impact how firms organize and
operate in a country?
Factor Conditions Demand Conditions

Does a nation offer the components What is the nature of the market in a
needed for competitive production in a particular country for an industry’s goods
particular industry? or services?
Related and Supporting Industries

Does a cluster of suppliers or related
industries that are internationally
competitive exist in a country?
Figure 8.3 Location Factors That Help Explain International Competitive Advantage.
Source: Adapted from Porter, M. E. (1990). The competitive advantage of nations. Harvard Business Review,
90, 77.
313
Factor Conditions
Does a nation offer the components needed for competitive production in a particular
industry, such as abundant raw materials, capital, business infrastructure, and skilled
labor? With the right combination of conditions, home-grown competitors can spring
up, do well domestically, and eventually become formidable international competitors.
For instance, the prime grape-growing land in California and a large pool of expert
winemakers are key reasons why the United States is a worldwide leader in this
industry.
Demand Conditions
What is the nature of the market in a particular country for an industry’s goods or
services? Large, sophisticated home markets often force firms to become more responsive
to demanding customers, which may foreshadow where international markets are ulti-
mately headed. This early awareness can help firms stay ahead of competitors from other
countries. For instance, the American desire for convenience and speed has spawned
efficient fast food companies (e.g., McDonald’s), many of which have done well overseas
where similar desires have subsequently emerged.
Related and Supporting Industries

Does a cluster of suppliers or related industries that are internationally competitive exist
in a country? If so, they can provide superior and mutually beneficial access to compo-
nents, technology, and innovation thanks to shorter lines of communication and estab-
lished working relationships. For instance, Italian shoe companies owe much of their
overseas success to the close relationships they have developed with local leather suppliers,
shoe component manufacturers, and specialized equipment firms.
Firm Strategy, Structure, and Rivalry

How does the domestic competitive environment, as well as local laws, culture, and
business practices, impact the ways in which firms organize and operate in a particular
country? Tough domestic competition forces firms to be more innovative, productive,
and cost efficient—characteristics that may serve them well in international markets. For
instance, Honda’s excellent performance in the U.S. auto market is partially a consequence
of its intensive competitive struggles with formidable homegrown rivals in Japan (e.g.,
Toyota and Nissan). Likewise, management practices can also make it easier or harder
for firms in certain countries to compete in specific industries.20
Implications of the Four Factors
As Figure 8.3 illustrates, the four factors driving national competitive advantage can
interact to affect how successful firms are in international markets. For example, just
having demanding domestic customers may not be enough to give a firm in a particular
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country a competitive advantage. But if that firm also faces tough domestic competi-
tion and existing factor conditions support its efforts to develop more innovative
products (e.g., technology infrastructure is excellent), then a competitive advantage
may result when the company tries to sell internationally. A combination of factors
may help explain why successful American software firms such as Microsoft have also
done well abroad. Conversely, a combination of factors may explain why Italian leather
and wool goods firms, some with histories dating back several hundred years, have
seen their long-running success recently put at risk by upstart Chinese competitors.
Being in a cluster of related industries with well-developed relationships and a tradi-
tion of craftsmanship helped the Italian firms prosper for many years. The local busi-
ness environment, however, made it difficult for them to respond quickly to Chinese
competition. Specifically, as low-cost, but high-quality Chinese companies started
winning customers away, the Italian firms were hamstrung by local labor laws that
made human resource moves difficult.21
Overall, the theory of national competitive advantage is useful for thinking about
how country-specific factors can affect a firm’s international competitiveness. That said,
questions about the theory remain. For instance, having a positive domestic environment
does not necessarily mean that a particular industry or company will thrive in a particular
location. Conversely, companies have emerged from locations without some of the posi-
tive factors specified by the theory and still become formidable international
competitors.22
The role of government is another controversial aspect of the theory of national
competitive advantage. According to the theory, governments can act to facilitate the
development of industries in a nation (e.g., by passing laws that influence firms’ ability
to compete). The exact nature and impact of government action on the creation of
competitive firms, however, is not completely understood. But like it or not, many
national governments are now engaged in helping their companies develop, innovate,
and compete. Dozens of countries are making strategic bets on innovation in various
ways. Consider these examples:
■ Singapore is focused on encouraging innovation in digital media, green technology,

and life sciences. Life sciences start-ups can receive tax credits, facilities, staff training,
and grants from the government.
■ China wants to become a world-class innovation country by 2020 and has provided
incentives to ten top universities to turn out more research and technical experts in a
variety of fields.
■ Finland has spent almost $1 billion to launch an “innovation university” designed
to foster new, commercially viable innovations that cut across multiple areas of
technology.23
These four factors spelled out by the theory of national competitive advantage generally
drive the international strategies used by certain firms. Companies need to make strategic
decisions and often reflect on and take advantage of the conditions that they face in
specific countries. When firms are operating in many countries across a variety of
315
different industries, they need to consider developing larger, corporate-level strategies.

In essence, they need to find ways to effectively manage operations that stretch across
a diverse array of both products and countries.24
Corporate Strategy Options in International Business

Corporate strategies are used by multinationals as a guide for adding value (e.g., based
on differentiation or low cost) to their business-level strategies across countries. It is
common for firms to slowly evolve through several levels of internationalization if
they are successful competitors in each. In fact, small companies often first enter
international markets by exporting and only later do they establish overseas facilities.
Some of these firms eventually build subsidiaries in dozens of countries and form alli-
ances with other companies. Nevertheless, this evolutionary pattern of international
development, one that is often followed by multinationals in rich, developed countries,
has been giving way recently. Instead, newer multinationals from developing and
emerging markets (e.g., China, India, and Mexico) have tended to grow and expand
much more rapidly. These multinationals have grown out of difficult home markets—
ones often plagued with weak business infrastructures, legal systems, and financial
institutions. As a result, they have developed the ability to handle tough environments,
something that allows them to move into foreign markets quickly and adapt well to
local circumstances.25
In general, foreign market entry decisions are driven by a variety of features, includ-
ing the nature of the industry the firm is in, the particular market being entered, the
firm’s strengths and weaknesses, and the firm’s stage of international development.
Chapter 9 considers the many options for entering foreign markets.26
When it comes to strategy, multinationals use various options that reflect the needs
of their different business units or product lines. GE offers an astonishing array of
products that cut across several industries. These include appliances, electrical equipment,
jet engines, lighting, medical diagnostic systems, and plastics (and this is not a complete
list!). The degree to which GE can compete by tailoring its products to local customers’
needs (versus selling the same product everywhere in the same way) varies considerably
across business units. That has implications for the international strategies that those
units need to pursue. It may help to think of diverse multinationals such as GE as net-
works of relationships that exist among many dispersed organizations, each with some-
what different goals, perspectives, and strategies. Nevertheless, the presentation here
simplifies things by treating multinationals as if they used a single strategy to guide all
of their international operations.27
Industry Pressures for Global Integration and

Local Responsiveness
Consider that a multinational’s international strategy often reflects the nature of the
industry in which it competes. For instance, in some industries, products or services have
316
to be tailored to customer preferences, traditional practices, local distribution methods,

legal requirements, and government regulations within individual markets. After all, the
multinational may face different local competitors in each. Such is the case for many
food, home, and personal care products, where local tastes for things such as flavors
and scents vary considerably (e.g., pizzas are ubiquitous but toppings vary noticeably—
such as octopus in Japan). In other industries, customer preferences may matter less than
the web of laws and regulations that govern the development, manufacture, and distri-
bution of products. The pharmaceutical industry is a good example of the impact of
laws on strategy.
Tradition may also matter in addition to customer preferences, meaning that products
have to be customized to match. For instance, in North America, people drive on the
right side of the road and want steering wheels on the left side of their cars. In the U.K.
however, cars are driven on the left side of the road, with preferences for steering wheels
on the right. Many other regional differences in cars exist for a variety of reasons,
including the price of fuel. In Europe, high gas prices mean people prefer smaller and
more fuel-efficient cars than their North American counterparts, where gas is compara-
tively cheap.
On the other hand, in some industries products can basically be sold anywhere
in the world on a nearly identical basis, with little or no modification across coun-
tries (e.g., computer chips, chemicals, passenger aircraft). Overall, the degree to
which companies have to tailor their products or services to satisfy local market
demands is a function of the pressure for local responsiveness in their respective
industries.
Likewise, industries vary in terms of how much pressure for global integration
exists. This force pushes companies in an industry to be very efficient and to capture
economies of scale. All eyes are on improving profitability by simplifying operations
and cost cutting. This depends on the number and prowess of competitors in an
industry. When competitors are few or weak, a company with unique or superior
products is likely to face low pressure for integration. When more formidable competi-
tors emerge, however, companies may look to integrate and coordinate all their value
chain activities. This is often done on a worldwide basis with an eye toward improving
their global efficiency and responsiveness to such competitive threats. For instance, in
low-cost locations, multinationals may try to concentrate their manufacturing. This
can help firms reducing control and coordination challenges. Integration pressures may
lead firms to source globally—searching far and wide for talent, supplies, and com-
ponents, thus creating an integrated web of value chain activities around the world.
Integration is especially appealing in industries where customer needs are becoming
similar or where delivering high-quality service to customers worldwide is key. None-
theless, the bottom line is that global integration pressures are higher in some industries
than others.28
There are five common corporate strategies used by multinationals, all of which
typically reflect responses to varying levels of this pressure for global integration and
local responsiveness discussed so far. Figure 8.4 summarizes these strategies on those
two dimensions.
317
HIGH Global Strategy Transnational Strategy

Central control, integration
across international
Industry examples: Industry examples:
operations is critical for Passenger aircraft, Pharmaceuticals, some
increased efficiency computer chips personal care products
Pressure for Global

Integration and
Regional Strategy
Efficiency
Industry examples:
Automobiles, some
consumer electronics
LOW International Strategy Multidomestic Strategy

Cost reduction and other
benefits associated with
Industry examples: Industry examples:
central control, integration Specialized industrial Commercial banking,
are not imperative equipment, some software certain food products
LOW HIGH
Identical products or Pressure for Local Products or services must
services can be sold Responsiveness be tailored to demanding
anywhere in the same way location-specific
preferences
Figure 8.4 Five International Strategies: Responses to Pressures for Local Responsiveness and Global
Integration.
Sources: Adapted from Beamish, P. W., Morrison, A. J., Rosenzweig, P. M., and Inken, A. C. (2000). International
Management: Text and Cases (4th ed.), 143. Burr Ridge, IL: Irwin McGraw-Hill; Daniels, J. D., and Radebaugh, L. H.
(2001). International Business: Environments and Operations (9th ed.), 529. Upper Saddle River, NJ: Prentice-Hall;
Hill, C. W. L. (2008). Global Business Today. (5th ed.). New York: McGraw-Hill/Irwin.
The International Strategy
When companies face low pressure to tailor their products or services across foreign
markets as well as low pressure to become more efficient and cut costs, they often choose
to pursue an international strategy (also referred to as an export strategy or home rep-
lication strategy). Companies using this approach sell the same or similar products
everywhere—often first created for their home markets. They typically perform all their
product development in the home market but may sometimes establish manufacturing,
marketing, or distribution facilities in important foreign markets. Headquarters, however,
still maintains control over operations and decision making (see Figure 8.4).
This international strategy is a good fit for companies in industries where serious
competitors are few and they can offer unique, specialized products that serve similar
(if not identical) needs across a variety of markets. Many domestic firms find themselves
using an international strategy when they first start doing business abroad, typically by
selling products created for their home markets. U.S. motorcycle maker Harley-Davidson,
for instance, is known for its iconic products. It holds a strong position in the U.S.
market for heavy bikes, where it earns some 70 percent of its total revenue. But in recent
years, Harley has distributed its U.S.-built bikes around the world—most recently India,
318
where it started selling 12 of its most expensive models in 2009 and has no competition
in the “luxury” end of the Indian market. In its earlier days, Procter & Gamble (P&G)
followed a similar path. All products were created in Cincinnati, Ohio, and then dis-
tributed overseas. Now, P&G faces much tougher, more entrenched competitors than it
did 20–30 years ago and thus no longer pursues an international strategy.
Nevertheless, many companies continue to follow an international strategy today,
often in very specialized niche markets where they have a dominant position. For instance,
Germany is known for producing firms with unique combinations of skills when it comes
to the development and production of specialized industrial equipment. These firms have
successfully integrated mechanical engineering prowess with sophisticated information
technology systems using some of the finest manufacturing specialists in the world. This
combination has proven hard for competitors to beat. This in turn buffers German firms
from having to focus too much on costs—which is a good thing, given Germany’s high
wage rates and taxes. Firms in countries such as Brazil, China, and India are increasingly
turning to these German corporations for their specialized equipment needs. Examples
include Kuka, a German robotics company that makes industrial robots for specialized
auto industry applications and, more recently, theme park rides. Another example is
Centrotherm Photovoltaics, another German firm that makes the world’s best solar-cell
producing machines. These are in demand by solar energy cell companies such as China’s
Asia Silicon.29
The Multidomestic Strategy
In other industries, the pressure to tailor products and services to meet local preferences
is high, even if integration and cost effectiveness pressures remain relatively low. In such
circumstances, companies may opt for a multidomestic strategy, which focuses on closely
aligning products and services to the specific demands found in foreign markets. This
can work well if the value-added associated with these customized products allows the
firm to charge higher prices or creates more demand for company products. Because of
the intense focus on localizing products, firms often cede enormous control to managers
in specific countries. This independence allows them to best respond to local conditions.
As a result, product variations—along with management approaches—may vary consid-
erably across countries. Subsidiary managers in specific countries are allowed to run
their operations more or less as intact companies, with little interference from headquar-
ters. The notion is that this is how to best provide tailored products and services for
the local market.
While this allows for maximum tailoring to local conditions, the multidomestic
strategy can be duplicative, inefficient, and lead to product proliferation. It can also
inhibit information sharing as country managers simply act in their own best interest or
even compete with each other for resources. Beauty product giant Avon experienced
some of these problems a few years ago. The company earns 70 percent of its revenues
overseas, much of it in developing markets such as Russia and China. It gave tremendous
autonomy to country managers: they had discretion to develop, manufacture, and market
their own products. Over time, bloat resulted, with overhead costs soaring to
319
$2.5 billion because of inefficiencies company-wide. Product proliferation had also

increased dramatically (for example, 13,000 products were offered in the Mexican market
alone). As business in key markets began to slow, these costs and inefficiencies became
intolerable for Avon. The company decided to restructure and to step away from its
multidomestic approach, cutting management layers and centralizing marketing and
manufacturing on a global basis. This underscores that firms may need to move away
from the multidomestic strategy if they encounter problems or if stronger competitors
emerge that ratchet up pressures for greater efficiency, cost savings, and innovation.30
Companies can put up with these drawbacks in the right circumstances. For instance,
in the commercial banking and beverage industries, multinationals must respond effec-
tively and quickly to a diverse set of local preferences and needs. Put simply, in these
industries, what will satisfy customers can vary from country to country. In response,
multinationals may need to modify their products, marketing, service delivery methods,
and/or pricing. In some industries requiring local responsiveness, differences in local
needs may obliterate any advantages that might otherwise be obtained with centralized
or integrated operations. Centralizing production of certain food products makes little
sense for companies such as Nestlé and Unilever (both of which operate hundreds of
manufacturing facilities worldwide). Transportation costs would offset any savings from
economies of scale, and centralization would make it more difficult to offer an array of
products tailored for specific locations in the first place.31
The Global Strategy
At the other end of the spectrum are industries in which country-specific preferences for
products or services are minimal and global integration can lead to cost reductions and
efficiencies necessary for profitability. In these industries, the same standardized products
or services can be sold everywhere with relatively few, if any, adjustments. For example,
as a key competitor in the production of commercial aircraft, Boeing operates in an
industry that has become increasingly global over the years. It sells commercial aircraft
worldwide with few major differences across countries. This is not to say, however, that
no differences exist. Boeing typically offers customers around the world a limited set of
variations on a particular plane, usually to accommodate the individual needs of specific
airlines (e.g., for passenger capacity, aircraft range, size of first-class cabin, etc.).32
In any case, multinationals operating in industries where requirements for local
tailoring are low and pressures for global integration are high often pursue a global
strategy—an approach where products or services are standardized as much as possible
for sale everywhere while goals and directions are set on a worldwide basis. Indeed,
with a global strategy, company headquarters serves a key integrating and controlling
role, maintaining central control over operations worldwide—to promote efficiencies,
economies of scale, and learning. Company operations are simplified and this makes it
easier for management to respond to changes in the marketplace. All of this also tends
to improve and promote product or service quality. This is essentially the situation at
prominent computer chip makers such as Intel. The company has chip-making plants in
only a handful of countries (including the U.S., China, Costa Rica, Ireland, and Israel),
320
despite the fact that its products are used globally. The key for Intel is to be able to
supply key customers such as Hewlett-Packard and Dell on a just-in-time basis while
keeping costs low and margins high. Indeed, companies pursuing global strategies may
avoid scattering value chain activities around the world. Instead, they often prefer to
concentrate important value chain activities such as manufacturing and product develop-
ment in key places to cut costs and increase efficiencies.33
Boeing has historically followed this approach in competing against Airbus, its
European rival. For example, Boeing operates a design center in Moscow, where several
hundred employees develop parts for various planes. Boeing also coordinates oversees
suppliers (e.g., Xian Aircraft in China and Mexmil in Mexico) that produce parts, and
partner firms that both design and build key aircraft components (e.g., Mitsubishi). In
essence, Boeing is an exporter of commercial aircraft. All of its planes are assembled in
the United States (albeit with an increasing percentage of parts coming from foreign
suppliers) and then sold to airlines around the world.34
That said, a global strategy also has serious drawbacks. For instance, it can prove
difficult for management to effectively coordinate highly dispersed international opera-
tions and activities. Undeniably, Boeing is a poster child for this particular problem. The
company ran into trouble with one of its latest planes, the 787 Dreamliner. Years behind
schedule, this high-tech plane is Boeing’s most complex to date (at the time of this book’s
publication). Because of the high development costs, Boeing not only decided to outsource
a great number of components to other companies, but it also asked them to do much
of the design work and assume the financial risks—instead of simply manufacturing
parts using Boeing blueprints. Unfortunately, this significantly increased the complexity
of Boeing’s supply chain, creating management headaches that Boeing was ill equipped
to deal with and burdening subcontractors with new challenges. The result was poor
quality and missed deadlines.
In response, Boeing moved production of some components back in-house and took
steps to reassert its control and improve its ability to coordinate subcontractors. Boeing
literally set up a worldwide control room for the Dreamliner labeled the “Product Inte-
gration Center.” From the Center, managers can see the Dreamliner assembly line as
well as monitor dozens of TV screens displaying parts shipments and technical queries
from around the globe—information that helps Boeing keep the assembly process on
track. The Center, which is open 24 hours a day, provides real-time communication and
translators so that Boeing can effectively interact with subcontractors from countries as
diverse as Sweden, Russia, Japan, Italy, Korea, France, Britain, and Australia.35 While
this has helped, Boeing continues to have trouble with the 787 as it has been deployed.
The Transnational Strategy
In some ways Boeing has it “easy”—at least relative to industries in which it is important
to both tailor products or services to local market preferences and operate on an integrated
basis worldwide to improve efficiency. Firms facing these challenges may want to move
value chain activities to wherever they can be done “best” (e.g., cheapest, most efficiently,
with the highest value-added, etc.), while still adapting to important local preferences.
321
This approach is the essence of a transnational strategy. To some extent, this

approach represents a “best of both worlds” blend of global and multidomestic
approaches. It involves firms seeking economies of scale and location advantages world-
wide while still acting locally with their products or services out of competitive necessity.
Increasingly, it is also a strategy that companies embrace because of the potential to
transfer knowledge and innovations around the company from wherever they surface,
which may prove especially important when competing in other markets. Yet, it also
offers high potential for conflict and management headaches given the competing demands
of local responsiveness and global efficiency. Indeed, standardizing products to the
extent possible promotes the goal of global efficiency—standardization makes for simpler
operations.36
Accordingly, companies that pursue a transnational strategy sometimes want to tilt
the balance toward the global side regarding product standardization. For instance, P&G
moved to simplify its personal care product lines and formulas worldwide. Today, the
firm’s Vidal Sassoon hair care products use a single fragrance worldwide. To satisfy local
tastes, however, less fragrance is used in markets where customers prefer subtlety (such
as in Japan) and more is used where customers like intense scents (such as some Euro-
pean countries). This often proves to be a delicate balancing act for companies. On the
one hand, moving toward similar products or services worldwide simplifies things for
companies by improving efficiency and reducing costs. But going too far risks alienating
customers if significant preference differences exist across markets that are not adequately
captured with a move toward greater standardization.37
As a result, firms pursuing a transnational strategy must tweak and juggle the often
competing demands for local responsiveness and global integration. One approach is to
create products that have many identical underlying components (which can be manu-
factured in a few central locations where location economies are best). Products can
then be assembled in plants in important markets, where specific features or parts can
be added to the final product that are particularly important given local preferences.
This is essentially what the Illinois-based company Caterpillar does to keep its costs low
while also localizing its products to a degree. And it is working. Caterpillar sells products
in 180 countries and is arguably the world’s top provider of earthmoving equipment for
agricultural, construction, mining, and logging applications. While most of its components
plants are in the U.S., manufacturing and assembly also takes place in 60 different facili-
ties within 23 countries. Needless to say, balancing product localization and integration
requires vigilant management. In fact, multinationals using a transnational strategy must
quickly transfer their core competencies throughout their worldwide organization and
be prepared to take advantage of new or improved core competencies wherever they are
developed.38
Another Alternative: The Regional Strategy
Despite the positive hype sometimes associated with global and transnational strategies,
they may not always be best. Indeed, multinationals sometimes have great difficulty
figuring out just how responsive they should be to local preferences. Some products fall
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into an area where lifestyles and tastes are converging worldwide (favoring a global
strategy), while others are in an area where customers still hold on to their own unique
preferences in specific countries (favoring a multidomestic strategy). And in some cases,
the reality is somewhere in between, with regional tastes and preferences instead of
significant country-by-country differences. Consider Pringles, P&G’s 40-year-old snack
brand. Today, Pringles are sold in dozens of flavors, typically created for regionwide
palates. While Americans are familiar with a variety of Pringles flavors (such as “origi-
nal,” “ranch,” “salt & vinegar,” and “pizza”), some flavors developed for other markets
may lead to some head-scratching. For instance, in Asian markets, unique Pringles flavors
include “seafood” and “aromatic crispy chicken.” In the Middle East, flavors include
“ketchup,” and in Western Europe, popular flavors include “grilled shrimp and pepper,”
and “Jamon Serrano.”39
Figure 8.5 lists factors that tend to favor global versus multidomestic strategies. As
you can see, the formation of regional trading blocks (e.g., NAFTA) appears under the
multidomestic column. Yet, some multinationals that compete in supposedly “global”
industries might be better off pursuing a regional strategy. This approach allows managers
in a regional area such as South America to make decisions, set goals, and respond to
customers’ needs. Part of this strategy also involves achieving efficiencies and economies
by leveraging any location advantages that may exist within or even across regions (e.g.,
minimize production costs by locating plants in cheap labor nations within a region).
For instance, at one point France’s Thomson Consumer Electronics used a regional
strategy for its television lines. Plants in Britain, Spain, Germany, and France each made
Factors Favoring a Global Approach Factors Favoring a Multidomestic Approach
• Converging income across industrialized • Industry standards and regulations governing

nations, rising middle-class incomes in business activities remain diverse across
developing countries nations
• Increasing similarity of consumer lifestyles • Customers continue to demand products and
and tastes worldwide services tailored to their local needs
• Rapid advances in technology, • Being seen as a “local” company is often a
communications and transport; globalized competitive asset
financial markets • Global organizations are hard to manage and
• Increasing worldwide trade, formation of control
global alliances among companies • Globalization can undercut unique
• Reduced trade barriers, more open markets, competencies of foreign subsidiaries
and privatization of state-dominated • Formation of regional trading blocks and
economies agreements (e.g., the North American Free
• Emergence of nations with productive, low- Trade Agreement or NAFTA)
cost labor (e.g., Ecuador and Indonesia)
Figure 8.5 Two Sides of the Coin: Factors Favoring Global and Multidomestic Strategies.
Sources: Adapted from Morrison, A. J., Ricks, D. A., and Roth, K. (1991). Globalization versus regionalization:
Which way for the multinational? Organizational Dynamics, 19, 17–29; Yip, G. S. (1995). Total Global Strategy.
Englewood Cliffs, NJ: Prentice-Hall.
323
specific types of televisions for the European market. Thomson’s North American opera-
tions were run independently and focused on producing televisions with the RCA and
GE labels just for that market, largely using regional suppliers of components. While
this regional approach lacked the worldwide integration found in a transnational strategy,
it offered more local product customization than a global strategy would. That said, a
regional strategy does allow more geographic coordination than a multidomestic strategy
(where multinationals set up quasi-independent subsidiaries to serve specific national
markets).40
Overall, a regional strategy often represents a good alternative for companies in
certain industries—where it is not possible to be truly global but where some customiza-
tion pressures exist across regional or national markets. Moreover, the increasing impact
of regional trade agreements and the fact that a large chunk of international commerce
is intraregional makes regional approaches a good bet for many multinationals. For
example, consider the automobile industry. While there are differences in national prefer-
ences and regulations, there are also broad regional differences (e.g., cars across Europe
are generally smaller and more fuel-efficient than cars in North America). Toyota has
been using regional strategies to compete for some time. For instance, the company relies
on a limited number of vehicle platforms which are designed for adaptability and on
top of which Toyota can apply regional customization. This gives Toyota economies of
scale while still delivering customization at a reasonable cost. Indeed, key Toyota factories
around the world produce a small number of unique models designed to be sold through-
out their respective regions. Toyota also takes truck and minivan engines and transmis-
sions made in its Asian plants and distributes them to assembly facilities serving markets
in Asia, Latin America, and Africa. These components are not used in the U.S. or Canada
because of differences in North American conditions (e.g., bigger engines are needed).41
When Strategy Provides a Competitive Advantage
At this point, you may be wondering when a firm’s international strategy choices actu-
ally provide a competitive edge. Of course, executing a strategy well is important.
Moreover, competitors change and evolve—today’s strategic success for a firm may be
tomorrow’s disaster if management fails to adjust to more effective competition. But it
is important to note that strategy itself can provide an important competitive advantage,
at least in the short run. This depends, in part, on the degree of alignment between the
industry and the strategies typically used by competitors.
For example, a multinational’s global strategy may offer a competitive advantage
when key competitors are relying on a multidomestic approach and the underlying
character of the industry actually favors globalization (e.g., where customer preferences
are becoming the same everywhere and global economies of scale are possible). In short,
if a multinational uses a global strategy in an under-globalized industry, such as when
competitors rely on strategies that do not fit the industry’s underlying character, it should
enjoy a competitive advantage. In fact, research supports the idea that the match or
mismatch between the actual strategies used by international competitors in an industry
and its underlying potential for globalization affects the relationship between multina-
tional strategy and performance. Figure 8.6 summarizes these points.42
324
Underlying Strategy Resulting Level Implications for Firm Strategy

Industry Used by Key of Globalization and Performance vs. Competition
Character Competitors in Industry
(and example)
Favors global Multidomestic Under-globalized Global strategies may offer real

strategy (credit card industry) competitive advantages and
higher performance relative to
multidomestic strategies
Favors global Global Optimum (ship- Global strategies may result in good
strategy building industry) performance but may not offer a
competitive advantage relative to
other firms
Favors Multidomestic Optimum (funeral Multidomestic strategies may result
multidomestic industry) in good performance but may
strategy not offer a competitive advantage
relative to other firms
Favors Global Over-globalized (tire Multidomestic strategies may offer
multidomestic industry) real competitive advantages and
strategy higher performance relative to
global strategies
Figure 8.6 When Strategies Matter Most: Taking Advantage of Mismatches between Industry Char-
acter and Competitors’ Strategic Choices.
Source: Adapted from Birkinshaw, J., Morrison, A., and Hulland, J. (1995). Structural and competitive determinants
of a global integration strategy. Strategic Management Journal, 16, 637–655.
How Culture Can Impact Strategic Choices
International strategy should be developed carefully and via a process that is shaped by
a firm’s context. For instance, European multinationals have smaller home markets rela-
tive to their American counterparts. This may explain why they tend to give foreign
subsidiaries more autonomy, as well as why foreign sales tend to account for a larger
percentage of total sales in European multinationals. Conversely, the large U.S. market
may be one reason that American multinationals have been slower to internationalize
than their European and Japanese counterparts. But these patterns also reflect the influ-
ence of culture on how managers interpret the “rules of the game” in international
business.43
In essence, managers from different countries may bring different views about time,
risks, and goals into the strategic planning process. For example, many Japanese multi-
nationals have a tradition of centralized control, with all roads leading back to Japan.
This tradition has been linked to several cultural factors, including Confucian values,
the importance of in-group networks, and a desire to avoid uncertainty. Cultural values
can also impact the methods used to develop international strategy. For example, when
developing their strategies, companies based in countries with high individualism (such
as the United States) tend to rely more on subjective information than on quantitative
data or forecasting methods.44
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Perceptions about culture matter too. For example, the wider the perceived cultural
gap between headquarters and foreign subsidiaries, the tighter the management control
from headquarters tends to be. Perceived similarity can also shape strategy. Firms often
make their first forays abroad in countries thought to have familiar cultures and busi-
ness practices. The rationale, of course, is that starting with foreign markets that are
similar to the home market is “safer.” But when judgments about similarity are inac-
curate, problems result. The high failure rate of Canadian retail firms entering the
American market, many of which assumed that the U.S. was merely a larger version of
Canada, is a case in point. Perceptions notwithstanding, real differences in tastes, values,
and business practices exist between Canada and the U.S.45
Finally, culture can impact the ownership positions firms take in their foreign opera-
tions. Companies based in high power distance, high uncertainty avoidance countries
(such as France) are more likely to maintain majority ownership over foreign subsidiaries
than multinationals based in low power distance, low uncertainty avoidance countries
(such as the U.S.). Managers with a low power distance perspective tend to be more
comfortable sharing control of overseas operations with a partner, such as in a joint
venture. Overall, international managers should consider how their values and perspec-
tives shape their strategy development and implementation efforts.46
The Process of Developing International Strategy

Culture fit or not, firms should develop international strategies that fit their competitive
contexts. But how is international strategy developed in the first place? While this process
can vary, in many cases management follows a series of steps in developing international
strategy. These steps are outlined in Figure 8.7.
Step 1: The Mission Statement
To clarify direction, many firms start the process of developing an international strategy
by creating a mission statement. This statement summarizes firm values and overall
purpose. Ideally, the mission will express common goals in a way that succinctly captures
management’s vision for the firm. For example, in its mission statement, motorcycle
maker Harley-Davidson describes itself as “an action-oriented, international company—a
leader in its commitment to continuously improve the quality of mutually beneficial
relationships with stakeholders.” Other firms eschew mission statements or produce
them after much of the strategic planning process is complete.47
Step 2: Conducting a SWOT Analysis
Assuming a mission statement is developed first, performing a SWOT analysis is typi-

cally the second step in strategy development. SWOT stands for strengths, weaknesses,
opportunities, and threats. It involves an assessment of the company’s internal circum-
stances and external environment. A SWOT analysis usually involves environmental
326
Create Corporate Mission Statement

● Define company values
● Set basic directions
Conduct a SWOT Analysis

● Diagnose external opportunities & threats
● Evaluate internal strengths and
weaknesses
Evaluate Alternatives, Set Strategic Goals

● Goals should exploit strengths and
opportunities
● Goals should overcome weaknesses,
neutralize threats
Develop Implementation Tactics and

Plans
● Create policies, programs, & procedures
that will help achieve strategic goals
Create Control & Evaluation Framework

● Develop systems and procedures to
monitor strategy implementation
● Take steps needed to keep firm on track
Figure 8.7 The Process of Developing International Strategy.

Source: Adapted from Griffin, R. W., and Pustay, M. W. (2005). International Business: A Managerial Perspective
(4th ed.), 322. Upper Saddle River, NJ: Prentice-Hall.
scanning, a process in which information about the internal and external situation facing
the firm is systematically collected and evaluated. The external side of this assessment
is known as an environmental analysis. Here, the company assesses both promising
international opportunities for its products or services (e.g., unmet demand or weak
competition in certain markets), as well as any threats in foreign markets that might
preclude those opportunities from being fully realized (e.g., inadequate business infra-
structure, political instability, onerous government regulations, increasing competition,
etc.).48
Ideally, firms will examine opportunities and threats at a multinational, regional, or
country-specific level. At the multinational level, companies assess how worldwide trends
might impact their businesses. For instance, many consumer product companies are
optimistic about their long-term prospects for international growth because of rising
disposable incomes in developing countries such as China. But assessing external oppor-
tunities and threats is easier said than done, particularly for companies that have been
327
largely domestic in their orientation. Such firms may lack the staff or expertise to conduct
an environmental analysis of international markets. Consequently, these firms may fail
to perceive international opportunities or significant foreign threats.49
In any case, it may be hard for companies to take advantage of international oppor-
tunities because of both internal weaknesses and pressure from competitors. See the
following International Insights feature regarding Kraft Foods’ international challenges
for an example.
I nternational Insights
Krafting Strategy for International Markets

Kraft is an American food icon. Its more than five dozen brands (including Velveeta, Oscar
Mayer, Triscuit, Planters, Toblerone, and Maxwell House) are household names. As the largest
food corporation in the U.S., Kraft is a giant, with sales of $42 billion in 2008. But Kraft is
somewhat of an also-ran overseas. Less than 42 percent of Kraft’s sales come from outside
North America and only 20 percent come from rapidly developing markets such as China
and India. By comparison, McDonald’s earns over 50 percent of its revenues abroad and
Coca-Cola exceeds 80 percent. Walk through supermarkets in Australia, for instance, and
Kraft products are relatively scarce. Referring to Kraft, one Australian supermarket owner
noted, “They would be classified as a slow-moving line.” In Great Britain, one of Kraft’s
strongest foreign markets, the company only ranks eighth in size among food companies.
Strategically, Kraft says that it wants to “rewire the organization for growth” and “drive
down costs without compromising quality.” But Kraft’s dominant market, the U.S., is saturated.
Indeed, the food business in the U.S. is cut-throat. Brand loyalty is undercut by supermarket
brands and intense price competition. Take salad dressing, for example. Many shoppers just
buy what is on sale—be it Kraft, Wish-Bone, or Hellmann’s.
So, Kraft is looking to overseas markets, particularly in developing countries, for more
rapid growth. The global competition is formidable and includes the likes of Anglo-Dutch
Unilever, Switzerland’s Nestlé, and France’s Groupe Danone. All three moved rapidly into
fast-growth emerging markets in Latin America, Eastern Europe, and Asia. Nestlé and Unilever
both realize over 30 percent of their sales from developing countries alone. In contrast, one
expert said Kraft still tilted too much toward the U.S. and Canada, noting that “A truly global
organization would have a quarter to one-third of its business in North America.”
Indeed, Kraft’s forte (pricey convenience foods and snacks) often have a tough time in
foreign markets where basic products are what many people can afford. For instance, while
Kraft’s visibility in India is low, competitor Unilever has done well by pushing staples such as
rice and salt. But the good news is that Kraft has a plan for boosting revenues in developing
markets. First, it wants to expand the range of products and brands it sells in countries where
it already operates. Second, the company also wants to acquire local competitors, particularly
in beverages and snacks, as a way to quickly enter new emerging markets and tap into rising
middle-class populations. Recently, Kraft has targeted other multinationals to quickly raise its
328
profile in key developing markets. For instance, in late 2009 Kraft offered to buy U.K.-based
confectioner Cadbury PLC for nearly $17 billion. With strong gum and candy brands, Cadbury
is the leading confectioner in high-growth emerging markets, including Egypt, India, Mexico,
and Thailand. In India alone, Kraft’s acquisition of Cadbury would vault it into a leadership
position in a confectionery market, projected to grow 15 percent annually as the Indian
middle class expands and spends more on candies.
Internally, Kraft has also made changes to put itself more on a growth footing. The
company recently reorganized around five global product units, with country managers holding
responsibility for local merchandising efforts. As one senior manager put it, the “challenges
we face . . . demand that we become a more unified, global company” while at the same
time strengthening the “local expertise that has built our success.” How well these moves
help broaden and deepen Kraft’s international reach in the years ahead, especially relative to
its competitors, remains to be seen, but it hopes to swat the competition with this new
strategy.50
Analyzing the environment from a regional perspective involves looking at emerging trends
in a geographic area. For example, South American governments have generally loosened
regulations and improved their business infrastructures in recent years, creating opportuni-
ties for multinationals specializing in construction, energy, and communications.51
While many Western multinationals have shied away from Africa because of percep-
tions about poverty, instability, and infrastructure problems, Chinese companies have
displayed no such reluctance. Indeed, Chinese mining, energy, automobile, and construc-
tion companies see such negatives as opportunities. For example, Chinese car companies
Geely Group and Chery Automobile view Africa as an ideal proving ground—a region
full of price-sensitive customers who might find their cheaper products appealing. Geely
and Chery hope that their African experience will eventually result in the kind of rec-
ognition and success now enjoyed by South Korea’s Hyundai Motor Co.52
Other Chinese firms feel that they can address needs in Africa that were once con-
cerns in China. As the director of a Chinese well-digging firm put it, “China doesn’t
need many new water wells. But Africans struggle to find drinking water every day.”
Chinese consumer-products firms view Africa as a region where they can avoid tough
competition from Japanese, European, and American multinationals. That led office-
supply company Shanghai Hero Co. to build a new facility in South Africa, giving it
easy access to the wider African market. This is not to say everything has gone smoothly
for Chinese companies—in some countries (such as Zambia), resentment against the
wave of Chinese investment is palpable. Complaints have included abusive labor prac-
tices, unsafe working conditions, and attitudes toward locals that smack of “colonialism.”
Exaggerated or not, these charges underscore the greater role Chinese firms now play
in markets around the world.53
Finally, environmental analysis can also be country-specific, assessing whether the
cultural, legal, economic, and political circumstances in a particular country are
329
opportunities or threats. For example, at one point multinationals wanting to do busi-

ness in Saudi Arabia had to consider the fact that the Saudi economy was growing twice
as fast as its electricity-generating capacity. Multinationals unwilling to risk power inter-
ruptions canceled or delayed plans to build new facilities as a result. Others installed
generators to keep things running during blackouts.54
It is important to note that cultural values and prior experiences shape managers’
scanning tendencies. Depending on their backgrounds, managers may pay attention to
different things in the environmental scanning process. One study found that Nigerian
managers paid more attention to governmental issues than did Americans, while the
opposite was true for technology issues. In Nigeria and other developing countries,
political instability can drastically affect business. The U.S., in contrast, is politically
stable, but has a volatile technological environment. Overall, managers coming from
these contexts need to adjust their environmental scanning efforts when considering
opportunities elsewhere.55
The internal side of a SWOT analysis is known as an internal resource audit. This
audit involves identifying key business success factors for the firm. For example, in the
pharmaceutical industry, business success factors might include product efficacy and
patents held, while in the automotive industry styling, quality, and fuel efficiency might
be key factors. In short, business success factors can vary across industries. Business
success factors can also vary over time as well as from country to country. In essence,
firms want to see how internal resources stack up against the demands that they will
face in foreign markets.56
For instance, a key success factor for Wal-Mart, particularly in the U.S., are huge
stores offering a wide range of products, combined with a sophisticated distribution
system. In fact, Wal-Mart’s computerized warehouses and its ability to negotiate and
influence suppliers with large orders help it keep prices low in the U.S. When it first
opened stores in Mexico, however, Wal-Mart’s Mexican suppliers wanted to ship smaller
orders directly to stores, not warehouses. Wal-Mart initially underestimated the difficul-
ties of creating a Mexican version of its American distribution system and experienced
lower initial sales in Mexico as a result. But the company has learned it was inexperi-
enced and inflexible when it came to foreign markets. Wal-Mart now understands that
what worked in America may not work elsewhere—and not just in Mexico. For instance,
in Sao Paulo, Brazil, huge stores were impossible to build in traffic-clogged streets, so
Wal-Mart stores have a smaller footprint. Wal-Mart is also paying more attention to
local and regional preferences in Brazil, both for products and for how they are presented
to customers. For instance, fruits and vegetables are piled high with large colorful
displays—typical of what customers would see in a traditional Brazilian market. Today,
Wal-Mart continues to expand abroad. According to its website, Wal-Mart has over
11,000 stores in 27 countries and saw $466 billion of revenue in fiscal 2013.57
So, the internal resource audit should include an evaluation of both internal strengths
(such as a skilled workforce and superior technology) and weaknesses (such as high
debt, poor name recognition, and lack of international experience) relative to competi-
tors. Firms typically want to build on distinctive strengths that would be tough for
competitors to copy in the short term (i.e., strengths that might provide a sustainable
330
competitive advantage). To identify strengths that are truly distinctive, management

should be able to answer “yes” to the following questions:
■ Can the strength help the firm exploit opportunities or avoid threats?
■ Is it rare/unique, or do competitors have similar “value-added” capabilities?
■ Is the strength difficult or expensive for competitors to duplicate?
■ Can the firm take advantage of the competitive potential of strengths?58
For instance, in the 1990s Japanese electronics giant Matsushita built a network of 150
plants across dozens of countries, providing a buffer against currency and economic
fluctuations in particular locations. Dispersed manufacturing, combined with cutting-edge
technology and world-class brands, gave Matsushita a global reach that few competitors
could match. In 2005, the company renamed itself Panasonic Corporation to forge a
stronger link between customers and its most famous brand. Today, Panasonic has over
$90 billion in revenues and some 300,000 employees.59
Step 3: Deciding on an International Strategy and

Setting Goals
After the SWOT analysis, the typical next step is for the firm to adopt an international
strategy. Ultimately, goals should flow from the SWOT analysis. The firm needs to exploit
strengths and opportunities while neutralizing competitive threats and internal weak-
nesses. Goals should reflect decisions about how broad or narrow the breadth and depth
of the firm’s international operations will be. For instance, the company will need to
decide if it will operate in a limited number of countries or many, and whether it will
offer all products and services abroad or just a subset.
Once general goals such as these are set, more specific objectives can be developed.
Goals should be achievable and have a specific time frame for accomplishment. Areas
where international goals might be set include: profitability (such as to grow an inter-
national profit by 25 percent), production (such as to increase the ratio of foreign to
domestic production from 50 to 75 percent), marketing (such as to improve marketing
effectiveness in Europe), and R&D (such as to disperse R&D capability worldwide),
just to name a few.60
Consider how Mercedes-Benz defined some of its strategic goals. Mercedes is a
luxury brand that embodies German craftsmanship and quality. But German labor costs,
among other things, made it very difficult for Mercedes to export cars to North America
at a profit. So, Mercedes decided to move a substantial amount of manufacturing capac-
ity to the U.S. Mercedes built an assembly plant in Alabama, allowing the firm to manu-
facture at a lower cost in a key market. Mercedes also bought more components from
non-German suppliers. On one hand, achieving these and related strategic goals may
dilute Mercedes’ image as the embodiment of German craftsmanship, ultimately hurting
sales. On the other hand, Mercedes’ sales suggest that the risk of being seen as “less
German” was worth taking, at least so far.61
331
Step 4: Developing Implementation Tactics and Plans
After strategic goals have been set, companies should develop specific plans and tactics that
involve deployment of corporate resources (material, money, people, etc.) to achieve them.
New procedures, processes, or facilities may also have to be developed to achieve company
goals, including specific steps designed to neutralize competitors. Basically, a support system
must be in place to actually move the firm from where it is to where it wants to be inter-
nationally. For example, in the late 1990s, Hyundai began manufacturing its small Santro
model in the Indian city of Chennai. This was the result of Hyundai’s assessment that, to
beat the rising tide of competition in the Indian market, it had to be fully committed and
design its products with local as well as other markets in mind. Consequently, Hyundai
sank $1.2 billion into building a world-class manufacturing plant in Chennai, investing far
more than rival multinationals. With two plants and a capacity of 600,000 cars annually,
Hyundai is the second largest auto exporter in India. It owns almost 20 percent of the
market in India, good for second place and better than local Indian rival, Tata Motors.62
That said, firms often underestimate what is needed to compete effectively abroad.
Pepsi’s decision in the 1990s to increase international revenues some 300 percent may
be a case in point. To achieve this goal, the firm quickly expanded its global presence.
Unfortunately, this expansion backfired. By the late 1990s, Pepsi was actually losing
money overseas and pulled out of some important international markets. Today, small
local competitors are giving both Pepsi and Coca-Cola a run for their money in develop-
ing markets such as in Peru, Mexico, and even Iran. With lower overhead costs, cheaper
prices, and local knowledge (that spawned effective guerrilla marketing tactics), small
firms such as Peru’s Kola Real can cut into the once fat margins of Pepsi and Coke.63
This underscores the idea that to secure a competitive advantage abroad, multina-
tionals must carefully design and execute actions that support their strategies and improve
key value chain activities. For example, multinationals can neutralize a common advantage
of home-grown competitors—greater understanding of the local market—by developing
products tailored to local tastes. In Japan, local soft-drink maker Suntory Ltd introduced
“Asian tea” drinks in response to local tastes. But Coca-Cola countered by developing
and offering an Asian tea for the Japanese market. Of course, such tactics carry risks.
Adapting products for specific markets can increase costs or prove wrongheaded, as
restaurant chain TGI Fridays discovered in South Korea. Customers turned up their
noses at its adapted menu, which included a variety of local items, because they expected
an “American” dining experience. This example highlights the difficulty of teasing out
when and how adapting products to local preferences makes competitive sense.64
Companies in other industries also face daunting challenges. An example is Texas
Instruments’ (TI) semiconductor group who wanted to establish a manufacturing and
technology presence quickly to better absorb market growth wherever it occurred. That
meant getting capital-intensive facilities and plants up and running fast to preempt
competitors. To achieve this, TI developed new tactics and practices, including the for-
mation of a ten-person team to facilitate new plant construction worldwide. The team
developed procedures (e.g., to cut through red tape quickly, find high-quality local
vendors) that enabled TI to bring world-class chip manufacturing plants online eight
months faster than competing firms.65
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Step 5: Putting Control and Evaluation Procedures in Place
This final step involves the control and evaluation procedures designed to ensure that
strategy implementation efforts stay on track so that all of the work done to this point
is not wasted. It is also about ensuring that companies can quickly adjust, if not reinvent,
their strategies as business circumstances change. Clearly, the development and imple-
mentation of international strategy is a dynamic, ongoing process.66
For example, starting in the 1980s and 1990s, Japanese car companies such as Nis-
san, Honda, and Toyota all built car plants in the U.S. in order to meet the needs of
the American market. When growing export demands needed to be met around the
world, Japanese plants in the U.S. shifted gears and ramped up production in response.
As a result, Japanese firms at one point were actually shipping more cars abroad from
their U.S. plants than GM, Ford, and Chrysler combined. This shift in strategy allowed
Japanese automakers to take advantage of lower U.S. production costs relative to Japan.
Moreover, the type of cars that emerging markets were clamoring for happened to be
the ones that the Japanese firms were already making in the U.S. Toyota’s American
plants helped it sidestep import restrictions in Taiwan and South Korea on cars built
in Japan. This strategic flexibility is one reason why Japanese car companies have proven
to be such formidable international competitors.67 This section concludes with a Global
Innovations feature about McDonald’s and Jollibee, a competitor in the fast food busi-
ness in the Philippines and the competitive flexibility that each has shown.
Global Innovations
A Strategic Fast Food Fight: McDonald’s Faces Tough Local Competition from
Jollibee in the Philippines
McDonald’s is an international giant. With over 34,000 outlets in 119 countries, its footprint
is indeed global. But the fast food is a tough business. McDonald’s is up against other
American firms such as Burger King, Subway, and Yum! in foreign markets. But, it also faces
a dizzying array of local competitors eager to take a bite out of the Big Mac. One of those
is Jollibee Foods, known as “the McDonald’s of the Philippines.” Jollibee has over 750 outlets
in the Philippines and another 95 in ten other countries including the U.S. (26 stores), Canada
and eight other Asian and Middle Eastern Countries (and it operates over 2,000 outlets
counting all its brands).
Needless to say, McDonald’s is one of the best-known companies in the world, with a
reputation for high quality, cleanliness, and fast service. It is excellent at picking high-traffic
store locations and successfully enticing families and children with jungle gyms, signature char-
acters, and licensed toys. Yet, Jollibee has thrived in the face of the McDonald’s challenge in
its home market. Today, Jollibee sits on top of the fast food market in the Philippines. While
McDonald’s has grown in the nation over the past several years, Jollibee has grown faster. The
bottom line is that Jollibee has been successful despite having to deal with McDonald’s.
333
What strategic recipe did Jollibee create to more than hold its own against McDonald’s
in the Philippines? And, how might McDonald’s respond, not just in the Philippines but
elsewhere? Jollibee decided that it had to copy aspects of McDonald’s approach, including
the same type of clean and speedy service, and adhering to its “FSC” excellent standards
(food, service, and cleanliness). Employee training is taken very seriously and pay leads the
industry in the Philippines. Jollibee also makes much of its own food products in centrally
located commissaries. It also markets itself to kids with in-store novelties and signature
characters—just like McDonald’s does worldwide.
That said, Jollibee decided that a key to succeeding against McDonald’s was to “act
locally,” more so than the Big Mac. So, anytime a customer approaches a Jollibee counter,
employees say, “Magandang umaga po”—welcome to Jollibee. The first part of this phrase
is a traditional Filipino greeting that underscores the company’s local heritage and creates an
atmosphere of humble Filipino hospitality. On top of that, Jollibee prices its food lower than
comparable items at McDonald’s. Jollibee’s menu is geared more toward Filipinos’ sweet-and-
spicy tastes than McDonald’s. For example, Palabok Fiesta is a noodle dish topped with
smoked fish, deep fried pork skin, bean curd, and onions. Along with spicy flavors, Jollibee
customers can opt for rice with their meals instead of fries, another local preference. In addi-
tion to palates, Jollibee is also mindful of lifestyle, as with its development of indigenous
characters that epitomize the Filipino spirit of “everyday happiness.”
Of course, how well Jollibee will compete against McDonald’s in the years ahead remains
to be seen. McDonald’s is well known for its flexibility and it responded to Jollibee’s success
by spicing up its own menu in the Philippines. Ironically, Jollibee’s own foreign expansion
exposed it to some of the same difficulties that McDonald’s initially encountered in the Philip-
pines and other locations. For instance, in the U.S., Jollibee found that it had to make adjust-
ments, including offering larger portions than it does in the Philippines. It also tended to
locate outlets in areas with large populations of Filipino expatriates.
In any case, competitors of McDonald’s—regardless of their origins—should not under-
estimate the power of the Big Mac. Over the years, McDonald’s has evolved its strategic
business model. For example, in response to concerns about healthy eating, McDonald’s added
salads and fruits in many locations. While outlets worldwide conform to company require-
ments, McDonald’s allows for a surprising amount of tailoring to local conditions. These varia-
tions in offerings and services are designed to help the company stand out in local markets.
For instance, take something that seems pretty simple—an apple. In the U.S., customers
receive apple slices in packets (with the skin removed). But in Europe, the apple skins are left
on. In Australia, customers are simply handed a whole apple. Next, consider the Big Mac.
While it is the most popular item worldwide, local variations in the product abound. For
example, a Big Mac’s meat patty is made of beef in the U.S., but chicken in India. McDonald’s
also offers service variations in some markets. For example, in China many outlets are open
24 hours a day and the company offers “dessert kiosks” which just sell drinks and sweets.
In crowded, traffic-choked cities around the world, McDonald’s delivers. In Cairo, Egypt,
a call center handles orders and motorbikes then deliver all over town from nearby outlets.
McDonald’s has expanded this model to cities where drive-thrus are impractical, including
Beirut, Sao Paulo, Shanghai, and Manila (Jollibee’s home). McDonald’s also capitalizes on
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cross-fertilization of ideas, such as when outlets in Australia came up with the idea of selling
gourmet coffees. They are now sold all over the U.S., and “Starbucks-like” cafés located
inside existing restaurants are growing in Europe. This underscores the firm’s willingness to
look for innovations anywhere that can be applied elsewhere.
Yet, more variety can mean higher costs, more operational complexity, and perhaps a
blurring of what it means to be McDonald’s. As one critic put it, “People go to McDonald’s
to eat burgers.” Some of McDonald’s American competitors have attacked this problem by
offering a separate line of restaurants aimed at local tastes. Yum! Brands made in China, for
example, have kept its Pizza Hut and KFC outlets, but have also opened a new fast-service
chain offering just Chinese food. The dilemma about how much to cater to local tastes versus
sticking to the “core” food and service concept is not going away soon. And, as Jollibee has
demonstrated, there is no shortage of local competitors who think they can take a bite out
of the Big Mac. All this is food for strategic thought. It raises issues about the kinds of chal-
lenges McDonald’s and other firms face with foreign expansion and how far to go to “localize”
menus and dining experiences. So, while Jollibee is on top in its home market, it too will
need to constantly assess a changing environment and innovate to keep McDonald’s at bay.68
Organizational Requirements for Successful

International Strategy
This final section briefly discusses four organizational features that have important
implications for multinationals’ ability to successfully develop and implement their
international strategies. These include:
1. Corporate structure: the way that reporting relationships and units are organized.
2. Management processes: the planning, budgeting, coordination, and performance
appraisal activities and systems used to run the firm.
3. Human resources: the people who staff the firm worldwide.
4. Corporate culture: the expectations, values, beliefs, and unwritten rules that guide
employee behavior in the company.
Multinationals must build characteristics into these organizational features that will
support strategy development and implementation. When firm characteristics and strategic
demands are aligned, better performance results.69
For example, a global strategy requires a corporate structure with some centralized
authority to assist global product development and to make global decisions. This does
not necessarily mean that “headquarters” calls all the shots. But some structure must
exist to coordinate worldwide operations and to make decisions, often with input from
local operations. For instance, South Korea’s LG Electronics credits much of its recent
marketplace success to a new structure where every product has an executive who takes
total responsibility for it—from the research and development stage until it is no longer
sold anywhere in the world. Known inside LG as Product Business Leaders (PBLs), these
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executives help the company spot problems quickly, allowing mistakes to be corrected
(which in some cases may mean pulling losing products off the market). PBLs at LG
spend much of their time visiting markets around the world to assess reaction to com-
pany products—while also interacting with product developers, factory managers, and
marketing personnel. As one senior executive at LG put it, before the PBL system was
developed, “we didn’t have people who owned the performance of a product.” Leader-
ship training and development is also built into this program and it is considered a
launching point for career success at LG.70
Management processes that facilitate coordination and strategic decision making are
also critical if companies are to respond quickly to the competitive environments they
face. For example, some firms can have more success developing and implementing
global strategies by using teams of key employees from different countries to make deci-
sions with worldwide implications. Such teams can bridge cultural and geographic bar-
riers to develop and execute complex global strategies effectively.71
Likewise, management processes may include specific capabilities that help the firm
outperform competitors in areas that are important to customers. In the semiconductor
industry this might involve developing cutting-edge chips more quickly than competitors.
Identifying and developing capabilities that are complex and diffused through the com-
pany (i.e., that cut across functions) and that rely on well-developed interfaces (e.g.,
sophisticated networks of informal communications) are best because they are tough for
competitors to imitate.72
The structures and processes designed to support an international strategy are them-
selves supported by a firm’s culture and human resources. For example, cultural values
that emphasize global flexibility and responsiveness help give the firm an identity that
fosters its ability to execute a global strategy. Figure 8.8 illustrates how corporate
General Area Specific Corporate Feature Necessary
Corporate Structure • Centralized global authority

• No international division
• Strong business dimension
Management Processes • Global strategy information system
• Global strategic planning
• Cross-country coordination
• Global budgeting
Human Resources • Global performance review and compensation
• Use of foreign nationals
• Frequent travel
• Statements and actions of leaders
Corporate Culture • Global identity
• Commitment to worldwide employment
• Interdependence of businesses
Figure 8.8 Corporate Features That Support a Global Strategy.

Source: Adapted from: Yip, G. S. (1995). Total Global Strategy. Englewood Cliffs, NJ: Prentice-Hall.
336
structure, culture, human resources, and management processes should be aligned to

support a global strategy. Of course, for other strategies, these organizational features
will be different. For instance, a corporate structure in which decision authority for
products, marketing, and so on is largely delegated to subsidiaries in specific countries
makes sense for firms using a multidomestic strategy.
Designing a Fair Strategy Development Process
Finally, companies should pay attention to how strategy is created. It turns out that if
the processes used to create strategies are perceived to be fair, then local managers are
more likely to implement them. This is especially the case when any new strategy is a
significant departure from the status quo. Among other things, instituting a fair process
for strategy development means that:
■ headquarters executives make a serious effort to familiarize themselves with local

operations;
■ two-way communication occurs when strategy is being developed;
■ headquarters executives are consistent across subsidiaries in making decisions;
■ local employees are encouraged to challenge headquarters’ strategic perspectives and
decisions;
■ the strategic decisions ultimately made are fully explained to local employees.
While this process is complex, it involves engaging the involvement of local employees,
fully explaining strategic options, and clarifying performance expectations. If this is done
reasonably well, multinationals can improve local employee trust and commitment in
headquarters management. Committed employees who trust the company will be more
likely to cooperate and act in ways that ensure company strategies are executed success-
fully abroad. After all, it is one thing to strategize, but people need to jump in and enact
the good ideas. This “jumping in” process is the subject of Chapter 9.73
Chapter Summary
Figuring out how a company should compete abroad is part of international strategic
management. Unfortunately, a surprising number of companies enter overseas markets
without a clear, well-designed approach. This can lead to problems, including the poor use
of resources abroad and failing to anticipate operational problems in foreign environments
(among others). All international strategies should help firms decide (1) what products/
services will be sold abroad, (2) where and how services will be delivered or products made,
(3) what resources are necessary and how they will be acquired, and (4) how competitors
will be outperformed.
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At a business level, firms make money through value creation, offering products or
services that customers want. One way to do that is by differentiating products from those
of competitors. Another tack is the cost-leadership approach. Finally, a niche strategy involves
focusing on a specific line of products or services relative to competitors who operate more
broadly. A company can also add value by changing any primary or supporting activities in
its value chain. International strategy is ultimately about how value chain activities are
configured and coordinated.
Five corporate-level strategies used by multinationals were discussed as a function of
industry pressures for local responsiveness and global integration: international strategy,
multidomestic strategy, global strategy, transnational strategy, and regional strategy.
The chapter also outlines the process of creating international strategy, which consists
of five key steps, including developing a mission statement, conducting a SWOT analysis,
the actual selection of a strategy and goals, followed by the development of implementation
tactics and plans. Finally, steps have to be taken to monitor strategy implementation on an
ongoing basis. The chapter concludes by noting that features such as corporate structure,
management processes and corporate culture all need to be aligned with a firm’s interna-
tional strategy to maximize performance.
1. What is the value of having a coherent international business strategy?
2. What factors determine national competitive advantage?
3. Explain the differences between international, global, transnational, and multidomestic

strategies. What roles do industry and firm characteristics play in the choice of strategy?
4. What is a SWOT analysis? What do you do with the results?
5. What organizational features are needed to successfully develop and implement a global
strategy?
General Electric Upends “Glocalization” in Favor of “Reverse Innovation”

As we mentioned in the opening feature, two of GE’s newest and most exciting products in
2009 were a portable ultrasound machine and a hand-held electrocardiogram (ECG) device.
338
Both devices are inexpensive and innovative and both were developed in emerging markets
for emerging markets (the ultrasound in China and the ECG in India) before being sold in
the U.S. This represented the start of GE’s move away from a “glocalization” approach—
creating products at home but moving them out to the world with adaptations for local
markets to a new unique strategy. Glocalization offered many advantages, including reduced
R&D costs while still allowing for tailoring to local conditions. GE recognized that it needed
to create cheaper products specifically designed for developing markets overseas to combat
indigenous competition in India, China, and Brazil. Local firms there were filling in the gaps
with less expensive yet innovative products. GE’s versions were expensive and too feature-
laden to penetrate deeply into emerging markets. Customers there were perfectly happy with
technology that offered good, but not great, performance at an extremely cheap price.
Indeed, many developing countries have weak infrastructures and huge populations,
making the development of inexpensive, inventive technologies very attractive. This is
certainly the case in China when it comes to health care, because many facilities outside
of urban areas are relatively basic with rudimentary technology. Because of this, developing
nations have started to become leaders in everything from low-cost medical devices to
cheap solar panels to rechargeable batteries. In turn, this produces local competitors who
can grow into formidable multinationals in their own right. This is something GE learned
firsthand—running into aggressive Chinese companies as it competed for power system
business in Africa.
GE also felt that any innovations it produced in emerging markets could be brought
back into wealthier markets—a process it ultimately dubbed reverse innovation. Products
created for the needs of developing nations can in fact sell very well in rich countries if they
offer new innovations. In the case of GE’s Chinese-developed ultrasound device, this meant
a lower-cost machine that was portable, space-saving, and energy efficient. Moreover, cheaper
products from developing markets can be upgraded to satisfy more demanding developed
markets while still offering innovations at a reasonable price. For example, GE added imaging
applications to its portable ultrasound for sale in the U.S. Likewise, GE invested money to
further develop technology in an aircraft engine created in the Czech Republic—an engine
that will be used in the turboprop market in developed nations.
But GE also has had to make some major internal changes for reverse innovation to
work. The company was structured for decades around the glocalization concept, with research
and development looking out from the U.S. to developing markets instead of the reverse.
Initially, GE managers in India and China had their ideas for new product developments shot
down by higher-ups within the U.S. To combat this, GE created local growth teams (LGTs)
to independently develop products and technologies in emerging markets. LGTs are free to
develop their own approaches, strategies, and products. They can manage their own intact
value chains and emphasize local recruiting. LGTs are also free to innovate from scratch, the
rationale being that simply tinkering with existing global products will not lead to breakthrough
innovations. Having LGTs report to a senior manager at GE was also important. A manager
with the clout to handle conflicts between LGTs and global business leadership, provide
resources, and smooth the way for products developed in emerging markets to find their
way into developed countries was invaluable.
339
Today, GE has over a dozen LGTs in India and China. For the most part, these teams
have been quite successful. GE’s portable ultrasound created a niche now worth almost $280
million in annual sales worldwide. But some managers raised on glocalization are having
trouble adapting and not all LGTs have developed breakthroughs. Nevertheless, GE vows to
push ahead—and we will all be watching to see what happens.74
Conducting a Company Situation Analysis
Purpose
To practice your skills in analyzing and assessing company strategies and to find out more
about a company’s international business situation relative to competitors.
Instructions
Your instructor will divide the class into groups of three to six people. Each group should
interview a senior manager (preferably one with responsibility for a major line of business)
at a local company that has some international activity. Ideally, the interview should focus
on a specific line of business. For instance, if you interview managers at diversified companies,
you should focus on a specific product line sold abroad since strategies are often different
across business lines. The interview itself should cover the issues listed here. Ideally, the
manager should answer questions for the business line he or she is responsible for in the
company and also should answer the same questions for two or three major competitors.
1. The nature of management

• Are any foreigners in senior management positions?
• How extensive is the cross-cultural training for managers?
2. Company strategy
• Is the company’s vision global, transnational, regional, or domestic?
• How willing is the firm to embrace alliances with foreign firms?
• Do units in different foreign locations operate independently or as a single global
company?
• How important is environmental scanning in the company?
• To what extent does the home country control key decisions?
3. Operational issues
• Where are the firm’s major facilities located (home country or abroad)?
• Are product development decisions centralized or decentralized?
• Are manufacturing decisions centralized or decentralized?
340
After the interview is completed, each group should make an assessment about the basic
strategy employed by the company (and its major competitors). Each group should then
develop recommendations about what the company can do to either close the gap with
competitors in terms of international practices or maintain the advantages the company
already enjoys.
Depending on the class time available, your instructor may ask you to conduct additional
research about the company interviewed and its industry before you come up with group
recommendations. These recommendations could be part of your group presentations or even
written up and given to the companies interviewed.
Assuming a more basic assignment, each group should make a 15-minute class presenta-
tion about their findings (allow 20 minutes if presentations are to include the group’s own
recommendations). Your instructor will then lead a class discussion (another 15–20 minutes),
focusing on these issues:
• How “globalized” were the companies interviewed? Did they generally tend to be ahead
or behind their competition in this regard? Why or why not?
• What industry, firm, or competitive factors might account for the differences or similarities
observed across firm practices?
An Alternative Approach to the Exercise
If the class size is too large or other constraints such as time or the availability of executives
make an interview approach impractical, your instructor may convert this activity into a library
research assignment. You may be asked to do an in-depth analysis of the strategic approach
taken by an international company or even an industry group. If so, you may also be asked
to use the interview questions listed to predict the responses that senior managers in the
company or industry might make.
Making Moves on a Global Stage
Purpose
To experience making strategic moves in an international context and to anticipate the possible
reactions of competitors
Instructions
Your instructor will divide the class into six groups. Each group will be assigned to analyze
one of the following pairs of competitors. The pairs consist of an American multinational
341
and a foreign rival that compete against each other in specific markets. Your instructor may
assign other pairs of companies as well.
• Power generation: General Electric (www.ge.com) vs. Siemens AG (http://w1.siemens.

com/entry/cc/en/)
• Laptops/PCs: Dell (www.dell.com) vs. Acer (www.acer-group.com/public)
• Cell phones: Samsung (www.samsung.com/us/mobile/cell-phones) vs. Motorola Corp.

(www.motorola.com)
• Automobiles: Ford Motor Company (www.ford.com) vs. Toyota Motor Corp. (www.
toyota-global.com/)
• Printers: Hewlett-Packard Co. (www.hp.com) vs. Canon Inc. (www.canon.com)
• Food: Kraft Foods Inc. (www.kraftfoodscompany.com/home/index.aspx) vs. Nestlé S.A.

(http://nestle.com).
Each group will be asked to select one product category or product type in which each of its
paired companies compete. Next, each group will be asked to assess where the American firm
in its pair stands relative to its foreign rival in that product category or type. Specifically, groups
will be asked to assess the foreign rival’s potential ability to react to increased pressure in that
product area (i.e., the level of motivation to defend a position in a product area) as well as
the degree of importance of that product area to the American firm. Each group will also
assess the relative clout of both firms (i.e., which firm is better able to take strong competitive
moves or better defend against the same?). Finally, each group will develop recommendations
for how the American firm in its pair can do a better job competing against its foreign rival
(e.g., what specific competitive moves might be made and why?). More details of how each
group should go about this competitive assessment, as well as possible competitive moves
that might be tried, can be found in this article: MacMillian, I. C., van Putten., A. B., and
McGrath, R. G. (2003). Global gamesmanship. Harvard Business Review, May, 62–73.
All groups should read this article before starting in earnest. Depending on the class and
time available, your instructor may ask each group to write a report summarizing its assess-
ment and recommendations. The scope and length of that report will be defined by your
instructor. In addition, your instructor may ask each group to give a 10–15 minute presenta-
tion about its findings.
Notes
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global post. The Wall Street Journal, January 9, A9; Ellison, S. (2003). Kraft’s stale strategy.
The Wall Street Journal, December 18, B1, B6; See also www.kraftfoodscompany.com.
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54. Pearl, D. (1996). Saudis, of all people, find industry hobbled by a lag in electricity. The Wall
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55. Sawyer, O. O. (1993). Environmental uncertainty and environmental scanning activities of
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also www.panasonic.net.
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62. The Economist. (2008). A global love affair: A special report on cars in emerging markets,
November 15, 8.
63. Ellis, E. (2007). Iran’s cola war. Fortune, March 5, 35–38; Luhnow, D., and Terhune, C. (2003).
A low-budget cola shakes up markets south of the border. The Wall Street Journal, October 27,
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64. Gupta, A. K., and Govindarajan, V. (2001). Converting global presence into global competitive
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65. Burrows, P., Bernier, L., and Engardio, P. (1995). Texas Instruments’ global chip payoff.
BusinessWeek, August 7, 64–66.
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114–122; Brown, S. F. (2004). Toyota’s global body shop. Fortune, February 9, 120B–120F;
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tan-caktiong-takes-jollibee-foods-global/ (retrieved December 10, 2013); Gross, M. (2009).
Jollibee brings a Filipino addiction to Queens. The New York Times, March 11, available at:
http://events.nytimes.com; The Economist. (2008). Here comes a whopper, October 25, 78;
Arndt, M. (2007). Knock knock: It’s your Big Mac. BusinessWeek, July 23, 36; Bellman, E.
(2009). McDonald’s plans expansion in India. The Wall Street Journal, June 30, B4; Liu, L.
(2009). Europe’s new McCafé culture. BusinessWeek, October 5, 70; also see www.jollibee.
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69. Johansson, J. K., and Yip, G. S. (1994). Exploiting globalization potential: U.S. and Japanese
strategies. Strategic Management Journal, 15, 579–601; Yip, Total Global Strategy.
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Wall Street Journal, July 21, B1, B5; Yip, Total Global Strategy.
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to globalize your company. Organizational Dynamics, 24, 50–67.
72. Bartmess, A., and Cerny, K. (1993). Building competitive advantage through a global network
of capabilities. California Management Review, 35, 2–27.
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Market Space and Make the Competition Irrelevant. Boston, MA: Harvard Business School
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procedural justice. Strategic Management Journal, 12, 125–143; Sloan Management Review.
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disrupting-itself/ar/pr.
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chapter 9
jumping in
foreign market entry and
ownership options
TAKING THE PLUNGE 349
FOREIGN MARKET ENTRY OPTIONS 358

Learning Objectives
describe the stages of international development that firms may pass through and how
these stages relate to foreign market entry;
understand the strengths and weaknesses of various foreign market entry options that
do not require ownership as well as those that do require some ownership
responsibilities;
identify the different types of strategic alliances between international companies and
why they are used.
General Electric Powers up in China . . . But at a Technological Price

For over two decades, GE has had success in China selling its many products—everything from
hair dryers and washing machines to jet engines and power-generating turbines. GE’s focus is
understandable given the economic growth in China. For example, the demand for power
generation was projected to grow by leaps and bounds. While China is the world’s largest
consumer of coal, it has also recognized the need for development of renewable energy and
has invested heavily in that. In 2009, GE turbines were installed when China launched its biggest
biogas energy plant, turning chicken waste into electric power with reduced greenhouse gas
emissions. GE also opened the firm’s first wind turbine assembly facility in China, a wholly
owned plant designed to supply the huge wind power needs there. The gearbox is a key part
of the technology for GE’s wind turbine and was to be jointly developed with partner Nanjing
High Speed and Accurate Gear Company (NGC). GE provided technical prowess and brought
NGC management to the U.S. for training and leadership development.
Yet, GE’s efforts to sell power turbines in China underscore the conundrum faced by
many who eye booming Chinese demand with relish. On the surface, the competitive context
facing GE’s power turbines seems clear. Specifically, GE’s potential Chinese customers are
mostly regional utilities and independent energy-producing firms. Today’s most advanced
power turbines are sophisticated pieces of technology that pump out huge amounts of
electricity from their high-tech blades. Consequently, GE’s main competitors at the moment
are mainly other multinationals, such as Vestas (Denmark), Siemens (Germany), and Alstom
(France). In contrast, multinationals in comparatively low-tech industries such as personal care
(for example, shampoo makers such as P&G and Unilever) see China as many different and
difficult local markets driven by specific preferences. These firms often face many local
competitors that operate cheaply and possess in-depth knowledge about local customers.
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F O R E I G N M A R K E T E N T R Y A N D O W N E R S H I P O P T I O N S
But a few years ago, GE faced big challenges of its own when it tried to win a contract
that could be worth billions to provide power turbines to several regional utilities in China.
On the one hand, China represented a big growth market for GE’s power turbines because
soaring economic development caused electricity demands in China to skyrocket in recent
years. At the time, China determined it must spend over $10 billion annually on new power
plants well past 2011 just to catch up.
On the other hand, in competing against Siemens and Mitsubishi for the turbine business,
GE faced Chinese negotiators who wanted access to all of the technology that allowed GE to
develop its cutting-edge turbines. Government officials asked GE to pass along its proprietary
technology to a couple of Chinese firms that wanted to be able to construct the turbines on
their own. Clearly, China wants its companies to be global players in high-tech manufacturing
industries. There is the rub—China’s strategy the past decade or so has been to dangle access
to its growing internal markets in exchange for the transfer of the most critical technologies.
As you might suspect, GE was torn. While access to China’s growing market for power
turbines was important, the Chinese demand for 100 percent of their technology was hard
to swallow, especially because the process of developing advanced power turbines cost some
$500 million. As one GE executive put it, “we’re interested in protecting the technology that
we made significant financial investment in.” In essence, companies such as GE face a
tradeoff—pursue short-term profits at the risk of creating formidable local competitors in the
long run, thanks to transfers of technology, or keep its technology and get shut out of a key
market. Indeed, multinationals such as Motorola, Samsung, and Ericsson all either formed
joint ventures with local partners or established research and development centers in China
as vehicles for responding to Chinese demands for the transfer of technology. GE is now
doing the same in certain areas, like the earlier example of GE’s partnership to develop wind
turbine gearbox technology.
So, here is the challenge. What should GE do in response to these technology transfer
demands? Is there a way that GE can protect itself, at least to some degree, and still gain
access to the Chinese market for power turbines? What might the role of the U.S. govern-
ment be, if any, in all of this? Think about these questions as you read through our sections
on modes of entry in foreign markets and their associated pros and cons. If you can, do
some research on the power turbine industry and the technologies involved. Because several
years have passed since GE faced this decision, you can then take a look at the Up to the
Challenge? feature at the end of the chapter for a glimpse at how GE actually responded.1
Taking the Plunge

This chapter examines the options companies have for entering foreign markets. Of
course, the options that companies select are often a direct reflection of their corporate-
level international strategies. As you will see, foreign market entry options vary consider-
ably in terms of the managerial and financial resources that need to be committed for
companies to be successful. But which specific entry method companies select usually
depends on how management sizes up the following sets of factors:
349
■ company objectives for foreign markets (e.g., desired market share, profitability);
■ the environment in specific foreign countries targeted for entry (e.g., cultural, eco-
nomic, and legal context, quality of the business infrastructure);
■ company capabilities and resources (e.g., technical, managerial, financial);
■ the competitive context in targeted foreign markets (e.g., existing as well as potential
future competitors);
■ attributes of the products or services to be sold within targeted foreign markets (e.g.,
certain products may be impractical to ship because they are perishable, too heavy,
fragile, or so complex that they require on-site support);
■ the risk–reward equation (e.g., do the risks associated with entering a particular for-
eign market stack up well against the potential rewards and help the company achieve
its objectives).
Other factors shaping company choices include the pros and cons of the various entry
options as well as the firm’s level of international development (and how successful it
is). Many of these factors are considered within this chapter. Yet, it is also important
to emphasize that entering foreign markets may not always be the best move for com-
panies. Unfortunately, some companies seem to feel that they must “go global” because
of a perception that “everyone” is involved in international markets one way or another.
The bottom line is that entering foreign markets has to make sense for each individual
company. Consequently, management should step back and ask some tough, basic ques-
tions before proceeding—questions that address the potential costs, benefits, and capa-
bilities of the firm as they relate to foreign market entry options. These questions are
summarized in Figure 9.1. Of course, addressing such questions can be part of the process
What Are the Potential Will the Costs of Going Does the Firm Have the
Benefits of Going Global? Global Outweigh the Management Skills Needed to
Benefits? Globalize?
When and where would the What costs are associated What specific management skills
benefits of global moves show with the benefits of moves to are needed to realize benefits of
up in financial statements? globalize? going global?
Is the understanding of each What do company skeptics Has the company demonstrated
benefit clear, and what is the say about the costs of that it has the talent and
value of each benefit? globalizing and the impact skills needed to execute the
on performance in foreign globalization moves under
markets? consideration?
Is there any hard evidence What’s the best alternative use Can the firm effectively develop
that other firms have realized of the resources the company the management skills needed
these benefits under similar plans to spend on executing to execute any planned
conditions? its strategy to globalize? globalization moves?
Figure 9.1 Thinking About Globalizing Your Company Somehow? Ask Questions in Three Areas
before Taking the Plunge.
Source: Adapted from Alexander, M., and Korine, H. (2008). When you shouldn’t go global. Harvard Business
Review, December, 70–77.
350
of developing a company’s international strategy in the first place, something covered

in Chapter 8. Nevertheless, companies need to avoid “bandwagon” thinking and care-
fully consider the alternatives before taking the plunge. As you read through this chapter,
keep the questions in Figure 9.1 in mind as we review the pros and cons of specific
foreign market entry options.2
Stages of International Development
It is useful to first understand how a firm’s embrace of international markets evolves

over time. Historically, companies have gradually expanded their international activities
in a series of relatively distinct stages. In essence, as companies accumulated experience,
knowledge, and capabilities overseas, their involvement in international markets grew
accordingly. This allowed companies to effectively manage the complexities associated
with more sophisticated international operations.3
For instance, a small company might first dip into foreign markets by exporting.
Perhaps the company saw potential foreign markets as attractive. Or perhaps it was
concerned about negative trends in its domestic market. Either way, the company reached
a tipping point and was willing to experiment and to dip a proverbial toe into foreign
markets. In such cases, exporting is a common option for small firms because large
capital outlays are not required (e.g., to build expensive plants overseas). But as com-
panies grow and evolve, however, they may move from relying on exports to building
manufacturing facilities overseas. Yet, the international developmental process is anything
but exact. Many firms do not evolve in a clear sequence of steps or move in a linear
fashion through developmental stages. For instance, companies can jump from exporting
to establishing an international division without establishing an overseas sales subsidiary
first. Likewise, overseas acquisitions may allow firms to leapfrog some steps. Later in
this section, we will take a closer look at the different evolutionary path that some
multinationals from emerging economies have taken to grow and develop.4
But first, consider the dichotomy between service and manufacturing firms. A manu-
facturer is more likely to go through a gradual series of stages as it expands internation-
ally. Global car giant Toyota is a good example. It began by exporting cars from its
home base in Japan, slowly expanding its presence overseas by building local manufac-
turing capabilities in key markets such as the U.S. In recent years, Toyota has been
aggressively expanding its manufacturing base in China.5
In contrast, service companies essentially have to jump in with both feet when they
decide to enter foreign markets, often through acquisitions. Unlike manufacturing firms,
service companies do not have the luxury of starting out slowly and gaining experience
(e.g., by exporting a product overseas) before setting up operations abroad. For instance,
GE Capital, the financial services arm of parent GE, lends money and offers insurance
worldwide. It has arguably become a master at setting up foreign operations quickly,
either building them from scratch or rapidly integrating foreign acquisitions. Some years
ago, GE Capital bought troubled Toho Mutual, a Japanese insurance firm. GE Capital
quickly installed its own procedures while scrapping Toho Mutual’s seniority-based
personnel system.6 Naturally, the success of this approach depends on how well the
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company executes its procedures and the extent to which local difficulties hamper opera-
tions. For instance, Western banks and other financial services firms that barreled into
Eastern European markets a few years ago ran into cultural, recruiting, and legal obstacles
that ate into potential profits, especially after paying millions to snap up local banks.7
Nevertheless, many firms evolve through relatively distinct stages as they become
more sophisticated in their international operations. Not surprisingly, there are different
perspectives as to how to define such stages.8 Nevertheless, many experts assume that
companies can be successful in any stage and that the time companies take to progress
through internationalization stages varies. Figure 9.2 presents a basic framework for
understanding the process of internationalization that involves six stages.
Stage 1: Exporting
A domestic company often begins internationalizing by exporting its products or services
to foreign customers. This stage may include marketing of products or services abroad,
perhaps through an export department run by a manager and small support staff. Such
departments are typically considered ancillary to the firm’s domestic sales and marketing
activities, at least initially. Alternatively, domestic firms that are new to international
business may turn to banks or consulting firms to handle many export-related activities
and provide the necessary expertise (such as dealing with documents, currency issues,
shipping, and letters of credit). For many years, L.L. Bean was a good example of a
Stage 1 firm. This Maine-based outdoor clothing company got its start in 1912 and,
while it has bricks and mortar retail outlets, L.L. Bean has been mainly known for its
direct-to-the-consumer sales approach, first by mail-order catalog and later by e-commerce.
The company began by serving only the U.S. market but eventually began exporting to
customers in other countries. Today, L.L. Bean ships its products to over 160 countries.
It does, however, obviously face a variety of challenges as an exporter, including import
restrictions on textiles in some European nations as well as U.S. government restrictions
on exporting to certain countries (such as North Korea, Syria).9
Stage 2: Sales Subsidiaries

As overseas sales continue to grow, firms may feel that it is best to contract with dis-
tributors or representatives to represent their products abroad, such as to promote
products, to answer questions, and to provide follow-up service, etc. For example, in
Japan, L.L. Bean established local customer service operations, including service repre-
sentatives, to help Japanese customers who have questions. Indeed, once a firm such as
L.L. Bean decides to open overseas sales offices or retail operations, it is essentially
moving to Stage 2. The company arguably reached that milestone in 1992, when it
opened its first overseas retail operation in Japan. As of 2008, the company had over
a dozen retail outposts in Japan and had launched its first store in China. Likewise,
Milwaukee-based motorcycle maker Harley-Davidson was the quintessential example of
a Stage 2 firm for many years. Strong growth in foreign markets prompted Harley-
Davidson, which exports just over 30 percent of its motorcycles, to establish overseas
offices and retail outlets for better marketing and sales support.10
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Stage 3: International Division

Indeed, Harley-Davidson has continued to expand its sales and retail presence overseas
(its first dealership in China opened in 2006). That said, the company has also moved
to Stage 3, which involves assembly or manufacture of products overseas. Specifically,
Harley-Davidson established its first foreign assembly operation in South America, ship-
ping motorcycle kits to Brazil for final assembly and subsequent sale. While the vast
majority of Harley-Davidson motorcycles are still assembled in the U.S., the company’s
move to assemble products in Brazil is a common and natural progression from the
creation of overseas sales subsidiaries. Yet, sometimes companies move from exporting
to an international division in one fell swoop. Regardless, having an international divi-
sion means that a more sophisticated organizational structure is in place to oversee all
foreign business activity and to support future international expansion. Usually, an
international division also means that the company has placed a greater emphasis on
hiring personnel who are knowledgeable about international business and can monitor
foreign markets.11
Stage 4: Multinational
Stages 4–6 describe the more complex multinational operations that may evolve over
time. In Stage 4, multinational companies recognize that while headquarters plays a
key role in important strategic decisions, foreign operations often do best when staffed
by local employees who understand the local environment. In fact, the role of the
foreign subsidiary in Stage 4 is to serve the needs of the national or regional market
where it is located. But expanding and localizing foreign operations or activities is
expensive and can distract from a firm’s core brand, especially in challenging times.
For example, Harley-Davidson acquired Italian performance motorcycle maker MV
Agusta Group in 2008 in order to give it a more significant footprint in Europe with
popular brands that could complement its own. But in late 2009, Harley-Davidson
reversed itself and put MV Agusta up for sale, concluding that the money spent on
acquiring and running the company was “diverting investment dollars away from the
Harley brand.”12
Stage Area of Concentration
Stage 1 Exporting
Stage 2 Sales subsidiaries
Stage 3 International Division
Stage 4 Multinational
Stage 5 Global or transnational
Stage 6 Alliances, partners, and consortia
Figure 9.2 Common Stages in the Process of Corporate Internationalization.

Source: Adapted from Briscoe, D. R. (1995). International Human Resource Management. Englewood Cliffs, NJ:
Prentice-Hall.
353
On the other hand, achieving the right balance between headquarters’ control and
local fine-tuning may sometimes mean playing up a foreign subsidiary’s local roots. For
instance, to enter the Brazilian market, American retailer J. C. Penney bought Lojas
Renner, a family-run regional department store chain. But rather than turning Lojas
Renner into just another J. C. Penney outpost, the company kept things local. After
running into trouble in other countries, J. C. Penney realized that successful retailing is
often a localized phenomenon. So, J. C. Penney wanted to keep the local expertise that
was the backbone of Lojas Renner’s outstanding reputation for service and value. Con-
sequently, J. C. Penney kept the Lojas Renner name on storefronts in Brazil and kept
the local management team in place. Those steps, along with J. C. Penney’s financial
help, allowed Lojas Renner to grow more than 100 percent within two years.13
There are many other retailers that also try to localize their operations to succeed.
For example, France’s Carrefour, the world’s second-largest retailer after Wal-Mart,
operates in dozens of countries and states that over 90 percent of the products in its
stores are local in origin. As one Carrefour executive explained, “In China, we are
Chinese; in Spain, we are Spanish.” Dutch competitor Ahold goes even further, operating
under different store names and emphasizing local brands in the more than two dozen
countries where it operates. As Ahold’s CEO put it, “Everything the customer sees, we
localize. Everything they don’t see, we globalize.” Yet, successful multinationals can
stumble if they are complacent. For instance, in 2009 Carrefour pulled out of Russia a
mere month after it had opened a second store there. Analysts suggested that the com-
pany was not fully prepared to compete in the Russian market and decided to cut its
losses and regroup.14
Wal-Mart is another company that has had its share of tumbles in foreign markets.
In Germany, for instance, Wal-Mart did not fully understand local shoppers, government
regulations, and the pervasive role of German unions, much less the competitive land-
scape. Indeed, Wal-Mart has been criticized abroad for everything from “abusing” local
suppliers to committing cultural snafus in foreign markets. For example, Japanese
employees initially resisted Wal-Mart’s “10 foot rule,” which pushes employees to offer
help to customers who come within 10 feet (in most Japanese stores the custom is to
wait for customers to ask for assistance). But Wal-Mart has learned—it now relies much
more on local management expertise and adapts its retailing approach where needed
when operating outside of the U.S. In 2003, Wal-Mart had over 1,300 stores in foreign
locations. By 2013, of its over 11,000 stores nearly 60 percent (6,350) were outside of
the U.S., and accounted for a significant portion of the firm’s revenue. In short, Wal-
Mart has lost some of its “headquarters knows best” mentality.15
Stage 5: Global or Transnational

A more global or transnational orientation marks companies in Stage 5. Of course, some
companies never reach this stage, perhaps because their industries do not require opera-
tional integration worldwide. As discussed in Chapter 8, companies that operate on a
global or transnational basis try to ignore geographical boundaries in terms of their ongo-
ing operations. In short, they will build product, source materials, or perform services
anywhere in the world if doing so somehow minimizes costs and maximizes returns. For
354
instance, computer-peripherals maker Logitech International has dual headquarters (in

Silicon Valley and Switzerland) and bases its top manufacturing executive in Taiwan (a
hub of low-cost Asian computer component suppliers and manufacturers) so that he or
she can make faster decisions about where it can source product. Of course, managing
this effectively is no easy chore, requiring flexibility, the ability to bridge cultures and time
zones, interdependence across all units, and a global perspective, among other things. A
transnational orientation, however, also will allow for location-specific tailoring of products
or services where necessary, often to a surprising degree. For large, diverse companies such
as GE, assessing whether the firm operates “globally” or “transnationally” really makes
little sense. Instead, each business unit (such as plastics, medical imaging, etc.) must decide
how local it needs to be to succeed against the competition.16
Stage 6: Alliances, Partners, and Consortia

Stage 6 highlights the fact that firms are increasingly linking up to leverage their combined
resources such as people, equipment, technology, expertise, and research. For many mul-
tinationals, partnerships, joint ventures, and alliances help tap resources that they believe
are either too expensive or otherwise impossible to secure alone. For instance, Daimler,
Mitsubishi, and Hyundai partnered to jointly develop a new engine. By sharing key
technologies and minimizing development costs, the three companies hope to use the
engine, in a variety of configurations, in cars sold in Europe, Asia, and the U.S. As one
auto executive put it, “You collaborate or die. You must achieve economies of scale.”17
The process of transferring technology via alliances can put a firm’s technology
advantage at risk. Many countries have developed laws that help their firms protect
their technological edge (see Chapter 2). A related issue for small and large firms alike
is the ability to prevent misuse of legal but questionable use of patents. For example,
large companies sometimes engage in patent flooding. This involves applying for many
different patents dealing with small variations on technology originally developed by
one’s competition or a small, start-up firm. The following International Insights feature
provides a specific example of how this shattered a partnership between a small U.S.
firm and large Japanese one.
U.S. Firm Battled a Japanese Giant to Protect Its Technology

Dr. Steven Case, founder and former chair of Cyberoptics, invited Yamaha Motor Co. to visit
the firm. The meeting was a great success and led to a beneficial agreement between
companies. But, the five-year alliance ended in U.S. District Court when Cyberoptics sued
Yamaha for contract and patent violations. It charged Yamaha (the well-known maker of
motorcycles) with using a deluge of patent filings to poach the technology that Cyberoptics
had developed—a practice called “patent flooding.”
355
At the time, patent flooding was more common in Japan, while it was generally viewed
as a questionable practice in the U.S. Flooding occurs when a firm files for many separate,
but isolated, patents that closely resemble a rival’s patent of larger scope. This handcuffs the
innovating firm and ties it to the firm that “flooded” the patents surrounding its product.
Otherwise, it finds itself slapped with lawsuits by the “flooder,” claiming infringement. To
avoid the problems and costs, many firms (particularly smaller ones) are cornered into
exchanging patent rights or paying fees to be able to launch their product.
The Cyberoptics case is similar, and because of its relatively small size there was a lot
on the line. The firm supplies optical laser sensors and image analysis systems to makers of
electronic equipment. Cyberoptics’ problems began when Dr. Case met with Yamaha engineers
at an Anaheim, California, hotel. There, Cyberoptics demonstrated its new product to an
impressed Yamaha who bought 500 systems over the next five years. Dr. Case stated in court
documents that during a visit to Yamaha he came up with a way to improve the effectiveness
of Yamaha’s robots. While there, he jotted down an outline of his invention on a napkin,
which became one of many documents entered into evidence (something that Case claims
he signed and dated). Other documents allegedly also support Cyberoptics’ claim that Yamaha
made only slight changes to its inventions when it subsequently filed 26 patents in several
countries that represent only slight variants of the Cyberoptics product. Another company
alerted Cyberoptics of the Yamaha patents and, once informed, it filed suit alleging Yamaha
violated the agreement that neither company could file patents on their collaboration without
mutual consent. Dr. Case claimed that the patents were very similar to those he had sketched
out on the napkin.
For Yamaha’s part, it denied the allegations and claimed that Cyberoptics was informed
of the applications and that the napkin was nothing more than a duplication of existing
Yamaha diagrams that its engineers showed Dr. Case. Yamaha countersued for defamation,
saying that the charges were false and slanderous. While the facts were being sorted out in
U.S. Federal Court, Cyberoptics continued to spend time and money to protect its technology.
Eventually the lawsuits were settled out of court.
Lawsuits such as this show why worries among smaller firms may be warranted. The
sheer number of similar cases led the U.S. to raise patent flooding by Japanese firms, and
the Cyberoptics case in particular, as an issue between countries a few years ago. As early
as 1996, Japan was added to the U.S. watch list of countries with weak patent protection.
Yet, despite a global treaty designed to stop flooding, the issue persists. Some think it has
gotten worse.
U.S. firms are getting into the act themselves with an onslaught of litigation brought
about by domestic patent “trolls.” Trolls are not inventors with creative ideas they want to
protect. Instead, they are people with some capital who typically buy up a slew of patents
that might slightly overlap with existing patents or products. They then engage lawyers to
sue anyone and everyone who might be using or selling the claimed “inventions” as small
parts of their products or processes. Lawyers euphemistically call the trolls “non-practicing
entities”—leave it to Americans to develop a market in patent “derivatives.” Trolls, in fact,
filed the majority of the roughly 4,700 patent suits in 2012, many of which were against
small companies and start-ups that often cannot afford to fight back.18
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Despite the increasing popularity of such between-company linkages, building trust

between partners can be quite difficult. This might be especially true when the firms
involved are separated by cultural differences, such as in the Cyberoptics–Yamaha case.
Even these gaps, however, can be bridged. For instance, one study found that American
automotive suppliers developed greater trust with Japanese automakers operating in the
U.S. than with American automakers. One factor that seemed to make a difference was
the greater tendency for the Japanese firms to be helpful—they sent consultants to help
American partners for months on end without charge. In short, to build trust in partner-
ships, you may have to give it first.19
Emerging Market Multinationals: A Different

Evolutionary Path
The stages of internationalization just described may not hold for every firm. Indeed,
there is increasing evidence that the traditional path to internationalization—slow
expansion into foreign markets as firms gain the knowledge and experience needed
to manage greater risks abroad—simply does not hold for new multinationals that
come from emerging market economies. In short, many emerging market multination-
als have internationalized very quickly. Moreover, they have done so after growing
in home markets that often come with many disadvantages such as weak business
infrastructures, poor intellectual property protections, political instability, and opaque
legal systems, as well as the fact that they must often compete against wealthy, expe-
rienced multinationals from developed markets. Figure 9.3 summarizes key develop-
mental differences between traditional multinationals and emerging market
multinationals.20
Ironically, these home market challenges often make emerging market multinationals
better equipped than “traditional” multinationals when it comes to coping with difficul-
ties in developing countries. They are often more nimble as well—lacking stifling corporate
bureaucracies and entrenched cultures that have built up over decades in more established
multinationals. Consequently, they often expand internationally by entering other emerg-
ing markets as well as more developed countries as they build their capabilities to compete
with established multinationals, such as in the U.S. or Europe. One of the ways that
they “upgrade” their competitive capabilities is by buying or forming alliances with
sophisticated multinationals in developed countries. Between 2008 and 2009, for instance,
Chinese energy companies such as China National Petroleum Corp, Chinalco, Cnooc,
and Sinopec put over $40 billion on the table to buy, sometimes unsuccessfully, energy
firms from Argentina (YPF), the U.K. (Rio Tinto), Switzerland (Addax Petroleum), and
Norway (Awilco Offshore). Sometimes, developing country multinationals bargain with
more established multinationals for reciprocal market access. Many Chinese multination-
als behave just this way, using their strong position at home to entice established Western
multinationals into partnerships—trading home market access and know-how for access
to technology or even developed country market access. A good example would be
Chinese appliance maker Haier, whose products, up until fairly recently, were not found
in American stores.21
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Development Traditional Multinationals Multinationals from Emerging

Dimension from Developed Countries Markets
Firm adaptability Generally low due to ingrained Generally high because of scant
cultures and structures that may international history, allowing for
lead to inertia nimble, innovative responses
Capabilities in unstable/ Generally weak; these firms Generally strong since these firms
difficult business and evolved in stable political evolved in markets with business
political environments contexts/good infrastructures and political instability
Competitive advantages Generally strong thanks to Generally weak; with limited
deep, well-developed resources resources that need to be upgraded
available in the firm relative to traditional multinationals
Path of expansion Simple, evolving from closer to Complex, often simultaneous entry
more distant nations into developed and emerging
markets
Typical foreign market Internal, with wholly owned External, relying on acquisitions and
entry mode foreign subsidiaries alliances
Speed of Gradual, often evolving through Accelerated, often rapidly moving
internationalization distinct stages into several markets in multiple
ways
Figure 9.3 Comparing the Old with the New: Developmental Differences between Traditional and
Emerging Market Multinationals.
Source: Adapted from Guillen, M. F., and Garcia-Canal, E. (2009). The American model of the multinational firm
and the “new” multinationals from emerging economies. Academy of Management Perspectives, 23(2), 23–35.
Foreign Market Entry Options

Our discussion so far suggests several options when it comes to entering foreign markets
and this section presents those choices in more detail, along with their respective pros
and cons. As noted earlier, the choice of entry mode reflects several factors, including
the challenges that exist in certain foreign markets and the capabilities that firms have
to overcome them. Other important factors shaping entry choices include firm goals and
opportunities in foreign markets.22
Entry Options without Ownership
First, we consider entry options that do not involve ownership of overseas facilities or
plants and then move to entry routes that involve at least partial ownership of overseas
assets.
Exporting: A Popular and Flexible Alternative

Compared to some options, exporting is a relatively easy, cheap, and flexible way to
enter foreign markets. These features explain both the ongoing popularity of exporting
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and why it is often a company’s first exposure to international business. Exporting

involves sending goods or services to other countries where they can be sold. Exporting
might be initiated for two reasons. First, it is an inexpensive way for companies to
increase their revenues: opportunities in foreign markets may entice firms to begin
exporting. Second, and conversely, weakening domestic demand may prompt firms to
diversify their markets by exporting, soaking up excess domestic capacity in the
process.23
A major plus of exporting is that it involves no foreign ownership requirements.
Because there is no need to outlay a firm’s capital, it is a low-cost market entry option.
Exporting also allows companies to shield themselves from risks in certain markets, to
sidestep foreign investment restrictions, and to shift gears relatively painlessly (export
agreements can generally be terminated fairly quickly and inexpensively). Moreover, once
companies start exporting, they can use customer feedback to tailor their products and
increase their overseas business. Yet, quick profits may not be the primary motivation
for small firms to begin exporting. Instead, learning about new markets, new technolo-
gies, and new ways of doing things may also be valuable motivations.24
Cost containment is not an issue limited to small firms. Manufacturing products in
one place and then exporting them abroad can help bigger companies, such as Boeing,
take advantage of economies of scale. When the dollar is weak relative to foreign cur-
rencies, those big American exporters can reap major financial rewards. In late 2009,
the dollar slid against major foreign currencies. This made the price tag for big-ticket
products exported by Caterpillar, General Electric, and IBM cheaper for foreign custom-
ers. As a result, all three companies were able to undercut foreign rivals on price while
continuing to make money. For instance, Caterpillar’s ability to stay ahead of Japanese
rival Komatsu, particularly in growing countries such as India and China, was helped
tremendously when the weaker dollar made its exported construction and mining equip-
ment less expensive. Currency fluctuations can cut both ways, like in 2005 when the
value of the dollar increased significantly—effectively hiking prices for U.S. firms.25
The Costs and Challenges of Exporting

This underscores the point that exporting also has costs and challenges to consider. For
instance, to be successful exporters, firms must:
■ select products that sell well overseas (requiring possible product modifications);
■ understand export rules and prepare to deal with voluminous paperwork;
■ find overseas customers (and adapt marketing and advertising to reach them);
■ deal with currency fluctuations, language issues, tariffs, and transport delays;
■ obtain letters of credit/financing from foreign customers; and
■ hire freight forwarders to ship products and distribute them overseas.
A single export transaction may involve many steps, several banks, and dozens of docu-
ments. Learning about, much less executing, these aspects of exporting all require time
and effort—as well as hefty price tags in some cases. Fortunately, there is plenty of help
available. American companies, for instance, can turn to a variety of local, state, and
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federal agencies for help (e.g., the U.S. government’s www.export.gov website). Firms
can also hire export management companies to handle some, most, or all of their export-
related chores, including ones that specialize in specific markets or industries. Export
management companies can be retained on a long-term basis or temporarily while the
firm learns enough to handle things itself.26
Nevertheless, let’s consider some specific exporting challenges in more detail. While
exporting is typically less expensive than perhaps building a new plant overseas, some
large firms end up making substantial foreign direct investments to support their export-
ing activities. To help sell the cars it exported to Japan, Chrysler at one point spent
$100 million to buy Japanese car dealerships, sank another $10 million on a parts
distribution center outside Tokyo, and dropped $180 million more to modify its cars
for the Japanese market. So much for “cheap” exporting!27
Another challenge for exporting firms is dealing with tariffs and trade barriers. For
instance, at one point Boeing faced a steep 40 percent import tariff on planes that it
was trying to sell in Russia to cash-strapped local carriers. Of course, foreign exporters
can also face hurdles in the U.S. In 2002, for example, steel companies in Europe and
Asia howled about lost export sales to the U.S. resulting when the American government
briefly imposed tariffs as high as 30 percent. More recently, the U.S. government did
the same to imported Chinese tires, slapping on tariffs as much as 35 percent in 2009.
China’s response was to levy tariffs on American imports of auto parts and poultry
products.28
In addition to tariffs and other regulatory barriers that boost costs, exporters also
face logistical challenges. Communications can be difficult because of the distance from
customers (e-mail and other communication technology notwithstanding). Moreover,
certain modes of transportation are too slow, too unreliable, or too expensive for par-
ticular types of exported goods. In many situations, the key to overcoming these draw-
backs is to find a foreign distributor who has both the knowledge and the resources to
market imported products successfully.29 For another look at how export rules can impact
U.S. firms, see the following International Insights feature.
Trouble Can Find American Exporters at Home

Optical Associates is a small company that makes components for semiconductor firms.
It had been doing well in the exporting game, at least until it shipped equipment to an
Indian nuclear facility without obtaining an export license. U.S. authorities told the firm
that it had violated federal export restrictions by selling to “forbidden entities.” Optical
Associates was fined $100,000 and prohibited from exporting to India for three years.
Other examples of fines include IBM, which paid a whopping $8.5 million fine for shipping
computers to a Russian nuclear lab and Northrop Grumman, which paid $15 million in
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fines for exporting without the needed licenses. Raytheon paid a similar fine in 2013 for
export violations that it reported. And, United Technologies agreed to pay a $75 million
fine for the sale of software (later used by China to develop its first attack helicopter)
that violated export laws.
Some might say that companies should know better. Regardless, the stakes for staying
out of trouble have never been higher. In 2008, the Department of Justice announced a new
program (Counter Proliferation Initiative) to more aggressively seek out, prosecute, and fine
those found in violation of exporting critical technology. A general rise in international trade,
combined with ongoing threats from terrorism and weapons development, has led the U.S.
to do more about, as well as to expand upon, export restrictions to dozens of countries.
Even allies such as Israel are subject to restrictions on products such as high-speed computers
and encryption software.
Yet, critics charge that export laws have become complex and difficult to fathom, costing
firms a bundle in lost business, late shipments and government penalties. Plus, the complexity
of global business has made it more difficult for firms to follow the law in the first place.
As one manufacturing executive put it, “When you’re sourcing from 10 to 15 countries for
a product, or you’re part of a supply chain, knowing who your customers are can be more
difficult than you think.”
Naturally, big companies, particularly those in sensitive industries, tend to have the
best resources for coping with the daunting array of export restrictions—including export
managers and software to help track and comply with export regulations. But for smaller
firms, the intricate and cumbersome regulations are intimidating. Most U.S. firms have
taken the position that while export restrictions are needed, the regulations governing them
should be simplified (e.g., less paperwork, shorter license approval times, etc.). In the
meantime, American firms interested in exporting may want to keep the following principles
in mind.
• Firms can run into trouble not because of their products. Any prohibited technology,
information, or data that is disclosed to restricted foreign entities or countries may trigger
action by the U.S. government.
• Export laws and regulations are complicated. For instance, defense-related products fall
under the control of the Directorate of Defense Controls (State Department) while products
that may have “dual use” are under the Bureau of Industry and Security (Commerce
Department).
• U.S. exporters need to ensure that they have appropriate export control procedures in
place and that their personnel or agents fully grasp applicable export laws. Compliance
training is a necessity.
• Come clean and disclose any illegal exports. Penalties are less severe when violations are
unintentional or companies voluntarily share their mistakes (such as the Raytheon example
mentioned previously). Firms that “put their heads in the sand” when it comes to U.S.
export laws do so at their own peril.30
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Types of Exporters and Types of Exporting

Data show that small firms (those with fewer than 500 employees) are more likely to
be exporters. Interestingly, small firms run by managers who embrace risk taking and
innovation are the most successful exporters—they export a higher percentage of total
sales and have higher export growth rates than competitors run by more conservative
bosses. A good example might be Frontier Foods, a small Australian food company.
Some years ago, Frontier began exporting a variety of cheese products to China. This
was a daring step because most Chinese at the time had no experience with cheese, were
concerned about digestion problems, or disliked the taste. But Frontier’s risky move
worked, thanks in part to a burgeoning middle class in China (and more openness to
new tastes) as well as the soaring growth of fast food operators and Western-type super-
markets in China. Within seven years, China accounted for 70 percent of the firm’s
revenues.31
Corporate giant Boeing and other large firms also export. Indeed, Boeing engages
in the three different types of exporting. When it sells a plane to a foreign airline, Boe-
ing is engaged in direct exporting—where sales of a firm’s products or services directly
involve foreign customers. The many U.S. companies that supply Boeing with parts or
components, however, are involved in indirect exporting. This occurs when a domestic
firm sells a product to another domestic firm, which in turn exports the product often
after changing it in some fashion. The final major type of exporting is an intracorporate
transfer. In this case, a firm located in one country sells a product to an affiliated com-
pany in another country. For instance, Ford plants in Mexico produce fuel tanks that
are then exported to Ford car assembly plants in the U.S. Intracorporate transfers such
as these account for about one-third of international trade worldwide and about 40
percent of all imports to, and exports from, the U.S. Figure 9.4 shows a breakdown of
intracorporate transfers in U.S. imports and exports.32
Overall, exporting and importing are deeply woven into the fabric of international
business. Honda is another good example of a company that uses exporting and import-
ing extensively, often in very inventive ways. The company operates a variety of facilities
in the U.S., including a major assembly plant in Marysville, Ohio. Honda makes creative
use of its $1 billion trading arm, Honda Trading America Corporation (HTAC). To help
supply its American operations, Honda ships parts and components from Japan to the
U.S. At one point, however, the transport ships involved went back to Japan empty after
U.S. Trade Flow Intracorporate Transfer Source
American Multinationals Foreign Multinationals

Imported goods Products imported from overseas Products imported from foreign parent
subsidiaries to U.S. parent firm company to a subsidiary in the U.S.
Exported goods U.S. parent firm exports products to Foreign-owned subsidiaries in the U.S.
its overseas subsidiaries export products to parent firm abroad
Figure 9.4 Sources of Intra-Corporate Transfers in U.S. Imports and Exports.

Source: Adapted from Koretz, G. (1997). A new twist in trade numbers, BusinessWeek, May 12, 24.
362
unloading their cargos in the U.S. But, thanks to HTAC, those ships now return to Japan
fully loaded with everything from scrap metal to frozen salmon to soybeans. Next to
Honda’s Marysville auto plant sits a huge HTAC warehouse that sorts and packages
soybeans grown under contract by over 100 American farmers. Soybeans are loaded
onto rail cars and sent to California, then put on ships bound for Japan. HTAC exports
around 800,000 bushels of American soybeans to Japan—about 14 percent of the high-
end foreign soybeans sold there. Profits from this soybean venture help buffer Honda
from downturns in the auto market and have introduced many American farmers to
exporting. Sounds like a win–win to us.33
Licensing
Another inexpensive and flexible foreign market entry option is licensing. This option
is often used when foreign investment or ownership restrictions are in place or firms
want to reduce their financial exposure in risky foreign markets. It also makes sense
when high tariffs render importing goods too expensive or when product customization
needs to be done locally. Likewise, when a company in a competitive industry wants to
sell a product abroad that is older or has dated technology, margins may be slim. Heavy
investments in overseas markets, therefore, make little sense given the low potential
returns. Licensing then represents a low-cost entry option that permits the firm to still
make good money on the product.34
In general, licensing is a contractual agreement in which one company (the licensor)
sells a foreign firm (the licensee) the right to use its brand names, trademarks, copyrights,
patents, manufacturing technology, or any other intellectual property. This shows that
licensing can cover a wide variety of circumstances. For instance, companies such as
Coca-Cola, Disney, and Harley-Davidson have licensed their logos and brand names to
clothing makers around the world. High-tech firms such as AT&T and Intel license their
expertise, know-how, and technologies to foreign companies as well. Agreements last
for several years and often include an option to renew. Typically, once the licensee
understands the licensor’s technology or intellectual property, the licensor has little or
no involvement with the licensee’s activities. In many cases, the license granted comes
with specific restrictions (e.g., licensed products can only be sold in a particular location
for a fixed amount of time).35
The advantages are clear. For one, the licensor obtains quick access to foreign mar-
kets and an immediate benefit in the form of royalties, fees, or even payment in kind
(i.e., products, know-how, or intellectual property) from the foreign licensee. Royalties
can be paid up front in the form of a flat fee or as a percentage of sales value. Regard-
less, these benefits accrue to the licensor without having to set up costly overseas plants
or expend significant capital. Consequently, licensing is often very attractive to small or
medium-sized companies since they lack the capital to pay for ownership entry options.
With licensing, firms have no reason to have any presence in foreign markets, much less
spend money there. It is also a great way to test out new foreign markets and learn
about them before making a more significant financial commitment. Large firms can
also use licensing to preempt (or block) rivals in foreign markets. For instance, Microsoft
used controversial long-term licensing agreements with government agencies and schools
363
in over a dozen African countries to both build its presence on a continent with only
10 million computers, for a population of 750 million, while also locking out competitor
Linux from key customers.36
But licensing also has risks and drawbacks. For example, firms wishing to license
their intellectual property to foreign companies should carefully craft the terms, condi-
tions, and boundaries of the licensing contract. The contract should clearly spell out the
obligations of both the licensor and the licensee. Typically, the licensor wants the licensee
to make narrow or limited use of its intellectual property and to avoid passing trade
secrets to competitors. Negotiating such terms is rarely easy because the two sides
involved usually have conflicting motives. For instance, the licensor often wants a fairly
short-term agreement, especially if it is using licensing as a way to test a market before
jumping in with major investments of its own. On the other hand, the foreign licensee
often wants a longer agreement, one that will allow it to recoup costs associated with
producing and distributing the licensed product.37
Even when an equitable licensing deal is struck, there are still major risks. For
instance, the licensor gives up considerable control by definition and can be hurt if the
licensee produces shoddy goods or otherwise behaves in ways that damage the licensor’s
reputation. The lack of control also makes it more difficult for licensors to take advan-
tage of location economies. Finally, firms that end up licensing their important technolo-
gies and production processes to foreign companies may be “educating” a potential
competitor. Indeed, firms often overestimate their ability to control technologies once
licensed.38
Franchising
In key respects, franchising is a more elaborate version of licensing. Imagine having a
contract that allows a foreign entrepreneur or firm to operate a business using the
methods, procedures, products, trademarks, and marketing strategies created by another
company. Moreover, that contract involves longer commitments between the parties and
requires tighter controls (e.g., strict adherence to specific operating rules) than what is
found in a licensing agreement. This is the essence of franchising.
The company offering the business system (including methods, trademarks, products,
and so on) is the franchisor, while the firm that agrees to run the business using those
methods and products is the franchisee. Service firms, particularly in the food and lodg-
ing industries, are most likely to enter foreign markets as franchisors. Sometimes fran-
chisors seek out a master franchisee in doing so. In other words, they find a company
or group of investors willing to coordinate all franchising operations in a specific foreign
market. This master franchisee then runs the franchisor’s businesses in the foreign market
and may even bankroll the entire operation, or conversely, sub-franchise to other inde-
pendent businesses there. McDonald’s is perhaps the quintessential example of a well-
known franchisor operating all over the world. The company looks for foreign firms or
entrepreneurs to run its restaurants in a particular country and sometimes seeks out
master franchisees. In exchange for use of company trademarks, operating procedures,
products, and various support services (such as training and logistics help), the foreign
franchisee pays McDonald’s a fee. The franchisee commonly has to fork over a portion
364
of revenues to the franchisor. Perhaps the most important aspect about franchising,
however, is that franchisees must adhere to strict guidelines about how the business has
to be run. That is one reason why McDonald’s restaurants operate similarly worldwide
despite the fact that many are run by franchisees.39
Besides being able to enter many foreign markets quickly and cheaply, franchisors
typically have attractive brand names to offer foreign franchisees, who in turn offer the
franchisors in-depth knowledge of local markets. The greater control franchising offers
is another key advantage compared to licensing. Similar to licensing, franchising also
allows the franchisor to shift costs (and risks) to the franchisee. So, when a foreign firm
signs a deal to run a 7-Eleven convenience store, that firm often has to come up with
the money to start up the business. This requirement allows franchisors, especially
established ones such as 7-Eleven and Subway, to expand quickly worldwide at a rela-
tively low cost.40
The success of franchising giants such as KFC has led smaller fast food companies
to dip into international markets (A&W, Au Bon Pain, Big Boy, and Schlotzky’s Delica-
tessen, are just a few). Smaller franchisors, however, sometimes cannot support franchisees
to the same extent that bigger firms such as Subway can (e.g., with global supply net-
works, extensive employee training programs, etc.). Consequently, franchisees may have
to scramble to find suppliers or to make necessary menu changes on their own. One
Big Boy franchisee in Thailand ended up with a menu oriented toward Thai locals and
European tourists instead of the chain’s trademark “American” hamburgers. As the
franchisee put it, “We thought we were bringing American food to the masses. But now
we’re bringing Thai and European food to the tourists.”41
Nevertheless, franchising has challenges that even the biggest firms have to grapple
with. For instance, control issues remain a concern. Firms often have high standards
that franchisees may not be motivated to duplicate. In fact, a brand name and the
expectations that go with it are precious commodities that the franchisor must protect.
Customers come to McDonald’s, for example, with high expectations of speed, cleanli-
ness, and food quality. Foreign franchisees that do not live up to these expectations can
hurt the overall McDonald’s reputation. Sometimes the franchisor will replace weak
franchisees by setting up company-owned outlets in foreign countries if local firms can’t
meet the franchisor’s standards. In other cases, disagreements between franchisors and
franchisees can spark distracting conflicts. For instance, McDonald’s got into a tiff at
one point with some Brazilian franchisees who complained that McDonald’s was opening
too many new restaurants near existing outlets, cutting into sales. Some Brazilian fran-
chisees also claimed that McDonald’s was ripping them off, demanding a 17-percent cut
of sales as a rental fee (almost twice what U.S. franchisees supposedly pay). McDonald’s
rejected these complaints, arguing that Brazilian franchisees were “spoiled” by their early
profits and that the rental fee helped it recoup the cost of building restaurants in Brazil
and providing technical help to local franchisees.42
Indeed, these control and franchisee management issues are one reason why a few
companies in this industry have decided to limit their exposure to franchising. Starbucks
is a case in point. With over $13 billion in annual revenue and some 21,000 stores
worldwide in 2013 (with over 7,000 locations outside of the U.S., within 62 countries),
Starbucks is a big company but not as large as McDonald’s. More than 60 percent of
365
its U.S. stores are company owned. Likewise, about 40 percent of its stores in foreign
markets are owned by the company, with many of the remainder being joint-venture
operations instead of franchisee outlets. Because it tends to rely more on company-owned
stores, Starbucks has lower profit margins and higher expenses than McDonalds and
other fast food chains. But, Starbucks feels that having greater control over more of its
stores is a tradeoff it is willing to make.43
Overall, the overseas growth opportunities for franchisors continue to be very bright.
For a closer look at why American franchisors are finding foreign markets so attractive,
see the accompanying Global Innovations feature.
Global Innovations
McDonald’s and Other U.S. Franchisors Find Foreign Growth Is Golden

How is this for a plan? To escape the sluggish and slow-growing American market, you decide
to search for better fortunes abroad. In the process, you entice foreign investors, entrepre-
neurs, and companies to bankroll your international expansion. Sound far-fetched? Not if
you are an American franchisor.
In fact, in recent years, U.S. franchisors such as McDonald’s, Subway, and the women’s
fitness center chain Curves International have been plowing into hot developing markets
where the middle class is growing rapidly, including Brazil, China, India, and Central and
Eastern Europe. Through mid-2013, almost half of McDonald’s nearly 34,000 units were
outside of the U.S.—in over 119 countries. For years now, Europe has been the stronghold
for McDonald's, representing well over half of its international revenue. Yet, the Asia/Pacific
region has been the hotbed for recent growth, with the number of restaurants nearly doubling
between 2006 and 2011, compared with just a 15-percent jump in U.S. revenue during that
period. To realize this growth, McDonald’s and other U.S. franchisors have been looking
for—and finding—master franchisees, groups of entrepreneurs or businesses willing to bankroll
operations themselves. In doing so, they often pay hefty fees to the franchisors for the right
to control a big territory or even a country. There they can act like a miniature franchisor
and sell outlets to smaller franchisees.
The biggest American franchisors are often the most sought after abroad because of
their instant name recognition and low risk. Especially attractive are the kind of relatively
simple, turnkey operations offered by franchisors such as Subway. Simple operations mean
lower prices and fewer barriers to entry for foreigners looking to invest as a Subway fran-
chisee. Subway restaurants, now the world’s largest franchisor with over 41,000 outlets, has
one of the lowest total franchisee fee structures. This resulted in the opening of more foreign
operations, including nearly 2,000 the last three years—now with about 10,000 locations
outside the U.S., in over 100 countries.
If you are a female in a foreign country who wants to get into better shape, you can
probably find a local Curves International fitness franchisee ready and eager to help. While
Subway opened 1,400 new overseas outlets between 2008 and 2009, Curves International
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was opening over 600 fitness centers outside the U.S. during the same period. Right now,
Japan is Curves International’s largest foreign market, where it has over 700 centers. But the
company also opened its first centers in China and India between 2009 and 2010. Now,
foreign locations represent over half of its 7,000 total units. This flip is due to increasing
international demand and a precipitous decline in the number of U.S. stores that occurred
between 2007 and 2010. Nevertheless, one intriguing possibility for more international growth
is in the Middle East, where Curves International’s core concept—fitness centers for
women—may play well because religious customs dictate that men and women use separate
facilities in public.
The future, at least for now, looks bright for American franchisors wanting to expand
abroad—where foreign customers apparently want to eat hamburgers and submarine sand-
wiches and then pump iron and sweat it off.44
Management Contracts
In an international management contract, one company provides a foreign firm with specific
services, technical help, or managerial expertise for either a flat fee or a percentage of sales.
Usually the contract is for a specific period of time. Like other entry modes considered,
this is a relatively low-risk way to increase international revenues because no ownership
costs are involved. For example, Marriott has run hotels overseas for years under manage-
ment contracts without actually owning them. Likewise, Disney actually owns minority
stakes in its theme parks in Paris, Tokyo, and Hong Kong—the company derives much of
its income in these locations by providing various management services.45
The operation of complex infrastructure facilities is another area where management
projects often come into play. For instance, some years ago Argentinean oil producer
Yacimientos Petroliferos Fiscales SA (YPF) used management contracts at its main refinery
in La Plata. The technical help that was provided under contract by U.S.-based Hughes
Tool Co. helped YPF modernize the plant and cut the cost of oil production in half.
Later, Chevron Corp. supplied executives under a management contract with YPF to
help run the ongoing operation. Likewise, U.S. Steel’s consulting group provided manag-
ers and engineers to help Slovakia’s Vychodoslovenske zelziarne AS (or VSZ) modernize
and refine its automated steelmaking equipment. U.S. Steel later bought VSZ.46
Turnkey Contracts
Sometimes management contracts are a consequence of international turnkey contracts.
Typically, turnkey contracts include all of the steps needed to design, build, and operate
large-scale facilities in foreign locations. When a project is complete, the facility may be
run for a short time by the contractor to ensure smooth operations. In many cases,
however, a facility will eventually be turned over to the company or government who
issued the contract. Most turnkey contracts involve building expensive, complex facilities
(e.g., power plants, dams, airports, oil refineries). Typically, the contracts themselves are
hundreds, if not thousands, of pages long and are the result of protracted meetings and
367
negotiations with foreign customers. It may take a year or more to land a turnkey con-
tract because of all that is involved.47
Some countries lack the internal expertise needed to construct such complex facilities
and turn to foreign firms for help. This often provides a forum for local companies to
learn about the technology and processes associated with building these facilities. This
is exactly why Colorado-based engineering firm CH2M Hill has had such success. The
firm’s reputation is impeccable and includes helping local engineers and technical experts
develop their own skills. These very factors helped the firm land a $5.3 billion expan-
sion of the Panama Canal, a project targeted for completion in 2014. One CH2M Hill
executive noted that because the U.S. owned and ran the Panama Canal until 1999,
sensitivities were high. In awarding the contract Panama looked for “a partner they can
trust, who won’t take over their project” and who would “leave the Panamanian engi-
neering and construction community stronger.”48
Turnkey projects are especially attractive when more direct forms of foreign invest-
ment are impossible or when political or economic instability makes such investments
risky. On the other hand, turnkey projects are often limited, one-shot deals that can
transfer know-how to potential competitors. Moreover, sometimes foreign governments
scuttle, delay, or raise costs for already approved projects.49
Certain countries, such as India, seem to put more obstacles in the way of foreign
companies than others. Although free market reforms continue to make India a good
place to do business, bureaucracy, convoluted regulations, and shifting political pressures
remain sources of frustration. Indeed, multinationals may have to deal with the central
government as well as one or more of 35 state governments. For instance, several agree-
ments to build power plants were signed between Indian governments and foreign firms
in the early 1990s. A decade later, financing troubles were still being worked out for
certain projects, while on others some of the American, French, and South Korean firms
involved had given up and pulled out. As of 2010, some 200 new plant and infrastruc-
ture projects worth almost $100 billion were on hold, thanks to a three-way tug of war
between government agencies, farmers seeking higher land prices, and companies wanting
to build. Many of these projects had been delayed for years and involved foreign firms
such as Luxembourg steelmaker ArcelorMittal, South Korean steelmaker Posco, and
Japanese car giant Nissan. Nevertheless, multinationals are still attracted to opportunities
in India, thanks to the country’s growing middle class and its desire for better business
infrastructure.50
Contract Manufacturing
An increasingly popular option in recent years, contract manufacturing allows companies
to outsource their manufacturing operations to other firms, either in whole or in part.
The advantages associated with this option are many. Companies can avoid spending
capital to build and maintain expensive plants as well as paying the workforces needed
to run them. For instance, shoe companies such as Nike are able to focus on critical
value-added areas, such as marketing and shoe design, because all of their manufacturing
is done under contract, mostly in low-wage Asian countries. Likewise, California-based
Vizio, Inc., a popular provider of inexpensive flat-panel TVs, relies completely on
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contract manufacturers in Asia to make its product line—which now also includes Blu-
ray video players. As the LCD TV market leader in the U.S., Vizio believes that contract
manufacturing kept it profitable as prices for electronics fell steeply in 2008–2009 while
also allowing them to focus on marketing and product design. Other household names
in consumer electronics have also been moving to contract manufacturing as a way to
lower costs. Sony, for instance, announced in 2009 that it would sell its LCD television
plant in Mexico to Taiwan-based Hon Hai Precision Industry Company, which would
continue making TVs on Sony’s behalf.51
Contract manufacturing also means that firms have ceded control for product quality
and timely delivery to someone else. Moreover, contract manufacturing may bring
unwelcome attention to companies. For instance, Nike has taken public relations hits
in recent years because of the alleged mistreatment of workers for contract manufactur-
ers operating in Indonesia and Vietnam. In addition, contract manufacturing is part of
the debate about the outsourcing of jobs from developed countries such as the U.S.
Manufacturing workers in a variety of American industries continue to be under pres-
sure due, in part, to the rising tide of contract manufacturing across industries. For
example, many American furniture makers have increasingly looked to companies in
China to produce furniture on their behalf. In the process, dozens of plants in the U.S.
were closed and thousands of employees’ contracts terminated, sparking political debates
and hurting the images of some firms.52
Entry Options Involving Ownership
As firms become larger and more multifaceted, some progress from strategies like export-
ing to those involving actual ownership of overseas facilities. Moving to ownership
position can also reflect a desire to make more money abroad, something made easier
with ownership control. Ownership also allows firms to more closely coordinate world-
wide operations. Overall, companies typically pursue ownership options for foreign
market entry with one or more motives in mind. Three general sets of motives exist:
market-based, where entering foreign markets provides opportunities to sell to new
customers; efficiency-based, such as opening overseas plants to lowering production
costs; and resource-based, such as the ability to obtain technologies or raw materials
available in a foreign market. Figure 9.5 provides more detail about these ownership
motives. Overall, however, these motives must be balanced against the greater expense
and risk that ownership typically entails.53
Wholly Owned Foreign Subsidiaries: The Greenfield Approach

One straightforward ownership option for firms is the Greenfield approach. Here, a
firm would enter a foreign market by establishing (from scratch) a wholly owned foreign
subsidiary there. Doing this means scouting for, and then buying, a piece of property
on foreign soil that can accommodate subsidiary operations. Once this site is acquired,
construction can begin on the facility. Later, workers can be hired to staff the new
operation. That is exactly what Swedish appliance maker Electrolux AB did between
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Source of Motivation for Ownership Options
Market-Based Efficiency-Based Resource-Based
Being able to access To tap government To gain managerial or

new customers and incentives while avoiding technical expertise that exists
opportunities in new trade barriers in a foreign market
markets
For instance, car companies By building plants or Firms wishing to learn and
have built plants in the U.S. partnering with firms in local innovate may want to establish
and China to tap into the markets, firms avoid import facilities where world-class know-
world’s largest automotive tariffs and realize government how exists, (e.g., the U.S. for
markets tax reductions or subsidiaries software or Japan for industrial
for setting up shop robotics)
To be able to directly To lower production/ To obtain critical raw
compete against important sourcing costs materials
rivals in their own markets
Forcing rivals to defend their Can explain growth of new In many cases, companies simply
own turf can make it more factories built in places like have to go where the resources
difficult for them to expand China, India, and Mexico— exist given their industries (e.g.,
elsewhere countries with inexpensive mining, oil production)
production costs and cheap
labor
To follow important To have production located To obtain the assets or
customers closer to customers knowledge of a foreign
partner
Suppliers may follow Having factories located Opening foreign facilities with
customers overseas to grow close to key markets overseas local partners allows firms to
sales and keep competitors at can yield pluses, especially if tap their expertise in product
bay (e.g., Japanese parts firms customer needs are changing development, marketing and
followed Toyota when they rapidly or they require close manufacturing
built plants overseas) attention
Figure 9.5 Why Firms Pursue Ownership Options in Foreign Market Entry: Three Key Motivations.
Source: Adapted from Cavusgil, S. T., Knight, G., and Riesenberger, J. R. (2008). International Business: Strategy,
Management, and the New Realities, 421–423. Upper Saddle River, NJ: Prentice-Hall.
2004 and 2012. It opened new plants in lower-cost locations such as Mexico primarily
to reduce production expenses.54
The main advantage of a Greenfield approach is maximum control. For instance,
proprietary technology can be protected more easily than with other foreign market entry
options. This is particularly the case when the firm is ahead of competition. Intel Cor-
poration’s newly built $2.5 billion computer chip factory in Dalian, China, is wholly
owned for just that reason—the firm worried that a joint-venture or partial government
ownership would have meant transferring sensitive technology and manufacturing expertise
to various entities in China. While it took years to complete, once it was finished in late
2010 Intel was able to tap another key advantage of a Greenfield approach—being able
to hire an entire workforce fresh, with no negative prior history to worry about. This
370
Dalian plant is only part of Intel’s nearly $5 billion recent investment in China. It also
built an assembly/test site in Chengdu and research sites in Beijing and Shanghai.55
Moreover, the Greenfield approach allows firms to pick a site that maximizes loca-
tion economies (e.g., being close to target markets or low-cost local labor) and then
put a modern facility on it. As the Electrolux example illustrates, location economies
explain why companies have spent billions in recent years to build new plants in low-
cost locations. Mexico provides an excellent low-cost manufacturing platform, especially
for firms that want to be close to the large American market. There are about 3,000
plants employing over 1 million Mexican workers set up by multinationals, many liter-
ally just across the border from the U.S. Such maquiladora facilities allow the parent
company to pay duty only on the value that local Mexican labor adds to exported
products. This arrangement, combined with low Mexican wage rates, proximity to the
American market, and access to the U.S. transportation system, lowers overall produc-
tion costs.56
Likewise, China continues to be a magnet for Greenfield plants, including the high-
tech variety, thanks to government land incentives, low costs, and a growing internal
market for more expensive products. Those positives prompted South Korea’s LG Display
Company to announce in 2009 that it would be building a $4 billion plant in Guang-
zhou, China, to manufacture large, sophisticated LCD display panels. Due to some
bureaucratic problems, construction was delayed until 2012, with the plant expected to
open in 2014. Samsung has beaten them to the punch and has already begun production
in 2013 on its flat-panel plant in Suzhou.57
There are also, however, significant downsides to a Greenfield option. Building a
Greenfield facility takes time and is very expensive (both of which are shown in the LG
case above). While facilities are under construction, companies may be particularly
vulnerable to the whims of the host government, such as raised taxes or onerous envi-
ronmental requirements. Nor does recruiting and training a new workforce happen
overnight, especially in a new culture and unfamiliar legal environment. Unfortunately,
firms sometimes ignore these realities and push too fast to set up new foreign subsidiar-
ies. For instance, U.S.-based Lincoln Electric lost money for the first time after the firm
built 16 new plants in 11 countries within a four-year period. The company ended up
closing plants in four countries and switched to exporting and alliances as its main
international entry modes.58
Wholly Owned Foreign Subsidiaries: The Acquisition Approach

Multinationals can also establish wholly owned foreign subsidiaries by purchasing exist-
ing foreign companies. This acquisition approach usually involves complicated negotia-
tions and financial transactions. There may also be legal, competitive, or political hurdles
to surmount, especially if the multinational is acquiring a foreign company with a strong
local reputation or one that is state owned. Over the past 20 years, countries transition-
ing to market-based economies have engaged in large-scale privatization efforts—with
governments selling off state-owned enterprises or assets to private companies or indi-
viduals. For instance, many of China’s state-owned businesses have been privatized
because they were poorly equipped to survive, particularly when matched against foreign
371
firms. China viewed privatization as one way to convert state-owned businesses into
more effective competitors. Often that means having foreign companies purchase or
otherwise invest in state-owned enterprises. But turning around moribund state-owned
enterprises is rarely simple or cheap.59
In any case, China still has plenty of government-owned firms operating, some of
which are owned at the local level and are looking to make foreign acquisitions of their
own to better compete. Consider Beijing Auto, owned by the city of Beijing’s municipal
government. A small player in the Chinese market, Beijing Auto sought to acquire foreign
car companies as a way of accessing new technologies and achieving better market
penetration at home and abroad. For instance, in 2009, Beijing Auto bid for a control-
ling interest in GM’s Europe-based Adam Opel GmbH operation. In rebuffing the bid,
GM was concerned that it would have to later face a Beijing Auto armed with Opel
(i.e., GM) technology in China, a market the company considers critical. This underscores
how competitive concerns can sometimes derail foreign acquisitions.60
When firms do successfully complete a foreign acquisition, they may encounter
some of the major risks associated with an acquisition approach. Specifically, acquiring
another firm, whether private or state-owned, also means buying all the problems that
acquired company had, such as poor labor–management relations, debt, and inferior
product quality. On top of that, cultural and managerial differences between the mul-
tinational and the foreign firm being acquired can be difficult to overcome, at least in
the short run. Interestingly, recent research suggests that long-term performance of a
foreign acquisition may be better when the cultural distance between the acquiring
and the acquired firm is larger rather than smaller. Companies, especially from highly
developed countries, may be more cautious before stepping into culturally distant
markets (e.g., exercise more diligence in investigating acquisitions, etc.). If so, then
they may be more prepared and less prone to make mistakes. Moreover, acquiring
another company in a vastly different cultural environment may help the acquiring
firm build strengths that improve its competitiveness. In short, while “culture clashes”
are perhaps inevitable with foreign acquisitions, they are not necessarily debilitating
over a longer time period.61
Regardless, there is no doubt that foreign acquisitions can present significant chal-
lenges, cultural or otherwise, in the short term. For instance, U.S. Steel acquired steel-
maker Vychodoslovenske zelziarne AS (VSZ) for $1.2 billion in 2000. U.S. Steel’s goal
in buying VSZ, a former state-owned enterprise in Slovakia, was to position itself to
supply steel to the developing countries of Eastern Europe. Along with the acquisition,
however, came antiquated equipment, management corruption, lousy customer service,
a bloated workforce of 17,000, and resistance to the “American business culture.”62
These challenges are hardly unique. For example, Ispat International, a London-based
steelmaker, spent $1 billion to buy Kazakhstan’s huge Karmet steelmaking complex in
1996. Among the problems Ispat inherited (besides outdated equipment) were 12 former
KGB agents who initially refused to leave their gadget-filled spy suite and hundreds of
workers who showed up drunk every day. Ispat felt that some 40 percent of Karmet’s
38,000 employees were unneeded while the local union saw the company as a rich target
and wanted a 75-percent wage hike. The company spent hundreds of millions of dollars
to upgrade the complex.63
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Nevertheless, one important advantage that acquisitions have over a Greenfield

approach is that they are quicker to complete. The multinational is, in many cases, buy-
ing a working foreign facility, complete with workforce, equipment, product, distribution
system, brand names, and reputation. The ability to enter foreign markets quickly,
especially in response to competitors’ moves, is an attractive option as international
competition intensifies and demands for worldwide efficiency rise. This may explain why
48 percent of manufacturers in one survey said that the best international entry strategy
was to acquire existing foreign plants. Only 31 percent said the best bet was to build
Greenfield facilities. In fact, speed explains Nestlé’s acquisition of Polish chocolate maker
Goplana. The Swiss giant felt that building a new plant would delay its entry into Poland
by two years. Waiting that long would prevent Nestlé from seizing a large share of one
of Eastern Europe’s largest markets.64
Besides speed, multinationals also target foreign companies for acquisition precisely
because they have assets, such as successful brands or unique technologies that represent
valuable competitive advantages. When added to the multinational’s “portfolio,” these
advantages have the potential to add revenue quickly. For instance, from 2007 to 2009,
Dutch multinational Philips Electronics NV snapped up medical equipment firms in
China, India, and Brazil—all key markets where the firm wanted to grow quickly. With
each acquisition, Philips picked up product lines designed for the local market (e.g.,
cheaper, simpler x-ray machines, other medical equipment), then upgraded the acquired
plants and products to sell elsewhere. Similarly, in 1996 Coca-Cola acquired Parle
Exports, India’s top soft-drink supplier. This gave Coke all of India’s local soft-drink
brands, plus 50-odd bottling plants. As a result, Coke owned brands accounting for
some 60 percent of the Indian soft-drink market. Conversely, Indian IT firm Wipro
bought U.S.-based American Management Systems Inc. and NerveWire Inc. in 2003.
Wipro hoped that this acquired expertise would help it better compete in the IT consult-
ing business.65
A common question for acquisitions is whether to buy or to build. Cross-border
acquisitions (“buying”) may not always be best, especially relative to a Greenfield
approach (“building”). Recent research suggests that what determines the better option
for long-term growth is complex and depends on how the acquiring firm is structured
and managed. For instance, if a firm operates foreign units as a tightly interconnected
network, then a Greenfield approach may be the better path to growth than an acquisi-
tion. If, on the other hand, foreign units operate more independently, then an acquisition
approach may be the better choice. In any case, an often-stated reason for large foreign
acquisitions is that consolidation and size in “global” industries results in greater effi-
ciencies. But savings from acquisitions are often overestimated, undercut by the com-
plexities inherent in cross-border deals.
Managers also need to ask themselves whether their industry is really becoming
more globally concentrated or if they are simply following a trend, perhaps because of
ambition. Consider Korean construction equipment maker Doosan’s nearly $5 billion
acquisition of U.S.-based Bobcat in 2007. By the middle of 2009, Bobcat sales were
down nearly 60 percent. While a recession certainly did not help, ex-Doosan employees
argued the firm overpaid for Bobcat because of “national pride” in the face of rival
bidders (independent analysis suggested Doosan overpaid by 20 percent or $1 billion).
373
Is your industry really becoming more concentrated

globally?
Yes No
Yes Foreign acquisitions Overexpansion is the

are most likely to pay likely outcome of
Is your company pursuing off foreign acquisition
foreign acquisitions as part
of an effort to consolidate
globally? No Failing to pursue
Not pursuing a foreign
foreign acquisition
acquisition is
risks putting the firm
appropriate
at a disadvantage
Figure 9.6 Will Foreign Acquisitions Pay Off? A Decision Matrix.

Source: Adapted from Ghemawat, P., and Ghadar, F. (2000). The dubious logic of global megamergers. Harvard
Business Review, 78, 71.
Figure 9.6 presents a simple decision matrix for determining whether a foreign
acquisition is the right move. While it looks simple, making the actual decision is very
difficult and is getting even more complex. Nevertheless, managers should avoid the
various types of traps in thinking about these issues, such as getting caught up in the
hype, wanting to match the “big deals” made by competitors, or rushing into a deal
without vetting the impact.66
A positive case in point is DuPont’s recent acquisition of Danish biotechnology firm
Danisco. In November 2010, DuPont CEO Ellen Kullman’s phone rang. On the other
line was the CEO of Danisco, who explained that his firm was “in play” and a European
chemical company had offered to buy it. His question to Kullman was “Are you inter-
ested?” Bids were being accepted only until January. While this had the potential to
similarly entice DuPont, Kullman kept her head. She was interested, and the company
was prepared. DuPont regularly scans the environment and Danisco was already on its
acquisition radar and already a JV (joint venture) partner. It knew that Danisco recently
changed shareholder voting rules, making it a little easier for a buyer. Kullman assembled
the key due diligence team and they worked from Thanksgiving until January, with
people eating and sleeping at the office. They worked until the last 30 minutes before
the bid was due, questioning all data and assumptions and relying on their previous
analysis of the firm. As Kullman said, “You can’t fall in love with a deal; you have to
fall in love with what it does for our company. And even then it has to be at the right
price.” Subsequently, they spent considerable time thinking through the integration of
Danisco into DuPont.67
Alliances and Partnerships
A cheaper alternative to acquisitions is to pursue various types of alliances and partner-

ships with other firms. There are several options available here.
374
Joint Ventures
Some alliances, such as joint ventures (JVs), involve shared ownership, but ownership
of a foreign operation need not be complete. A JV is a strategic alliance between two
companies that is set up as a separate legal entity. Joint venture ownership can be split
50/50 between the parent companies or one firm can have a more dominant stake.
Partners that hold more than a 50-percent share usually do so to have tighter control
over the JV.68 Firms with sophisticated technology seek a controlling stake in JVs, espe-
cially if the local partner’s role is largely to supply local market expertise. That is the
approach that U.S.-based appliance maker Whirlpool took to quickly position itself in
key Asian markets. In the mid-1990s, Whirlpool started JVs with four Chinese and two
Indian firms. Whirlpool bought controlling stakes in each to balance costs with maximum
control. This expensive rapid expansion and effective local competitors, however, eventu-
ally caused Whirlpool to pursue cheaper alternatives.69
Not all international JVs involve manufacturing a final product. Sometimes they are
designed to procure raw materials, produce components, or deliver services. Creating
one may also involve construction of Greenfield facilities, the acquisition of existing
firms, or both. Finally, JVs may have more than two partners and their form and purpose
can vary considerably.70
That said, a common goal for many international JVs is to market, produce, and
distribute a product in a particular foreign country or region. Often the partners are a
large multinational and a smaller local company, as is the case with Whirlpool and its
Asian counterparts. It is easy to see why both parties would be attracted to a JV. For
example, the multinational might provide product design and technological expertise
desired by a local company, while the local partner might provide marketing know-how
and knowledge of local culture, laws, and business practices sought by the multinational.
In short, both sides benefit.71
Cost, knowledge, and risk sharing are also major reasons for creating these alliances.
This can be especially important for firms that want to be the first to position themselves
in risky emerging markets. For instance, Pratt & Whitney (a unit of United Technolo-
gies) signed a JV agreement with Russia’s Aviadvigatel in 1995 to put engines on Russian-
built jets, even though big profits were unlikely in the near future. Likewise, UT’s Otis
Elevator unit was among the first U.S. firms to enter China in the early 1980s.72
JVs, however, are not limited to partnerships between large multinationals and much
smaller local firms. Increasingly, the costs and risks of entering global markets or devel-
oping a salable product encourage even large multinationals into JVs with each other.
In 2004, for instance, Honda and GE Aviation formed GE Honda Aero Engines, a 50/50
JV headquartered in Cincinnati, Ohio, to develop, certify, manufacture, and market a
new small engine for light business jets. In 2007, the firm began building a new plant
in North Carolina with the goal of starting mass production of engines in late 2010.
Jet engine development is technically complex, expensive, time consuming, and subject
to certification requirements and government oversight. The joint venture setup was
attractive because of the shared development risks and costs as well as the size of the
potential market (roughly 200 engines worldwide per year). In other words, with this
alliance both firms had a better chance of recovering the costs of designing and produc-
ing the engine.73
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Joint ventures can also provide access to markets that otherwise would be difficult
to penetrate, such as China, where JVs can be either equity based or contractual in nature.
Having a local firm as a partner in such markets can also be a buffer against pressures
from foreign governments and changes in local regulations. A local partner can also allay
some of the mistrust that certain countries may feel toward foreign multinationals due
to fears of exploitation or a history of colonialism. Many developing countries, for
instance, are concerned that foreign multinationals will overwhelm local firms, but JVs
can help allay these fears and help local firms to be more competitive.74
As noted with earlier entry strategies, this could also hurt multinationals if key
technologies or know-how is transferred to a local partner. Like licensing, the joint
venture may turn local firms into formidable competitors later. JV contracts can be
written so as to disallow transfer of critical technologies. But obtaining agreement on
this may be tough as some countries strongly desire technology transfer. In addition,
experience has shown that cultural and managerial conflicts can plague JVs. Decisions
about selecting partners, setting goals, managing the venture, and performance appraisal
strategies can be thorny. Indeed, research suggests that as many as ten decision factors
impact joint venture performance—many of which are multi-faceted and complex.
Nevertheless, making good decisions here is critical if the JV is to perform well. One
way to minimize conflict is to use a delegated arrangement in which the partners agree
to step back from the management of ongoing operations and instead either hire new
executives or reassign executives already working for the partners. But this might simply
shift conflict to who will be hired or transferred. Given these challenges, management
should think carefully about the partnering process and all the decision questions that
need to be addressed if a JV is to function well (see some of these process and questions
in Figure 9.7).75
A common theme of many of the questions listed in Figure 9.7 is, once again,
concern about control. Indeed, one of the largest disadvantages of JVs has to do with
these very issues. Crucial decision making may be hampered because of the need to
consult with the JV partner, especially if the partners do not see eye to eye on matters.
Joint ventures also may fail to provide the level of control multinationals need to
take full advantage of location economies or coordinate worldwide operations. A
common way to minimize these disadvantages is for the multinational to have major-
ity control over the JV. Of course, foreign companies do not want to play second fiddle
in many cases. So, finding a partner willing to accept a minority position can be dif-
ficult. While taking a majority position means greater control, it also means greater
financial risk.76
Nevertheless, the additional financial commitment may be worth it. For example,
having a dominant position in a Chinese JV can pay big dividends, giving management
from the senior foreign partner more leverage over key business decisions. Not surpris-
ingly, one study found that American managers felt U.S.–Chinese joint ventures were
more efficient and profitable when dominant control is maintained.77
This sounds as though a multinational’s ideal joint venture is one in which it can
run things as usual despite having a local partner. Indeed, multinationals often seem
most satisfied with alliances where they can ignore the local partner, at least on certain
issues, and run operations their own way. But acting in that manner could lose the
376
Developing the Partnership Decision Questions to Address
● What are our goals? Are we in this for the long

Evaluating the Strategic haul or just the short term?
Rationale for a Joint Venture ● What resources are needed to achieve our goals and
how do we obtain them?
● Is a joint venture really our best option?
● Are our goals aligned with our partner’s goals?

Choosing the Best Partner ● Does the partner have the resources we need and
will they provide them?
● Does the partner have any international joint
venture experience?
● What are the partner’s motives and are we
compatible as companies?
● What are the business practices in the country

Negotiating Terms of the where the joint venture will be?
Partnership ● Who will manage the joint venture? How will
performance be assessed?
● What equity split is appropriate?
● Are all assumptions on the table? Any unresolved
issues remaining?
● How should we handle disputes and any potential

Implementing and Managing need to renegotiate terms?
the Joint Venture ● If outcomes are poor, how do we improve? When
should we terminate the joint venture?
● Are we learning and can the parent firms leverage
any new capabilities?
Figure 9.7 The Joint Venture Partnership Process: Decision Questions That Must be Answered.
Source: Adapted from Beamish, P. W., and Lupton, N. C. (2009). Managing joint ventures. Academy of Manage-
ment Perspectives, 23(2), 88.
learning and opportunities provided by the partner’s perspective. When this happens, it
undercuts one of the major benefits of establishing a JV in the first place. Moreover,
when multinationals ignore their foreign partners or otherwise are not paying close
attention, the results can be disastrous, even when the multinational has a dominant
position in the JV. The accompanying International Insights box discusses this issue.78
Danone’s Chinese Joint Venture Turns Sour

It seemed like a good match. Groupe Danone SA of France formed a 51 percent joint venture
with Shanghai-based Hangzhou Wahaha Group in 1996 to produce soft drinks, juices, and
milk products for the Chinese market. Aimed at a valuable and growing consumer products
377
segment in China, Danone’s stake in the JV was worth over $500 million and included some
40 different operations—a stake that gave it access to one of China’s leading brand names,
Wahaha.
In 2007, however, Danone publicly released its complaints against Hangzhou Wahaha,
a highly unusual step in China where disputes are typically handled in face-saving fashion
behind closed doors. Danone accused Wahaha of illegally selling Wahaha-branded products
by using distributors outside of the ones selected by the JV. After two bitter years of charges
and counter-charges, including back-and-forth lawsuits, Danone announced in 2009 that a
settlement was reached and it would be exiting the partnership and selling its 51 percent
stake. This left Danone to basically start over from scratch in China with a much smaller
presence—after losing perhaps $100 million or more. Danone’s first foray without Hangzhou
Wahaha involved a yogurt product launched through a new, wholly owned subsidiary, one
lacking the impressive distribution network of its former Chinese partner.
So, what went wrong? Granted, running joint ventures in China can be a challenge,
especially because partners’ motives are often different. The foreign multinational is after
efficiency, profits, and market access while the Chinese partner is more focused on securing
better technology and increasing employment. Indeed, foreign joint venture partners have
complained about theft of technology and the lack of adequate redress from Chinese courts.
Danone alleged that Zong Qinghou, Hangzhou Wahaha’s billionaire founder, had set up
and run a parallel set of operations outside of the joint venture, surreptitiously run by his
spouse and daughter, to produce a Wahaha line of drinks. Danone claimed that its joint
venture agreement entitled it to 51 percent of the profits from anything with the Wahaha
name on it, which it did not receive from these parallel plants. Mr. Zong replied by saying
that he had Danone’s permission to set up the plants, that the joint venture agreement was
“outdated” anyway, and that the French company was only interested in making quick profits.
Part of the problem may have been that Danone was arguably piggybacking on Mr.
Zong’s earlier success in creating the Wahaha brand and developing a distribution network.
Moreover, Danone apparently had been content to let Hangzhou Wahaha run the show,
playing little or no role in managing its joint venture operations in China. As one analyst put
it, to operate joint ventures successfully in China, companies need to build a business together
“from the ground up.” That did not appear to be the case with Danone. Despite owning
51 percent of the joint venture, Danone allowed Mr. Zong to operate them with almost no
supervision or review. In any case, the former partners have both moved on, choosing not
to cry over spilled milk.79
Figure 9.8 summarizes the key pluses and minuses of the market entry options that we
have presented in this chapter.
Other Types of Strategic Alliances

JVs are actually just one of many possible strategic alliances. That said, making alliances
work well requires trust between the parties, a clear set of shared objectives, and a
378
Non-Ownership Pluses Minuses
Modes
Exporting • Fairly inexpensive, no ownership risks• Missed location economies

• Relatively easy foreign access • Logistical and communication
• Can move in/out of markets quickly challenges
• • Learning compromised due to
Can leverage skills and capabilities of
foreign partners, distributors distance
• Exposed to trade barriers,
tariffs, currency fluctuations
Licensing • Inexpensive, flexible, generates quick • Risky where intellectual property
revenues via current intellectual property protection is weak, especially
• Good when trade barriers preclude with complex products
exporting or ownership restrictions exist • Control ceded to licensee may
• No ownership costs, good for testing inhibit coordination
risky markets or preempting rival firms • May create new competitors
Franchising • Low-cost, low-risk, quick market entry • Maintaining control can be a
• Offers more control than licensing challenge
• Established brand names attract • Conflict due to franchise not
franchises with local market knowledge adhering franchisors’ standards
• Requires monitoring of franchisees
Management • Very inexpensive • No long-term presence
contracts • Low-risk revenue • May create competitors
Turnkey contracts • An option if direct investment isn’t • No long-term presence
feasible • May create competitors
• Lowers risk if long-term instability exists • Vulnerable to political changes
Contract • Low financial risk, reduced • Less control (lower product
manufacturing manufacturing costs quality)
• Allows firm to focus on value-added • Learning is compromised
areas • Public image may suffer
Ownership Pluses Minuses

Modes
Greenfield • Allows extremely high control • Setup expensive and time

subsidiaries • Offers location economies consuming
• Can pick own site, workers, technology • Requires considerable global
expertise
• Risky due to ownership
Acquired • Allows high control • Risky due to ownership
subsidiaries • Rapid entry compared to Greenfield • Cultural differences may be
• Offers location economies formidable
• Taps acquired firm’s technology/ • May be ‘buying’ problems (e.g.,
knowhow shoddy products, bad equipment)
Joint ventures • Less financial and business risk than • Risks transferring some control
wholly owned subsidiaries or technology to partner
• Leverages partner’s resources, know- • Still some ownership risk
how, market knowledge • can be a headache to manage
Figure 9.8 Pluses and Minuses of Foreign Market Entry Options.

Sources: Adapted from Cavusgil, S. T., Knight, G., and Riesenberger, J. R. (2008). International Business: Strategy,
Management, and the New Realities. Upper Saddle River, NJ: Prentice-Hall; Griffin, R. W., and Pustav, M. W. (2004).
International Business (4th ed.). Upper Saddle Ridge, NJ: Prentice-Hall.
forward-thinking management style. One success story, at least so far, is the Renault–
Nissan partnership. In 1999, France’s Renault took a 37-percent equity stake in struggling
Nissan. Making this partnership work and moving from losses to profits in the process
is arguably thanks in no small measure to Renault’s charismatic leader, Carlos Ghosn.
As Mr. Ghosn confidently put it, “there is only one global alliance that has added value,
and that is Nissan and Renault.”
Even as the car market skidded in 2008, Mr. Ghosn was nevertheless pursuing new
projects and joint ventures to keep the alliance moving forward—including electric
vehicles in Denmark, building a new factory in Morocco, rehabbing a shoddy Soviet-
built plant in Russia, and designing a $3,000 car for the Indian market. Interestingly,
part of the Renault–Nissan alliance’s success has been Ghosn’s effective management of,
as he puts it, “the contradiction between synergy and identity.” According to Ghosn,
each corporate partner must maintain its unique identity (“because it is the basis of
motivation”) while still embracing common goals.80
Features of Alliances
Other types of alliances are typically narrower in scope, are less stable, and are shorter
in duration than most JVs. These partnerships may also lack the formal structure and
independent legal status found in JVs. As such, they are formed when multinationals
believe that a cooperative arrangement is the best way to advance their own self-interest
in specific areas. For a variety of reasons, including ease of market entry, the sharing of
risk, and the ability to realize competitive advantages quickly, the use of strategic alli-
ances has grown in recent years. The advantages associated with alliances are especially
critical in less developed countries—where deregulation has created more demanding
and competitive markets. Other entry options provide similar advantages. Strategic alli-
ances, however, are often a better way for a multinational to learn “invisible skills”
from a foreign partner. These skills are informal, tacit forms of expertise or know-how
that can only be learned through the close contact possible in cooperative relations.
Often, they are quite complex and evolve from a specific cultural context, such as
Honda’s expertise in developing and producing engines. This proficiency has been applied
to diverse products (Honda cars, motorcycles, lawn mowers, and now, even jet turbines)
and reflects a complex blend of know-how in flexible manufacturing, customer service,
quality control, product development, and just-in-time materials management.81
Production Alliances
Acquiring such expertise is often part of the motivation behind production alliances.
These involve firms that agree to manufacture products or deliver services in a shared
facility that is either built from scratch or owned by one of the partners. Prior to its
acquisition by Boeing, McDonnell-Douglas and Shanghai Aviation Industrial Corp. had
a production alliance to assemble jetliners in China using kits shipped over from the
U.S. The alliance was seen by the Chinese as a way to learn how to develop and build
commercial aircraft. Costs can also be part of the equation. H. J. Heinz, for instance,
asked food business competitors Unilever and Nestlé to consider sharing production
facilities as a way to reduce manufacturing overheads.82
380
R&D and Financial Alliances

Another way for multinationals to stay ahead of rapidly changing technology is to enter
into a research and development alliance. These involve joint research aimed at the
development of new services, products, or technologies. Often partners agree to cross-
license any new developments that result from joint research so that all participating
firms can equally share in any applications. HP’s cooperative arrangement with Japan’s
Canon Corp. to develop new printer technology is an example. Also, financial alliances
are formed by partners whose primary goal is to reduce the monetary risks of doing a
particular project. Such was the case when IBM and Toshiba entered into an alliance to
share the cost of developing new computer chip manufacturing facilities.83
Marketing Alliances
Finally, marketing alliances are designed to share marketing-related expertise or services.
These are often formed by companies wanting access to the other partner’s markets and
who are willing to pool resources to get it. This is probably the type of alliance that the
general public is most aware of and it has become standard practice in the airline business
worldwide for nearly a decade. Specifically, most of the world’s major airlines are members
of one of three competing global alliances: Oneworld, Sky Team, and Star Alliance. Each
of these alliances has at least one major American carrier. American Airlines is part of
Oneworld, Delta is part of Sky Team, with US Airways and United a part of Star Alliance.
Alliance members fluctuate to an extent given the fortunes of the airline business and the
circumstances of individual airlines. Continental, for example, switched from Sky Team to
rival Star Alliance in late 2009 where it stayed until it merged with United in 2013. Likewise,
in 2010 both Sky Team and Star Alliance were unsuccessful in their efforts to persuade
Japan Airlines to leave Oneworld and join their group instead. Their reasoning was simply—
both Star Alliance and Sky Team covet Japan Airline’s Pacific and Asian routes, lucrative
assets for alliances aimed at sharing passengers in a global flight network.84
Knitting together these networks requires code-sharing agreements among alliance mem-
bers. For instance, this would allow member airlines to sell customers “seamless” tickets for
flights from American cities to various European destinations and then on to Middle Eastern
and Asian capitals. In essence, such alliances allow airlines to tap into the strength of each
other’s route structures while offering customers integrated trip planning, airport services,
and frequent flyer miles. For example, to fly from Cincinnati to Moscow, with a quick
mini-vacation in Rome, Delta could fly customers to New York, where they would take an
Alitalia flight to Rome before boarding an Aeroflot plane for the final leg to Moscow. This
allows Delta to tap into Alitalia’s and Aeroflot’s overseas routes while the other airlines can
do the reverse, tapping into Delta’s extensive route structure inside the U.S. And for Delta
customers, it means earning frequent flyer points on all legs of the roundtrip.85
Cost efficiencies are an important benefit of these alliances. Members can share
check-in locations, personnel, airport lounges, and planes. Yet, their major benefit is on
the marketing side. As Sky Team explains, the alliance offers improved brand recogni-
tion, market positioning, customer service, and increased reach to additional destinations.
Even though the airline business rebounded in 2012 from previous lean years, marketing
alliances are looking better than ever.86
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Chapter Summary
Chapter 9 began by considering the six stages that many companies go through in their
international development. We then considered options for entering foreign markets, starting
with modes that do not require ownership of facilities. This includes exporting and licensing.
Licensing can be a very risky proposition, especially when proprietary technology is involved.
Franchising involves the contractual right to operate a business using the methods, proce-
dures, products, trademarks, and marketing strategies created by another company. Manage-
ment contracts, turnkey projects, and contract manufacturing are also examples of entry
modes not requiring any ownership.
We then considered modes of entry involving ownership, including wholly owned foreign
subsidiaries. A form of entry that only requires partial ownership is a joint venture, an alli-
ance between two companies set up as a separate legal entity that offers benefits for both
partners. It comes with challenges and management hassles that also accompany other types
of strategic alliances.
1. What are the different stages that companies may pass through as they develop
internationally? Can you think of examples of firms that have progressed through all the
stages? What about examples of firms that have remained very successful in a particular
stage?
2. Compare and contrast the various foreign market entry options that do not involve
ownership. Under what circumstances would each option be ideal?
3. Likewise, compare and contrast the various foreign market entry options that involve
ownership. Under what circumstances would each option be ideal?
4. Describe the different international alliances that may exist between firms. What are some
of the management headaches associated with such alliances?
GE Antes Up (Some) Technology to Power China’s Growing Market

Facing a choice between taking a pass on a lucrative contract to supply power turbines to
Chinese utilities vs. having to transfer key technologies to potential competitors, GE eventually
382
chose a middle-ground approach. In doing so, GE eventually won the biggest single slice of
the turbine market at the time (a contract to supply 13 turbines, worth about $900 million).
It may largely account for why GE took the lead in terms of world market share in 2012 (at
15.5 percent).
The company concluded that technology transfers were necessary to compete for a piece
of the Chinese market. GE passed along some, but not all, of the critical technologies (e.g.,
designs, manufacturing processes, etc.) necessary to produce its most sophisticated power
turbines. It did so via an agreement to set up two joint ventures where it had a majority
stake. The first was with a state-owned firm, Harbin Power Equipment Ltd., which was
allowed to assemble GE turbines in one of its plants. The second joint venture with Shenyang
Liming Aero-Engine Group allowed it to produce certain turbine blades. This required the
transfer of technologies involving blade metallurgy and turbine combustion systems. That
said, GE was able to keep some critical technologies secret—it held on to the cooling system
design for the first row of turbine blades as well as its proprietary thermal coating. These
first-row blades were produced at one of GE’s U.S. plants, then sent to the Harbin plant for
installation in the final product.
But, GE’s actions raise questions about whether it is creating new, potential competitors
and whether the U.S. government played a role in GE’s ability to protect its technology. First,
GE reasoned that the threat of creating new competitors by transferring technologies was
not imminent. The experience of other multinationals suggested that having critical technolo-
gies simply was not enough to quickly turn Chinese companies into serious global competitors
in advanced manufacturing. It felt that the Chinese firms did not have the technical expertise
to take full advantage of the technology. It knew that after joint ventures with firms such as
Ericsson and Nokia dissolved, Chinese firms were not able to manufacture advanced telecom
equipment.
GE’s own experience was similar. Earlier, GE had licensed its turbine technology to Chinese
companies, and in the 1980s it also formed joint ventures with state-owned firms to produce
small, less sophisticated power turbines. Competitors in the turbine business formed joint
ventures with Chinese firms at the same time, all involving the transfer of technology. The
net result of all this was that Chinese firms mastered the ability to produce steam-driven
turbines, but not before GE subsequently developed newer, more advanced turbines. Put
simply, Chinese firms had been unable to keep up with advancing technologies pursued by
the likes of GE and Siemens.
As far as the government’s role, U.S. firms can sometimes use trade law as a reason to
protect their technologies. Indeed, U.S. export regulations are such that GE is prohibited from
transferring cooling system technologies for turbine blades since they are also applicable to
aircraft engine design. At one point, Intel used U.S. export restrictions on sensitive technolo-
gies to blunt Chinese demands to build a cutting-edge silicon wafer plant in China.
Overall, GE felt it could maintain control over its most critical technology and still land
a big chunk of the Chinese business. It plans to continue to develop more advanced turbines
while its Chinese counterparts scramble to digest and develop enough expertise to reproduce
GE’s current turbines. Chinese officials admit that, at least in the short run, they remain
dependent on GE for key components and technology. As one official put it, “The foreigners
383
are now agreeing to tell us how and where to dig a hole, but we still do not know why to
dig a hole there.”
But is this all a risky pipe dream on GE’s part? Isn’t there a real risk that Chinese firms
will scale the learning curve faster in the future and develop enough internal expertise to
catch up, if not surpass, their partners? Clearly, Chinese companies want to continue to
acquire sophisticated technologies, either by forming joint ventures with foreign companies,
licensing technology, or inventing it themselves. Indeed, while some of their products may
still lag GE’s in complexity, Chinese competitors to GE have been stepping into foreign markets
around the globe. Shanghai Electric and Dongfang Turbine both won contracts to supply
equipment to power plants in India and Belarus. Other Chinese firms are building power
plants in Kenya, Nigeria, Pakistan, Senegal, and Yemen—posing yet another challenge for
GE to deal with in the years ahead.87
Using the Global Practices Instrument
Purpose
To hone your ability to assess the internal environment of an international company from a
strategic perspective.
Instructions
The Global Practices Instrument measures the extent to which corporate practices embrace
an international perspective and reflect a clear international strategy. Select an internationally
oriented company that you might be interested in learning more about (alternatively, your
instructor may assign a company to you) and then do some Internet research to answer the
questions by circling the appropriate number. In doing so, be sure to keep industry factors
in mind, such as that industries vary in terms of the extent to which products or services
have to be tailored for local markets. A good place to start for basic information is Hoover’s
online information service for business, which will allow you to search for companies by
industry or location (www.hoovers.com). Alternatively, you can pick a company on the Fortune
Global 500 list (http://money.cnn.com/magazines/fortune/global500/2009/index.html), or, if
you are more interested in the international strategies used in fast-growing companies, start
with the Inc. magazine list of the 500 fastest-growing firms (http://inc.com/inc5000/2009/
the-full-list.html).
Of course, whether a particular international strategy orientation is appropriate for a
specific company is another matter entirely. Likewise, a company may have a reasonable
384
international strategy but may not execute it very well. These are issues that you should
consider once all the answers are in. Put another way, how well do you think the company’s
existing strategy matches what it should be doing? If the match is poor, what recommenda-
tions would you have? If the match is good, what suggestions, if any, do you have for
improving the firm’s execution (e.g., in terms of market entry options or other management-
related issues)?
Global Practices Instrument
A. Management Team
1. The firm’s vision and culture is:
Domestic 1 2 3 4 5 Global
2. The senior management team . . .
Does not include 1 2 3 4 5 Includes many many

foreigners foreigners
3. Key jobs in all countries are held by . . .
HQ employees 1 2 3 4 5 Local employees
4. Top managers travel the world . . .
Rarely 1 2 3 4 5 Often
5. Top management’s familiarity with local culture in key markets:
High 1 2 3 4 5 Low
6. Number of foreign nationals on company’s board of directors:
None 1 2 3 4 5 Three or more
385
B. Strategy
1. The strategy for each country, region, or profit center in the firm is:
Independent 1 2 3 4 5 Under one global plan
2. Firm’s philosophy about forming alliances or coalitions in foreign markets versus using
wholly owned subsidiaries or acquisitions:
“Go it alone” 1 2 3 4 5 “Share to gain”
3. Units in specific foreign locations operate as . . .
Separate companies 1 2 3 4 5 One global company
4. In the company, environmental scanning of foreign markets is . . .
Somewhat important 1 2 3 4 5 Extremely important
5. The extent to which decisions made in the firm reflect home-country concerns and
control:
A great deal 1 2 3 4 5 Very little
C. Operations and Products
1. The primary focus of the company is . . .
Exporting 1 2 3 4 5 Fully global operations
2. The company’s major operating facilities are mainly located in:
The home country 1 2 3 4 5 Around the world
3. Production processes and product design decisions are . . .
Mostly decentralized 1 2 3 4 5 Mostly centralized
386
D. Scoring
Add up the points for each area:
A. Management team (score range is 6–30): _____ divide by 6 = _____ average.

B. Strategy (score range is 5–25): _____ divide by 5 = _____ average.
C. Operations/products (score range is 3–15): _____ divide by 3 = _____ average.
To see where the firm is on the continuum between purely domestic and fully global, compare
averages with the following scores:
Domestic Moving Toward Approaching Global Global

Global
1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0
Source: Adapted from Lussier, R. N., Baeder, R. W., and Corman, J. (1994). Measuring global practices:
Global strategic planning through company situational analysis. Business Horizons, September–October,
58–60.
Exporting Your Technology Products
Purpose
To better understand the process of exporting and the benefits and challenges that come
with it.
Instructions
For this exercise, we want you to imagine that you work for a firm that makes equipment,
and software to drive it, that is useful in the chemical and biological industries. Most of your
sales are to drug firms, academic institutions, and other research and development labs, and
you are looking to expand your business overseas. That means that you will need to research
issues related to the export of your products to other countries. Choose three countries from
separate continents that might be in a position to purchase your products/services. Your
instructor may put the class in groups to complete the project, in which case each person
(or pair of students) can be responsible for a continent. Once you target your countries, you
should prepare a report that addresses the following items:
387
1. Do you need an export license from the U.S. Bureau of Industry and Security (USBIS;
formerly the Export Administration) for any of your products? Use the following website
for more information: www.bis.doc.gov/licensing/exportingbasics.htm. You may also wish
to view a consolidated federal government export site (www.export.gov/about/index.asp)
for more information.
2. To answer Question 1, you may have to determine a commodity classification for your
product. All commodities, technology, or software is subject to the licensing authority
of the government via the Commerce Control List (CCL). Go to www.bis.doc.gov/
policiesandregulations/index.htm#rp and begin the classification process for at least two
of your products.
3. U.S. law places the burden on exporters to classify their products and services and to
then request an export review by USBIS prior to receiving their classification. Look closely
at the guidelines for an export license after you classify your product (www.bis.doc.gov/
licensing/index.htm#factsheets and www.access.gpo.gov/bis/ear/ear_data.html). If your
instructor requires it, obtain and complete the application form (www.access.gpo.gov/bis/
ear/pdf/forms.pdf; scroll through this list of many different applications). This part of the
assignment asks you to simulate the required application process (but not to submit it).
Nevertheless, you can give an oral report of your findings to the class.
4. What are some examples of countries that are barred from possible exports from the
U.S.? If none of the countries you have chosen is barred, be sure to note at least one
such country. Conversely, if each of the countries you chose cannot receive your exported
product, choose at least two countries that can. (One source for this is: www.access.gpo.
gov/bis/ear/ear_data.html; see country chart.)
5. Finally, show that you have performed due diligence in familiarizing yourself with
warning signs/red flags of possible problems with your export partner (www.bis.doc.gov/
complianceandenforcement/redflagindicators.htm).
Notes
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19, R7; The Economist. (2009). Selling foreign goods in China: Impenetrable, October 17,
73–74; Kranhold, K. (2004). China’s price for market entry: Give us your technology, too.
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freedoniagroup.com/Turbines-In-China.html.
2. Alexander, M., and Korine, H. (2008). When you shouldn’t go global. Harvard Business Review,
December, 70–77; Cavusgil, S. T., Knight, G., and Riesenberger, J. R. (2008). International
Business: Strategy, Management, and the New Realities. Upper Saddle River, NJ: Prentice-Hall.
3. Guillen, M. F., and Garcia-Canal, E. (2009). The American model of the multinational firm and
the “new” multinationals from emerging economies. Academy of Management Perspectives,
23(2), 23–35.
4. Cavusgil, Knight, and Riesenberger, International Business: Strategy, Management, and the
New Realities ; Negandhi, A. (1987). International Management. Boston, MA: Allyn & Bacon.
388
5. Shirouzu, N. (2003). As Toyota pushes hard in China, a lot is riding on the outcome. The Wall
Street Journal, December 8, A1, A12.
6. Rohwer, J. (2000). GE digs into Asia. Fortune, October 2, 165–178; see also www.gecapital.
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congruence theory. Academy of Management Journal, 16, 318–339.
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11. See www.harley-davidson.com.
12. Aeppel, Harley-Davidson profit plunges.
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19. Dyer, J. H. (2000). Examining interfirm trust and relationships in a cross-national setting. In
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20. Guillen and Garcia-Canal, The American model of the multinational firm and the “new” mul-
tinationals from emerging economies.
21. Poon, A. (2009). Chinese oil firms bid $17 billion to expand. The Wall Street Journal, August
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393
Case 3: Go Global—Or No?

For two years, DataClear has had the $20 million in 2001 and then $60 mil-
data analysis market to itself. But now lion in 2002!”
a British upstart is nipping at its heels.
Should DataClear continue to focus on
Clouds on the Horizon
its strong domestic products or expand
overseas to head off the nascent inter- A New Jersey native, Greg held an MSc
national threat? from Rutgers and then went West to
get his PhD in computer science from
“Why aren’t they biting?” wondered UC Berkeley. He spent the next 15 years
Greg McNally as he laid down another at Borland and Oracle, first as a soft-
perfectly executed cast. He was fly- ware developer and then as a senior
fishing in the most beautiful spot he had product manager. He started DataClear
ever seen, on the Alta River in Norway— in Palo Alto, California, in the spring
reputedly the home of Scandinavia’s of 1998.
worthiest salmon. And he had plenty of At the time, Greg realized that com-
opportunity to admire the view. No fish panies were collecting information faster
were getting in the way. than they could analyze it and that data
What a difference from the luck he’d analysis was an underexploited segment
had a couple of weeks earlier trout fish- of the software business. It was at a
ing at Nelson’s Spring Creek in Mon- seminar at Northwestern University that
tana. It seemed like so much more time he saw his opportunity. Two researchers
had passed since the two-day offsite he had developed a set of algorithms that
had called there, designed to be part enabled analysts to sift through large
celebration of the past, part planning amounts of raw data in powerful ways
for the future. without programmers’ help. Greg cashed
Some celebration had definitely been in his Oracle options and, in partnership
in order. The company, DataClear, was with the two researchers, created Data-
really taking off, fueled by the success Clear to develop applications based on
of its first software product, ClearCloud. the algorithms.
In 1999, its first full year of operation, His partners took responsibility for
DataClear’s sales had reached $2.2 mil- product development and an initial stake
lion. Now, the following September, it of 20 percent each; Greg provided
was looking like 2000 sales could easily $500,000 in financing in return for 60
reach $5.3 million. At the all-staff meet- percent of the shares and the job of
ing on the Friday before the offsite, Greg CEO. A year later, Greg offered David
had announced the company’s success Lester, founder of DL Ventures and a
in recruiting two more great executives, former Oracle executive, 30 percent of
bringing the staff to 38. “I’m more con- the company in return for $5 million in
fident than ever that we’ll hit our goals: additional funding.
394
In his previous positions, Greg had In fact, with relatively little product
shown a knack for leading “fizzy” tech- development, Greg and his partners
nical teams, and under his leadership the believed, ClearCloud could be adapted
two researchers came up with a state of for the chemical, petrochemical, and
the art data analysis package they pharmaceutical industries. Annual
dubbed ClearCloud (from the clarity the demand for customers in those sectors
software brought to large data clouds). could reach as high as $900 million.
Two versions, one for the telecommuni- But accessing and serving clients in
cations industry and the other for finan- those fields would involve building spe-
cial services providers, were officially cialized sales and service infrastructures.
launched in September 1998. Clear- Just two months ago, to spearhead that
Cloud had a number of immediate and initiative, Greg recruited a new business
profitable applications. For instance, it development manager who had 20 years’
could be used to help credit card com- experience in the chemical industry. A
panies detect fraud patterns more quickly former senior R&D manager at DuPont,
in the millions of transactions that Tom Birmingham was excited by Clear-
occurred every day. Greg conservatively Cloud’s blockbuster potential in the U.S.
estimated the annual demand from the market. “The databases can only get
U.S. telecommunications and financial bigger,” he told Greg and Susan. Greg
services sectors to be around $600 mil- had asked Tom to put together a pre-
lion. The challenge was to make poten- sentation for the offsite in Montana on
tial users aware of the product. the prospects for expanding into these
ClearCloud was an instant hit, and, new sectors.
within just a month of its launch, Greg Just two weeks before the outing,
had needed to recruit a dozen sales staff- however, Susan burst into Greg’s office
ers. One of the first was Susan Mos- and handed him an article from one of
kowski, a former sales rep at Banking the leading trade journals. It highlighted
Data Systems, who had worked success- a British start-up, VisiDat, which was
fully with Greg on several major joint beta testing a data analysis package that
pitches to financial institutions. She had was only weeks away from launch.
spent two years at BDS’s Singapore sub- “We’re not going to have the market to
sidiary, where she had laid the ground- ourselves much longer,” she told Greg.
work for a number of important “We need to agree on a strategy for
contracts. She had left BDS to do an dealing with this kind of competition. If
MBA at Stanford and joined DataClear they start out as a global player, and we
immediately on graduating as the new stay hunkered down in the U.S., they’ll
company’s head of sales. She was an kill us. I’ve seen this before.”
immediate success, landing DataClear’s The news did not take Greg alto-
first major contract with a large West gether by surprise. “I agree we’ve got to
Coast banking group. put together a strategy,” he said. “Why
Greg realized that ClearCloud had don’t we table the domestic expansion
huge potential outside the telecommuni- discussion and talk about this at our
cations and financial services industries. offsite meeting, where we can get
395
everyone’s ideas? Unlike the rest of us, In ending, Susan drew the obvious
you’ve had some experience overseas, so moral. “It seems pretty clear to me that
perhaps you should lead the discussion. the only defense for this kind of threat
I’ll square things up with Tom.” is to attack. We don’t have any interna-
tional sales strategy. We’re here because
we need one—and fast.”
Go Fish She glanced at Greg for any hint of
In Montana, Susan kicked off the first objection, didn’t see it, and plunged
session with a story of GulfSoft, a thinly ahead. “We know we can sell a lot of
disguised case study of her former software in the United States, but if we
employer. The company had developed want DataClear to succeed in the long
a software package for the oil and gas run, we need to preempt the competition
exploration business, which it intro- and go worldwide. We need a large
duced only in the United States. But, at installed base ASAP.”
almost the same time, a French company “I propose that for the afternoon we
had launched a comparable product, split into two groups and focus on our
which it marketed aggressively on a two options for going forward. Group
global basis. A year later, the competitor A can consider building our own orga-
had a much larger installed base world- nization to serve Europe. Group B can
wide than GulfSoft and was making think about forming alliances with play-
inroads into GulfSoft’s U.S. sales. When ers already established there. Based on
she reached the end of the story, Susan what you can come back with tomorrow,
paused, adding ominously, “Today, we we’ll make the call.”
have twenty installations of ClearCloud As the lights came back on, Greg
outside the United States—fifteen in the blinked. He was dazzled. But he sensed
U.K. and five in Japan—and those are that he needed to do some thinking, and
only U.S. customers purchasing for their he did his best thinking knee-deep in the
overseas subsidiaries.” river. After lunch, as the two groups got
At Susan’s signal, the room went to work, Greg waded into Nelson’s
dark. Much of what followed, in a bliz- Spring Creek. The fish seemed to leap
zard of overhead projections, was mar- to his hook, but his thoughts were more
ket research showing a lot of latent elusive and ambivalent.
demand for ClearCloud outside the
United States. The foreign markets in
Money, Money, Money
telecommunications and financial ser-
vices were shown to be about as large Greg decided he needed a reality check,
as those in the United States—that is, and that night he called David Lester to
another $600 million. The potential in review the day’s discussion. Not too sur-
pharmaceuticals, petrochemicals, and prisingly, Lester didn’t have a lot of
chemicals looked to be about $660 mil- advice to give on the spot. In fact, he
lion. Taken altogether that meant a had questions of his own. “Instead of
potential market of $1.5 billion domesti- focusing on foreign markets in our core
cally and $1.26 billion abroad. industries, what if we focus on
396
developing ClearCloud for the domestic Greg was also reminded of his own
pharmaceutical, petrochemical, and lack of international management expe-
chemical industries and capitalize on the rience. Eight years earlier, he had politely
$900 million U.S. market?” he asked. turned down an opportunity to lead a
“How much would that cost?” Greg team of fifty Oracle development engi-
offered a best guess of $2 million for the neers in Japan, primarily because he had
additional software development costs been unwilling to relocate to Tokyo for
but hadn’t yet come up with a number two years. His boss at the time had told
for marketing and sales; the industries him: “Greg, software is a global busi-
were so different from the ones that ness, and what you don’t learn early
DataClear currently focused on. about cross-border management will
“Whatever the cost turns out to be, we’re come back to haunt you later.”
going to need another round of financ-
ing,” Greg allowed. “Right now we’re
Options on the Table
on track to generate a positive cash flow
without raising any additional capital, At ten o’clock the next morning, Group
but it won’t be enough to fund a move A took the floor and made their recom-
beyond our core industries.” mendation right off the bat: DataClear
“That’s not where I was headed,” should immediately establish an office
Lester replied. “What if we went out in the U.K. and staff it with four to six
and raised a lot more money and sales people. Britain would be a beach-
expanded the product offering and our head into all of Europe, but eventually
geographic reach at the same time?” there would also be a sales office some-
Greg swallowed hard; he was usu- where on the continent, maybe in
ally game for a challenge, but a double Brussels. They had even drafted a job
expansion was daunting. He couldn’t description for a head of European sales.
help thinking of the sticky note he’d Greg was impressed, if a little over-
posted on the frame of his computer whelmed. “Any idea how much this
screen a few days after he started Data- would cost in terms of salaries and
Clear. It clung there still and it had just expenses over the first year?” he asked.
one word on it: “Focus.” “Conservatively about $500,000 a
Lester sensed Greg’s hesitation: year, probably more,” the group leader
“Look. We’re not going to decide this replied. “But cost is not so much the
tonight. And really, at the end of the day point here. If we don’t make this move,
it’s up to you, Greg. You’ve done the we’ll be killed by VisiDat—or some other
right things so far. Keep doing them.” competitor we don’t even know about
Hanging up, Greg was reminded how yet. Imagine if SAP introduced a similar
pleased he was with Lester’s hands-off product. With their marketing machine,
approach. For the first time, he won- they would just crush us.”
dered what things would be like if he Tom Birmingham started to object.
had a more hands-on venture capitalist “Where are we going to find local staff
as an investor—maybe one with some to install and support the product?” he
experience in international expansion. wanted to know. “I mean, this is not
397
just about setting up an office to sell: might be cheaper than doing this all on
ClearCloud is a complex product, and our own, at least for now,” the presenter
it needs a service infrastructure. We’d said.
have to translate the interface software, Susan chose that moment to speak
or at least the manuals, into local lan- up again. “I have to admit I’m skeptical
guages. We’d need additional resources about joint ventures. I think it will prob-
in business development and product ably take too long to negotiate and sign
support to manage all this. Selling Clear- the contracts, which won’t even cover
Cloud in Europe is going to cost a lot all the eventualities. At some point we
more than $500,000 a year . . .” will have to learn how to succeed in each
Susan was quick to jump in. “Good region on our own.”
point, Tom, and that isn’t all we’ll need. That’s when Greg noticed Tom
We also have to have somebody in Asia. studying Susan, his eyes narrowing. So
Either Singapore or Tokyo would be an he wasn’t surprised—in fact he was a
ideal base. Probably Tokyo works better little relieved—when Tom put the
because more potential clients are head- brakes on: “I guess I don’t see how we
quartered there than in the rest of Asia. can make that decision until we gather
We need at least four people in Asia, for a little more input, Susan,” Tom said.
the time being.” Tom frowned, but feel- “At the very least, we need to have a
ing that Susan had the momentum, conversation with Benro and any other
decided to hold his fire. potential partners. And I know I’d want
After lunch it was Group B’s turn. to meet some candidates to lead a for-
They suggested using autonomous soft- eign sales office before I’d be comfort-
ware distributors in each country. That able going that route. But my real
would help DataClear keep a tight grip concern is more fundamental. Are we
on expenses. Greg spoke up then. “What up to doing all this at the same time
about teaming up with some local firm we’re building our market presence in
in Europe that offers a complementary the United States? Remember, we don’t
product? Couldn’t we get what we need yet have the capability to serve the
though a joint venture?” chemical and pharmaceutical industries
“Funny you should mention that, here. There are still only thirty-eight of
Greg,” said the presenter from Group B. us, and I estimate that building the
“We came up with the idea of Benro but support infrastructure we need for
didn’t have time to pursue it. They might domestic expansion could cost as much
be willing to talk about reciprocal dis- as $2 million—on top of product
tribution.” Benro was a small software development.”
shop in Norway. Greg knew it had about Before Susan could object Greg
$5 million in sales last year from its data struck the compromise. “Tell you what.
mining package for financial services Let’s commit to making the decision in
companies. Benro was very familiar with no more than three weeks. I’ll clear my
European customers in the financial ser- calendar and connect with Benro myself.
vices sector but had no experience with At the same time, Susan, you can flush
other industries. “Working with Benro out some good candidates for a foreign
398
sales office and schedule them to meet “That bad?”

with Tom and me.” “Actually, to be honest, some things
were easier than we thought,” she
allowed. “Recruiting, for example. We
Casting About never expected to get any great engineers
And that’s how Greg McNally found to leave Nokia or Hitachi to join us, but
himself up a creek in Norway that Sunday we ended up hiring our Oslo and Tokyo
morning. Benro’s CEO had been inter- core teams without much trouble. Still,
ested; Greg was confident that meeting some things turned out to be hard—like
with him on Monday would yield some coordinating the three sites across the
attractive options. And once the trip was borders. There were so many misunder-
booked, it didn’t take Greg long to realize standings between Oslo and Mountain
he’d be near some fabled fishing spots. View that at first our productivity went
He also realized it would be a great down by 40 percent.”
chance to pick the brain of his old Berk- The story got worse. Sarah explained
ley classmate, Sarah Pappas. A hardware how, in 1998, her venture capitalist
engineer, Sarah had started her own com- sought to exit his investment. As an Ini-
pany, Desix, in Mountain View, Califor- tial Public Offering seemed inadvisable
nia, in 1993. The company designed for various reasons, the parties agreed
specialty chips for the mobile communi- to sell the company to Pelmer, a large
cations industry. Within seven years, equipment manufacturer. Sarah agreed
Desix had grown into one of the most to stay on for three years but couldn’t
successful specialized design shops do much to keep the engineers in her
around the world, with about 400 employ- Oslo and Tokyo subsidiaries from leav-
ees. Like Greg, Sarah had received funding. No one had fully anticipated the
ing from a venture capitalist. As a lot of clash between Pelmer’s strong U.S. cul-
demand for Desix’s services was in Scan- ture and Desix’s local cultures in Oslo
dinavia and to a lesser degree in Japan and Tokyo. By this point, Sarah felt, the
as well, Sarah had opened subsidiaries merger had destroyed much that had
in both places and even decided to split gone into making Desix a small multi-
her time between Mountain View and national company.
Oslo. “I can tell I’ve been a real buzz
Greg arrived in Oslo on Thursday killer,” she laughed apologetically, as
morning and met Sarah that evening at Greg picked up the check. “But if I were
a waterfront restaurant. They spent the you, given what I’ve been through, I’d
first half-hour swapping news about stay focused on the U.S. for as long as
mutual friends. Sarah hadn’t changed possible. You might not build the next
much, thought Greg. But when the con- Oracle or Siebel that way, but you’ll live
versation turned to potential geographic a happier life.”
expansion and he asked her about her “So you think you made the wrong
experience, Greg saw her smile grow a choice in expanding internationally?”
little tense. “Ah, well,” she began. “How “Well, no,” said Sarah, “because I
much time do you have?” don’t think we had a choice. You, on
399
the other hand, can sell much more prod- under the surface. He cast his line again,
uct in the U.S. than we could have.” an elegant, silvery arc across the river,
and maneuvered the fly deftly through
the water. Nothing.
Up to His Waist Greg slogged back to shore and
The next day brought its own worries, as peered into the box housing his extensive
Greg met with Pierre Lambert, a candi- collection of hand-tied salmon flies. Was
date for head of European sales, whom it just that he was so preoccupied? Or
Susan had identified through a head- were the conditions really so different
hunter. Lambert had graduated from the here that none of his flies would work?
Ecole des Mines in Paris and then worked One thing was for sure: it was a lot
for four years at Alcatel and five years at chillier than he’d expected. Despite the
Lucent. As they talked, it occurred to liner socks, his feet were getting cold.
Greg that he had no experience in reading
résumés from outside the States. Was
Ecole des Mines a good school? He noted Assignment Questions
that Lambert had worked only in France 1. What dilemma or strategic threat is
and the United States. How successful DataClear facing?
would he be in the United Kingdom or 2. Would you recommend that Data-
Germany? As he wrapped up the inter- Clear expand into international
view, Greg figured he would need to markets at this point in time? Either
see at least five candidates to form an way, fully explain the basis for your
opinion about the European labor mar- recommendation.
ket. And Asia would be even harder. 3. If your answer to question 2 was
That evening, he compared notes yes, lay out specific recommenda-
with Tom, who had interviewed Lambert tions for exactly how DataClear
by phone the previous day. Tom expressed should proceed to “go global” in the
some doubts: he suspected Lambert new term. If the answer to question
wasn’t mature enough to deal with the 2 was no, what specific steps should
level of executives—chief information DataClear take to position itself for
officers and chief scientists—that Data- possible expansion overseas?
Clear would be targeting. That call only
just ended when the cell phone rang “Go Global—Or No?” by Walter Kuemmerle.
again with Susan on the line. “Greg—I Reprinted by permission of Harvard Business
thought you’d want to know. VisiDat Review, June 2001. Copyright © 2001 by
just made its first significant sale—to the Harvard Business School Publishing
Corporation. All rights reserved.
Shell. The deal is worth at least $500,000.
This is huge for them.”
HBR’s cases present common managerial
And now, two days later, here he dilemmas and offer concrete solutions from
stood in the glorious, frustrating Alta. experts. As written, they are hypothetical,
He could see the salmon hanging out and the names are fictitious.
400
part IV
managing people
in the international
arena
10 MOTIVATING AND LEADING ACROSS CULTURES 403
11 BUILDING AN EFFECTIVE INTERNATIONAL WORKFORCE 447
12 EVALUATING AND REWARDING EMPLOYEES WORLDWIDE 489
13 MANAGING CULTURAL GROUPS: FROM SMALL WORK 537

chapter 10
motivating and leading
across cultures
MOTIVATING AND LEADING ABROAD: ONE SIZE DOES NOT

FIT ALL 406
WESTERN MOTIVATION CONCEPTS AND THEIR APPLICABILITY

TO OTHER CULTURES 406
EFFECTIVE LEADERSHIP IN A GLOBAL CONTEXT 420

M A N A G I N G P E O P L E I N T H E I N T E R N A T I O N A L A R E N A
Learning Objectives
recognize and adapt motivation practices across cultures;

explain how effective cross-cultural motivation strategies can be developed;
determine how a leader’s behavior, power sources, and influence tactics can be modified
to be more effective across international environments;
identify the challenges facing managers in multinationals and describe how effective
international leaders can be developed.
Can Stodgy South Korean Companies Loosen Up Their Leadership?

It is common to hear stories of organizations that encourage innovative leadership, develop-
ment of ideas, and speedy decision-making. This prototype is seen as a formula for success
in many firms—the old view of a leader acting as referee, naysayer, and keeper of the order
is now a distant memory. Yet, in some countries and cultures the concept of leadership
conjures up images of paternalism (taking care of employees like parents to offspring), order,
and formality. Those descriptions fit the leadership approach of many large Korean companies
over the past 50 years, where the power to make key decisions has been concentrated at
the top of a rigidly bureaucratic corporate structure.
The paternalistic perspective came to the surface recently at the Bank of Korea (BOK),
and especially so when Lee Ju-yeol came to the podium to present his farewell speech to
employees in the spring of 2012. Mr. Lee had spent his 35-year career there, rising to the
rank of senior deputy governor. Everyone expected a traditional warm “thank you” as he
rode off into the sunset, but instead, Lee took the decidedly non-Korean approach of a verbal
barrage at his boss, Governor Kim Choongsoo, who sat in the front row of the packed room:
“Many feel in chaos now because the values and rules that have been developed over the
last 60 years were denied in a single day.” The target of his comment was his boss, Mr. Kim,
who apparently showed no reaction to these public criticisms. The executive of the Bank of
Korea consists of the governor, the senior deputy governor, and five or fewer deputy
governors.
What were those long-standing values and rules Mr. Lee referred to in his speech? They
involve a traditional leadership approach which flows from Confucian values that emphasize
family, loyalty, and seniority. Seniority based on age (even a single year difference) is deeply
404
M O T I V A T I N G A N D L E A D I N G A C R O S S C U L T U R E S
embedded in Korean society, especially at a traditional organization such as BOK. When

meeting strangers or co-workers, Koreans work subtly to figure out one another’s age and
then use that as a guide for behavior. One effect of these values is that at each level of
management, subordinates are often prohibited from questioning their (older) superiors, much
less allowed to communicate with other executives further up the line. Some experts feel
that this stifles creativity and chokes off growth, putting many Korean companies in danger
of falling behind competition.
As bank governor, Mr. Kim felt that there were too many senior officials in high-ranking
roles, including many such as Mr. Lee who had been at the bank for decades, and too few
working-level employees. A U.S.-educated “outsider,” Mr. Kim took the unconventional
approach of replacing these high officers after serving only two years as governor. His view
was that age-based hierarchies and other traditional leadership practices limit promotion
opportunities for younger talent in the organization.
These changes were not without consequences. Mr. Lee’s critical speech, itself a break
from tradition in its directness, also released some deeply held frustration among many at
BOK. One deputy governor who left the bank before Mr. Lee (possibly experiencing the same
fate) stated that, “It’s a humiliating experience for those who spent the better part of their
lives at the bank only to see one day their juniors take control.”
So, what are Korean firms to do in today’s environment? On the one hand, huge Korean
companies such as Samsung, Hyundai, and LG (and the interrelations they share via the
chaebol system, which is a South Korean form of business conglomerate) have produced
great economic success. And, the hierarchical and closed leadership approach employed by
Koreans seems well suited for the culture. The power to make key decisions is concentrated
at the top of rigidly bureaucratic corporate structures, often run by wealthy families who act
like royalty. This authoritarian nature allows South Korean firms to move quickly (e.g., the
Lee family’s control over Samsung), but it can also stifle creativity and cause problems, such
as the fall of the Daewoo chaebol and the clan-style management it exemplified (Daewoo
was the second largest conglomerate in Korea after Hyundai Group, followed by LG
Group and Samsung Group—there were about 20 divisions under the Daewoo Group, some
of which survive today as independent companies).
In 2011, a special Wall Street Journal report raised key questions for the country.
While it gave ample credit to the country-level strategy that brought South Korea into the
upper echelon of world economies, it was also very critical of current leadership. The
report, entitled “The miracle is over: Now what?” advocated a tough, yet important self-
examination along the lines taken by BOK above. As you read this chapter, think about
this traditional hierarchical system and closed leader style. Do you think a new approach
to leadership is necessary or should companies stick with what got them where they are?
What features could Korean firms import from other countries to help change the style?
Importing new methods of leadership from other cultures is not a panacea, so think
through some of the challenges that would be involved in importing. Finally, take a look
at the Up to the Challenge? feature at the end of this chapter for some further thoughts
on this issue and to learn from some other South Korean firms who seek to change
traditional leadership.1
405
Motivating and Leading Abroad: One Size

Does Not Fit All
Most Americans agree that firms need motivated and engaged employees in order for the
company to succeed. Yet how to motivate employees is a frustrating exercise for many.
Compounding matters is the challenge of motivating across borders or cultural contexts.
Western approaches to motivation typically reflect the individually oriented and goal-driven
cultures that produced them in the first place. This may significantly limit their applicability
in places where employees embrace different values. Many experts believe that what motivates
employees and how they respond to feedback may vary depending on cultural factors.2
In fact, cultural values (such as the emphasis placed on hard work) may affect employee
motivation in ways that can help explain different economic growth rates across nations.3
Overall, cultural values may shape the “psychological contract” that employees have with
their firms. For example, consider the implications of employees who view work as a “money
for effort” transaction, an inherent good in itself, or an opportunity to be part of something
important. Each perspective has important but different implications for motivation. While
many unanswered questions remain about how motivation processes work across cultures,
it is clear that, when it comes to motivation, what works in one culture (or even company)
is unlikely to work well everywhere, at least not without some adaption.4
Consequently, this chapter starts by explaining how culture may limit the applicabil-
ity of popular Western approaches to motivation. To be effective, managers need to
know which motivation strategies require culture-specific adaptations.5 The bottom line
is that few cross-cultural universals exist when it comes to motivation. Even for similar
concepts, such as merit pay, managers often have to tweak their implementation to match
local cultural norms, at least initially. For instance, managers in most places would prefer
to rely less on formal authority to motivate their employees. Employees everywhere want
to be trusted by their superiors and to be fairly compensated. But how managers should
delegate authority, build trust, and define “fair pay” may vary considerably from place
to place.6 Not surprisingly, cultural values also may have an impact on leadership styles,
a related topic tackled later in this chapter.
International managers must understand how cultures can shape employee motiva-
tion in particular countries as well as their response to leadership. Moreover, motivation
and leadership approaches that run counter to the prevailing culture may still work,
especially if given enough time to succeed or if focused on receptive segments of the
population (e.g., younger workers who may be more open to new ideas).7 International
managers may also face important regional differences in values within countries that
impact both motivation and business performance. For instance, regional subcultures in
Brazil have distinct motivational tendencies when it comes to work.8
Western Motivation Concepts and Their

Applicability to Other Cultures
This section addresses the cross-cultural applicability and limitations of some specific
motivation theories that have been popular in America and other Western countries.9
406
Maslow’s hierarchy of needs and Herzberg’s two-factor theory both focus on explaining
what needs actually energize employee behavior. In contrast, equity theory, reinforcement
theory, and expectancy theory all examine the process by which employees are motivated
to pursue their needs.
Maslow’s Hierarchy of Needs
Psychologist Abraham Maslow believed that everyone is motivated by five basic needs
that are pursued hierarchically.10 At the most pure are physiological needs such as food
and shelter. Once these needs are met (via decent wages, for example), then employees
are motivated by safety needs, which are met via benefits such as life insurance. Next
are social needs. These are satisfied when employees feel that they “belong.” Esteem
needs are met when employees have found self-respect and confidence. Finally, self-
actualization needs are motivators after all other needs have been met. They reflect an
employee’s desire to reach his or her maximum potential. Overall, research shows that
needs are not always triggered in the order specified by Maslow, but that all of these
needs occur at some point.11
Cross- Cultural Applicability

We might expect the motivation to pursue higher-order needs (such as self-actualization)
to be the strongest in developed countries, with lower-order survival needs more promi-
nent elsewhere. Put simply, many workers in poor countries may be less interested in
self-actualization if their daily survival or safety is in question. That said, this same
pattern may also exist within countries. For instance, in one survey, wealthier elites in
rapidly developing nations such as India, China, Russia, and Brazil were much more
positive about how things were going in their countries (and presumably better positioned
to “self-actualize”) than the general (and poorer) population at large. All of this under-
scores a primary finding about Maslow’s theory—that cultural values and societal context
may impact which needs tend to be pursued most strongly. Moreover, how employees
interpret needs-related self-actualization—such as competition and achievement—is
shaped by a complex constellation of factors, including culture and the position people
occupy in a society.12
As an example, having cooperative co-workers and meeting other social needs may
rank above self-actualization for some Chinese employees.13 Other studies find that
employees in individualistic societies (such as Australia and Germany) are more likely
to be interested in pursuing personal accomplishment than employees in more collective
societies (such as Japan and Mexico) and, in turn, less interested in esteem needs than
employees in societies embracing “feminine” values (such as Sweden).14 These ingrained
preferences may be slow to change, even in the face of large-scale social upheavals.
Indeed, a recent Gallup survey showed that a clear majority of employees in most Western
European countries view their supervisor as a “partner” (i.e., someone who involved
them in decisions and provided some “self-actualizing” autonomy) rather than an auto-
cratic boss who is uninterested in their opinions. The opposite was true in many Eastern
407
European nations, perhaps reflecting their previous heritage as communist members of

the old Soviet bloc—and the heavy-handed, top-down management that went with it.
Figure 10.1 summarizes these results by country. What is particularly fascinating is that
those Eastern European employees fortunate enough to work for a “supervisor-as-partner”
reported being more satisfied with their jobs than their counterparts toiling under a
more autocratic boss.15
Eastern European Nations Majority of Employees View Supervisors as a . . .
Belarus Autocratic Boss

Czech Republic No clear majority
Estonia Autocratic Boss
Hungary No clear majority
Latvia Autocratic Boss
Lithuania No clear majority
Moldova Autocratic Boss
Poland Autocratic Boss
Romania Partner
Russia Autocratic Boss
Slovakia Autocratic Boss
Slovenia Autocratic Boss
Ukraine Autocratic Boss
Western/Northern European Nations Majority of Employees View Supervisors as a . . .
Austria Partner
Belgium Partner
Denmark Partner
Finland Partner
France Partner
Germany Partner
Greece Partner
Ireland Partner
Netherlands Partner
Norway Partner
Portugal Partner
Spain Partner
Sweden Partner
Switzerland Partner
United Kingdom No clear majority
Figure 10.1 Partner or Boss? How Employees in European Countries View Their Supervisors.
Source: Adapted from Brown, I. T. (January, 2009). In Western Europe, More Partners Than Bosses, available at:
www.gallup.com/poll/114076/western-europe-partners-bosses.aspx.
408
Research on Maslow’s ideas is clear—needs simply do not operate in a fixed hier-

archy across borders. In essence, Maslow’s hierarchy is a philosophy that reflects American
values. Its emphasis on higher-order growth needs is popular in the United States because
American culture values individualism, personal achievement, and risk taking. Neverthe-
less, to the extent that individuals or nations evolve toward those values, we would
expect more receptiveness to higher-order growth needs.16
Herzberg’s Two Factor Theory
Herzberg suggested that without decent “hygiene” factors, such as good pay and work-
ing conditions, employees will be unhappy and unmotivated. But, just because these
needs are attended to does not mean that employees will be highly motivated. If firms
want highly motivated employees, Herzberg believed that management must also provide
motivators such as challenge, responsibility, and autonomy.17 Hygiene factors are often
extrinsic to the job itself (such as pay or poor supervision) and should be dealt with in
order to improve the workplace. Motivators deal more directly with doing the job
itself—they are intrinsic to doing the job itself (such as challenges, opportunities, etc.).
Paying attention to these two main factors (hygiene and motivators) and ensuring that
a job has plenty of motivators built in, is often referred to as job enrichment. Hygiene
factors are needed to ensure an employee is not dissatisfied, while motivators are needed
to encourage higher performance.
Cross- Cultural Applicability

Research has produced a variety of results regarding Herzberg’s ideas. For instance, one
study found that workers in Zambia generally matched Herzberg’s two-factor approach,
with growth needs (a motivator) associated with high motivation and bad working
conditions (a hygiene factor) associated with dissatisfaction. But other studies suggest
that Herzberg’s ideas do not fit other cultures as precisely and may work best in a
Western context, similar to Maslow’s hierarchy model, where efforts to increase individual
opportunity and performance are often very attractive to employees.18
Consistent with this argument, another study found that British managers, when
compared to their French counterparts, were more interested in responsibility and
autonomy, but less interested in security, fringe benefits, or good working conditions.
This finding suggests that job enrichment efforts might be easier to implement in Britain
than in France.19 It seems that the more that employees value individualism, risk taking
(low uncertainty avoidance), and performance (masculine culture traits such as ego-
oriented and work-centric), the more likely that Herzberg’s motivators will help spur
personal achievement. Many employees in the U.S. and Britain fit this description. In
Sweden, however, many employees embrace individualism while also being very
relationship-oriented (feminine culture traits such as relationship-oriented and family-
focused). In these circumstances, efforts to improve interpersonal harmony in the work-
place may be more motivating than job enrichment efforts aimed at encouraging individual
achievement.20
409
International managers might also find it difficult to implement Herzberg’s motiva-

tors in developing countries such as Indonesia, India, and Pakistan. These countries
are collectivist, high in uncertainty avoidance and power distance, and low in mascu-
linity. Employees who are high in uncertainty avoidance and power distance may be
reluctant to make decisions involving risk, or ambiguity. Likewise, many employees
who embrace collectivistic values may also react poorly to efforts aimed at enriching
jobs on an individual basis. Finally, when feminine values hold sway, job enrichment
efforts that focus narrowly on the job itself, without concern for interpersonal issues,
may backfire since employees’ obligations to family or community are often a
priority.21
The worldwide trend toward increasingly complex (or enriched) jobs, and the
responsibility that goes with them, marches on. Yet the willingness of employees to
embrace such jobs still depends, at least in part, on cultural values and context.22 For-
tunately, experts believe that cultural obstacles to implementing job enrichment efforts
can be overcome. They suggest that international managers should learn about the local
cultural environment in depth before attempting any job enrichment effort. Once manag-
ers understand how local values may impact job enrichment, managers can sidestep
cultural barriers while leveraging local values in other ways to improve employee
motivation.23
A case in point is what Thomson, the French electronics giant, did to improve
motivation and performance at a plant in Morocco. Its challenge was to convince
employees to take on more responsibilities and to make decisions independently.
While this sounds like a typical Western job enrichment effort, these motivation
changes were accomplished in a culture-specific way. In the process of doing so,
openness and trust also increased dramatically. Morocco is a high power distance
context, one in which senior executives often expect to wield sweeping authority
over many workplace decisions. Consequently, Thomson management decided to lead
by example using culturally appropriate methods. Specifically, their efforts to improve
motivation were described as a “new moral code, one that everyone would live by.”
This new code was linked to Islamic values pervasive in Moroccan life. For example,
management encouraged employees to embrace greater responsibility as a way of
living Islam’s emphasis on openness, honesty, and respect for the contributions of
others.24
It is important to underscore that hygiene factors alone can, under certain condi-
tions, prove highly motivating to employees. For instance, job security and pay often
behave as motivators in developing countries, but may also be very motivating in indus-
trialized nations. For instance, according to one survey, Danish employees are the most
satisfied workers in the world—perhaps because of outstanding relations between labor
and management. This theme of “getting along” is part of Lego’s culture, perhaps Den-
mark’s best known company. The very name of the firm is derived from two Danish
words that mean “play well.”25 For another look at how a hygiene factor, money, is a
big motivator for some Russian women, read the following International Insights
feature.
410
Money Drives Russian Women Working for Mary Kay and Avon
Mary Kay Cosmetics and Avon, both American firms, have been successful in Russia for years.
Thanks to a burgeoning demand for cosmetics, Russia ranks high among Mary Kay’s opera-
tions in 35 countries. Likewise, some 70 percent of Avon’s revenues come from developing
nations—and Russia is one of its three biggest foreign markets. A big key to the success of
both firms is the sales force of Russian women. And, for most of them, money is a key
motivator. Mary Kay provides sales training and sells its products at a discount to retail prices
to its Russian sales representatives who then sell them at full price, preferably to small groups
of customers. Women in Mary Kay’s Russian sales force typically make several hundred dollars
a month while top performers, many of whom have their own offices and administrative
staff, can rake in thousands. Either way, Mary Kay’s sales force exceeds the average monthly
wage in Russia by a considerable margin—which may explain why turnover among Mary
Kay’s Russian sales force is so low. Avon’s experience is similar and the company prides itself
on helping its representatives get started, including low-cost loans.
Mary Kay and Avon are attractive to Russian women because they offer financial inde-
pendence, something that remains relatively rare in Russia. Some women feel that Russia’s
economic development has left them behind. The majority of Russia’s unemployed are women
and some Russian organizations still reserve certain jobs for men. When they are employed,
women in Russia are often trapped in low-paying jobs and are the first to be laid off. Ironi-
cally, these same attitudes toward gender in Russia help make being a Mary Kay or Avon
sales representative a socially acceptable job for Russian women—one that can pay very well
indeed.26
Overall, rather than focus on hygiene factors versus motivators, it might be simpler just
to assume that what motivates employees probably varies from place to place more often
than not. At the risk of generalizing, implementing enriched jobs that provide autonomy
and opportunities for achievement is likely to foster deeper motivation and commitment
more quickly in places where individualistic and masculine values are strong (e.g., U.K.,
U.S.). In contrast, it may be better to improve working conditions and relations among
workers if managers want to create a motivated and committed workforce in places
where collectivism (e.g., Japan) or feminine values tend to exist (e.g., Sweden).27
Equity Theory: You Should Get What You Deserve
Equity theory proposes that an employee’s sense of fairness is an important driver of

his or her level of motivation at work. If an employee perceives that she has been treated
unfairly by an organization or boss, she is motivated to take action to restore a sense
411
of fairness. These judgments of fairness or equity are reached by comparing oneself with
similar people at the workplace (peers with the same job title and description, etc.). The
theory claims that we consider various outcomes and weigh the possible consequences
of actions and rewards that we receive at work (such as pay, recognition, etc.) relative
to the amount that we put into the job (such as effort, education, skills, etc.). When the
comparison of outcomes to inputs is roughly balanced, employees should feel that they
have been fairly treated by their organization. If they do not have this sense, employees
will spend time and effort trying to restore the balance somehow.28
Applying Equity Concepts Across Cultures

Research seems to show that the way that different cultures define, interpret, and assess
“fairness” can vary considerably. Moreover, national culture is not the only factor
impacting employee views about equity. The corporate context (e.g., firm norms, the
nature of the industry) can also shape employee acceptance of equity concepts. For
instance, over time a strong merit pay system—one in which higher pay is linked to
individual performance—may influence employee attitudes. And, as multinational cor-
porations continue their push abroad, they are helping to shape workforce values in
those places. For instance, one study found that Chinese employees working for inter-
national joint ventures involving Western firms were increasingly accepting of company
norms that distributed rewards based on their performance. This flies in the face of the
fact that distributing rewards equally among workers would be more consistent with
traditional Chinese values. Yet, how fast and how far such changes will permeate across
the broader Chinese workforce remains to be seen.29
International managers would be wise to consider the impact of cultural values when
it comes to equity concepts. For example, workers in cultures that highly value individu-
alism may still be more motivated by equity and deservingness than employees elsewhere.
In such cultures, individual performance is important (inputs) and should be rewarded
accordingly based on deservingness (outcomes). On the other hand, in collectivist cultures
there may be more openness to seeing rewards distributed equally, regardless of perfor-
mance, to preserve group harmony and cohesiveness.30
As previously stated, however, the link between culture and equity-based rewards is
both complex and evolving. Some studies suggest that employees in collectivistic cultures
are less likely to apply equity concepts when distributing rewards than employees in
individualistic cultures. Other experts, however, suggest a more nuanced view, pointing
out that studies have found that employees in collectivistic cultures may be more likely
to use equity norms when rewarding efforts to promote group cohesiveness. Still other
studies suggest that in-group versus out-group differences may also complicate matters
in collective cultures such as China. For example, equality norms (relatively equal dis-
tributions, regardless of inputs) may be preferred when distributing rewards to in-group
members, whereas equity (performance-based) norms are more preferable when rewards
were being divvied up to out-group members. Finally, some studies have suggested power
distance can impact these differences in equity–equality, with low power distance employ-
ees preferring equality and high power distance employees preferring equity as the fairest
way to distribute rewards.31
412
An alternative perspective emerging on equity theory is that we should focus less

on broad fairness rules and more on understanding what goes into the mental equation
that employees consider when judging fairness around the globe. Put another way, there
may be fewer differences across cultures than we think when it comes to preferences for
equity or equality norms. Instead, culture may have a bigger impact on what employees
consider to be relevant work inputs and outcomes, as well as how important they are.
While everyone may understand and have similar views about broad norms like equity,
how these are implemented may be shaped to a large extent by culture. A related example
of this is illustrated in Figure 10.2, which shows the results of a survey of nearly 90,000
people across 18 countries (five examples are shown in Figure 10.2). Employees were
asked to rank features that attract them to a firm and also to rate various features that
engage them once employed there. As the figure shows, there are common features in
ranked items, as well as some unique features that are motivating within any one
country.
Country Top Three Attraction Drivers Top Three Engagement Drivers
Brazil Competitive base pay Organization rewards outstanding

Career advancement opportunity customer service
Challenging work Improvement of my skills over last year
Senior management sincerely interested
in employee well-being
China Learning and development Excellent career advancement
opportunity opportunities
Career advancement opportunity Organization encouraged innovative
Competitive base pay thinking
Organization’s reputation for financial
stability
India Career advancement opportunity Input into decision making
Challenging work Senior management actions consistent
Learning and development with values
opportunity Organization’s reputation for social
responsibility
South Korea Competitive benefits Senior management ensures
Competitive base pay organization’s long-term success
Reputation of organization as good Unit has skills needed to succeed
employer Organization supports work–life balance
U.S. Competitive base pay Senior management sincerely interested
Competitive health care benefits in employee well-being
Vacation/paid time off Organization’s reputation for social
responsibility
Improvement of my skills over last year
Figure 10.2 What Attracts Employees to a Firm and Engages Them Once They Are There?
Source: Adapted from Tower Perrin. (2008). Closing the engagement gap: A road map for driving superior busi-
ness performance. Tower Perrin Global Workforce Study, available at: www.towersperrin.com/tp/showhtml.
jsp?url=global/publications/gws/index.htm&country=global.
413
Hopefully, researchers will be able to sort this out in the years ahead and offer more
concrete advice to international managers in the process. This important information is
needed by practicing managers who regularly make compensation and other reward
decisions. That said, cultures are not static and this complicates efforts to solve this
puzzle. Moreover, the pace of change regarding how employees judge equity and fairness
distribution may vary considerably as a consequence of local circumstances. For instance,
although we mentioned shifting equity perspectives among Chinese employees at the
beginning of this section, there is also evidence to suggest that Chinese managers have
been slower to adopt “Western” equity rules to distribute material rewards than, say,
their Russian counterparts.32
What do these complex findings mean for international managers? Findings suggest
that managers should do the following:
1. Think through how their own cultural values might affect their use of equity or equal-
ity rules in doling out rewards.
2. Take some time to understand how the cultural values of their subordinates might
affect the use of various inputs and outcomes.
Overall, it is important to be mindful of how traditional values and practices may change
in ways that affect how rewards should be allocated. Again, conditions in China not
long ago allowed firms located on the coast to keep workers from the interior reason-
ably satisfied with low pay and no raises (sometimes for years). Job prospects elsewhere
were just very slim. But this has changed as the country has developed and opportunities
spread. Indeed, many low-paid employees in China already feel pangs of inequity, par-
ticularly if they compare themselves to others who seem better off.33 As discussed later
in Chapter 13, this resulted in widespread worker protests and was partially responsible
for ethnic strife in some Chinese provinces in the late 2000s.
Reinforcement Theory: Connecting Behavior and

Consequences
The central idea behind reinforcement theory is that the best way to motivate is to
clearly link valued consequences to the performance of specific employee behaviors. For
example, managers can improve employee performance by applying positive reinforcers
(e.g., big bonuses). Conversely, poor performance can be eliminated by carefully applying
sanctions or punishment (e.g., a pay cut).
Culture, Context, and Reinforcement Ideas

To use positive reinforcement most effectively managers need to know what employees
value. Culture and societal context, however, makes this more challenging than it
seems. For example, in South Africa many black employees are more motivated when
their firm continues to remove the social inequalities left over from apartheid (e.g.,
the inferior housing still plaguing much of the black majority). This connection between
414
work and life outside of work also reflects African cultural values that emphasize the
importance of community and family. Such values are less common in Western man-
agement approaches.34
Culture may also affect how employees interpret performance-related feedback. For
instance, while employees everywhere react more favorably to positive than to negative
feedback, this pattern is more pronounced in collectivistic cultures. Moreover, employees
in individualistic cultures tend to respond more to individualized performance feedback
rather than group performance feedback, with employees in collectivistic cultures doing
the opposite. Narrowing our lens even further for a moment, while U.S. employees tend to
prefer positive feedback, they will often take steps to explain away or dismiss negative
feedback. In contrast, while Japanese employees tend to react even more strongly to nega-
tive feedback than Americans, they are also more open to feedback and more likely to
respond with behavioral changes. It is very likely that these tendencies are rooted in cultural
and societal traditions. Many Americans like to revel in their triumphs, especially individual
ones, while finding failure threatening to their self-worth as individuals. In collectivistic
Japan, however, critical evaluations may help people maintain a humble posture toward
the wider group as well as offer suggestions for improving overall group performance.35
Similarly, U.S. and Mexican workers may react differently to positive performance
feedback.36 Americans may see praise as suggesting that even better performance is pos-
sible, while Mexicans may see it as recognition that their current performance is good.
Mexican workers are also less likely to exceed the informal performance norms of their
work groups regardless of the feedback they receive from a supervisor. Compared with
Americans, Mexican employees may be more collectivist and tend to pay close attention
to group norms.37
Cultural values can also present other hurdles for reinforcement strategies. For
instance, performance-based pay may not motivate workers in high uncertainty avoid-
ance cultures because pay is put at risk. Using large bonuses or big pay increases alone
may also prove difficult in feminine cultures since loyalty to the boss, company, or co-
workers is valued above performance. India is an example of a country where cultural
values may limit reinforcement strategies. In fact, pay systems in some Indian companies
violate reinforcement principles. For example, compensation may strongly reflect
employee seniority as opposed to being contingent on behavior. Performance appraisal
may also be rudimentary, making “merit pay” seem arbitrary. This may reinforce the
resigned fatalism and indifference to good performance (a state referred to chalega) that
some Indians already embrace because of their socialization experiences. Instead, Indian
employees’ efforts may be directed to activities aimed at strengthening relationships with
supervisors who offer valued rewards.38
Overall, managers need to consider how culture affects the elements that employees
find motivating as well as how they react to company efforts to link those motivators to
desired behaviors. Once again, managers must be willing and able to scale what is often
a formidable learning curve to understand what works best in a particular cultural con-
text. This does not necessarily mean that U.S. managers have to avoid Western approaches
to reinforcement. What it does mean, however, is that to be accepted by employees,
reinforcement approaches may have to be modified to fit local sensibilities.39
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Expectancy Theory: Setting Goals and Tying in Rewards
Expectancy theory pulls together many of the ideas about motivation that we have
presented so far. The expectancy approach assumes that three factors determine employee
effort in a given situation, with effort being a strong indicant of motivation.40 First,
employees must believe that working hard will result in good performance. So, if an
employee feels it is impossible to hit production goals that have been set, he or she will
not exert much effort. Second, employees must believe that rewards are tied to good
performance. If this is not the case, then motivation will also suffer. Finally, the available
rewards must be valued—motivation and effort will languish if the rewards employees
receive are unimportant to them.
Cultural Assumptions of Expectancy Theory

You may have noticed that expectancy theory makes some now-familiar cultural assump-
tions in that it emphasizes individualistic and masculine values (such as a focus on tasks
rather than on relationships). It also assumes that individual workers are rational and
control their lives by manipulating effort. All of this fits U.S. culture quite well. But
many Asian and Middle Eastern cultures believe that fate helps determine events. Similarly,
many Mexicans feel that being from the appropriate family is a real key to success.
Likewise, many Saudi Arabians believe that what happens at work is a reflection of
God’s will. In each case, external forces are important.41
Because rewards must be valued to produce motivation, expectancy theory suggests
that the rewards used should reflect cultural values. For instance, in one study U.S.
managers felt that bonuses should be tightly connected to performance. This fits the
expectancy assumption that people are achievement-oriented and can tolerate risk. But
the French and Dutch managers in the study were less interested in money and were
more skeptical about linking bonuses to performance. And in reality, the bonuses earned
by French and Dutch managers were smaller and varied less than did the bonuses earned
by Americans. The Dutch tend to have a more feminine cultural orientation and are less
individualistic than Americans. As a consequence, Dutch managers are less likely to use
pay as a way to “keep score” of personal achievement. Similarly, managers in high
uncertainty avoidance cultures, such as France, may be leery of reward systems with
large, highly variable performance bonuses.42
These cultural differences help explain why the “outrage threshold” for executive
compensation is generally lower in Europe than in the U.S. In particular, these differences
might affect the second key element of expectancy theory explained earlier—the belief
that rewards are tied to good performance. Indeed, European executives in major firms
earn only about 40 percent of what their American counterparts take home. In 2009,
this averaged roughly $13 million for American CEOs vs. an average of only roughly
$3 million (Dutch) to $6 million (British) for European CEOs. Moreover, legal restric-
tions on executive pay, bonuses, golden parachutes (huge payouts if an executive leaves),
and stock options tend to be more severe in Europe than in the U.S. As a result, it is
not surprising that (in 2007) the $14 million pay package earned by the CEO of giant
Swiss pharmaceutical company Novartis sparked many negative comments
416
about “excessive compensation” in Europe—a sum that is unlikely to provoke a similar

reaction in the U.S. That said, pay packages for U.S. executives will produce outrage if
they are seen as “exorbitant” by American standards and are not perceived to be strongly
linked to performance.43
Of course, sensibilities about pay change and evolve. Indeed, some of the outrage
that has been seen in Europe regarding “huge” executive pay packages reflects a shift
toward U.S.-style compensation. Between 1998 and 2008, for instance, CEO pay jumped
up dramatically as European firms tried to keep up in the worldwide search for talent.
In fact, foreigners now run several major German and French companies, with U.S.-type
incentive and bonuses plans being much more common across the board. After losing
talent to U.S. and British rivals in recent years, Deutsche Bank and Bayerische Vereins-
bank in Germany began offering American-style performance bonuses that increased
total compensation by 50 percent or more. Many other German banks remain uneasy
and have relied on smaller bonuses—some even making part of the bonus pay contingent
on the ability to work well with colleagues. This also underscores the fact that pay dif-
ferences persist across European nations. Northern European countries (e.g., Netherlands,
Norway, Sweden), along with Germany, tend to have more egalitarian values than their
British and French counterparts—and hence tend to pay CEOs less.44 For a closer look
at how performance–reward linkages are evolving in Japan, see the International Insights
feature.
Global Dining’s Message to Its Japanese Employees:

Perform or You Are Chopped Liver
The “cut-throat capitalism” of the U.S. is a tough sell for many Japanese. Contentious
disputes about pay and performance are rare in Japan, at least in traditional companies.
But Japanese firms such as Global Dining may provide a peek into the future. This restaurant
chain embraced three innovations that are shocking for many Japanese—plenty of conflict,
do-or-die competition between employees, and brutally honest individual performance
feedback.
How brutal? One cook sat in front of a group of bosses and peers to demand a big
pay increase. They immediately shouted criticisms, including that his cooking was uneven
and that sales on his shift were lousy. A quick vote was taken with the humiliated cook
being rebuffed. In fact, all employees, from senior leaders to dishwashers, are evaluated
against performance criteria in such face-to-face meetings. Those who miss performance
targets get no bonuses. Managers who foul up are quickly demoted or fired. But excellent
performers are rewarded incredibly well. One young restaurant manager made over
$150,000, considerably more than a typical mid-career executive working for a large Japa-
nese firm. Global Dining’s CEO summed up the system’s philosophy this way: “Just as sharks
417
need to keep swimming to stay alive, we only want people who are constantly craving
challenges.”
The willingness to embrace this demanding approach is part of a broader debate in
Japan regarding traditionally cushy relationships between employees and big firms that often
have little to do with performance (e.g., lifetime employment, seniority-based raises, etc.).
Japan’s prolonged economic difficulties have been driving that debate, so Global Dining is
not alone. Companies such as Sony, clothing chain Fast Retailing, and machine parts firm
Misumi Corporation are among the bigger Japanese companies that have aggressively recruited
young managers willing to live with the ups and downs of a tough pay-for-performance
system. Thanks to bonuses, one young Misumi manager earned almost $530,000—a sum
that eclipsed the pay of the company president.
But some workers at Global Dining worry about the pressures under such a hardnosed
performance management system. Even waiters watch each other closely because everyone
votes on raises and bonuses for everyone else (one performance marker is how long it takes
a waiter to notice that a customer needs another drink). That said, Global Dining employees
may have the last word because the system actually encourages criticism of superiors, right
up to the CEO level. In fact, at one point, employees complained to the CEO about the
bonus formula. Eventually, employees demanded a vote on the issue; the CEO lost, and the
formula was modified. One manager who left Global Dining to start his own restaurant said
that while performance management was a good thing, his system would be less ruthless.
As he put it, “There’s a saying, ‘too much is as bad as too little.’”
Indeed, the flip side of the challenges that firms such as Global Dining take on is the
growing percentage of younger Japanese who are “slackers,” perfectly content with
humdrum jobs. These workers, labeled hodo-hodo zoku (“so-so folks”) in Japan, deliberately
avoid working hard and refuse to accept more responsibilities, promotions, and even pay
raises. As unusual as it may seem in workaholic Japan, only 3 percent of Japanese employees
said that they were giving their jobs full effort in a recent 18-nation survey—the lowest of
any country. Critics suggest that Japan’s crumbling traditions of lifetime employment and
generous benefits are causing younger workers to do the minimum amount of work and
are thus threatening Japanese productivity in the process. But these employees watched
their parents commit themselves totally to their jobs and companies, putting in extraordi-
narily long hours, only to see them “rewarded” with layoffs and pay cuts during recessions
in the 1990s and 2000s. As one “so-so” employee put it, “That’s definitely not the life I
want.” Consequently, companies as diverse as Sanyo Electric and Dai-ichi Mutual Life
Insurance are having a hard time just finding employees willing to be promoted into
management.
Perhaps the answer for these companies is to take the Global Dining approach and offer
more radical alternatives to employees—where there are plenty of risks, but also plenty of
bigger rewards. This might entice younger Japanese into signing up if they believe big rewards
will really follow from working hard—unlike their parents’ experience in the slow, seniority-
based approach found in traditional Japanese firms. Yet it remains to be seen whether younger
Japanese will gravitate more toward hodo-hodo zoku thinking, the “cut-throat capitalism”
embraced by Global Dining, or something else entirely.45
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As interesting as these Japanese examples are, major shifts in attitudes and motivation
do not typically happen overnight. For instance, in recent years Japanese have been
seeking out foreign companies for employment in ever-increasing numbers. In most cases,
this attraction is based on the belief that, relative to their domestic counterparts, foreign
firms demand fewer hours while at the same time are more willing to pay for individual
performance and to promote based on personal achievement. That said, the percentage
of Japanese in the workforce who are employed by foreign companies is still small (less
than 3 percent) and trails the percentage in other industrialized nations by a consider-
able margin (e.g., over 5 percent in both the U.S. and Germany).
So while change is occurring, the starting point is low and the rate of change unclear.46
In general, the perceived link between effort and performance remains stronger for
Americans than for Japanese. The longer history of performance-contingent reward
systems in the U.S. likely explains this difference. Finally, Americans still tend to see pay
increases, promotions, and personal recognition as more desirable than do their Japanese
counterparts. Cultural values that emphasize individual performance and achievement
in the U.S. and group cohesion in Japan may be the source of those findings. Conse-
quently, how fast and to what extent Japanese society will become more individualistic
is unclear. But the government apparently wants to move in that direction. A few years
ago, Japan launched a new education policy designed to help children become more
independent and individually oriented.47
Conclusions about Motivation Across Cultures
International managers would be well served to take culture and related factors into account
when designing and implementing motivation strategies for use abroad.48 But this is no
small challenge, especially because cultural values are a moving target and managers may
not appreciate how their own values affect the motivation strategies they use.49 Consequently,
international managers should rely on motivation approaches and tactics that complement
rather than conflict with the specific cultures involved. In short, they should strive for
cultural synergy in their motivation efforts. This can be done in five basic steps:
1. Describe the motivation situation. The first step is to discover if different motivational
perspectives exist and if they create conflict. How does the manager view the motiva-
tion issue? What perspectives do employees have?
2. Identify cultural assumptions about motivation. The next step is to pinpoint the cul-
tural values that explain different perspectives on motivation. The goal is to be able to
see things from another culture’s perspective.
3. Determine where cultural overlaps exist. Next is to determine where similarities and
differences exist between cultures in the work environment.
4. Generate culturally synergistic alternatives. Once cultural assumptions have been iden-
tified, the next challenge is to develop motivation strategies that blend elements of the
cultures involved or even go beyond them.
5. Select, implement, and then refine a synergistic strategy. The final step involves picking and
implementing the best motivation strategy. A key is to have all parties observe the strategy
from their own cultural lens and then fine-tune it based on any feedback that is received.
419
Accomplishing these steps may require conversations with foreign employees, as well as
their involvement in the development and implementation of specific motivation pro-
grams. To ensure success in these efforts, managers and employees must both possess
cultural self-awareness (i.e., awareness of their own values) and cross-cultural awareness
(i.e., awareness of others’ values). Having both types of awareness increases the odds that
the chosen strategy can be implemented in a way that reflects the best of the specific
cultures involved. But first, underlying values and cultural frames of reference must be
identified. This will help foster an appreciation for alternative perspectives, something
that can then be used in generating motivational approaches which accomplish manage-
ment goals in ways that are sensitive to local cultures.50
Effective Leadership in a Global Context

In this section we turn our attention to management, shifting our focus from motivating
employees to those who often are responsible for implementing a motivation program:
the leaders. At the core, leaders help set things in motion in their organizations—they
guide the development of the firm’s vision and enable employees to contribute effectively
to its achievement. But thanks to globalization, today’s leaders face daunting challenges—
whether coordinating virtual teams from 10,000 miles away, leading a foreign subsidiary
as an expatriate, or running a multicultural department in their home countries.
Consequently, effective leadership in international companies requires openness, an appre-
ciation of cultural differences, and the ability to bridge differences quickly—to develop
culturally synergistic solutions to international management challenges.51 Recent thinking
is that these global skill sets can be differentiated from a more domestic leader style along
three dimensions. Global leadership is more complex because it comprises the above skills
in addition to some of the same domestic leader skills. The flow of knowledge and infor-
mation is also both wider and deeper. And, the degree to which leaders must span geog-
raphy and culture (presence) is in much greater demand from a global manager.52
Yet, the specific ways in which “leadership” is practiced can also become blurry
once borders are crossed.53 For instance, perspectives vary about what characteristics
leaders must possess to be effective. Nevertheless, leaders exist in every culture. Moreover,
some leadership attributes seem to be viewed as positively (or negatively) contributing
to a leader’s effectiveness in most countries. That said, other leader attributes are viewed
differently across cultures. Figure 10.3 presents a few examples of leadership attributes
that are considered positive in most cultures, negative in most cultures, and interpreted
very differently across cultures. Researchers continue to investigate how leadership attri-
butes travel across cultures. One recent study suggested that self-awareness, an attribute
often seen as critical to leadership effectiveness in the U.S., may not be as important
elsewhere. Americans embrace the open sharing of inner thoughts and feelings—which
promotes managers’ self-awareness as they receive feedback from others. On the other
hand, in cultures where saving “face” is valued and direct communication is less accept-
able, self-awareness may be much less important for leadership success. But even when
attributes are generally seen as good or bad in most cultures, how those attributes are
manifested varies considerably depending on the cultural context. Finally, even when
420
Leadership attributes likely to be viewed as “good” in most Decisive

cultures Good communicator
Honest
Intelligent
Has integrity
Positive
Trustworthy
Leadership attributes likely to be viewed as “bad” in most Dictatorial
cultures Egocentric
Irritable
Ruthless
Leadership attributes likely to be viewed differently across Ambitious
cultural boundaries Enthusiastic
Individualistic
Logical
Sensitive
Willing to take risks
Figure 10.3 Leadership Attributes Across Cultures: Examples of the Good, the Bad, and the Different.
Sources: Adapted from Frost, J., and Walker, M. (2007). Cross-cultural leadership. Engineering Management, June/
July, 27–29; and House, R. J., Hanges, P. J., Javidan, M., Dorfman, P. W., and Gupta, V. (eds) Culture, Leadership,
and Organizations: The GLOBE Study of 62 Societies. Thousand Oaks, CA: Sage.
cultures tend to manifest certain types of leadership behaviors, it doesn’t mean interna-
tional managers should automatically emulate them. Instead, other approaches to leader-
ship will be more effective in the long run.54
Consequently, some tough questions are tackled in this section. Do managers behave
differently across cultures in leadership roles? Do certain situations require similar lead-
ership behaviors, regardless of culture? Can corporate culture override or weaken other
cross-cultural effects with respect to leadership? This section offers some answers to
these and other important questions.
Leader Behavior Across Cultures
Leadership concepts, values, and styles continue to evolve around the world, which com-
plicates matters. This evolutionary process can be seen in Russia, Poland, and other
countries in Eastern Europe that have undergone social and economic upheaval in over
the last decades.55 Yet, tension between old and new ways of leading is not limited to
former members of the Soviet bloc. South Korea has produced some remarkable success
stories in recent years, with many Korean brands such as Hyundai, LG, and Samsung now
household names in Western markets, including the U.S. There is little doubt that some
of this success reflects the impact of shifting leadership cultures in certain top South Korean
firms, a point considered more closely in the closing case of this chapter.
421
Task- vs. Relationship- Oriented Leader Behavior: Cultural Limitations

A common distinction drawn by American researchers is that two basic types of leader
behavior exist. Task-oriented behavior includes clarifying performance expectations and
specific procedures to be followed. Other examples include planning, scheduling, provid-
ing technical help, and goal setting. In contrast, relationship-oriented behavior includes
showing concern for subordinates’ feelings, needs, and well-being. Other examples include
expressing empathy, warmth, encouragement, consideration, and trust to subordinates.
But which type of leadership behavior produces the best performance and in which
countries? There is no simple answer. On the one hand, leaders in collectivistic cultures
such as Japan may tend to use relationship-oriented behaviors more than leaders in
individualistic cultures such as the U.S. On the other hand, when relationship-oriented
behaviors are used, employee reaction tends to be relatively positive across a wide variety
of cultures. Reactions to task-oriented behavior, however, tend to be more variable across
cultures. The bottom line is that depending on the circumstance (which may include
cultural factors, organizational context, and employee characteristics) leaders may need
to use different combinations of task-oriented and relationship-oriented behaviors to be
effective.56
Use India as an example. It presents a challenging leadership environment to say
the least, as a rapidly developing Asian country where personal relations are critical and
complexities abound due to culture, religion, caste, and family ties. Many Indian experts
have suggested that a nurturing style of leadership that mixes empathy and concern for
subordinates with an emphasis on getting the job done often works best in many Indian
work contexts.57 See the following International Insights feature for more detail on the
nurturing style of leadership.
Vineet Nayar: Changing the Leadership Culture, 1.2 Billion at a Time

India is a large and rapidly developing Asian country with a number of features shared by
the U.S. For example, India is the world’s largest democracy with (now) deep-seated political
roots. The rule of law is firmly established and detailed. Likewise, India nurtures a free press,
a strong judiciary, and well-educated business leaders operating in open capital and labor
markets. Yet, there are significant differences, which can create problems if the businessperson
is not well schooled on each culture. Likewise, even within such a large country, clashes can
occur between old and new ways. This might be especially the case in areas of India in which
personal relations are critical and complexities abound due to culture, religion, caste, and
family ties.
This may have led to an indigenous and unique leadership style. Many Indian experts
have suggested that a nurturant style of leadership that mixes empathy and concern for
422
subordinates with an emphasis on getting the job done often works best in many Indian
work contexts. Interestingly, researchers asked sets of Indian executives about this and related
leadership issues. Leaders of the 100 largest publicly listed companies (by market capitaliza-
tion) were asked to order their priorities in running their businesses. These responses were
compared to those of similar American executives. A distinctive feature of the Indian approach
was the high priority that leaders placed on investing in and power given to their employees.
This ranked well above maximizing shareholder value—the highest priority voiced by American
executives.58
Given this priority, it is no surprise that interesting and unique leadership ideas are coming
from India. There is no doubt that large swaths of India remain impoverished, but in the
growing tech and business sectors, Indian companies are fighting hard to attract and to retain
highly talented and skilled employees who are among the world’s best. At HCL Technologies
(an information technology outsourcing firm that is the fifth-largest firm in India), even
throwing money, perks, and fancy benefits at employees was not enough to stem an atro-
cious attrition rate. Instead, HCL’s CEO, Vineet Nayar, decided to focus on his people. First,
he deployed a 360-degree feedback system that collected assessments of over 1,500 managers
worldwide (including Mr. Nayar himself) from peers, bosses, subordinates, customers, and
more. As Mr. Nayar said, “Our competitive differentiation is that we are more transparent
than anybody else in our industry . . . [Employees and customers] like us because there are
no hidden secrets.” No secrets indeed! HCL routinely puts the results of those 360-degree
reviews on the firm’s intranet for all to see—including Mr. Nayar’s own evaluation. Plus,
instead of determining who gets bonuses or promotions, the goal of the system is to encourage
democracy. In a reversal of the usual truism (as Mr. Nayar puts it) HCL’s goal is “to get the
manager to suck up to the employee.”59
Other new approaches include an online complaint system that employees can use
for any issue and which also tracks complaint resolution. Mr. Nayar also spends his week-
ends personally responding to the 50 or so electronic questions that he receives from
employees every week. His responses are posted for all to see. Mr. Nayar claims that a
traditional “command and control” orientation at HCL is giving way to “collaborative
management.” But, he is not content to let this take its own course—Mr. Nayar has
pushed for more rapid evolution. To accelerate this change, in any one year he spends
upwards of half his time in town hall meetings with employees, sharing his views and
vision and taking questions. He has a personal goal of shaking every employee’s hand
every year, with the goal (self-stated) of “destroying the office of the CEO” in five years.
On his public blog (also titled “Destroying the Office of the CEO”) he explains that he
wants decision making pushed out of the C-suite and into the hands of where the company
meets the client.
Overall, these unique employee-focused approaches may be consistent with the nurturant
style of leadership described above. They may be well beyond it! Either way, it has people’s
attention. While a variety of Western firms have visited India in order to learn about HCL’s
leadership ideas, none have adopted its 360-degree system so far. CEO Nayar’s explanation
is simple: “It’s too radical for most of them.” It is easy to see why Vineet Nayar’s well-
understood motto is “Employee first, customers second.”60
423
Japan has also produced some interesting ideas about leadership in that country. For
example, the “PM leader” is a leadership style that combines complementary concern
about problem solving and motivation of group performance (performance leadership)
with behavior designed to promote interdependence, avoid conflict, and maintain har-
mony within the group (maintenance leadership). On the surface, these behaviors resemble
the distinction between task- and relationship-oriented behaviors drawn by American
researchers.
But their implementation in Japan makes it clear that both sets of behaviors are
grounded in a very different cultural context. For instance, if a Japanese leader discussed
a subordinate’s family problems with other employees, this would likely be seen as
showing high maintenance leadership. The same behavior in the U.S., however, would
most likely be viewed as inappropriate. Similarly, performance leadership behaviors that
would be seen as positive in Japan (e.g., the leader being strict about following company
policies or urging employees to work to their utmost as a group) would be off-putting
to many U.S. employees. U.S. employees typically view leadership as an individual pro-
cess, and want their leaders to “make tough calls” and to “take charge.” In contrast,
traditional Japanese leadership tends to have a more communal quality, focusing instead
on group performance. Decision making is typically much slower, and involves plenty
of consultation with peers and concern for relationships.61
These examples from India and Japan underscore that lumping everything into two
behavioral dimensions can often mask important cross-cultural differences. In fact, the
relationship-oriented behavior described by Western scholars is colder and more egalitar-
ian than the paternalistic Indian version. That “paternalistic version” of relationship-
oriented behavior may produce positive reactions from employees in places such as India,
the Middle East, and parts of Latin America. Consequently, international managers may
get themselves into trouble if they limit leadership to Western views of “task-oriented”
and “relationship-oriented” behaviors.62
A survey of Iranian employees further illustrates this point. Respondents were asked
whether their immediate supervisor showed task-oriented and relationship-oriented behav-
ior styles. The results showed that Iranian supervisors who acted in a benevolent and
paternalistic way had the best performance ratings from subordinates. Yet, forcing the
Iranian data into task- and relationship-oriented factors produced no significant relation-
ships with leader performance or subordinate satisfaction. This suggests that Western
definitions of leader behavior may not fit Persian or Middle Eastern cultures. In Iran,
the boundary between work and family relationships is often ambiguous. The warm but
firm father figure who plays such a prominent role in Iranian society translates into the
work supervisor who is directive but still shows respect for subordinates.63
In essence, leadership style must be understood in terms of both its general underly-
ing structure as well as its particular expression in certain cultures. For example, American
and Japanese leaders might agree that being supportive (relationship-oriented behavior)
is important for success. In the individualistic U.S., a manager might express support by
showing respect for subordinates’ ideas. In collectivistic Japan, however, a manager might
express support by spending more time with subordinates as a group.64
A study comparing managers from Britain, Hong Kong, Japan, and the U.S. found
that while there was agreement on basic aspects of leadership style, the specific
424
expression of these behaviors varied across the four countries.65 These differences may
explain why American and Japanese managers often encounter enormous difficulties
when in leadership roles in each other’s “home” environment. Overcoming this may
require a blending of leadership strategies that parallel our synergistic recommendations
on motivation.66
Culture and the Impact of Leader Behavior

The behavior shown by leaders can affect an employee’s attitude and performance. But,
as with motivation, this effect may change because of cultural background. In collectiv-
ist, high power distance cultures such as Japan and Taiwan, task-oriented behaviors may
have a stronger positive impact on employees than in individualistic, low power distance
cultures such as the U.S. For instance, the criticism that Japanese managers use (often
aimed directly at subordinates) would likely seem punitive to many Americans, even
though it works well in a Japanese context. In Japan, managers will often balance criti-
cism with plenty of supportive behaviors and go to great lengths to minimize status
symbols. On the other hand, Americans are more likely to use status symbols (e.g., a
big, fancy office) to project authority.67
What happens, however, when American subordinates work under Japanese leader-
ship at a facility within the U.S.? In one study, Japanese managers had less impact on
American subordinates than Japanese ones, and had less influence over both groups than
American supervisors. American subordinates, however, performed better when a Japanese
supervisor was friendly and supportive but worse when an American supervisor did
basically the same thing. So, the nationalities of supervisors may affect how their behavior
is interpreted by their subordinates in specific contexts. Friendliness by an American
supervisor may imply weakness, while the same behavior from a Japanese supervisor
may be seen as a desire to get things done.68 But, can different leader behaviors have
the same positive effects across cultural contexts? The answer is yes, according to experts
testing this question.
In many U.S. companies, for example, participative approaches that involve employees
in decision making by supportive supervisors are effective. This participative method is
a good match for low power distance cultures, such as the U.S. This style may not work
well in high power distance cultures, such as Mexico. There, a paternalistic, autocratic
leadership approach would fit better—where managers make most decisions in a way
they feel is best for employees (as a parent would for offspring). One study examined
this very issue by comparing managers in plants in Mexico and the U.S. Both plants
were owned by the same American firm and produced the same product. American
managers got their employees involved in decisions by seeking their reactions and feed-
back to quality improvement options. Mexican managers, however, did not consult with
employees, but instead reserved most of those decisions for themselves.69
The broader implication here is that foreign outposts can match the level of perfor-
mance found within U.S. facilities, for example, without having to use a strictly “Ameri-
can” approach to leadership. Consider the U.S.–Mexico comparison in more detail.
Many of the initial production problems facing American-owned plants in Mexico may
be due to the use of management techniques inconsistent with Mexican cultural values.
425
Management Expectations and Attitudes
Leadership Issue American Managers Mexican Managers
Valued subordinate behaviors Initiative, achievement Obedience, harmony

Key to subordinate evaluation Performance Personal loyalty
Leadership style Loose/informal, communicative, Close/formal, empathetic, use of
power sharing possible directives, little power sharing
Basis of discipline/justice Uniform application of rules Personal relationships
and procedures
Work environment model Competitive team Cooperative family
Figure 10.4 Leadership at the Border: The Expectation Gap between American and Mexican Managers.
Source: Adapted from de Forest, M. E. (1994). Thinking of a plant in Mexico? Academy of Management Execu-
tive, 8, 33–40.
These differences surface when U.S. multinationals send poorly prepared Americans to
manage Mexican workers. Figure 10.4 describes some of the divergent expectations that
may separate American and Mexican managers. Mexican workers sometimes appear
passive to Americans. Compared to the U.S., Mexico is less individualistic but higher in
power distance and uncertainty avoidance. What seems like Mexican passivity is really
due to beliefs that conformity, respect, and personal loyalty to supervisors are important.
Indeed, for many Mexican employees, viewing the organization as an extended family
makes sense. Just like in a family, people should work cooperatively but within a pre-
scribed role. The value Americans place on individual achievement and power sharing
may strike many Mexican employees as inconsistent with this view.70
American managers also need to be sensitive when interacting with Mexican employ-
ees. For instance, honoring status is part of Mexican business. At one plant in Mexico,
the ranking union leader was insulted when the American plant manager failed to
introduce him to visiting executives. Formality is another way that many Mexicans
recognize status differences. American informality can produce problems. For example,
one American manager in Mexico tried to reduce status differences by wearing jeans
and dropping professional titles. But, the result was that Mexican workers thought he
was “unsophisticated.” Distance between management and labor is expected. Mexican
workers often view autonomy as less important and may respond best to formal but
empathetic managers who supervise them closely. Likewise, traditional Mexican supervi-
sors are used to being obeyed without question. They view having to explain an order
as a weakness. Consequently, American management efforts to share power and encour-
age problem solving can be confusing to Mexican employees, although this can be
overcome by training that taps into familiar family concepts (e.g., “we are all brothers
and sisters in this together”).71
For their part, U.S. managers in Mexico sometimes feel that local workers are
undisciplined and that Mexican workplaces run “loosely.” U.S. managers feel that dis-
cipline results when policies are applied equally to all workers. Mexicans, however, may
view discipline embodied in the form of loyalty to a manager, not a policy manual. One
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American plant manager learned this lesson the hard way after he created an elaborate
grievance system to prevent labor unrest. He was later shocked when the entire work-
force walked out without using the new system to air their complaints. Resolving griev-
ances in Mexico may require a relationship-oriented approach that includes personal
expressions of understanding of workers’ needs.72
Aligning Leadership Behavior with the Cultural Context

This information suggests that international managers may need to adapt their leadership
style to match expectations in specific countries to be effective, at least initially. Consider
a common cultural mistake that American managers make in Japan—assigning parts of
a project to different individuals instead of handing it off (in totality) to a group. In the
U.S., giving clear, specialized assignments to each employee is often seen as the best way
to organize work. In Japan, however, it would be better to give the entire project to a
group of subordinates, letting them tackle it as they see fit. The Japanese view is that
interaction among employees provides the structure for organizing work.73
Nevertheless, many Americans continue to believe that if they are good managers
in Indianapolis or Denver, that they can export that style successfully overseas. One
study debunked this idea by comparing Americans managing in Hong Kong and the
U.S. on 12 different leader behaviors. As expected, the American managers behaved
relatively similarly in both places. But the relationship between behavior and performance
was quite different. While eight of the leader behaviors were correlated with overall
performance in the U.S., only one behavior was correlated with performance for the
Americans in Hong Kong. In short, the same behaviors that “worked” in the U.S. had
no impact in Hong Kong.74
Of course, U.S. managers are not the only ones who can have trouble adapting their
leadership approaches to foreign contexts. Some experts believe that many of the factors
that helped the Japanese succeed at home and in the export market became stumbling
blocks as they set up operations overseas and/or globally integrated.75 Also, consider
some of the challenges that German giant Siemens has encountered in trying to run its
U.S. subsidiaries and its tens of thousands of American employees. One of the complaints
from the American side of things is that German leadership is too autocratic, inflexible,
slow, and bureaucratic, with many decisions requiring approval from Germany. At Sie-
mens, a management board meets in Germany to make decisions about a variety of
strategic and operational issues. When major decisions are involved, another group, the
supervisory board (consisting of both employees and shareholders), has to step in and
approve the decision made by the management board before the firm can proceed. As
you might suspect, some Americans view this leadership approach as cumbersome, one
that tends to shut out local input and initiative.76
Transformational Leadership: What Is It and

Does It Work Across Cultures?
This section considers transformational leadership, a recent—and increasingly popular—

perspective in the U.S. A transformational leader is able to galvanize employees, turning
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poorly performing companies into winners. This happens when the transformational
leader creates an emotional bond with employees—something which inspires intense
loyalty and outstanding performance. This bond is the result of the leader’s:
■ charisma, which arouses intense emotions among followers based on faith in and
identification with the leader;
■ use of inspirational appeals, that convey a clear and compelling future vision, with
very high performance expectations for employees;
■ intellectual stimulation, that challenges subordinates to think about new ways to do
things, overcome problems, and design products as they pursue the leader’s vision;
■ individualized consideration which offers subordinates personal attention, empathy,
and communication.77
In American firms, transformational leaders can have positive effects on subordinate

effort, performance, and satisfaction. This often requires a willingness to cede control
to the leader, something that is more likely when subordinates feel vulnerable (such as
during a business downturn). Research does show that transformational leaders seem to
have the greatest impact in a crisis.78
But does this mean that international business, with its rapid changes and competi-
tive threats, is tailor-made for transformational leadership? Some experts believe that
“yes,” the most successful international managers are transformational leaders. Support-
ing this are studies showing the positive impact of transformational leadership in places
as diverse as Israel, New Zealand, Germany, and Singapore. Still, broad statements about
the “global” value of transformational leadership should be treated cautiously for a
number of reasons.79
First, the nature of the “positive impact” of transformational leadership can vary
from place to place. For example, most studies done in Western cultures find improved
job satisfaction to be one of the benefits of transformational leadership—something that
does not seem to be the case in the Middle East or India. Second, research seems to
suggest that regardless of the nature of any positive impacts, they are driven by different
aspects of transformational leadership in different cultures or even unique, culture-specific
aspects. For instance, research has found that doing one’s duty (dharma) is a key com-
ponent of transformational leadership in India while in China showing good moral
character and sensitivity to others were important parts of transformational
behavior.80
Some research suggests that transformational leadership behavior can actually have
negative effects on innovation in an international context—as it did in one study that
examined research alliances between American and Japanese firms. This underscores the
impact of the international context (in this case, a complex research-oriented alliance)
on leadership effectiveness as well as the need for more research about how transfor-
mational leadership works and under what circumstances.81
For now, we can say that the appeal of transformational leadership may be somewhat
limited in collective cultures where group harmony is highly prized. In countries such
as Japan, for instance, a charismatic leader who tries to galvanize individual performance
could degrade group cohesiveness. Tweaking a transformational approach to focus on
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group performance may be a better bet. That said, implementing a transformational

approach to leadership will likely be more difficult in Japan than in the U.S. Yet, most
research on transformational leadership did not include foreigners or expatriates trying
to be transformational leaders with local employees. As discussed previously, U.S. employ-
ees react differently to Japanese managers than American managers, even when their
behavior is similar. One wonders, for example, whether a Japanese executive would have
been seen as successful in taking over Nissan as French executive Carlos Ghosn was a
few years ago. Seen as heroic by many Japanese, Ghosn came from Renault and turned
struggling Nissan around. Of Lebanese decent, Ghosn was born in Brazil but raised in
France. He closed unproductive plants and fired employees (decisions that raised eye-
brows in Japan) while pushing for bold new products. Indeed, Ghosn’s words on product
design speak to his inspirational vision and intellectual stimulation of employees, both
hallmarks of transformational leaders: “We are unleashing the imagination of our design-
ers as part of our strategy for the market. You are going to see revolutionary designs
from Nissan.”82
Cross Cultural Leadership Effectiveness: Pulling Everything

Together
Clearly, there is no shortage of approaches to leadership. Unfortunately, when it comes

to a comprehensive framework that can account for a variety of individual, organiza-
tional, and situational factors, including culture, we still have a long way to go.
Nevertheless, our discussion concludes by presenting two content-based leadership frame-
works that summarize the impact of culture on international leadership. These are not
meant to be exhaustive guides nor should they preclude international managers from
thinking critically about their specific leadership situations. Nevertheless, these two
frameworks provide some important initial guidance for international managers to
consider.
The first framework comes from the Global Leadership and Organizational Behav-
ior Effectiveness (GLOBE) Project. An impressive research effort involving scholars
from more than 60 countries, GLOBE described six basic leadership dimensions,
identified whether they facilitated leadership effectiveness, and indicated where these
dimensions would be most likely and least likely to be displayed by leaders (see
Chapter 4). Figure 10.5 summarizes these findings from the GLOBE Project. What is
interesting is that two leadership dimensions (charismatic/value-based, team-oriented)
were found to contribute positively to effectiveness while one dimension (self-
protective) was generally negative—regardless of country or culture. Naturally, there
may still be country-specific implementation differences with respect to specific aspects
of these dimensions. Overall though, these are the leadership dimensions that seem
to have the most consistent impact on effectiveness across countries and cultures. For
the remaining dimensions (autonomous, humane-oriented, participative), the results
were mixed, with effectiveness much more a function of the cultural context. In short,
in the right cultural environment, these dimensions could also prove to be moderately
to highly effective.83
429
Leader Description of Leader Dimension Effective Where Is Dimension

Behavior Dimension Across Countries/ Most/Least Prevalent?
Dimension Cultures?
Autonomous Encourages Depends—ranges from Most in Eastern Europe,

individualistic and facilitating to impeding least in Latin America
independent behavior leader effectiveness
Charismatic/ Motivates/inspires, has Generally facilitates Most prevalent in Anglo
value-based high expectations; all leader effectiveness nations; least in Middle
driven by core beliefs East
Humane Supportive, generous, Modestly facilitates Most prevalent in South
orientation considerate, leader effectiveness, but Asia; least in Nordic
compassionate has little impact in some countries
places
Participative Involves others in General positive impact Most prevalent in
making decisions on leader effectiveness, Germanic countries; least
but considerable in Middle East
variation
Self-protective Concerned with safety, Generally negative Most prevalent in South
security, face-saving impact on leader Asia; least in Nordic
effectiveness countries
Team-oriented Focuses on team Generally facilitates Most prevalent in Latin
building, and common leader effectiveness America; least in Middle
goals among members East
Figure 10.5 Leader Behavior Dimensions: Effectiveness and Prevalence Across Cultural Boundaries.
Source: Adapted from House, R. J., Hanges, P. J.,. Javidan, M., Dorfman, P. W., and Gupta, V. (eds) (2004). Culture,
Leadership, and Organizations: The GLOBE Study of 62 Societies. Thousand Oaks, CA: Sage.
The path–goal leadership approach is arguably the most proscriptive model of all
and predicts that leadership effectiveness is contingent on matching leadership style to
the situation. This approach includes four basic leadership styles:
1. Directive: The leader provides clear procedures, guidelines, and rules for subordinates
to follow when doing their jobs.
2. Supportive: The leader focuses on subordinates’ needs and overall well-being to main-
tain positive relationships.
3. Participative: The leader consults with subordinates, solicits their opinions, and oth-
erwise involves them in decision making.
4. Achievement-oriented: The leader focuses on maximizing subordinate performance
by setting lofty goals and challenges, and emphasizes excellence.
To be most effective, leaders should use the style that best fits the demands of a particular
situation. In fact, several factors may shape which style produces the highest motivation
and performance among employees. For example, tasks that are poorly defined or
unpredictable may require more directive leadership, everything else being equal. On the
430
other hand, tasks that are well defined, with clear guidelines for performance, may be
a better fit for participative leadership. Similarly, employees who lack experience may
benefit from directive leadership, while employees who have well-developed skills may
benefit from achievement-oriented leadership.84
If we consider Hofstede’s cultural dimensions as modifiers of this path–goal approach,
some useful applications can be generated for practicing managers. In general, participa-
tive leadership should work best in low power distance cultures (such as Sweden), while
directive leadership should work best in high power distance societies (such as France).
Countries with moderate levels of power distance (such as the U.S.) may find leadership
that combines participation with some supportive behavior most attractive. A paternalistic
style combining both supportive and directive behaviors should work best in collective
societies (remember that collectivism is often associated with high power distance, e.g.,
Taiwan). Individualistic societies (such as Denmark), which are often associated with
low power distance, should embrace participative leadership. Finally, strong uncertainty
avoidance cultures may prefer directive leadership (such as Greece), while in cultures
more tolerant of ambiguity, participative and achievement-oriented styles might be better
received (such as England). It is important to remember that these are merely generaliza-
tions, albeit complex ones. International managers will still need to factor in even more
complexity of the situation that they are in to determine which approach to leadership
will work best in a specific context.85
Leadership Development in Multinationals
The leadership challenges discussed thus far can be daunting and add to an already
difficult job. After all, leaders are not exactly welcomed with open arms and showered
with positive feedback in their own countries where they largely manage their own
nationals—let alone while working in a foreign culture. Figure 10.6 demonstrates the
results of a study of nearly 30,000 employees who rated their senior management on
five different attributes. Ratings included features such as the leader’s ability to deal with
company challenges and their people-management skills. The highest-rated leaders were
from China and India—over 70 percent of employees rated leaders as effective in those
countries. Overall, however, the average score given to leaders across the 21 countries
was only 55 percent, with Japan bringing up the rear. Japanese leaders received awful
ratings: only 35 percent of employees in Japan rated leaders as effective, a dramatic fall
from the late 1980s when Japanese leaders drew wide praise for their various manage-
ment techniques. (These data were collected before a sequence of tragedies in 2011 in
Japan when an earthquake resulted in a massive tsunami, and which in turn produced
a major nuclear disaster.) True to predictions of the path–goal theory, the study also
showed that ratings of effectiveness varied across a number of situational circumstances,
such as government vs. private settings and across high-tech vs. low-tech firms.
Many multinationals undoubtedly hope that the increasing similarity (in terms of
structure, technology, and strategy) of companies around the world will weaken or overcome
cross-cultural differences. But, these convergent forces may be offset by factors that continue
to maintain, or even accentuate, cultural differences, as discussed next. Consequently, a safe
431
Skill/Development A Transnational Manager . . . A Traditional International

Area Manager . . .
World view Understands the business Focuses on managing relationships

environment from a global between headquarters and a single
perspective foreign country
Culture knowledge Learns about a variety of Becomes an expert on a single
cultures culture
Approach to Learns from many cultures, Works with people in each foreign
learning creates a culturally synergistic culture separately or sequentially,
workplace integrates foreigners into parent
firm culture
Ability to adapt Able to transition effectively Able to adapt to living in a single
to living in a variety of foreign foreign culture
cultures
Cross-cultural Uses cross-cultural interaction Uses cross-cultural interaction skills
interaction skills daily mainly on foreign assignments
Collaboration Interacts with foreign managers Interacts within defined hierarchies
as equals of cultural and structural dominance
Foreign experience Views foreign experience as Views foreign assignments as a
critical for career development mechanism for getting a job done
Figure 10.6 Comparing Transnational and Traditional Skills for International Managers.
Source: Adapted from Adler, N. J., and Bartholomew, S. (1992). Managing globally competent people. Academy
of Management Executive, 6, 54.
assumption is that managers’ effectiveness will continue to depend, at least in part, on how
well they adapt their approaches to the cultural circumstances in which they lead. In fact,
some U.S. (such as General Electric), European (such as Nokia), and Japanese (such as
Sony) multinationals have created comprehensive programs to help develop better interna-
tional managers. Some experts have gone so far as to say that multinationals also need
training programs to help local employees interact more effectively with the international
managers they have to work with—again, because of cultural differences.86
Other multinationals work to embed their corporate values into the work environ-
ment of various countries. They believe that by emphasizing corporate values, a more
homogeneous international workforce can be created. This allows managers to use similar
(and already tested and successful) leadership strategies everywhere that the firm does
business. This assumes, of course, that employees are willing to accept corporate values
at the expense of their own. Some successful examples include McDonald’s and FedEx.
Building a global workforce with a common set of values is very difficult. Simply
working for a multinational may actually accentuate local cultural values. In one study,
cultural differences were more pronounced among employees working for a multinational
than for employees working for domestic firms. It may be that the contrast accentuates
differences that might otherwise blend in better. So, for example, Italians acted more
“Italian” when they worked for a foreign firm than when they worked for an Italian
company. The same was true for the other nationalities in the study.87 Resistance is also
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likely when multinationals push foreign employees to embrace corporate values that
explicitly conflict with local values. For example, an American multinational’s effort to
encourage participative decision making among European managers backfired—merely
reinforcing the differences between corporate and local values. The conclusion reached
by management was “horses for courses,” or that some situations and cultures are more
amenable to participative leadership than others.88
The Skills Needed for International Leadership

The best option for multinationals may be training and development programs aimed
at building international leadership skills and experiences throughout the corporation.
But that is just part of the job: firms also need to identify their aspiring international
managers early, using valid and reliable methods. For instance, experts suggest that
companies screen for personality attributes (e.g., extroversion) associated with greater
receptiveness to developmental activities when selecting managers for international
assignments.89
Once on an international leadership track, it will take managers time to acquire the
skills needed to be effective. As the CEO of one international search firm put it, “cultural
sensitivity does not always come naturally, so developing global executives often requires
helping people to see their own biases.” And doing that means more than simply plug-
ging managers into a foreign outpost. Rotating people through international work
assignments is just one part of a systematic and proactive effort to design a career plan
that takes managers’ experience and skills, as well as the company’s needs, into account.90
Some firms have developed unique training programs for international leaders. At
IBM, the most promising international managers are sent in small groups for one-month
stints abroad to help solve social and economic problems in developing countries. This
Peace Corps-type approach is aimed at teaching managers “how the world works” and
exposes them to everything from installing water wells in Filipino villages to battling
malaria in Ghana. Many managers return recognizing the need to change their leader-
ship styles.91 The Global Innovations feature details the public accounting firm Pricewa-
terhouseCoopers’ unique approach to leadership development.
Global Innovations
It Takes a Village: Developing an International Leadership Cadre at PwC

Alain Michaud was reflecting on the time he spent in Paraguay and what he learned in his
time there. Tahir Ayub talked about his experiences in the Namibian outback. And, Jennifer
Chang was wowed by the time she spent in Belize—great experiences all. But, Chang was
not reflecting on one of those exotic eco-tourism vacations that are all the rage now. Nor
were the others sharing great get-away experiences they found out about in Travel magazine.
Instead, they were commenting on the impact of an innovative leadership training program
called Ulysses© that each had participated in with their firm, PricewaterhouseCoopers (PwC).
433
In 2000, PwC started Ulysses with the purpose of building a network of global leaders
for the firm. The goal was to send promising senior managers and leaders overseas to gain
experience in cultural diversity and to better equip them to work and lead in a “global
stakeholder society.” So, Mr. Ayub, a PwC partner, worked in a Namibian village to help local
leaders deal with their community’s terrible AIDS crisis. The cultural disconnect was huge—
which was something that PwC was looking for in this and other assignments, such as Ms.
Chang’s in Belize, where she lived among residents in dirt-floored houses and some dreadful
poverty. Mr. Ayub and two colleagues had to leave behind their iPhones and the PowerPoint
presentations and work from the break of dawn to nightfall to provide help for the commu-
nity. Others completed similar projects in their eight-week stints.
Does this “walk a mile in someone else’s shoes” approach make for an effective leader
development tool? PwC thinks so. While the results are hard to quantify, they point to the
tangible benefits noticed among participants and their impact on others. Among other things,
increased understanding of others, deeper listening skills, and the value of trust in interac-
tions have all been cited by participants.
Likewise, Genesis Park is a related program deployed by the firm. This is a ten-week
assignment also designed to develop leadership and innovation. Nascent leaders are nominated
by their managers to work on real-life problems in multicultural teams, with input from diverse
leaders in their field. The problems are strategic rather than technical and ones that PwC’s
clients are likely to encounter (e.g., how does PwC enter a new market?). The teams collabo-
rate together, obtain necessary information, throw around innovative and creative solutions,
evaluate results, and then prepare recommendations for PwC leadership. The teams live in
close quarters during their ten weeks together and are pushed hard. At the start, they are
told that they will be challenged “physically, emotionally, professionally, and intellectually.”
The expected results are surprisingly non-tangible, especially for an accounting firm: leaders
become more creative; innovative; better able to understand client and firm problems; and
are better able to understand wider personal, political, and global realities. PwC is careful to
monitor and to build on the benefits accrued from these and other global leadership devel-
opment programs.
If you reflect on your view of public accounting firms, it may conjure up images of staid,
conservative approaches to problems, managers reactive more than proactive in their stance.
Yet, in our opinion, accounting firms are often at the vanguard of modern human resource
practices and these innovative leadership programs mentioned are but a couple more examples
of global innovation that we have seen.92
Regardless of how they acquire it, international managers should have a perspective on
cultural issues that is not limited to a particular country or region. The continuing
internationalization of business is increasing the need for more and different cross-cultural
relationships—something, for example, that Lenovo recognized after they purchased and
merged with IBM’s PC division. Management worked to train leaders to develop a style
434
that combined Eastern and Western cultural features.93 This merging of cultures will
probably be a more common experience in the coming decade. As a result, a country-
based or regional set of experiences and skills is insufficient over the long haul. Ultimately,
managers need transnational leadership skills to be effective—some of these are listed
in Figure 10.6.
Relatively few multinationals have made a comprehensive and sustained effort to
develop managers with transnational leadership skills such as those by IBM or PwC.
But, this is changing and more substantial leadership development programs are replac-
ing the limited, modest efforts undertaken by most firms.94 Chapter 11 will consider
international human resources in more detail and illustrate how firms can link leadership
development to their business objectives. Some general suggestions for a transnational
leadership development strategy are summarized in Figure 10.7 and include ideas for
both individuals as well as corporate training programs. Companies serious about pre-
paring their managers for international leadership challenges will take these ideas to
heart.95
Suggestions for Individuals Description/Explanation
Be open to new global experiences both Key skill to develop is tolerance for ambiguity; treat
emotionally and intellectually international experiences as learning opportunities
Avoid making assumptions or forcing Focusing on what others in an international context will
your values onto others help you recognize and bridge cultural differences
Do your cross-cultural homework It’s essential to put time into researching the cultures
where you’ll work—read as much as you can/find
mentors to help
Grab opportunities to meet foreign Video conferences save money, but there’s no substitute
colleagues face to face for face-to-face interaction to learn/build relationships
Reflect on your limitations Understanding your strengths/weaknesses will help you
make the most out of any international experience
Suggestions for Corporations Description/Explanation
Emphasize overseas experience for Work experience is a key for developing international
managers managers
Make sure leadership development Building international skills into appraisal and
and key human resource practices are promotion processes reinforces the value of
aligned international development
Create support mechanisms for This helps track careers and development activity
development effectiveness
Make senior executives responsible for Top management is in the best position to build visible
leadership development and influential support for international development
efforts
Figure 10.7 Individual and Corporate Suggestions for Developing Transnational Leadership Skills.
Sources: Adapted from Conner, J. (2000). Developing the global leaders of tomorrow. Human Resource Manage-
ment, 39, 147–157; and Frost, J., and Walker, M. (2007). Cross-cultural leadership. Engineering Management,
June/July, 27–29.
435
Chapter Summary
This chapter discussed the challenge of motivating and leading across cultural boundaries.
A key point is that most research on these topics was done by Americans on Americans,
with all their accompanying cultural baggage. If managers need to know which motivational
approaches and techniques work well overseas, then what might be common wisdom in
the U.S. may be inappropriate in other countries. There are relatively few universal approaches
when it comes to motivation. But even if the underlying principles (e.g., equity) being used
are the same, how they are framed and presented needs to reflect local values to be effec-
tive, at least to an extent.
Overall, managers should take cultural variables into account in designing reward systems
and motivational strategies. Action steps that international managers can take in order to
develop synergistic solutions to motivation issues start with efforts made by managers to
understand their own value systems, as well as employees’, before tackling motivation issues.
This can be valuable in generating motivational approaches that meet goals in ways that
are sensitive to local cultural values and dynamics. At the same time, while it is important
to be sensitive to host-country norms, we should not take those as fixed or uniform.
Similar conclusions were reached about what makes for effective leadership in an
international context. Leader behavior can vary across cultures and that a manager’s inter-
national effectiveness can be increased by awareness of this fact. Indeed, what constitutes
effective leadership behavior and style also differs across cultures to some degree. A take-
charge, aggressive style may work well in many situations in the U.S., whereas in the
Netherlands it may be less successful. It is suggested that multinationals need leaders with
transnational skills throughout their ranks.
1. What difficulties might international managers encounter when implementing each of the
motivation approaches discussed in this chapter? What specific concerns might come up if
managers were trying to motivate Japanese employees? Mexican employees?
2. What steps would you take to develop a culturally synergistic approach to motivation
challenges? What difficulties might you encounter in trying to implement those steps?
3. Describe how some popular leadership approaches, such as transformational leadership

and the path–goal model might operate in different countries. How can those explain why
different leader behaviors can have the same positive effects across cultures?
4. How can corporations identify and develop managers with transnational leadership skills?
436
Leadership with Seoul: Korean Firms Are Mindful of Their Roots While Trying New
Approaches
This chapter opens with a discussion of the traditional South Korean leadership style—one
that may be out of step with the premium placed on creativity and nimbleness that seems
to characterize today’s global economy. This authoritarian and closed leadership style seems
to flow from traditional Confucian values that emphasize family, seniority or age, and loyalty.
How can a South Korean firm overcome these ingrained, base values? It will not be easy, as
illustrated in the opening feature, due to the emotions raised by changes introduced at the
Bank of Korea in terms of promotions and other management practices.
Yet, this has not prevented other Korean firms from trying. Take, for example, SK
Telecom—a big Korean provider of cell phones that recently saw business level off in its home
market. In the process of considering moves into new markets, particularly China and the
U.S., SK Telecom concluded that success would require a revamp of its leadership culture.
The changes made were radical, particularly by South Korean standards, and included a flatter
leadership structure and incentive systems tied directly to performance. The company started
promoting people based on performance and ability instead of age or seniority, giving
employees in their 20s leadership of important product teams. The management hierarchy
was also pared down, the dress code relaxed, and employees encouraged to voice opinions
to their bosses.
The result was more idea flow and free-wheeling discussions that led to new product
initiatives. Some old-guard managers struggled to adapt even as they recognized the merits
of the new approach. As one of them put it after being challenged by a younger employee
with admittedly better ideas, “For a moment I wished it was back in the old days when I
could have shut that guy down.”
A more well-known Korean firm, LG Electronics (part of the giant chaebol LG Group),
took a different approach to shaking up its leadership. It put Westerners in top executive
roles, luring them from companies like P&G, IBM, HP, and Unilever to run marketing, purchasing,
HR, and supply-chain management efforts for the company.
An engineering powerhouse that grew into a good-but-not-great producer of TVs, cell
phones, and appliances, LG Electronics had become complacent. The firm decided it wanted
to be a premium player in the global marketplace and concluded that it needed to shake up
company leadership to meet the challenge. Of course, bringing in the Westerners brought
challenges of its own. Executive meetings became feisty as the newcomers pushed and probed
the Koreans’ thinking. Some Korean managers felt that Western leadership styles clashed too
much with Confucian values. Nevertheless, both sides hung in, putting significant efforts into
building a bridge between the two cultures. And, having interpreters constantly present also
helped.
Korean Airlines conducted a similar staff shuffle in 2012, making a point of promoting
a 44-year-old woman as part of its senior leadership team. They explained that “KAL is a
very conservative company but, we’re moving toward a merit-based system to induce
437
competition.” Perhaps the best example of the priority on merit over age occurred when a
Dutch soccer coach, Guus Hiddink, took over the national Korean soccer team prior to the
last World Cup. He was stunned to see that the internal hierarchy was so strong that younger
players felt obliged to pass the ball to older ones. Coach Hiddink promoted better younger
players and eliminated the older player preference as part of a revamp. South Korea became
the first Asian team to reach the World Cup semifinals and Hiddink became a national hero.
Leadership courses even sprung up touting the “Hiddink Way.” Today, Korea continues to
build toward a new future and a new leadership sensibility. They are doing it by integrating
non-traditional aspects of leadership without abandoning their Korean roots.96
How Are Your Cross-Cultural Motivation Skills?
Purpose
To learn more about the challenge of motivating people from different cultures.
Instructions
Several short descriptions of situations involving Chinese, Egyptian, Japanese, Saudi, and
American subordinates are presented, along with alternatives for motivating them. Think
about, and select, an answer for each situation. Your instructor may ask you to break into
small groups to come up with a consensus answer for each example in class. Your group
can then make a brief presentation about your answers and rationales. Your instructor can
then lead a discussion about the most appropriate answers for each situation.
Motivation Situations
1. You would like to have a Saudi Arabian colleague’s help so that you can finish a major
assignment. You are most likely to get that help if you say:
a. “In the name of God, please help me.”
b. “If you help me, I’ll buy you dinner.”
c. “My friend, I need your help.”
d. “Let’s be the first to finish this assignment.”
2. You are a department manager in China. Which of the following would probably work
best to motivate your production supervisor to improve performance?
a. “If our department increases output by 20 percent, you’ll get a 5 percent bonus.”
b. “I’m planning to reorganize the department and I’m thinking of promoting you if pro-
duction increases.”
c. “If your team doesn’t meet the quotas, you’re fired.”
d. “Why don’t you put in some overtime to help make the production quotas?”
438
3. You are a manager about to conduct a series of performance appraisals on your American
subordinates. To motivate them, you will probably want to focus on recognizing the
Americans’ . . .
a. promptness
b. creativity
c. directness and openness
d. accomplishments.
4. Last month your Japanese team hit all production targets. Which of the following would
be the best way to acknowledge their achievement?
a. Treat them to a dinner where you give special recognition to the team leader.
b. Do not mention it, because meeting targets is their job.
c. Call the oldest team member aside and thank him or her.
d. Thank the group at your next meeting and ask them to increase production even more.
5. You are managing a factory in Egypt. One supervisor’s group is not meeting your produc-
tion expectations. Which of the following might be the best way for you to draw the
supervisor’s attention to this problem?
a. “Increase your group’s productivity or you’re fired.”
b. “Do you need any help with your group?”
c. “You’d better take care of your group, or I may have to move to another job.”
d. “Why don’t you hold a meeting with your group to find out what’s wrong?”
6. You are a manager in a large international company and are about to begin an important
project. Mr. Hiro has been assigned to work for you on this project. Because Mr. Hiro is
Japanese, which of the following is likely to motivate him?
a. Being part of a strong, leading international firm
b. A good raise in his annual salary
c. A promotion to group leader and a better title
d. A trip to Hawaii after the project is completed.
Source: Based on materials from Elashmawi, F., and Harris, P. R. (1993). Multicultural Management: New
Skills for Global Business, 148–151. © 1993 by Gulf Publishing Company. Used with permission. All rights
reserved.
Leadership Transitions in BRIC Countries: Understanding

the New Economic Powerhouses
Purpose
To conduct a detailed analysis of how leadership approaches have evolved in what are
commonly referred to as the “BRIC countries” (i.e., Brazil, Russia, India, and China). These
439
countries have all experienced rapid economic growth in recent years. Russia and China also
have had long experience with authoritarian regimes.
Instructions
All four BRIC countries are expected to continue to play increasingly large roles in the global
economy in the years ahead. Consequently, assessing how their business leadership has
evolved over the years will help us better understand these countries as well as their associ-
ated strengths or weaknesses. Your instructor will assign you one of the BRIC countries to
research and will place you into small groups (ideally four to six) to do research on the basic
approach to leadership used in a specific BRIC country you are assigned to. This research
effort should be done outside of class and focus on:
a. the dominant business leadership approaches used in your assigned country 30 years ago
(i.e., before the fall of the Soviet Union);
b. an assessment of how business leadership has evolved in your assigned country since then
and why;
c. an analysis of any additional changes in leadership and management practices that
need to be made if your assigned country is to become a more formidable global
competitor;
d. suggestions for how remaining barriers to change can be overcome (including how changes
in leadership values and management practices can be encouraged).
Your instructor may ask each group make a presentation (20 minutes) about its findings to
class. This could be followed by a discussion about common as well as unique leadership
themes in the BRIC countries as well as the role of cultural values. If your instructor decides
to make this an individual assignment, be prepared to take part in a general class discussion
on the issues raised.
Research Tips
To get started with your research, you may want to consult the websites below for background
information and profiles about BRIC countries. These websites should help you refine your
research efforts and act as a gateway to articles, reports, and other websites about leadership
issues and management practices in your assigned country:
• https://www.cia.gov/library/publications/the-world-factbook/index.html: the CIA

World Factbook. It provides in-depth information about individual nations.
• www.imf.org/external/country/index.htm: the International Monetary Fund Country

Information page.
• www.worldbank.org: the World Bank website (see the Data and Statistics subpage for
country-specific information).
440
Notes
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chapter 11
building an effective
international workforce
A STRATEGIC LOOK AT INTERNATIONAL HUMAN RESOURCE

MANAGEMENT 449
STAFFING FOREIGN OPERATIONS: A WORLD OF CHOICES 453
SELECTING AND DEVELOPING INTERNATIONAL EMPLOYEES 458
CULTURAL DIFFERENCES IN SELECTION AND DEVELOPMENT

PROCEDURES 462
EXPATRIATES: WORK A WORLD AWAY 464
RETURNING HOME: THE CHALLENGE OF REPATRIATION 476

Learning Objectives
explain why an international human resource management strategy is critical for achieving
international business goals;
identify global staffing options and their advantages and disadvantages;
discuss how cultural factors impact the selection and development of international
employees;
describe how firms can manage equal opportunity and diversity issues in their international
operations;
pinpoint the major factors associated with the effective use of expatriates.
Seoul-Searching a Work World Away: One U.S. Expatriate’s Cautionary Tale

Linda Meyers’s experience in South Korea is a cautionary tale for any expatriate. Meyers
welcomed the opportunity to become an expatriate by accepting a management position in
human resources at Seoul-based SK Telecom. The prospect of working in Asia’s fourth-largest
economy while helping SK Telecom become a more global company was exciting. Meyers
brought impressive credentials to her new employer, including years of experience as an
expatriate consultant helping executives from top U.S. multinationals such as ExxonMobil and
HP make successful transitions to their overseas assignments.
Yet, soon after arriving in Seoul Meyers began wondering if she had made a huge
mistake. Despite previous job experience that required considerable overseas travel (e.g.,
several months in the Czech Republic and Ecuador) and her expertise as an expatriate consul-
tant, Meyers was unable to fully grasp the situation, much less operate effectively, at SK
Telecom. During the next two years, Meyers came to realize that her direct Western style of
addressing situations clashed with the formal and polite style of her Korean colleagues. She
also learned that SK Telecom had few Western employees in general and only a handful of
women in senior positions. Meyers discovered that she was, in effect, a trailblazer—one of
the few U.S. women to serve in an executive capacity at any Korean company. Eventually,
Meyers concluded that she and SK Telecom had divergent views about her role in the company.
She had become frustrated, demoralized, and exhausted—an outsider who was marginalized
and precluded from having the impact she desired.
The signs of things to come started early, when Meyers was initially e-mailed by an SK
Telecom recruiter—who assumed she was male. These and other incidents gave her pause,
448
B U I L D I N G A N E F F E C T I V E W O R K F O R C E
but she eventually took the job feeling it was simply too good to pass up. Once in Seoul,
Meyers was surprised that she received no official orientation or even much specific help on
how to adapt to her new surroundings. She also noticed how homogeneous things were at
SK Telecom and South Korea more generally, where less than 3 percent of the population
has foreign roots (vs. roughly 20 percent or more in cities such as London, New York, and
Singapore).
But Meyers was completely shocked by the struggles she had communicating with her
colleagues inside the company’s hierarchical management structure. Her inability to speak
Korean was a major impediment, and Meyers felt that she had no choice but to ask for an
interpreter to attend certain meetings. Getting information from Korean colleagues who did
speak English was also difficult. Forced to ask questions to learn anything, Meyers felt that
even her polite questions were interpreted as criticisms.
Nevertheless, after just four months on the job, SK Telecom promoted Meyers, asking
her to lead SK Holding’s Global Talent group. Meyers became frustrated, however, at her
inability to push through any significant changes in HR policies and practices. This was espe-
cially vexing because Meyers saw herself as an agent of change for the company—a view
that senior leadership at SK Holdings apparently did not share. Meyers felt increasingly
ostracized in her new job, hamstrung by the language barrier and what seemed to be a
deliberate effort to exclude her from important conversations and meetings with top
executives.
Things eventually got so bad that many of her colleagues simply would not speak with
her. The other shoe finally dropped in 2009, when Meyers was told that her contract would
not be renewed. While disappointed that she did not have the impact on the company that
she would have liked, Meyers also felt a sense of relief that she would be leaving. As you
read this chapter, think about some of the experiences and insights that Meyers went through
and develop your own assessment of the situation. Her experience raises many questions:
Who is responsible for expatriate difficulties and adjustment? Why did Meyers encounter so
much trouble in Korea, especially considering her prior overseas experience? Think about
these and related questions concerning expatriate adjustment as you read this chapter. Then,
read the Up to the Challenge? feature at the end of the chapter to read about possible
answers to these important considerations.1
A Strategic Look at International

Human Resource Management
In the previous chapter, we looked at the motivation and leadership challenges facing
international managers. Here, we build upon that understanding and begin to consider
the broader role that human resource management plays in a global context. International
human resource management (IHRM) activities focus on selecting, training, developing,
appraising, and rewarding employees for firms operating in a global environment.
Granted, human resource professionals, even those working for domestically focused
449
companies, are “international” to the extent that they hire immigrants, assemble multi-
cultural teams, and compete against multinationals in their local markets. But, compared
to their domestic counterparts, a broader and deeper set of challenges face those respon-
sible for IHRM, especially in larger multinationals.
Some of these many challenges are outlined in Figure 11.1. These include HR com-
plications due to different legal systems and laws, currencies, cultures, compensation
packages and tax codes—among many others. Mistakes made in some of these areas
involve much bigger stakes than in a domestic setting. Moreover, IHRM professionals
must also contribute to the overall international strategic planning process for the firm
as well as think strategically within their own functional area.2 Ideally, human resource
executives should be involved in all phases of the development and implementation of
a company’s international goals.3
A strategic perspective on IHRM is essential because companies with a highly trained,
flexible, and motivated global workforce may have an advantage over competitors,
especially if that workforce directly supports corporate goals.4 As theorist Michael Porter
put it, “[h]uman resource management affects competitive advantage in any firm, through
its role in determining the skills and motivation of employees.”5
Porter is right in that developing an effective international workforce is more dif-
ficult for a competitor to emulate than buying some technology (or even securing capital)
and can mean the difference between success and failure.6 There are many positive
outcomes that result from the effective management of international human resources.
These can include outperforming competitors in terms of identifying new business oppor-
tunities, adapting to changing conditions, sharing knowledge throughout the firm, coor-
dinating acquisitions and subsidiaries well, and maintaining a high-performing, committed
overseas workforce.7
Possible Additional/Unique Responsibilities Description/Explanation
A wider variety of external variables that must Different cultures, laws, languages, currencies,
be taken into account when making decisions and governments influence IHRM and require
broad expertise
Need to manage a wider and more diverse mix May include parent-country, host-country, and
of employees third-country nationals
A larger portfolio of human resource activities IHRM professionals may be involved with
and functions international relocations, work visas, complex
and different pay and tax issues for employees
More direct exposure to international risk issues HR decisions involve greater liability potential
(e.g., mistakes made in supporting foreign
acquisitions, posting or repatriating managers
overseas who fail involve bigger stakes).
Figure 11.1 Additional Responsibilities Facing International Human Resource Management (IHRM)
Professionals.
Source: Adapted from Briscoe, D. R., Schuler, R. S., and Claus, L. (2009). International Human Resource Manage-
ment (3rd ed.). New York: Routledge.
450
In many multinationals, a key and common challenge is how to balance the need
to coordinate units scattered around the world against the need for those units to have
the control necessary to deal quickly and effectively with local issues.8 Getting the right
mix of control is tough. For example, consider a situation in which the parent firm’s
national culture differs dramatically from the cultures in its overseas subsidiaries. This
may make it harder for the parent firm to share information, technology, and innova-
tions between the home office and foreign outposts. It may also be more difficult to
promote needed organizational changes and manage any conflicts that come up between
employees in different countries.
Fortunately, IHRM strategies can help deal with such problems.9 Companies could
benefit from the development of an international human resource philosophy. These
both describe and guide corporate values about human resources. These strategies in
turn shape the broad outline of what constitutes acceptable IHRM practices for employees
all over the world. Under this “big tent,” individual units can then fine-tune and select
specific practices that best fit their local conditions. But this is easier said than done,
especially for firms operating in dozens of countries. For instance, multinationals usually
find it extremely difficult to design a compensation system that is sensitive to cultural
differences yet still meets general guidelines of being seen as fair by employees every-
where. Culture can also impact other “local” human resource management practices,
from how benefit packages are constructed to the hiring, firing, and promotion practices
that are used.10
So, for all of these reasons, the selection of the right IHRM strategy can pay off,
even if it is customized to a particular foreign market. Consider multinationals wanting
to quickly enter countries with transition economies as they continue to move from
being state-dominated to being market-based (e.g., former Russian republics, others).
Choosing to enter those markets by buying local firms, building new plants or establish-
ing joint ventures may create significant human resource challenges that undercut per-
formance if not handled well. Consequently, multinationals need to adopt an appropriate
human resource management strategy in order to meet transition economy challenges.
Figure 11.2 presents three possible strategies that might be used in transitional
markets. The social welfare approach is a “womb to tomb” perspective on employees
that was once characteristic of many state-dominated economies. In contrast, a cost-
containment approach is characteristic of some Western multinationals that believe in
minimizing employee costs in the face of changing business conditions. Neither of these,
however, may be the best options in transitional markets. Instead, an invest-in-employees
approach may be best for increasing employee motivation and subsequent firm perfor-
mance. This may be especially true for transition economies in which high uncertainty
avoidance and a strong desire for stability both prevail (e.g., Ukraine). Like the social
welfare approach, the invest-in-employees approach offers at least some stability to
employees—provided they perform. More importantly, it relies on human resource prac-
tices that reflect the idea of “investing” in the workforce (e.g., training that can help
employees’ careers). That being said, the degree to which multinationals should pursue
this approach depends on local conditions. Put simply, one size does not fit all—some
combination of the strategies in Figure 11.2 may be the best bet, depending on the coun-
try circumstances.11
451
Types of IHR Strategies
Human Social Welfare Approach Cost-Containment Invest-in-Employees

Resource (e.g., used by some Approach (e.g., used Approach (e.g., used by
Issue state-owned firms in by U.S. firms with a Western firms with a high
China and Russia) cost-cutting mentality) commitment philosophy)
Employee Narrow, training tends to Minimize training Wide range of

training/ be technology-specific expenditures to the developmental training
development extent possible offered for new and existing
employees
Monetary Pay determined on a group Individual performance Both individual bonuses/
incentives basis and not performance- is the primary driver of incentives and unit/firm-
driven raises, bonuses based profit-sharing are
used
Employee Extensive subsidies for Cut back or eliminate Slowly phase out direct
health and housing, health, child subsidies for employee subsidies not directly linked
welfare care, other needs welfare needs to employee performance
provisions
Employee job Offers high job security No job security offered Moderate level of job
security security offered
Expected Negative—may result in Negative—may result in Positive—may result in
link to firm poorer performance poorer performance better performance
performance
Figure 11.2 Effectively Managing Human Resources in Transition Economies: Three Possible Strategies.
Source: Adapted from Buck, T., Filatotchev, I., Demina, N., and Wright, M. (2003). Inside ownership, human
resource strategies and performance in a transition economy. Journal of International Business Studies, 34,
530–549.
This caution underscores the idea that developing an effective IHRM system that
reflects broad principles while also allowing for some local flexibility is tough to do.
Moreover, it begs the question of how such systems are created in the first place. In
reality, a variety of developmental processes exist across firms—depending on their level
of internationalization, the nature of their industries, and other factors. Many firms
develop such systems over time as their international operations grow in size and
complexity—sometimes with professional help from experts at consulting firms.12
IHRM systems themselves also vary. In some firms, virtually all IHRM functions
are run out of corporate headquarters. Others set general policies while asking foreign
subsidiaries to customize those policies locally. Then there are firms that look for best
practices in IHRM worldwide in order to implement them everywhere that is practical,
regardless of origin. In other cases, specific IHRM responsibilities are divided up among
corporate headquarters, regional areas, and individual subsidiaries.13 Finally, some firms
organize IHRM functions around the type of employee. It is important to understand
how firms choose from among employee types to staff international operations.
452
Staffing Foreign Operations: A World of Choices

This section explores the options for staffing international operations. For instance, some
multinationals reserve human resource responsibilities for parent-country nationals
(PCNs) and third-country nationals (TCNs), but delegate decisions about host-country
nationals (HCNs) to local units.14 As already suggested, the strategic choices among
these three options (and more) that firms make should be supported by their IHRM
philosophy and practices. For instance, a company that earns a significant chunk of its
revenue in foreign countries should be led by senior executives who have substantial
international experience, including a firsthand understanding of foreign markets, cultures,
and business practices.
U.S. multinationals have focused more in recent years upon hiring and promoting
top managers with international experience as well as offering international development
opportunities to managers lower in the ranks. And, one foreign posting these days is
not enough—especially for those who want to rise high within the organization. At
Novelis, a Georgia-based aluminum firm, the chief HR officer states that those with
high-level ambitions are required to have multiple overseas assignments before they enter
the C-suite. At Xerox, rising stars must pass the test of several years’ overseas assign-
ments (and eight of ten managers are promoted from within).15
Yet, many U.S. multinationals seem “multinational” in name only—at least when it
comes to the percentage of board members who are either foreign executives or Ameri-
cans experienced in running foreign outposts. Indeed, less than half of the firms in the
S&P 500 have even one foreign national on their boards. And some firms have boards
where only 4–5 percent of the members have significant foreign experience or are foreign
nationals, including companies earning over 50 percent of their revenues abroad (e.g.,
Adobe Systems, Halliburton, and Unisys). At the other end of the spectrum are companies
that seem to think that foreign experience matters a great deal when it comes to the
board. Consider Colgate-Palmolive and Schlumberger—both firms earn over 75 percent
of their revenues overseas and both have boards where at least half of the membership
has foreign experience or are foreign nationals.16
Staffing international operations can be complex, though, with IHRM professionals
facing a dizzying array of choices. Take a look at Figure 11.3—it summarizes many of
the different types of employees available to help firms run their international
operations.
A traditional staffing option is to recruit parent-country nationals (PCNs) for top
management and important technical positions in foreign subsidiaries. PCNs have citi-
zenship in the country in which the hiring multinational is headquartered. Once posted
abroad for at least one year, PCNs are referred to as expatriates. Among the most com-
mon reasons for sending a PCN on an expatriate assignment are:
■ the perceived lack of appropriate expertise in a foreign subsidiary

■ the belief that a PCN is the best way to monitor and control foreign operations
■ a desire to transfer know-how about local markets back home to the parent firm
■ a desire to provide opportunities for high-potential employees to develop their cross-
cultural expertise.17
453
Types of Employees Description
Parent-country nationals Employees who are citizens in the nation where the multinational is
(PCNs) based
Traditional expatriates PCNs who are sent abroad on assignment for one year or more
Second-generation Immigrants who are naturalized citizens of the multinational’s home
expatriates country and who are then posted overseas for one year or longer to
a country other than where they were born
Just-in-time expatriates Expatriates hired outside the multinational on a one-time basis to
fill a specific role or particular assignment—hired on an as-needed
basis
Short-term international Employees sent on assignments lasting between a few weeks and a
assignees year; increasingly popular option that doesn’t require relocation
Frequent business travelers Employees who must make frequent international trips for their jobs,
usually lasting from a few days or weeks to a few months at most
Localized employees Employees posted to a foreign location and treated as a local
employee; the firm/individual may want to be permanently based
there
Permanent expatriates Employees who spend many years, if not their entire careers, in
international assignments, going from one foreign posting to
another
Host-country nationals Locals hired to staff foreign subsidiaries or operations
(HCNs)
Inpatriates Typically HCNs who are brought to the multinational’s parent country
to fill a temporary assignment lasting from months to two years
Third-country nationals Employees hired to work in a foreign subsidiary or the headquarters
(TCNs) of a multinational, but who are actually citizens of another country
Domestic internationals Stay in their home country, but perform “remote” international
work (e.g., interacting with foreign customers by phone, e-mail,
video, etc.)
International commuters Live in one country, but commute to work in another country
Boomerangs Employees who are hired or chosen to return to their home
countries to work for the multinational
Outsourced employees “Employees” who actually work for global employment firms hired
by the multinational to provide workers/staffs for a foreign outpost
Figure 11.3 Types of International Employee Available to Multinational Firms.

ment (3rd ed.). New York: Routledge.
A case in point here is CEMEX, a Mexican multinational that had about 100 managers
in expatriate roles in 2012. They were assigned overseas because the company decided
that local employees did not have the necessary skill level, or motivation level needed
to instill the CEMEX corporate culture in the company, of the home managers.18
On the other hand, however, sending a PCN abroad is typically the most expensive
staffing option. Adding to the expense is that failure rates for expatriate assignments
454
are high. Although estimates for failure rates vary considerably (from under 5 percent
to some 70 percent), a rough rule of thumb is that around 25 percent of expatriate
postings end in some kind of failure (e.g., premature return or ineffective performance).19
Perhaps the biggest risk in sending PCNs overseas is their often limited grasp of local
cultures and business practices, especially early in the assignment.20 To offset this, some
firms recruit immigrants for positions in foreign subsidiaries back in their ancestral
homes. But such employees, sometimes referred to as “boomerangs,” can run into trouble,
causing issues for themselves and multinationals in the process. Read the following
Global Innovations feature to learn why this staffing option holds some great promise
yet is not as simple as it seems.
Global Innovations
Want an Alternative to Traditional Expatriates? Try “Boomerangs”

Instead of posting expatriates to foreign countries, some multinationals are experimenting
with so-called “boomerangs.” These firms are recruiting employees who emigrated abroad
and asking them to return to their home country to run the company’s business operations
there. Firms at the vanguard in the use of boomerangs seem to be more common in countries
with dissimilar cultures and languages. For instance, U.S. multinationals have frequently turned
to Chinese boomerangs in recent years—often recruiting them while they are living in the
U.S. and then sending them back to China to run business units.
It sounds like a terrific idea—in part because the appeal of boomerangs is simple.
Companies can fill key positions in important foreign markets with skilled professionals who
are on an equal footing with country nationals because of their grasp of the local culture,
business practices, and even language. Examples of U.S. firms using boomerangs include
Marriott, McDonald’s, and Payless Shoes—all of which have returned highly educated and
well-trained immigrants to their home nations to offer service support or to lead operations.
Payless Shoes sent a native El Salvadoran to run a store in that Central American country
and to lay the groundwork for further expansion in the region. This particular manager had
left El Salvador at the age of 15 and eventually became a U.S. citizen. By posting her back
to her birth country at the age of 35, Payless Shoes had a boomerang manager in place that
understood the local culture well and spoke Spanish fluently.
Yet, simple as this seems, there can be significant challenges. Experience shows that
boomerangs can struggle to adapt when they find themselves back in their “home” cultures.
The reasons for these struggles vary but can include an overestimation of their understanding
of the local culture after years spent elsewhere, as well as their inability to change aspects
of the local culture they might now find unappealing.
One Chinese executive who returned home after working in the West for a number of
different multinationals found the traditional behavior of his subordinates frustrating. When
he arrived to visit one branch office in China, the executive found employees waiting for him
455
in a receiving line—a traditional courtesy designed to boost management egos. A little

annoyed and embarrassed, he asked the branch manager not to do that again. Likewise, he
experienced difficulty persuading his managers not to run to the airport to personally greet
him after a trip. His view of the airport scenario was blunt: “To me it’s wasting time—they
should be working in the office.”
Boomerangs can also be surprised at the treatment that they receive from local
employees who may not perceive them as locals after so much time away. Some of those
employees view the boomerangs’ attempts to “act local” as flimsy impersonations that
betray their status as overpaid interloper. For example, one executive went back to Japan
after more than two decades in the U.S. in order to run Apple Computer’s Japanese opera-
tions. His Japanese colleagues felt that he was “too American,” and he left in frustration
after just one year. Likewise, a management consultant returned to her Russian homeland
after living for years in the U.S. Despite her fluent Russian, she returned to the U.S. after
less than two years, tired of Russian women who found her ambition and accomplishments
off-putting.
Companies can help boomerangs overcome such obstacles and eventually succeed. One
tactic that works well is to assign locals to serve as “cultural translators” for boomerangs in
order to ease their adjustment back into their native cultures. Another option is cross-cultural
training designed to help reintegrate back into their local cultures. Apparel giant Levi Strauss
does this very thing. One Peruvian Levi Strauss employee was educated in the U.S. but ran
into trouble when she was sent to Mexico for a management position. During company
training, she realized that her failure to use formal titles when addressing her Mexican
colleagues was a key reason why they were being standoffish—they thought that she was
being rude.
Unfortunately, some companies seem only to be following or imitating the vanguard
firms in their use of boomerangs. They see the success of firms and jump on the band-
wagon with little planning, assuming that boomerangs will somehow automatically under-
stand and conquer the ropes in their native countries, even if they have spent years away.
Because of this, some estimates show that less than 20 percent of boomerangs receive any
cross-cultural training. Yet, the training received at the best companies shows that it would
be wise not to assume that boomerangs will automatically snap back into their native
cultural environments without any difficulty, especially if they have had a new home for
years now.21
Consequently, many companies turn to host-country nationals (HCNs), especially to

fill lower- and middle-level management jobs. HCNs are individuals from the foreign
country where a multinational has set up operations. Some firms are reluctant to put
HCNs in top management positions, fearing that it may dilute their control over
operations or corporate culture. Still, HCNs offer some potential advantages over
PCNs. Typically, HCNs have a superior grasp of the local culture, business practices,
and language. HCNs are also less expensive, because expatriates usually entail
456
expensive relocation costs and enticing pay packages. “Going local” to staff foreign
operations can also bring public relations benefits and relieve government pressures
to create jobs.
The giant Korean firm Samsung uses just this approach. With almost 100,000
employees outside of South Korea (up 300 percent over the last decade), the number of
HCNs continues to rise, approaching 70 percent in 2011. One of Samsung’s senior HR
executives said that “[t]his is a change from the past, when Samsung’s overseas opera-
tions were mainly run by Koreans.” While some firms will wonder if the HCN has the
appropriate knowledge to build corporate culture, the advantages of HCNs over PCNs
are clear: the former usually have a better understanding of local practices and culture.22
This seems to be especially true for Western companies doing business in Asia. In fact,
a leading HR consulting firm reports that three out of four senior executives hired in
Asia by multinationals were Asians already living in the region. It appears that firms
want someone who can directly make deals with local businesses and governments—who
are now more likely to be equals.23
Another popular staffing option is third-country nationals (TCNs), to work either
in foreign subsidiaries or at multinational headquarters. TCNs hold citizenship in a
country other than the one in which they are working: for example, if a multinational
wants someone with expertise in local culture and business practices to fill a manage-
ment position in a foreign subsidiary. PCNs may have plenty of management experience
but lack local knowledge. Likewise, HCNs understand local conditions, but may lack
relevant technical skills. A TCN may be the best option, especially if the goal is to
groom someone for top management positions in foreign subsidiaries or to effectively
run operations in countries that lack home-grown management talent. For instance,
an American firm setting up manufacturing operations in Costa Rica may find appro-
priate candidates in Mexico, a country with a large pool of Spanish-speaking manage-
ment talent.
Although PCNs, HCNs, and TCNs represent three major staffing categories, they
do not describe all staffing possibilities or situations. For instance, multinationals often
want a talented international cadre—a group of managers who can be plugged into any
country and successfully represent the company’s values. Doing this means selecting
managers based on potential and ability, regardless of nationality, and then exposing
them to a variety of international experiences. Indeed, some international cadre members
essentially spend their careers jumping from one foreign assignment to the next. These
people might best be described as permanent expatriates—employees who stay on at
one or more foreign assignments for an extended period of years. For example, during
a visit to China, an American executive working for a U.S. multinational in Shanghai
has been continuously working in various overseas subsidiaries for over 25 years. Devel-
oping an international cadre seems to pay off. Multinationals that use regional transfers
and TCNs extensively to build their international cadres tend to outperform multination-
als that rely on traditional expatriates.
Finally, consider a promising Chinese employee working in Beijing for an American
firm. The Chinese employee is sent to the U.S. to fill a temporary position at corporate
headquarters for as long as a few years. Such employees are sometimes referred to as
457
inpatriates. Sending foreign employees to the home country is often done to develop
skills and strengthen commitment to the parent firm. Likewise, companies can take
advantage of what inpatriates can teach them about doing business in particular
countries.24
Interestingly, some experts urge international firms to strive to have PCNs, HCNs,
TCNs, and other types of employees working side by side wherever possible. Their
rationale is that a diverse work environment improves innovation and learning, outcomes
that ultimately raise subsidiary performance. The role for IHRM professionals in this
context is to select the right people and ensure that the advantages of staff diversity are
not overwhelmed by its accompanying disadvantages (e.g., more conflict and coordina-
tion problems). This can be accomplished by appropriate selection, socialization, and
training efforts that make employees aware of staffing goals while improving their
international skills.25
Selecting and Developing International Employees

Identifying types of employees is one thing, but how do multinationals decide which
option is best for a specific overseas position? Experts suggest that such decisions should
be made with a firm’s international business strategy in mind, taking into account its
competitive environment, overseas sophistication, level of internationalization, and the
foreign market where the position will be based. One study of a U.S. financial services
firm found that overseas branches with higher proportions of American expatriates
offered more complex services. In these locations, expatriates could offer greater insights
about complex services than their local counterparts. On the other hand, however,
branches in foreign countries with fierce local competition—places in which local knowl-
edge was critical—had more HCNs and fewer expatriates.
But the degree to which IHRM is melded with a firm’s strategic decision-making, and
the specific selection tactics and training approaches used, varies across countries. This
suggests that national culture impacts human resource activities. One example is the Chi-
nese emphasis on business contacts that rely on reciprocal obligation (known as guanxi),
which seeps into the hiring practices, training approaches, and career development activities
of many firms in ways not seen elsewhere. There is pressure to reciprocate a favor, and
this could extend to one with human resource implications. This type of local, cultural
knowledge often needs to be developed in PNCs and even TCNs and should be part of
a firm’s development programs. The ability to put this knowledge into play can, as we
will see in the second part of this chapter, be included in a performance evaluation.
Figure 11.4 summarizes some of the skills that international managers need to suc-
ceed. As you can see, this is a formidable list of talents. Fortunately, research shows that
even mastering several of these skills goes a long way toward improving managerial
effectiveness across cultures.26 This skill set can help promote a wide understanding, to
be sure. Yet, at the same time, it is also important to recognize that stamina and a steady
hand play a role in managerial success. With this in mind, read the following Interna-
tional Insights feature on some of the more mundane, yet common, challenges facing
most of today’s international managers.
458
Skill Area Thumbnail Sketch of Desired Competencies
Multidimensional Has extensive multi-functional, multi-country, and multi-environment

perspective experience
Line management A successful track record in overseas projects and assignments
proficiency
Decision making Successful in making strategic decisions across a variety of situations
Resourcefulness Has skills to be accepted by host country’s government and business elite
Cultural adaptability Can quickly adapt to foreign cultures, with diverse cross-cultural experience
Cultural sensitivity Deals effectively with people from many cultures, races, nationalities, religions
Team-building Can create culturally diverse working groups that achieve organizational
goals
Mental maturity Has the endurance needed for the rigors of foreign posts
Negotiation Has track record of successful business negotiations in multicultural contexts
Delegation Has track record of ability to delegate in cross-cultural contexts
Business practices Can conduct business across borders successfully in a global environment
Change agent Has track record of successfully initiating/implementing organizational
changes
Vision Can quickly spot and respond to threats and opportunities in the host
country
Figure 11.4 Think You Have the Right Stuff? A Skill Profile for International Managers.
Sources: Adapted from Briscoe, D. R., Schuler, R. S., and Claus, L. (2009). International Human Resource Manage-
ment (3rd ed.). New York: Routledge; and Howard, C. G. (1992). Profile of the 21st-century expatriate manager.
HR Magazine, June, 93–100.
Glamour, Grunge, or Both? In the Trenches with International Managers

International management is a term that conjures up a romantic image of travel to exotic
locales, generous perks, and a pampered life abroad. But, as is too often the case, this image
can contrast with actual experience. At the minimum, the perks are not what they used to
be. Companies are putting the brakes on the rising costs of sending expatriates overseas.
One way has been through the use of shorter overseas assignments, often to tackle oppor-
tunities in growing markets such as in Latin America and Asia, whose firms in turn are sending
their employees out to extend their global reach.
Shorter assignments can mean frenetic and exhausting trips. One manager’s 11-day trip
included stops in six countries. Hardly sleeping, the manager got sick and canceled his final
Moscow stop. Another manager earned 17,000 frequent flyer miles on just a four-day trip
spanning three continents. Yet, do not assume that jet lag is a small price to pay for going
to flashy cities such as Paris or Hong Kong. Managers are increasingly finding themselves in
459
underdeveloped and risky locations where they may travel on dirt roads, stay in lousy hotels,
and deal with challenges such as disease, polluted air, bad water, and security threats ranging
from street crime to terrorism. One American manager ended up using buckets of sea water
for washing (and flushing) in Papua New Guinea after the hotel’s water main was blown up
by local guerrillas. Another manager found himself in the middle of 500,000 chanting Egyp-
tians in a march protesting U.S. involvement in Iraq on the way to a Cairo business meeting.
Today, companies often restrict travel after a terrorist incident. But, temporary restrictions
typically fade, even in the face of terrorism. The reason is simple—fast-growing markets
demand attention. On November 26, 2008, 12 coordinated terrorist attacks occurred in the
city of Mumbai, India. Several of these targeted locations were favored by foreign business
travelers, including the Taj Mahal luxury hotel. Over 100 people were killed by members of
a Pakistani extremist group, although hotel employees showed tremendous heroism in saving
many customers. Despite the destruction and tragic loss of life (something that has repeatedly
occurred in Mumbai since 1993), many companies continued to send employees there, even
as they took additional precautions. After the Mumbai attacks, one marketing executive from
a Western firm said that his company was undeterred and “would not even think of changing”
travel plans to India.
More mundane travel concerns that affect international managers include an often
grueling lifestyle and family hardships. One executive at a Boston-based firm spent three out
of every four weeks on the road, mainly abroad. When asked what he wanted for Christmas,
the executive’s son said he “wanted his Dad to be home.” Likewise, the children of a manager
making ten trips a year to China for a Pittsburgh-based company endured schoolyard taunts
about having an absent parent. A Ford expatriate in China with his family saw them struggle
with isolation and culture shock in the massive city of Chongqing. The urbanization of many
cities has been remarkable, as has the growth of amenities and sights to see. Yet, it can be
a difficult adjustment for some.
There are many positives, however, associated with all of this globetrotting, whether it be
short term or long term. The Ford manager referenced previously felt that his posting to China
helped strengthen family ties, improved his children’s education (they attended an excellent
school for expatriate children), and provided opportunities for travel within China and Asia. The
Pittsburgh-based manager felt that making ten trips to China a year put him “on the frontier”
in perhaps the key world market where he was able to make decisions on the spot.
Balancing the pluses and challenges of frequent international travel requires flexibility and
adaptability. One BellSouth manager spent much of his time shuttling between Atlanta and
various South American countries. He learned to adapt early when his Cuban parents sent him
to live in the U.S. at the age of 9. His secret to survival was being able to adapt his style to
whatever culture he was in. Over time, he learned to handle big differences in business styles
across continents. Also important are foreign language skills, having a mentor, and resilience to
travel stress. More mundane survival tactics for assignments include doing whatever is necessary
to get enough sleep and exercise—which includes turning off laptops, cell phones, and all other
“24–7” technology products in order to protect sleep time. It may also mean not over-scheduling
meetings and letting go of the home office. As one PricewaterhouseCoopers veteran put it,
when on business overseas, “forget about home” and “focus on why you’re there.”27
460
Cultural Values and Staffing Needs
Researchers are focusing more than ever on the connections between cultural values and
staffing—information that would be valuable for HR practitioners who need to make
staffing decisions. For instance, Japanese multinationals tend to use PCNs to run foreign
subsidiaries to a greater extent than American and European firms. But, this tendency
can change depending on the business conditions in play. For instance, Japanese firms
in industries where global integration and control are important tend to be especially
heavy users of expatriates. As their experience grows overseas, Japanese multinationals
tend to shift toward using more HCNs in subsidiaries. Generally, when higher power
distance and assertiveness are valued in their home countries, multinationals tend to use
expatriates more often. These decisions reflect the belief that higher levels of control are
needed in foreign outposts, tipping the balance in favor of the high-cost expatriate
option.28
General Staffing Models

There are likely many situations that call for different employee types. It might be
helpful, however, to consider some broad perspectives that can guide multinationals’
international staffing efforts—even if they are modified later by prevailing conditions.
For instance, a geocentric philosophy means that the firm stresses ability and perfor-
mance when selecting international staff, without regard to nationality. The goal is to
develop and train managers who can be good corporate citizens anywhere in the world.
Standards for performance are determined collaboratively between headquarters and
foreign operations. At the other extreme is an ethnocentric philosophy. In this case,
headquarters makes all key decisions and foreign subsidiaries have little autonomy or
input. Most or even all important jobs at headquarters and in all foreign operations
are held by PCNs.
In between these two extremes are two other philosophies. A polycentric philosophy
gives HRM control to the foreign subsidiary, although headquarters still makes broad
strategic decisions. Each subsidiary is a semi-independent entity that controls its own
staffing needs. As a result, HCNs usually hold top jobs in foreign subsidiaries. These
same HCNs, however, rarely move beyond their local subsidiary to headquarters or
other foreign locations. Similarly, with a regiocentric philosophy, most foreign employees
will not move into headquarters positions. Nevertheless, employees can move from
country to country in a particular region.29
Developing Managers with International Skills
Many firms embrace the geocentric philosophy as they become more experienced in
international business. It can take years to build an international workforce where
employees are flexible, open-minded, and expert in several cultures and languages. And
because large multinationals operate in dozens of countries, virtually all aspects of the
business involve international contact. For these firms, relying on just a small handful
of managers with international experience is a recipe for trouble. Ideally, all employees
461
must recognize how differences in cultures, laws, and business practices across borders
impact international communications and relationships (see Figure 11.4).
Options for Developing International Managers

But how should firms go about developing employees with appropriate international
skills? While there is no clear recipe, many companies rotate promising managers through
different foreign assignments over several years. This strategy produces managers with
experience across a variety of countries and organizational circumstances, such as man-
aging a start-up operation, an ongoing joint venture, a restructuring, and so on. Indeed,
some companies go about this from the ground up. Procter & Gamble, for instance,
emphasizes identifying and cultivating talent at local levels worldwide. Promising employ-
ees are then plugged into regional talent pools as they develop—eventually, they gain
the experiences and abilities needed to fill critical assignments anywhere in the world.
This also promotes diversity throughout the P&G global workforce as employees from
countries around the globe are fed into the system. To keep track of it all, P&G uses a
computerized system that tracks promising employees worldwide by experiences, skills,
and success in prior assignments, making it quicker and easier to select someone for an
international position when an opening occurs.30
Another option is to recruit foreign students who want to work in their home country
after graduation—where their language and cultural skills can be put to good use. Like-
wise, some firms will focus on potential employees who are fluent in multiple languages,
open to other cultures, and willing to tackle overseas assignments. Finally, some U.S.
companies have had success with training programs that bring high-potential managers
from all over the world to work together on a variety of projects in a simulated envi-
ronment. Such programs build cross-national relationships and improve cross-cultural
problem-solving skills. For example, Motorola annually puts up-and-coming international
managers through a business simulation that can last weeks. As one manager who went
through the simulation said, “[i]t’s surprising how realistic and demanding it is.” Using
such tools can also save firms money. French food giant Danone SA cut its failure rate
among expatriate managers from 35 percent to 3 percent in three years by using simula-
tions to evaluate international talent.31
In fact, some firms with extensive overseas operations have developed global training
programs for employees. Sometimes this includes training for expatriates going to specific
countries. Global training programs, however, usually have broader goals, such as devel-
oping cultural awareness, working effectively in cross-cultural teams, and building cross-
cultural communication skills. Procter & Gamble and Intel Corporation are examples
of U.S. firms that have successfully implemented global training programs.32
Cultural Differences in Selection and

Development Procedures
So far, the chapter has explained that cultural values shape how firms select, develop,
and place international staff. For instance, American and British multinationals have
used different procedures to select and manage expatriates than their German and
462
Japanese counterparts.33 When these cultures and their unique methods interact, conflict
can emerge. Consider what an American experienced when he was hired by Samsung
to help set up a plant in New Jersey:
The hiring process was unique. Many people attended the interviews. Side conver-
sations in Korean were the norm. Decision making inched forward as consensus
was painstakingly achieved. The senior people did not commit themselves to a
position until their respective staffs had fully and freely expressed their support
or concerns for my candidacy. Personal issues were critical. Those items went
beyond my wife and me. They penetrated into realms of what my father had done
for a living, whether or not my mother worked outside of the home, and what
my brothers and sister were doing. They all seemed to have a significance I could
not fathom.34
This American was surprised by a hiring process that differed from that normally used
within the U.S. To his credit, his professed ignorance of Korean culture and hiring
practices prevented him from really understanding what was happening at the time.
Likewise, Samsung’s Korean managers were clearly unaware that Americans would find
the personal questions that they asked shocking and off-limits. In the U.S., such ques-
tions are perceived as irrelevant, discriminatory, or both. Plus, some of these questions
would be illegal in the U.S., where anti-discrimination laws are extensive and strictly
enforced. Many other countries either do not have the same type of legal protections in
place when it comes to forms of discrimination (e.g., Thailand) or do not enforce them
consistently if they do (e.g., Mexico). In any case, it is no surprise that foreign managers
may be unaware of U.S. legal and cultural restrictions on interview questions nor grasp
that what is seen as fair with respect to selection procedures can vary greatly. From their
perspective, the Korean managers in this example likely felt that they could not make
a good hire without understanding the candidate’s home life, religious orientation, and
family.35 They may be puzzled if such questions were not asked of them if they were
interviewing with a U.S. firm.
Selection procedures can be modified to fit the situation, though. For example,
traditional American selection and job analysis procedures can be adapted to better
fit cultural values that Japanese firms often want to emphasize in their U.S. plants. In
one auto parts plant, Japanese management wanted to stress team skills, consensus
building, harmonious relationships, and other “Japanese values” when hiring American
workers. Yet, these values make the common U.S. practice of openly comparing indi-
vidual applicants uncomfortable for some Japanese. American managers generally feel
that their role is to pick the best candidate for a job, making comparisons between
people necessary. Clearly, American and Japanese approaches to selection are
different.
Fortunately, the selection system developed at the American plant cleverly blended
both approaches. At the plant, groups of job applicants assembled windshield wiper
motors. Individual performance within groups was assessed by trained evaluators who
arrived at a final score for each person using a consensus decision process. All appli-
cants who reached a predetermined cutoff score were considered qualified and hired
463
to staff the plant. This system cleverly combined individual assessment (American)
with consensus decision making for overall evaluation (Japanese). It also allowed
Japanese managers to assess issues critical to them, including an applicant’s ability to
work well in a team.36
Finally, the success of any selection or training program depends on how well it
matches the values and culture of those employees being trained. For most U.S. manag-
ers, self-focused training improves performance more than group-focused training. The
opposite is true for many Chinese managers. To Americans, information about their
ability to succeed at a task (self-focused training) seems more useful than information
about the ability of a group they belong to (group-focused training). Self-focused infor-
mation is valued in individualistic cultures where performance is usually viewed at the
level of an individual employee. In contrast, Chinese managers may pay more attention
to information that describes how a group that they belong to should approach a task.
As you know, in collectivistic cultures people tend to view themselves as members of a
group first and as individuals second. As a result, “performance” is a function of shared
responsibilities, which in turn makes information about group behavior more valuable.
In a nutshell, firms should take the cultural values of employees into account when
designing training programs.
Expatriates: Work a World Away

In this section, we focus on selection and development issues for expatriates in more
detail. For a decade or more now, American multinationals have been hiring more locals
in foreign subsidiaries, sending headquarters staff out on more short-term overseas trips,
and using technology (e.g., e-mail, teleconferencing) to keep people connected worldwide.
In part, this might reflect a change to more of a geo- or polycentric philosophy by the
multinationals. But, it is also likely that the high cost of sending expatriates abroad is
a concern in tough economic times. Increased safety concerns and political turmoil abroad
are other considerations that weigh on the minds of managers.
The Need and Presence of Expatriates
Nevertheless, despite these trends, expatriates are not going to disappear anytime
soon. Indeed, they have played valuable roles (and will continue to do so) for mul-
tinationals as technical experts, international managers, relationship builders—or all
three. In many cases, there is simply no better option than to send someone overseas
for multiyear assignments. If anything, the expatriate population has actually been
increasing in very recent years. This may be due to more companies engaging in
international business than ever before, including multinationals rising up from devel-
oping markets such as Brazil, China, and India. Moreover, many established multi-
nationals have expanded the number of countries in which they do business and have
pushed heavily into emerging markets. This expanded need for expatriates can also
explain their rising numbers—which are staggering. In China, over 90 percent of
464
companies on the Global Fortune 500 list operate there. Moreover, the number of
foreign employees posted to China (more than 300,000) has doubled over the past
several years.37
As you might guess, a good portion of those 300,000 foreigners working in China
are U.S. expatriates. Indeed, the overall number of Americans who work in foreign
countries or travel abroad for business is astounding. Roughly 6 million Americans work
abroad in some capacity, and 7.5 million more go on business trips to foreign countries
each year. Roughly 1.3 million expatriates work for U.S. multinationals, 80 percent of
whom have a partner or spouse that will accompany them. So, if we also count children
who accompany an expatriate parent, nearly 3 million people are somehow “involved”
in expatriate assignments for U.S. multinationals alone. Some of the big multinationals
support huge expatriate populations. For instance, energy giant Royal Dutch/Shell has
over 5,000 expatriates posted to 120 countries, while German conglomerate Siemens
has roughly 2,000 expatriates posted to over 100 countries.38
While it is important to remember that expatriates represent only a small slice of
the overseas workforce in most multinationals, there is little doubt that expatriate assign-
ments will continue to be important.39 Indeed, in one recent survey, Japanese firms were
the most likely to report that they were moving toward longer expatriate stints overseas.
The bottom line is that expatriates often fulfill a variety of critical roles for multination-
als, ranging from technical experts to subsidiary managers to relationship builders, either
alone or in combination. At times, there is no substitute for a long-term international
assignment.40
Expatriates: Balancing Risks with Rewards
The role of an expatriate can be a risky proposition. When firms make mistakes in
selecting and managing expatriates, the consequences of failure can be expensive for the
company as well as for the expatriate. Figure 11.5 summarizes some of these conse-
quences. By failure, we mean expatriates have either returned early, finished the assign-
ment but were ineffective, or left the company soon after coming home—all costly
outcomes. As explained earlier, failure estimates vary considerably, with 20 percent being
a reasonably accurate value. Failure rates, however, may be creeping upward. A recent
survey found that 34 percent of expatriates in 180 multinationals failed—perhaps because
larger numbers were posted to challenging places such as Russia, India, and Indonesia.
Moreover, U.S. firms tend to experienced higher expatriate failure (common estimates
around 20–30 percent) more than either their European or Japanese counterparts (com-
mon estimates are around 10 percent). Europeans may do better because they are exposed
to a variety of languages and cultures while the Japanese tend to have longer overseas
assignments, which may help their adjustment.41 Likewise, failure rates depend on the
location as well. For example, U.S. failure rates are lower in Europe than in more cul-
turally challenging areas.42
Expatriates are very expensive, however, even when things go well. Add up all the
costs (e.g., higher pay, airfare for family members, moving expenses, housing allowances,
education benefits for any children, company cars, taxes, home leave, extensive
465
Failure Consequence Description/Implication
Premature return Estimates of the percentages of expatriates who are asked to come
home (or request it) vary on the assignment and situation. Yet,
premature return can jeopardize a firm’s ability to compete effectively.
Wasted relocation costs Sending expatriates abroad (plus partner, spouse, children), is very
expensive. Wasted costs on relocation can easily top $100,000.
Wasted preparation and Failure means the firm loses the direct (e.g., training, overseas pay)
support costs and indirect costs (e.g., not getting the job done) spent on preparing/
supporting an expatriate.
Other indirect costs Failure hurts the career/confidence of the expatriate and damages
relations with local employees, officials, customers, and suppliers
(which take time to repair).
Ineffective performance Even if expatriates stick out their assignments, they may not be
performing well (e.g., making poor decisions, hurting local relations,
not meeting firm goals).
Turnover after repatriation When expatriates return from a foreign assignment, it leaves the firm
with no return on its $1 million-plus investment for a typical three-
year posting.
Negative momentum As word spreads of the problems expatriates have (e.g., failure, “out
of sight, out of mind” issues, lousy repatriation prospects), recruiting
becomes harder, making it more difficult to capitalize on overseas
opportunities.
Figure 11.5 Expatriates and the Consequences of Failure.

Sources: Adapted from Birdseye, M. G., and Hill, J. S. (1995). Individual, organizational/work and environmental
influences on expatriate turnover tendencies: An empirical study. Journal of International Business Studies, 41,
787–806; Black, J. S., Gregersen, H. B., and Mendenhall, M. E. (1992). Global Assignments: Successfully Expatriat-
ing and Repatriating International Managers. San Francisco, CA: Jossey-Bass; Carpenter, S. (2001). Battling the
overseas blues. Monitor on Psychology, July/August, 48–49; Hauser, J. (1999). Managing expatriates’ careers. HR
Focus, February, 11–12; Poe, A. C. (2000). Destination everywhere. HR Magazine, October, 67–75.
training, etc.) and the first year abroad can cost 300 percent of the expatriate’s base
salary. The tab to post a professional overseas for three years can easily top $1 million
(see Chapter 13).43
Of course, one might not find a three-year foreign assignment appealing anyway—
perhaps because of worries about terrorism, political upheavals, or personal safety.
Indeed, the perception is that the world has become a more dangerous place in recent
years. Of some 240 foreign locations examined, nearly 30 percent are ranked as high
risk, compared to just over 20 percent in 1998. Or, perhaps one is just not the sort
of person who would thrive in a challenging foreign environment regardless. If you
think you are the kind of person who could succeed as an expatriate, multinationals
may be interested. Increasingly, multinationals want their top executives to have exten-
sive foreign experience, making an expatriate assignment essential for reaching the
corner office. Figure 11.6 outlines some tips if landing a job overseas is part of your
career plan.44
466
Tips for Snaring a Job Abroad Explanation/Description
Learn additional languages Multilingual professionals are always in demand

For lower-level jobs, leverage Specialized skills can provide an edge in lower-level jobs if
any specialized skills marketed correctly
For higher-level jobs, network Focus on people who have clout where you want to go and
like crazy with key players develop long-term relationships with executive recruiters
Get involved in international Attend international meetings, participate in global bulletin
professional groups to raise boards, and speak at international conventions—these
your visibility provide opportunities to meet and pitch people who might
hire you for an overseas job
Get noticed in the press about Volunteer to write articles, give reporters quotes for their stories
international issues to raise about international business topics in newspapers or business
your profile as an expert publications—a reader with authority may notice and hire you
Seek introductions from foreign These people may be in a position to hire you or to steer you to
suppliers, customers, and someone who can in your desired location
officials
Keep track of former colleagues They may now be working for a new employer in a foreign
country and may be in a position to help
Offer to pay for recruiting costs Offering to cover interview or even relocation costs is expensive,
but it may impress a hiring manager overseas and help you
compete against local talent that is cheaper to recruit
Figure 11.6 Want an Overseas Job? Better Get Busy.

Source: Adapted from Lublin, J. S. (2005). Job hopping overseas can enhance a career, but it takes fortitude. The
Wall Street Journal, June 7, B1.
Choosing People for Expatriate Assignments
In choosing expatriates, many factors should be considered in the selection and training
process, including the assignment itself (e.g., which competencies are needed and how
much interaction is required with local employees or customers), and features about the
assignment location (e.g., cultural and socio-economic differences present). Of course,
important features of the potential expatriate—including motivation, skills, experience,
and family situation—should also matter a great deal.
National Differences in Expatriate Criteria

Across countries and regions, multinationals weigh such features differently and sometimes
diverge altogether regarding the factors that they use in selecting expatriates. For instance,
U.S. firms tend to emphasize previous performance, technical skills, and a desire to be
assigned overseas when choosing expatriates, often because the assignment itself is aimed
at fixing problems in overseas subsidiaries. Recently, U.S. multinationals have been paying
more attention to personal fit and family circumstances in their selection process. Screening
personal factors such as resilience and openness, as well as consideration of family
467
motivation to travel, has become an important tool in the process. On the other hand,
in Chinese firms, while managers take skills and performance into account when choosing
expatriates, they may place greater emphasis on their relationships with candidates.
Chinese firms seem to be less interested in employee development when dealing with
expatriate assignments. As a result, expatriate selection is driven by managerial authority,
if not favoritism, in many Chinese firms.45
European and Scandinavian firms tend to stress flexibility and cultural competencies
more than do multinationals from other parts of the world. They also tend to rely on
a wider variety of evaluation methods than U.S.-based firms. This suggests that European
and Scandinavian firms place more weight on the alignment of candidate skills and
attributes with the needs of a specific assignment. Many U.S. firms fail to systematically
assess the extent to which location and assignment demands fit with a candidate’s family
situation, personal attributes, and “soft” skills. The most important factors for expatriate
success include certain personal attributes (e.g., tolerance and emotional stability), soft
competencies (e.g., motivation and the ability to bridge cultural differences in building
relationships), and family context (e.g., the accompanying spouse’s or partner’s ability
or motivation to adapt).46
Get to “Yes” and Success

But how do multinationals actually evaluate candidates for expatriate assignments? As
you might suspect, evaluation practices can vary, independent of the selection criteria
used. Sophisticated Western multinationals may use talent information systems to track
large groups of employees and build a pool of potential expatriates. P&G uses just such
a database to keep track of 13,000 managers all over the world, with variables that
capture experiences in foreign or cross-cultural contexts. From there, a variety of addi-
tional techniques can be employed to identify the best individual candidate for the
expatriate position, including interviews (ideally including spouses and partners), psy-
chometric tests (measuring such traits as adaptability and emotional maturity), perfor-
mance in assessment-center training (where candidates are put through various real-world
scenarios), and intensive reviews of past accomplishments relevant to the assignment.
U.S. companies often use in-depth interviewing when picking expatriates. In addition to
any job-relevant qualifications, the interviews are most productive if they examine indi-
vidual attributes related to expatriate success. The key goal is to pick the person who
best fits the requirements of the expatriate assignment.47
Getting a handle on the precise factors that lead to success in expatriate assign-
ments will also require some analysis. Much will depend on how well expatriates
adjust to their new cultural environment, the nature of the work they are doing over-
seas, and the interaction needs of their foreign colleagues. Individuals, however, bring
different talents, skills, and experiences to the workplace and firms will also differ in
how much support is provided to expatriates before and after they leave for an assign-
ment. Consequently, we should expect variance in how expatriates adjust to foreign
assignments, perhaps a good amount of it. These variations in adjustment approaches
may reflect differences in home cultures as well as the HR practices companies use to
support expatriates.48
468
Regardless of how rigorous the selection process has been, an expatriate candidate
may, at the end of the day, simply decline the assignment offer. To secure a “yes” from
potential expatriates, the financial package will need to be attractive and the job itself
interesting and rewarding, offering the potential for advancement rather than a high risk
of failure. Expatriate candidates may also decline assignments if their concerns (or those
of their family) about the location are not assuaged. Few individuals would want to be
assigned to a location that is viewed as politically unstable or physically unsafe.
If there are few job opportunities available for partners or spouses planning to
accompany an expatriate, or a lack of strong schools and education programs for any
accompanying children, little incentive exists. Issues such as these can be particularly
vexing. Not surprisingly, it is often difficult to convince employees to consider an
expatriate posting if the culture overseas does not provide for his or her family. Another
deterrent is that expatriates themselves are more likely to be demoted rather than
promoted after they finish an overseas assignment. Multinationals typically refuse (or
are unable) to promise expatriates their old jobs back and instead often place them
into open positions that are available after they return (often a de facto demotion).
Firms should be clear about how expatriate assignments will develop an employee’s
career and specify how expatriates will be assigned a new position once they return
home.49
Some forward-thinking companies have been taking additional steps to tackle these
common concerns of potential expatriates. About 25 percent of multinationals factor in
the potential loss of a trailing spouse’s or partner’s job by including job search help,
career counseling, or a cash bonus in the expatriate’s assignment package. Approximately
90 percent of multinationals offer location visits before employees accept an assignment,
and roughly 50 percent offer language or other training for family members who are
accompanying the expatriate. For some of the most dangerous locations, extreme offers
are made to lure expatriates. Several years ago, a U.S. company offered expatriates an
annual $75,000 hardship bonus for working in Iraq. Firms may also give expatriates
safety training before leaving, and otherwise address emergency procedures, personal
safety, and local politics. If needed, others may provide high-security housing within
walled complexes guarded 24/7 by security personnel.50
A Selection and Evaluation Process

Regardless of what package is needed by the employee to accept an expatriate position,
multinationals should have a systematic process for choosing and evaluating expatriates
relative to the requirements of a particular foreign assignment. Firms would do well to
follow the recommended process laid out in Figure 11.7—which begins by putting
together a selection team and ends with the chosen expatriates preparing for their over-
seas assignments.
Selection teams should consist of home-country, host-country, and international HR
professionals. The role of HR experts is to identify expatriate candidates and help the
team use appropriate selection methods. Home- and host-country managers on the team
are there to represent the needs of the parent company and foreign subsidiary, respec-
tively. Once formed, the team should determine the job factors (e.g., nature of the work
469
Create Team to Select and Evaluate Candidates

(team should include home and host country representatives, IHRM experts)
Analyze Job, Firm Factors Relevant to Assignment Analyze Location Factors Relevant to Assignment
● Nature of work, fit to firm strategy ● Extent of cultural differences with home context
● Technical, managerial skills needed to succeed ● Nature of political/social/business environment
● Level of interaction job required with locals ● Level of development and standard of living
● Nature/extent of training available ● Proximity to home country
● Nature/extent of on-site support available ● Attitudes toward foreigners
Establish Selection Criteria, Then Recruit Candidates
Consider Candidate Factors That May Impact Expatriate Success or Failure

● Ability, need, and desire to go (e.g., for career or personal development purposes)
● Family situation and dynamics (are trailing spouse/partner, children in the mix?)
● Educational background, international experience, technical skills, and language proficiency
● Personality attributes: Tolerant, flexible, open, emotionally stable, extroverted, agreeableness
● “Soft” competencies: Task-oriented, relationship-oriented, able to bridge home-host country practices
Apply Multiple Selection and Evaluation Methods to Assess Candidates

● Use assessment instruments that evaluate personality attributes and/or learned skills and competencies
● Conduct formal reviews of past performance and experiences, especially in overseas contexts
● Interview candidate and family members (by home/host country representatives and IHRM experts)
● Use assessment centers that put candidates through simulations/exercises to evaluate suitability
Potential Expatriate Accepts Assignment Offer
Transition New Expatriate into Training and Preparation Programs/Activities
Figure 11.7 A Recommended Process for Effective Selection and Evaluation of Potential Expatriates.
Sources: Adapted from Black, J. S. Gregersen, H. B., and Mendenhall, M. E. (1992). Global Assignments: Suc-
cessfully Expatriating and Repatriating International Managers. San Francisco, CA: Jossey-Bass; Briscoe, D. R.,
Schuler, R. S., and Claus, L. (2009). International Human Resource Management (3rd ed.). New York: Routledge;
Downes, M., and Thomas, A. S. (2000). Managing overseas assignments to build organizational knowledge.
Human Resource Planning, 20, 33–48; and Shaffer, M. A., Harrison, D. A., Gregersen, H., Black, J. S., and Fer-
zandi, L. A. (2006). You can take it with you: Individual differences and expatriate effectiveness. Journal of Applied
and skills required) and location factors (for example, cultural differences) most relevant
to the assignment. Next, the team should establish criteria for judging assignment suc-
cess and then begin to build a pool of candidates (such as through job postings). Can-
didates should be carefully assessed on factors known to predict expatriate success and
failure, including motivation to go, family dynamics, cross-cultural experience, personal
470
attributes (such as tolerance), and appropriate competencies (such as technical and lin-
guistic requirements). The team should use multiple methods and tools to conduct
candidate screening (for example, tests, interviews, exercises).51
After the candidate pool has been reduced to a handful of finalists, another set of
interviews can be conducted that focus on assignment issues in greater depth. It would
be wise at this point to include detailed information about what work and home life
will be like in the host country as well as the specific implications of successful assign-
ment completion for expatriates’ careers. It is absolutely vital at this point to interview
any trailing spouses, partners, or family members. Sending candidates and any trailing
family members on pre-assignment trips to the host country may also help them grasp
what life abroad will be like. This is also a good mechanism for fleshing out any potential
lingering concerns held by the candidate or family members—these should be discussed
at length and taken seriously. Once the selection team has had its assignment offer
accepted (hopefully by the best-fitting candidate), the next step is to begin efforts to
prepare the expatriate to succeed abroad.52
Training, Preparation, and Adjustment of Expatriates
Preparing Expatriates
But what constitutes effective preparation for an overseas assignment? First, training
and preparation should be an ongoing process, with rigorous efforts made before,
during, and even after repatriation. After all, expatriates often experience a culture
shock of sorts when they return home, not just at the beginning of their assignment.
While a variety of approaches exist, all preparation and training programs should have
two basic goals: (1) help expatriates be effective in their assignments as quickly as
possible; and (2) minimize adjustment difficulties expatriates and their families face,
in both their new environment and after they return. In addition to cultural training
and language instruction programs, preparation efforts may also include briefings and
counseling on:
■ completing the physical relocation (e.g., travel, shipping possessions);

■ daily life overseas (e.g., housing, shopping, living conditions);
■ family issues (trailing spouse/partner opportunities, educational for kids);
■ acclimating to business overseas (e.g., business practices, maintaining relationships,
legal issues, political/economic conditions);
■ health, safety, and security issues; and
■ company history, policies, and personnel in the foreign location.
Unfortunately, many firms provide no significant preparation or training prior to depar-

ture (estimates are that between 40 and 70 percent of firms with expatriates fall into
this category). And when it comes to small to mid-sized companies, the figure may be
on the high end of this range, if not exceed it. Given that evidence shows that training
improves the ability to adjust to new cultural environments as well as boost job perfor-
mance, this training gap is unfortunate.53
471
Cross- Cultural Training

Cross-cultural preparation is a very important component of most expatriate training
efforts. So, what should cross-cultural training look like and include? Learning from
cross-cultural training involves a three-step process. The first step involves paying atten-
tion to cultural differences that explain why foreigners think and behave the way that
they do. Next, expatriates must retain knowledge about behavior that is culturally
appropriate. In other words, expatriates must think about the new cultural knowledge
that they receive and use it to develop a mental framework for their own behavior. This
tactic helps expatriates remember how to behave in foreign settings and the consequences
of mistakes. The last step involves practicing culturally appropriate behavior that is
consistent with expatriates’ mental frameworks. This trying-it-out process helps expatri-
ates fine-tune culturally appropriate behaviors and increases their confidence when
interacting with foreign colleagues, clients, and suppliers.54
Cross-cultural training itself can range from superficial activities that can be covered
in a few days to rigorous efforts spanning across months. Figure 11.8 displays the range
of training rigor possible and some associated activities. Determining the right mix of
rigor and activities is critical. In making this determination, firms should consider how
important the assignment is, how long it will last, and the extent to which an expatriate
must interact with locals. For instance, if an expatriate’s job requires extensive interac-
tion with locals and communication norms in the foreign country are different, then
more rigorous training is advisable. This example also underscores the importance of
assessing cultural toughness. Said differently, this raises the question of how different
the culture is in one assignment location from the home culture of the expatriate.
Everything else being equal, the greater the difference from the home culture, the
more difficult the expatriate’s adjustment process in a foreign country will be. Conse-
quently, more rigorous training is needed for expatriates headed to countries that, to
them, are high in cultural toughness. For instance, Americans typically have less trouble
adjusting in Europe than they would in Africa, the Middle East, or Asia—all places
Level of Rigor Time Duration Activities Included
Low 4–20 hours Lectures, films, books, area

briefings
Moderate 20–60 hours Everything above, plus role-plays,
cases, survival-level language
training
High 60–180 hours Everything above, plus
assessment centers, simulations,
field trips, in-depth language
training
Figure 11.8 Levels of Cross-Cultural Training Rigor.

Source: Black, J. S., Gregersen, H. B., and Mendenhall, M. E. (1992). Global Assignments: Successfully Expatriat-
ing and Repatriating International Managers. San Francisco, CA: Jossey-Bass), 97. Copyright © Jossey-Bass Inc. By
permission of the publisher.
472
where the cultural values encountered may seem more “foreign.” Overall, cultural tough-
ness can negatively affect expatriates’ adjustment and even their willingness to accept a
foreign assignment in the first place.55 See the accompanying International Insights
feature, which takes a close look at the issue of cultural toughness.
Hardship Post or Comfortable Sojourn? Chinese Expats in the West

Things are looking up for Western expatriates in China. Well-worn hotels, poor food, and
weak education and hospitality services have given way to glitzy housing developments, fancy
restaurants, and high-priced private schools and a university system on its way to the top for
children. Rapid growth has made China the place to be for foreign expatriates, who are
increasingly accepted within society and are less likely to attract stares, even in far-flung
inland Chinese provinces such as Sichuan. Like nearly everywhere, however, not everything
is perfect. Air quality and traffic can be big problems in some cities. Likewise, censorship,
opaque government rules, and cultural differences present hassles for Western expatriates.
The movement of Western expatriates into China, however, is no longer a one-way
street. Thanks to enormous economic clout, Chinese companies are setting up shop and
making deals all over the world. As a result, a flood of Chinese expatriates has been sent
into Africa, Europe, and the U.S. Yet, the contrast between the shifts made by Western
expatriates and their Chinese counterparts could not be starker. Westerners landing in China
have left modern democracies with individualist values and slow-growing economies for a
more collectivist place with rapid growth, governed by a controlling and bureaucratic regime.
And, Chinese expatriates have done exactly the reverse. So, are there differences in what
each group of expatriates generally experiences? And, which group might have the greater
challenge making the adjustment?
While the answers to these questions are less than precise, anecdotally Chinese expatri-
ates seem to have the more difficult challenge. This is partly because for most Chinese
expatriates, the perks and pay fall short of that rewarded to Westerners. As a result, the
higher prices that they often encounter in Western cities create hardships. Instead of having
maids to cook and clean as they do at home, Chinese expatriates in the West find themselves
having “to clean their own toilets,” as one expatriate so aptly put it. And, without a generous
package to lean on, most Chinese leave their families behind to cut costs. Many Chinese
find their time in Western countries lonely—unless they are extroverted, single, are able to
communicate easily.
Beyond these challenges, Chinese expatriates may encounter other difficulties. Back
home, they tend to be waited on and shown tremendous deference and respect, both in
and out of the office. In Western countries, however, they are more likely to be greeted with
just a smile, especially outside of work. The entire atmosphere abroad as an expatriate may
also be different by group. In Western multinationals, being picked for a stint in China is
473
often highly motivating—an opportunity to learn a fascinating culture, make more money,
and receive an indirect acknowledgement of being on the fast track to the top. But in China,
winning promotions is often a function of cultivating close relations with key superiors and
that is hard to do when you are an expat on the other side of the world. Indeed, when some
Chinese managers are tagged for an expatriate assignment, it may signal that they are not
well regarded, or that they have some weaknesses that could harm the company. Yet, unlike
in most Western firms, Chinese who are employed by state-owned companies cannot refuse
an expatriate assignment.
Then there are differences in attitudes and practices that Chinese expatriates must deal
with, including the fact that strikes can strand people at train stations and airports, particu-
larly in Europe. While China has labor unrest, it does not extend to public services because
of government control. Also, Chinese expatriates often start from behind because Chinese
companies are not well-known brands in most Western countries, making it tough to
penetrate Western markets. Western directness also tends to throw some Chinese expatri-
ates for a loop. Being peppered with questions by potential customers in China could
mortify a Chinese manager making a sales presentation. Yet, such behavior in Western
countries is common and may reflect a desire for more information, not negative percep-
tions of the presenter.
Postings to Western countries also have big pluses for Chinese expats. First, society
is relatively transparent and business regulations are clearer. For example, instead of having
to tap into your network of contacts to get a business license, one Chinese expatriate
marveled that “you just download a form from the Internet and apply.” People in Western
countries also tend to be friendly toward Chinese expatriates, with little evidence of
hostility. So, overall, both types of expatriates have the opportunity to develop their skills
and to even enjoy themselves. The latter two outcomes, however, are importantly deter-
mined by preparation and mindset—two things good in any business venture and discussed
next.56
Trends in Expatriate Preparation
Wider and Deeper Training

Some multinationals are going to great lengths to create sophisticated training programs
for expatriates. Royal Dutch/Shell, for instance, sent surveys to 17,000 former, current,
and potential expatriates, as well as family members, to systematically assess the issues
confronting employees in foreign assignments. The company used the results to develop
better training and career-management programs. Indeed, such extensive efforts are most
likely to appear in companies such as Royal Dutch/Shell, IBM, Unilever, and others that
have made expatriate preparation and global management development a board-level
priority.57
Recently, cross-cultural training programs have focused more on improving open-
mindedness by challenging expatriates’ prejudices, assumptions, and attitudes about
474
different cultures. This goes beyond the short, superficial courses on overseas business
etiquette and dress often used in the past. Instead, the training emphasis today is likely
to be on understanding and respecting all cultures. That is the goal that Motorola had
in mind when it built a cultural training center to help company managers be more
effective in whatever cultural context they found themselves.58
Involvement of Families
It was noted earlier that many firms are doing more to address safety, family, and dual-
career issues. In part, this is because many of these issues are causing recurring problems.
For instance, nearly 90 percent of Fortune 500 firms in one survey stated that dual-career
complications will continue to create expatriate selection and performance headaches in
the future. Often, the expatriate’s family situation is the most important predictor of
success or failure—even more important than cultural skills, adaptability, or job
knowledge.59 The good news is that involving spouses, partners, and children in pre-
departure cultural training can improve the adjustment of expatriates and their families,
especially when combined with other forms of assistance (e.g., help with spouse/partner
job searches or lost income replacement).60
Training Will Continue to Improve

In the years ahead, companies may step into new areas when it comes to expatriate
training and preparation, especially if research shows that they improve success rates.
For instance, providing mentors is a promising area. Specifically, companies should
consider creating programs that partner expatriates with both a home-country and host-
country mentor throughout their assignments. Having a home-country mentor who
consistently provides long-distance support, communication, and updates about the home
office appears to improve expatriates’ knowledge of the organization as well as their
promotion chances and job performance.
Likewise, a host-country mentor provides similar benefits. Host-country mentors
also appear to facilitate organizational knowledge sharing and teamwork. In other words,
expatriates learn to appreciate the host-country assignment more, feel more integrated
into host-country staff, and are more likely to share what they know. All of these posi-
tive effects are potentially career enhancing—particularly important because expatriates
often report that their careers stall or take a step backward after returning home. For
companies, it increases the odds that expatriates will be motivated knowledge transmit-
ters who improve the flow of critical knowledge across national boundaries in the markets
they serve.61
Self- Preparation and Training

Nevertheless, when it comes to training and preparation, expatriates would be wise to
look out for themselves. As one expert observed, “[i]t would still be rare to find a
company that is using everything that research has shown us about selecting, training,
developing, and supporting expatriates.” This suggests that expatriates should also help
themselves prepare for overseas assignments. For instance, they can sign up for college
475
courses to help build skills and abilities not included in company training. Expatriates
can also seek independent advice from firms that specialize in cross-cultural training
and relocation (such as from the U.S.-based Cartus Corporation). Soliciting insights
from other expatriates is another good option. Finally, if not already provided by the
employer, a pre-departure visit to the host country (with the family) can help ease the
settling-in process. Once abroad, expatriates can also seek out groups that offer support
(such as trip planning, blog and message boards, advice, and, in some cases, expat
camaraderie).62
Returning Home: The Challenge of Repatriation

Unfortunately, the need for preparation, planning, and training does not end when
expatriates leave to return home. A bevy of potential problems also awaits expatriates
when once home. These repatriation problems explain the high turnover rate among
expatriates. Consider these common repatriation challenges:
■ Changes in the home country and in the expatriate’s values after several years abroad
make “home” seem more “foreign”.
■ Changes at the home office require major adjustments and new learning.
■ New jobs after return can be disappointing (this may be due to a demotion, a discon-
nect from the overseas job, or an unclear career track).
■ There may be problems of reorientation to living conditions in the home country.
■ The expatriate may experience feelings of under-appreciation by the firm after per-
forming well overseas.
■ Returning home may mean adjustment to a lower standard of living (with no more
pay premiums or fancy benefits).63
Many companies now realize how expensive it is to neglect these repatriation issues. To
the contrary, there is growing recognition that expatriates represent a unique and valued
resource once they return—they are individuals who can help the firm because of the
important information they have collected, the new competencies that they developed,
and the new knowledge that they created during their overseas assignment. Without
successful repatriation, all of this will be lost, which could end up being a competitive
disadvantage for the firm (and consequently a plus to a competitor!). 64
Thus, some firms address repatriation issues in depth even before the expatriate
leaves for an assignment. For instance, Monsanto, the pharmaceutical, chemical, and
agricultural giant, started a repatriation program to combat high turnover among its
expatriates. In a nutshell, they found that expatriates’ dashed expectations for advance-
ment upon return home were a big part of the turnover problem. Monsanto instituted
pre-departure planning for the role that expatriates would have once they returned. The
firm also now gives returning expatriates opportunities to showcase their overseas
accomplishments publicly and provides counselors to help with readjustment problems.
Programs such as these can improve the performance and adjustment of expatriates after
they return.65
476
Attacking the “out of sight, out of mind” problem is another key issue. Some com-
panies deliberately bring expatriates back home several times a year to give them visibility
and express appreciation for their work. Expatriates can meet with important managers
and, ideally, a designated mentor. Return trips also serve to jump-start the adjustment
process. The longer that expatriates are away, the more difficult they will find it to
return. To combat this, firms can increase the frequency of home visits as the final return
date approaches, especially for employees who are gone for more than two years. Con-
sider what happens at Coherent, Inc., a California-based manufacturer of lasers and
other high-tech equipment with offices in several countries, including China. The company
brings expatriates home for short stints of a few months before their final return. During
this time, expatriates complete modest projects. They then return to their foreign post-
ings to conclude their affairs before coming home for good. This months-long period in
the U.S. helps reacquaint expatriates with the office, their (new) colleagues, and ongoing
projects. It also gives expatriates an extended taste of life back home. Overall, the pro-
gram has helped cut down the repatriation adjustment period. Figure 11.9 lists some
additional steps that firms can take to ease the repatriation process.66
Time Frame Suggestions/Description
Before departure • Clearly communicate reentry job options, establish career development
plan
• Appoint home- and host-country mentors to support expatriate
• Arrange home visits for visibility
6–9 months before • Narrow list of reentry job options, send expatriate job openings/listings
return • Conduct home office visits to facilitate adjustment, schedule job
interviews
3–6 months before • Conduct briefings with employee/family about what they’ve learned
return • Explain home-country changes that may impact their return
• Ask expatriate to list return expectations to minimize misunderstandings
• Explain firm’s moving policies and repatriation programs
Immediately on • Assign employee/family to a welcome home group of former expatriates
return • Provide a home sponsor to review changes in firm (e.g., policies,
products)
• Provide returning spouse with career-related assistance
• Offer counseling for more serious problems
3–6 months after • Provide training for reentry shock, or any negative feelings about return
return • Ask employee how new skills and experience can be better used by the
firm
• Reassess adjustment process to identify outstanding problems and offer
assistance
Figure 11.9 Before, During, and After: Suggestions for Improving the Repatriation Process.
Sources: Adapted from Shilling, M. (1993). How to win at repatriation, Personnel Journal (September), 40–46;
Solomon, C. M. (1995). Repatriation: Up, down, or out? Personnel Journal, January, 28–37.
477
Chapter Summary
This chapter discussed the challenges of managing human resources globally as well as the
strategic value of international human resource management (IHRM). Aligning IHRM with firm
goals is important. Consequently, companies may want to develop approaches to IHRM that
both reflect broad principles while also including tactics tailored for use in specific markets.
We also considered the basic options for staffing foreign operations. These include
PCNs, HCNs, and TCNs. Some firms are trying to develop an international cadre of managers
who can be sent anywhere in the world. Companies are increasingly using boomerangs to
improve their effectiveness in foreign markets. Likewise, firms continue to designate valued
foreign employees as inpatriates, bringing them to the parent country for various develop-
mental assignments to increase their commitment.
Sometimes firms embrace a particular selection philosophy in making staffing decisions.
At one extreme is a geocentric approach, where ability is all that matters. An ethnocentric
approach, in contrast, means that only PCNs will be posted in key overseas positions. Poly-
centric and regiocentric approaches fall between these two extremes. In a polycentric
approach, human resource management control is in the hands of the foreign subsidiary,
although headquarters still makes key decisions. Likewise, under a regiocentric approach,
most foreign employees will not move into headquarters positions. Employees, however, can
move from country to country in a particular region.
The chapter concluded with a focus on expatriates, where the consequences of failed
assignments are often severe. Firms need to develop a rigorous selection process and use
criteria that accurately predict success. Expatriates also need to be prepared to deal with all
of the cultural and lifestyle changes that will be encountered abroad. The exact nature and
level of training needed should be driven, in part, by the cultural toughness of the foreign
location. Preparation is also needed if employees are to be successfully repatriated back to
their home countries. Fortunately, companies are moving toward more sophisticated repatria-
tion programs that kick in before the expatriate has even begun the foreign assignment.
1. What are some of the unique challenges facing international human resource management
professionals?
2. What are some of the pros and cons associated with using PCNs, TCNs, and HCNs? How
does culture impact selection and development of international employees?
3. What are the elements of a successful program to select, prepare, and repatriate employees
destined for foreign assignments? How can cultural toughness and family issues be managed
effectively?
478
Trying Fitting in Across an Ocean of Differences

At the beginning of this chapter, we told you about the real-life experiences of a seasoned
international business professional, Ms. Linda Meyers. In particular, we relayed her observa-
tions about the various interactions and styles of management in South Korea and her (self-
acknowledged) lack of preparation for the many cultural differences between managing in
the U.S. and Korea. Plus, Meyers was hardly a novice as she had other extensive assignments
that ended successfully and was a consultant to other firms about expatriate deployment.
So, what happened in Seoul?
On reflection, Meyers felt that she had made some important mistakes. One lesson was
summarized by the phrase “easier said than done.” The extensive experience that she had
in prepping others for expatriate roles did not make it any easier to implement that advice
herself. Moreover, much of the training she provided to other soon-to-be expatriates did not
have much specific applicability to the SK Telecom environment in Seoul. Despite her own
personal preparation efforts to read about and to understand Korean business culture, Meyers
judged that her efforts were superficial and that she missed about 80 percent of what she
actually needed to know. Another realization was that Meyers’s view of progress and change
did not align with her more conservative Korean bosses, something that she should have
done more work on to clarify in advance.
In terms of her own management style, Meyers also concluded that she should have
been more patient when introducing changes to her Korean subordinates. For example, soon
after arriving in Seoul, she tried to create a more informal environment by telling her Korean
subordinates to stop using her title and instead to address her by her first name. Unfortu-
nately, this backfired and caused her subordinates to lose respect for her and to perceive her
as weak. Likewise, Meyers admitted that she tended to jump to the conclusion that every
misunderstanding that she had with her Korean colleagues was due to cultural differences
or poor treatment because she was a foreigner. After one disagreement with a Korean
manager, which she chalked up to a cultural misinterpretation, Meyers spoke to another
colleague about how to handle the situation. The Korean manager was very embarrassed
and upset when he found out that Meyers had consulted with another colleague about their
misunderstanding.
After leaving SK, Meyers returned to her roots, again serving as a consultant to help
other people prepare for their expatriate assignments. Her experience in Korea, Meyers
believes, ended up making her a better consultant. As she put it, “those years in Seoul taught
me to question my own actions and assumptions. I realized that my leadership style had
been shaped by a particular environment and that my way was not always best.”
As you reflect on this situation, does it surprise you that she encountered so much
trouble in Korea, especially given her prior experiences and positions? What are some addi-
tional steps that she could have taken to better prepare for her role at SK Telecom (both
before she accepted the job as well as after)?
479
What Is Your International Orientation?

Purpose
To develop self-insight and knowledge about your level of experience with, and interest in,
other countries and cultures. This may help provide guidance about whether you would be
attracted to and likely succeed in a foreign work environment.
Instructions
The following items are from the International Orientation Scale. Answer each question and
give yourself a score fo each dimension. The highest possible score for any dimension is 20
points.
Dimension 1: International Attitudes
Use the following scale to answer questions Q1 through Q4, placing the appropriate number
next to each question.
1 2 3 4 5
Strongly disagree Somewhat disagree Unsure Somewhat agree Strongly agree
Q1. ___ Foreign language skills should be taught (as early as) elementary school.
Q2. ___ Traveling the world is a priority in my life.
Q3. ___ A year-long overseas assignment (from my company) would be a fantastic opportunity
for my family and me.
Q4. ___ Other countries fascinate me.
Add up total score for Dimension 1 (scores will range from 4 to 20).
Dimension 2: Foreign Experiences
Q1. ___ I have studied a foreign language.

1. Never
2. For less than a year
3. For a year
4. For a few years
5. For several years.
Q2. ___ I am fluent in another language.
1. I don’t know another language.
2. I am limited to very short and simple phrases.
480
3. I know basic grammatical structure and speak with a limited vocabulary.

4. I understand conversation on most topics.
5. I am very fluent in another language.
Q3. ___ I have spent time overseas (traveling, studying abroad, etc.).
1. Never
2. About a week
3. A few weeks
4. A few months
5. Several months or years.
Q4. ___ I was overseas before the age of 18.
1. Never
2. About a week
3. A few weeks
4. A few months
5. Several months or years.
___ Add up total score for Dimension 2 (scores will range from 4 to 20).
Dimension 3: Comfort with Differences
Use the following scale for questions Q1 through Q4, placing the appropriate number next
to each question.
1 2 3 4 5
Quite similar Mostly similar Somewhat Quite different Extremely different

different
Q1. ___ My friends’ career goals, interests, and educations are _________ to mine.
Q2. ___ My friends’ ethnic backgrounds are _________ to mine.
Q3. ___ My friends’ religious affiliations are _________ to mine.
Q4. ___ My friends’ first languages are _________ to mine.
___ Add up total score for Dimension 3 (scores will range from 4 to 20).
Dimension 4: Participation in Cultural Events
Use the following scale to answer questions Q1 through Q4, placing the appropriate number
next to each question.
1 2 3 4 5
Never Rarely Sometimes Often Always
481
Q1. ___ I eat at a variety of ethnic restaurants (e.g. Greek, Indian, Thai, German).
Q2. ___ I watch the major networks’ world news programs.
Q3. ___ I attend ethnic festivals.
Q4. ___ I visit art galleries and museums.
___ Add up total score for Dimension 4 (scores will range from 4 to 20)
Self-Assessment Discussion Questions
1. First, lay out your total scores on each of the four dimensions. Also, add together your
scores on each dimension for a total score (should range from 16 to 80). The higher your
score on each dimension (and the higher your total score), the greater your experience
with and interest in other countries and cultures.
2. On what dimension is your highest score? Your lowest score? Your instructor may provide
comparative data from other students. If so, how do your dimension totals and your overall
total score compare to other students?
3. Would you like to improve your international orientation? If so, what could you do to
change various aspects of your life? What dimension would you tackle first? Which one
would be the hardest to improve?
4. Is an overseas assignment something that is attractive to you? Why or why not? Are there
specific places in the world that you would be interested in going to as an expatriate?
Places that you would not? Why?
Source: This exercise was prepared by Paula Caligiuri, School of Management and Labor Relations,
Rutgers University. Used with permission. As appeared in Management International: Cases, Exercises,
and Readings by Dorothy Marcic and Sheila Puffer. Copyright © 1994 by West Publishing Company,
Minneapolis/St. Paul, Minn., a division of International Thomson Publishing Inc. Reprinted by permission.
International Human Resource Management in Specific Firms
Purpose
To learn more about the international human resource management challenges facing compa-
nies and how they try to cope with them.
Instructions
Your instructor will divide the class into groups of three to six students. Each group should
interview at least two managers with human resource management responsibility who work
482
for companies engaged in significant international business activity that requires staff abroad.
Examples of activities requiring overseas staff (i.e., expatriates, local employees, or third-country
nationals, either alone or in combination) include:
• having offices in foreign countries to help market and sell products or services;
• running foreign subsidiaries that deliver services or manufacture products; and
• joining ventures overseas or forming international alliances to develop technology, build a

product, share information, or make international deals.
The goal of the interviews is to assess the international human resource challenges facing
the company and to determine what the company is doing to cope with them. Some good
general questions to ask might include the following:
• How do you support the company’s international business operations?
• What are the key human resources challenges facing your company in its international
operations (e.g., staffing foreign operations, not having enough control to deal with local
issues)? Why do these challenges exist? To what extent do they reflect cultural, legal, or
political differences across countries?
• What human resource strategies, policies, and practices have been developed to overcome
these challenges? Have they been successful? Why or why not?
Naturally, other, more specific questions can be developed that are tailored to the specific
managers being interviewed. Your instructor may also ask you to research specific international
human resource management issues and develop questions aimed at examining how local
companies have responded. If interviewing managers is impractical for any reason, your
instructor may treat this activity as an Internet research assignment.
Deliverable
To conclude the exercise, each student group should make a 15-minute class presentation
about their findings. Alternatively, your instructor may set up this activity as an individual
assignment. There are a variety of Internet information sources available for doing research
on international human resource management issues. For instance, the following websites
may be useful for generating questions, better understanding the employee side of inter-
national human resource management, or learning more about specific company
practices:
• www.expatriates.com (offers an extensive directory of expatriate-oriented links)
• www.shrm.org (site of the Society for Human Resource Management, a professional

organization that provides a wealth of information and links).
483
After all groups have presented, the instructor will lead a class discussion (15–20 minutes)
that focuses on three issues:
• To what extent do the human resource challenges reported reflect the type of international
operations companies are engaged in?
• To what extent do the human resource challenges reported reflect country-specific factors,
such as culture?
• What about the quality and appropriateness of the international human resource strategies
being pursued by various companies?
Notes
1. Green, S. (2011). The would-be-pioneer. Harvard Business Review, April, 124–126.
2. Briscoe, D. R., Schuler, R. S., and Claus, L. (2009). International Human Resource Management
(3rd ed.). New York: Routledge; Truss, C., and Gratton, L. (1994). Strategic human resource
management: A conceptual approach. International Journal of Human Resource Management,
5, 662–686.
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chapter 12
evaluating and
rewarding employees
worldwide
EMPLOYEE PERFORMANCE APPRAISAL: THE GLOBAL CHALLENGE 492
MULTINATIONALS AND PERFORMANCE EVALUATION

FOR EXPATRIATES 493
WHO SHOULD EVALUATE EXPATRIATE PERFORMANCE? 495
WHEN SHOULD EXPATRIATE PERFORMANCE BE EVALUATED? 499
CONTEXT VARIABLES THAT IMPACT EVALUATIONS

OF EXPATRIATES 500
SOME ADDITIONAL CHALLENGES WITH CROSS-BORDER

PERFORMANCE EVALUATIONS 501
EVALUATING FOREIGN-BORN EMPLOYEES 503
COMPENSATION OF INTERNATIONAL EMPLOYEES 506
EXPLAINING COMPENSATION DIFFERENCES ACROSS COUNTRIES 512
THE CHALLENGES OF EXPATRIATE COMPENSATION 513
METHODS FOR COMPENSATING EXPATRIATES 515

Learning Objectives
evaluate employee performance and describe the tradeoffs and challenges associated
with appraising the performance of expatriates;
understand that providing performance feedback can mean different things to employees
with different cultural values and in different locations;
recognize that compensation is one of the main reasons to evaluate performance and
that this means more than just level of pay;
explain the different options for compensating expatriates and be able to select an option
most likely to be effective in a particular context.
Multinationals Are Making it Harder for Employees to Accept Expatriate

Assignments
The cost of sending expatriates abroad has always been a challenge, but maybe more so
today than it has ever been. As companies around the world rebuild themselves after a tough
recession, they face more international staffing demands than ever—thanks largely to fast-
growing countries such as China, Brazil, and India. Today, “lean” is the watchword in most
business, but especially when concerning international business and, in turn, the expatriates
working for the firms. Compensation packages and perquisites have been cut back
significantly—at least compared to “the good old days.” Unless you are a very high-level
executive, most incentives and allowances have been reduced or eliminated, along with
once-common perks such as drivers and maids.
As a result, potential expatriates have increasingly been turning down foreign assignment
offers and finding themselves doing more penny-pinching than ever, even when they do
agree to an assignment. Multinationals, on the other hand, especially in the U.S. and Western
Europe, are finding it difficult to talk employees into going overseas for years at a time,
especially with less compensation on the table. Even when compensation is good, savvy
employees increasingly factor in the context of the international assignment and the impact
that this has on their annual evaluation in the short run, as well as their career path in the
longer run.
The reasons for this reluctance are varied, but Americans may be among the most likely
to refuse an expatriate assignment: for instance, if you are a 45-year-old mid-level marketing
490
E V A L U A T I N G , R E W A R D I N G E M P L O Y E E S W O R L D W I D E
manager earning $140,000 for a Pittsburgh-based company and have a husband and two
school-age children. Your company wants to send you to Seoul, South Korea, for three years.
Would you want to uproot your children and pull them out of their schools? Likewise, what
if your spouse does not want to give up his or her job to move across the world to follow
your job?
Another major reason Americans are saying “no” to foreign assignments is that
companies are offering less in efforts to control costs, given that traditional expatriates are
a huge “money pit.” Posting that 45-year-old American marketing manager and her family
to South Korea, for example, may cost three times her base salary per year. Consequently,
the expatriate package presented to her might not include any bonuses or Foreign Service
premiums as incentives to say yes. In the past, these were often worth an additional
10–20 percent of the base salary. Nor will housing or cost-of-living allowances necessarily
cover everything. It could be that a portion of housing expenses in Seoul may be out of
pocket and frugality in food and clothes shopping will be the byword. All of these expenses
would be in addition to the hassle of having to sell or rent out the family home in Pitts-
burgh before leaving the U.S. This also may be an expense that the company might not
help with.
Cost considerations do not stop there. American expatriates often pay twice when it
comes to income taxes thanks to U.S. tax regulations. Specifically, U.S. expatriates typically
pay income tax to the foreign country in which they are posted, based on their locally earned
salaries, as well as U.S. income tax on anything over roughly $97,000 earned abroad (as of
2013). This hits well-paid American expatriates especially hard for those assigned to countries
where local income taxes are relatively low (such as Singapore or Russia), but less so in high-
tax countries (such as Germany) where amounts paid can be credited against U.S. tax liabilities.
Many expatriates end up paying thousands of dollars more a year in income taxes as a result.
Moreover, companies are less likely to provide tax equalization benefits to wipe out these
extra costs—meaning that while companies save themselves money, expatriates have to pay
up instead.
So, here is the big question: if you were that American marketing manager, would
you want to be an expatriate under these (complex) circumstances? If not, what kind of
compensation and support package would be necessary in order to entice you to sign up
for a one-, two-, or three-year posting abroad? Are there other benefits besides money
that companies could offer? And on the company side of the ledger, what would you
recommend multinationals consider if they want to get more people to say “yes” to expa-
triate assignments—other than throw lots of money at them (which seems unlikely regard-
less)? Are there other options for firms, especially U.S.-based multinationals, that are dealing
with lots of “no” answers from expatriates, in addition to ever-higher costs of long-term
overseas assignments? As you read this chapter, you may come up with some answers or
at least some possibilities to consider. Then read the Up to the Challenge? feature at the
end of the chapter to learn what some multinationals are doing to address these expatriate
compensation issues.1
491
Employee Performance Appraisal:

The Global Challenge
Managing employee performance is always challenging and is among the most important
functions of a manager or leader. But for multinationals, the difficulty is compounded
by having employees scattered all around the world—some of whom embrace different
cultural values and welcome the experience of localized practices for performance. Then
there is the thorny issue of how to evaluate and manage the performance of
expatriates—something that produces yet another major set of headaches.
There is no doubt that employee performance evaluation is more costly and complex
for a multinational than for those with single-country operations. It is important to keep
in mind the core questions facing multinationals when it comes to managing and apprais-
ing employee performance:
■ Should the multinational rely on a standardized set of policies, procedures and prac-
tices when it comes to managing and appraising employee feedback worldwide?
■ Should the multinational rely on a dispersed set of systems that are aligned with local
business and management practices in the places where it does business?
■ Should the multinational take a blended approach to performance appraisal and man-
agement, one that relies on a combination of standardized practices and local latitude
aimed at keeping some local practices intact?
The bottom line is that there are no simple answers to these questions. While some
multinationals have moved toward a blended approach over the years, this has only
made the front-line manager’s job more difficult. A key is to keep the global workforce
focused on company goals and moving forward to successfully execute firm strategy for
international markets—performance appraisal systems are an important mechanism for
doing just that. Yet, this all has to be done against a background where employees in
different places vary in terms of how they interpret performance, react to feedback, and
view their jobs.2
Receiving a performance appraisal is not likely to be high on an employee’s list of
favorite activities. Likewise, conducting performance appraisals is one of the things that
many managers dislike most about their jobs. Performance appraisals, after all, are
inherently difficult and few managers enjoy providing employees with direct feedback
about their performance, especially when the feedback is negative. Anyone who under-
estimates how hard this is to do has probably not given many evaluations yet.
Imagine you have six employees reporting to you in your firm’s London
headquarters—your job as a manager is determine how well they performed their jobs
and to give them performance appraisal on an annual, semi-annual, or even more
frequent basis. But unless you took extensive notes on each employee as the year
unfolded, you would need to recall the accomplishments, limitations, and challenges
of each person, then somehow sum up these pluses and minuses over the evaluation
period accurately, trying not to be overly influenced by recent or overly salient events.
Next, you may want to compare these appropriately weighted evaluations across your
492
six employees and rank-order them so that you can distribute your limited pool of
rewards and demonstrate to your superiors that you have the fortitude to distinguish
between high-performing employees and those deserving of a negative evaluation.
Finally comes what is often the hardest part for managers—following the company’s
procedure to meet with each person to give him or her feedback, outlining rewards
that you think his or her service deserves.
Now imagine if one of the subordinates you had to evaluate was an expatriate
posted to Mexico City. First, your office is in London, and even if you visited Mexico
City during the year it is not likely that you would have had a chance to assess the
expatriate’s performance in any detailed manner. Moreover, imagine that you have never
worked in Mexico and do not know all that much about the environment there, includ-
ing any differences in culture or business practices. In short, you would probably have
great difficulty grasping how you could do a fair job of appraising the expatriate’s
performance, especially from thousands of miles away.
Consequently, the first half of this chapter details dilemmas just like this—when
managers must confront the pitfalls that can occur when conducting performance evalu-
ations of expatriates and foreign nationals. The second half of the chapter reviews the
intricacies of making compensation decisions in an international context as well as the
challenges of constructing pay and benefits packages for expatriates.
Multinationals and Performance

Evaluation for Expatriates
Evaluating expatriates can prove daunting. This is especially the case for large
multinationals—firms with expatriates scattered across dozens of countries where they
do business. While these firms face considerable diversity in employee attitudes and
values across countries, it is also true that multinationals themselves vary—sometimes
considerably—in how they approach performance appraisal in the first place.
For instance, in the previous London example, some underlying assumptions are
apparent in the description, including that performance appraisal is focused on indi-
vidual performance, with the best performers getting the biggest share of available
rewards. This “winner takes all” orientation is more common among firms based in
the U.S. and the U.K. In northern European countries such as Sweden, however, com-
pany policies have evolved and adjusted to include greater legal regulation of compen-
sation and associated performance management systems. This most likely emanated
from basic egalitarian values that discourage wide compensation differences and “puni-
tive” performance appraisal. Likewise, compared to their American or British coun-
terparts, Japanese multinationals operate in a more collectivistic environment.
Consequently, they tend to emphasize loyalty to the company in their performance
appraisal procedures, with length of service carrying relatively more weight and indi-
vidual performance relatively less. It is important to remember that multinationals (in
part) are a product of the home environment where they evolved. While they are
always changing and evolving, it is not uncommon for those roots to be reflected in
493
the philosophies, policies, and practices of firms, in relation to performance appraisal

and compensation.3
Regardless of their roots, research shows that when multinationals tailor performance
appraisal and other international human resource management (IHRM) practices to the
local context, their foreign subsidiaries tend to perform better. This is largely because
employees become more motivated and skilled, with their performance improving as a
result. Nevertheless, there are experts who argue that multinationals should apply IHRM
“best practices” globally, particularly those that help firms execute their international
strategies or preserve corporate values deemed important for all employees to embrace—
wherever they live and work.4
Some multinationals take a blended approach, insisting on certain common practices
everywhere while also allowing for considerable tailoring in local units. Interestingly, a
number of factors seem to impact how much local tailoring takes place. For instance, as
the number of expatriates deployed increases, the amount of local IHRM tailoring tends
to decrease. In essence, more expatriates make it easier for multinationals to directly
transfer parent company knowledge and practices, including about IHRM, to foreign
subsidiaries. The nature of the foreign location itself, however, may also impact how much
or how little local IHRM adaptation takes place. For example, consider Western multina-
tionals operating in both China and India. One study found that, compared to their Chinese
subsidiaries, Indian subsidiaries were seen as playing a stronger strategic role for the firm
while also using more localized IHRM practices. This may reflect India’s greater exposure
to Western influence, as well as the more common use of English—factors that may make
it easier for the parent company and the subsidiary alike to create blended IRHM practices
that reflect both the corporation’s strategic directions and local preferences.5
A company’s goals for sending expatriates to foreign locations include the desire for
employees to gain additional business skills and to experience a global perspective on
the business. These goals are often met. In one study, expatriates reported that their
experiences abroad:
■ increased their ability to manage cultural differences;

■ improved their understanding of international operations;
■ made them more open-minded about different problem-solving methods; and
■ improved their ability to more flexibly approach human resource issues.6
While these growth experiences benefit the employee as well as the company, these are
not commonly part of a domestic performance appraisal. If they are considered, such
experiences are difficult to evaluate, especially without observing the expatriate over a
long period of time. Employees from different cultures may have divergent reactions to
appraisal feedback as well as a different understanding of how such feedback should be
presented. In essence, the challenge of evaluating expatriates is compounded when the
evaluations are conducted from a distance—whether that distance is geographical, cul-
tural, or both.
Nevertheless, most multinationals routinely evaluate the performance of their expa-
triates. Consequently, the remainder of this section will deal with several important
questions about performance appraisal for expatriates:
494
1. Who should evaluate their performance?

2. When (and how often) should they be evaluated?
3. What aspects of performance should be evaluated?
Who Should Evaluate Expatriate Performance?

Multinationals have a variety of options for evaluating expatriates. First, expatriate
evaluations can be conducted in the host country, the home country, or both. Moreover,
any number of potential evaluators can be involved in this process besides the expatri-
ate’s supervisor. This can include peers, subordinates, and HR professionals. In fact,
multinationals may use a mix of home- and host-country personnel in the evaluation
process. Figure 12.1 shows how frequently different types of personnel are involved
in expatriate evaluation. This involvement implies a sophisticated evaluation system,
but the reality is that most expatriate evaluations are anything but. Instead, they are
often conducted on a relatively informal basis. While expatriate evaluations frequently
follow the outlines of domestic performance appraisal processes, an irony is that fewer
evaluators may be involved. According to one survey, domestic performance evaluation
involved twice as many evaluators than their international counterparts. Nevertheless,
evaluating expatriates is actually much more challenging than evaluating domestic
employees.7
For example, while an American manager assigned to the Netherlands may have a
Dutch boss, he or she may still have a boss in the U.S.—and be evaluated by both. Part
of the frustration for multinationals is that little hard evidence exists about what the
“best practices” are with respect to evaluating expatriates. For instance, there is consid-
erable controversy about which evaluator is better—a host-country manager or a home-
country manager.8
Performance Review Conducted Performance Review Conducted

in Home Country in Host Country
% of multinationals 56%—but more common in 71%—but more common in

conducting review multinationals with less than multinationals with more than
in location 100 expatriates 100 expatriates
% of expatriate 41%—Immediate supervisor 75%—Immediate supervisor

appraisals involving 23%—Corporate HR manager 23%—Expatriate himself or
a specific evaluator 17%—Regional manager herself
7%—Assignment sponsor 12%—Local HR manager
10%—Peers
7%—Subordinates
Figure 12.1 Who Evaluates Expatriate Performance in Multinationals? A Snapshot.

ment (3rd ed.), 302–303. New York: Routledge.
495
Evaluations by Host Country Professionals
As shown in Figure 12.1, having host-country professionals involved in expatriate evalu-

ation is a popular option, particularly for bigger multinationals with a large number of
expatriates to manage. Presumably, the advantages associated with host-country evalu-
ation increase with numbers, making it more difficult for home-country managers to
collect the information needed to perform adequate reviews on their far-flung expatriate
workforces.
Moreover, host-country professionals are more likely to be familiar with the expatri-
ate’s work and performance, particularly given local cultural norms. This is important
because the quality of the expatriate’s job in large part revolves around how culturally
savvy he or she is in the business environment. Consequently, having expatriates evalu-
ated by their host-country supervisors or other local professionals makes a great deal
of sense. Indeed, many experts argue that these are the only people who are in a position
to closely observe the expatriate’s work over a long period of time and who fully under-
stand the local context.9
Yet, relying on host-country professionals to evaluate expatriate performance is
not without drawbacks. For instance, while local professionals are knowledgeable
about their environment, they also bring their own cultural frames of reference to the
table in ways that cause problems. One American expatriate working in India pressed
his subordinates for their ideas about a project—consistent with participative manage-
ment techniques that work well in the U.S. But, his host-country supervisor frowned
upon this behavior and gave him a negative performance evaluation. The local supervi-
sor’s reactions are not surprising given that Indian culture tends to be higher in power
distance than the U.S., which makes autocratic forms of leadership more acceptable.
But the expatriate nevertheless paid the price—after returning home, this negative
evaluation was one of the reasons that he was denied a promotion. One reaction to
this incident is that the American expatriate got what he deserved. On the other hand,
what if the American parent company wanted the expatriate to instill openness to
participative management in its Indian workforce? Regardless of the wisdom of such
an approach, should the expatriate be punished for following instructions? Or perhaps
the blame could also be placed on the home office, for failing to provide the cultural
training necessary for instilling a greater appreciation for business participation in a
culturally appropriate manner. Regardless of where the blame lies, this underscores
the dangers associated with having host-country professionals evaluate expatriate
performance.10
Other potential problems associated with a host-country evaluation include language
and the fact that the host professional may simply be unable to clearly communicate
feedback to the expatriate. Perhaps more important, however, is that dimensions of
performance considered important may vary considerably between the local context and
the home country. Some of this may stem from cultural differences. But whatever the
reason, factors important to the host professionals evaluating expatriates will likely be
weighted heavily in the evaluation. The problem occurs, of course, when expatriates do
not realize that the evaluation criteria used in the home country and those that are used
locally are not aligned. An expatriate in China, for example, may have to learn over
496
time to show considerable restraint in sharing her feelings, even if she is upset with a
subordinate. That restraint may count positively in an evaluation by a local manager,
while being viewed negatively in the U.S.11
Moreover, differences in criteria may be subtle and not directly related to performance
per se—instead, reflecting differences in interaction norms. As a result, even if a multi-
national uses the same performance appraisal system everywhere, the results might be
different because of these norms. Naturally, expatriates parachuting into a new environ-
ment may not be aware of these norms and make mistakes as a result. For instance,
consider Indian expatriates posted to an American subsidiary. Because of common
interaction norms in their home country, these Indian expatriates might make an effort
to develop a relationship with their bosses because in India, getting a supervisor to like
you may positively impact your performance evaluations. American supervisors, often
trained to separate personal feelings from performance goals and targets, are unlikely
to be swayed by this. Indeed, they may wonder why the Indian expatriates spend so
much time on relationship building instead of “doing their jobs.” Conversely, American
expatriates posted to an Indian subsidiary may not realize the importance of building a
positive personal relationship with their immediate supervisor. Failing to do this may be
seen as rude and result in supervisory dislike that spills over to the expatriates’ evalua-
tion. The evaluations of both the Indian and American expatriates are likely to suffer.
Naturally, this is something that could be alleviated by training—for expatriates as well
as evaluating professionals in host countries.12
Finally, it is important to recognize that host-country professionals may not have
the multinational’s overall strategy in mind when evaluating expatriates. This can result
in negative evaluations when an expatriate is seen as behaving in ways that benefit the
corporation as a whole instead of the foreign subsidiary. While one might hope that the
home office would recognize and understand what the expatriate has done, this is far
from certain. In fact, it may be easier to simply take the evaluation by local professionals
in stride.13
Overall, the use of host-country professionals to evaluate expatriate performance
has both pluses and minuses. Consequently, multinationals may want to use home-office
personnel for performance evaluations of expatriates for greater control and
continuity.
Evaluations by Home Country Professionals
Indeed, there are clear advantages to having home-country professionals evaluate

expatriates. For one, these managers are typically more familiar with expatriates’
experiences, work history, and performance track record. Moreover, in most cases
home-country professionals speak the same language and share the same basic cultural
roots as the expatriates they are evaluating—a definite advantage over host-country
professionals, at least when it comes to communicating performance feedback. These
similarities and shared perspectives make it easier for the home-country manager—
everything else being equal—to help the expatriate learn and develop from the feedback
he or she receives.
497
On the other hand, home-country professionals also have shortcomings as evalu-

ators of expatriates. One clear disadvantage has to do with distance—both geographic
and psychological. Simply put, home-country professionals cannot observe expatriates
and their performance in the foreign locations where they work. Moreover, home-
country professionals typically receive little feedback or information from the host
country about the expatriates that they have to evaluate. Consequently, a major chal-
lenge for home-country professionals is gaining access to the information needed to
make a quality evaluation of expatriates. Indeed, most expatriates have relatively little
“quality” contact with home-office personnel during their overseas assignment, includ-
ing their direct home-country supervisor. When they do, it is often initiated by expatri-
ates themselves.
Granted, e-mails and video conferencing have made it easier to connect with the
home office. But this kind of “lean” contact is no substitute for more extended and
“rich” on-the-job observations. Nor does it mean that home-office personnel really
understand what is happening in the foreign subsidiary and why. In fact, home-office
professionals may not be familiar with, much less grasp, the intricacies of the expatri-
ates’ foreign posts or even have any experience in the country whatsoever. As a result,
they may not fully understand the pressures that the expatriate faces and the appropriate
standards to use when evaluating that person’s performance.14
Figure 12.2 summarizes the advantages and disadvantages associated with home
versus host-country professionals doing performance evaluations of expatriates.
Performance Evaluation Done by Performance Evaluation Done by

Home-Country Professional Host-Country Professional
Pros • Typically has a better understanding of • In the best position to observe expatriate’s
overall corporate goals and objectives behavior and performance over a long
• Has more background on expatriate’s period of time
work history • Has excellent understanding of local
• Often shares expatriate’s values and context, practices, and values and how
language, easier to give performance they relate to performance
feedback
Cons • May have limited understanding of • Evaluations shaped by local values; may
local context or culture create problems given company objectives
• Little or no direct observation of • Less familiar with overall company
expatriate performance in foreign strategies and objectives
location • More difficulty communicating because of
• May have weak grasp of criteria language and cultural differences
needed to perform well in local context
Figure 12.2 Pros and Cons of Home-Country versus Host-Country Evaluation of Expatriates.
Sources: Adapted from: Briscoe, D. R., Schuler, R. S., and Claus, L. (2009). International Human Resource Manage-
ment (3rd ed.). New York: Routledge; Oddou, G., and Mendenhall, M. (1991). Expatriate performance appraisal:
Problems and solutions. In. M. Mendenhall and G. Oddou (eds) International Human Resource Management,
364–374. Boston: PWS-Kent.
498
Advantages and disadvantages are one thing, but multinationals want to know what
approach is the best for evaluating expatriates. The answer, however, is complex. It
depends on the multinational’s goals, the number of expatriates involved, the location
that they are posted to, and the nature of the work required—just to name a few param-
eters. As you might suspect, some multinationals have tried to capitalize on the respective
strengths of home- and host-country professionals by involving both in the evaluation
of expatriates. This may translate into home-office professionals playing a supporting
rather than leading role in the evaluation of local performance. For example, AT&T
and 3M Corporation developed a “career sponsor” program to link expatriates to the
corporate office. Sponsors keep the expatriate in touch with what is going on at home
and act as mentors. They will also conduct performance evaluations using the cultural
perspective of the home office. Assessments of such programs show them to be success-
ful. Likewise, research conducted with a focus on U.S. multinationals has shown that a
balanced set of evaluators from both the home and the host country increases the accu-
racy of performance evaluations.15
When Should Expatriate Performance Be Evaluated?

Another important question to address is when to perform the expatriate evaluation.
U.S. firms have historically evaluated employees—domestic or international–once or
twice a year. Experts, however, have argued that this is too infrequent; it forces evalu-
ators to rely on shaky memories and makes them subject to some well-known errors in
judgment. Recent actions and events carry inordinate weight because they are first to
mind. Experts suggest that evaluations be done more frequently, depending on the tasks
or projects involved, as well as the role of the evaluator.16
For example, given the complexities, it may make sense to have local supervisors
or professionals conduct evaluations as major projects or task milestones or completed.
Home-country professionals, in contrast, might provide less frequent or calendar-based
evaluations of performance, such as once every six months, given their distance and
inability to make detailed observations. Again, this may vary depending on the expatri-
ate’s work role, rank, and experience. Frankly, it may be premature to conduct a formal
performance appraisal during the first six months of a foreign assignment in any case.
After all, expatriates and their families need time to adjust to their foreign surroundings.
On the other hand, if it is obvious that things are not going well, management—in either
the host or home country—should let the expatriate know and take steps to help as
soon as possible.17
This underscores the importance of flexibility in the timing of expatriate evaluations.
Early on in their assignments, it might be best to give expatriates informal feedback and
wait until after the first six months abroad before conducting anything more formal that
is focused on performance. Naturally, the cycle of task or project completion may impact
the precise timing of evaluations, particularly those done locally. Still, multinationals
would be wise to expect and plan for problems, many of which have already been dis-
cussed. For example, obtaining home-office support may be difficult if visits are infrequent
or short term in nature, limited to interaction such as brief e-mails, phone calls or video
499
conferences. Sensitive information is typically best conveyed in a personal, face-to-face

context, whether individual or group-based—something that is more difficult for home-
office professionals to do by definition. Depending on where the expatriate is posted, it
may be culturally difficult for local managers or professionals to provide “informal”
feedback. Plus, in some cases it may take the expatriate longer than six months to adjust
to the point where performance is optimal. Overall, the best time to evaluate expatriates
depends on what is “right” given the nature of the overseas assignment and the adjust-
ment of the individual holding it.18
Context Variables That Impact Evaluations

of Expatriates
In some ways the thorniest question about evaluating expatriates has to do with what
areas or criteria should be considered in the evaluation. There are at least three impor-
tance features about the context of the assignment that should be kept in mind when
evaluating expatriate performance: the environment in which the job is done, the task
or tasks themselves, and the personal characteristics of the expatriate.19
Environmental Variables
The circumstances under which any job is performed can be more or less demanding.
Working in a mine is physically more difficult than working in an office. Consequently,
the degree to which the environment presents special challenges should be taken into
account when determining performance criteria. Posting expatriates to foreign locations
that are full of cultural, legal, and social differences can present unique environmental
challenges. For example, an American working for a mining company in Zimbabwe will
have more challenges than if they worked for the firm’s operations in the state of Montana,
which is within the employee’s home country. Moreover, given that home-office personnel
are not in a position to observe the local context that the expatriate must operate in, it
is not likely that the full impact of environmental variables will be appreciated.
For example, imagine that an expatriate running a plant in Mexico has an employee
productivity level much lower than a comparable plant running in the U.S. (the firm’s
home country). Should the expatriate be given a negative evaluation as a result? Experts
would say probably not—this outcome could reflect a unique Mexican context. If more
detailed data show that this plant’s employees were much more productive than their
average Mexican counterparts, experts would be even more confident that these results
are due not to the expatriate manager’s lack of acumen, but perhaps the constraints of
working in Mexico.20
Task Variables
The nature of the work itself may present special challenges to expatriates in ways
that impact their performance, thus close attention should be paid to such challenges
500
when determining performance criteria. For instance, an important job factor in many
expatriate roles is how much interaction will be required with locals. Expatriates
whose performance relies on effective interactions with locals should have performance
evaluations that heavily consider such task criteria. Evaluators may place greater
emphasis on displaying cultural savvy in this area than for another assignment. A
software engineer is less likely to need the same level of cultural awareness than an
expatriate in a marketing role to perform successfully. Likewise, on foreign assign-
ments, American expatriates who are middle-level managers might need to have more
interactions with government officials overseas than they would in the comparable
roles back in the U.S.21
Personal Characteristics
Finally, there are differences among individuals in their ability to handle a foreign
assignment—either because of experience, temperament, or other features. For instance, as
discussed in Chapter 11, tolerance for ambiguity and flexibility are among the charac-
teristics that help expatriates adjust to their overseas location and to be successful.
Consequently, personal characteristics that are known to predict success or failure on
expatriate assignments should be taken into consideration, particularly during the process
of choosing who to send.
Some Additional Challenges with Cross- Border

Performance Evaluations
Even if a firm has considered these three important constraints on performance over-
seas, measuring an expatriate’s performance can still be challenging. For example,
while it might seem fairly straightforward to evaluate an expatriate leading a business
unit using financial measures, the overseas context complicates matters. First, business
laws and tax rules will be different than in the home country, making it harder to
calculate things such as profitability. Second, there may be challenges associated with
currency conversion and profit repatriation, issues that can prove especially vexing
when currency values shift suddenly or nations create hurdles for getting money out
of the country.
China is a good example of a country that has loosened currency exchange and
profit repatriation rules in recent years. Nevertheless, the regulatory environment in
China is burdensome and complex for multinationals, especially when it comes to profit
repatriation. Foreign firms must be able to navigate in and around several governing
institutions regulating business operations in China. It is easy to see how jumping through
all of the bureaucratic hoops required in China could make it more difficult to figure
out how well an expatriate leading a multinational’s Chinese subsidiary is actually doing
from a financial perspective.22
Because of tax law and currency differences, multinationals often take a variety
of steps to minimize taxes and avoid losses from currency fluctuations. As a result,
501
the true performance of a foreign subsidiary, and the management team running it, is
often obscured. Firms may want to use additional yardsticks to evaluate expatriate
performance. These measures are designed to tease out and separate tax, currency, and
other regulatory hurdles that firms have to deal with when borders are crossed. Granted,
companies may not have the time and money to do this. Instead, it may be more
practical to follow some general guidelines for effectively evaluating expatriate
performance.23
General Guidelines for Expatriate Evaluation
Rate the Assignment Difficulty

Doing a thorough assessment of how difficult a specific foreign assignment might be for
an expatriate, well in advance of an actual assignment or placement, should pay divi-
dends when the time comes to evaluate his or her performance. Difficulty scores can
then be applied to weight the normal process used to evaluate performance. For example,
if an expatriate will be posted to a very difficult assignment, his or her usual evaluation
could be multiplied by 2.0. If the foreign posting is moderately difficult, then the process
could be weighted by 1.5, and so on. Of course, the challenge for human resource per-
sonnel is to figure out which assignment is more difficult than others and what specific
weighting should be applied.24
First, the extent of language adjustment—if any—would certainly add to assignment
difficulty. An American expatriate posted to a location such as India, where the primary
business language used is English, may have an easier time than if sent to a place where
English use is less pervasive, such as Vietnam.
Economic and political stability are factors that would also determine difficulty in
posting (see Chapter 2 for more detail). Expatriates who do well in tough places are
deserving of excellent evaluations. For example, one American expatriate was instrumental
in stopping a strike from occurring in the firm’s Chilean plant—this would have shut
down the plant and soured relations with the home office. Preventing the strike was a
big accomplishment. Clearly, the expatriate demonstrated a good deal of cultural acumen
and insight. Unfortunately, while the labor situation was unfolding, volatile exchange
rates in Chile caused demand for the plant’s product to temporarily drop 30 percent.
Rather than recognize the expatriate for averting the strike, the parent company focused
on the negative sales figures. As a result, the expatriate received a lackluster performance
evaluation.25
Additional Suggestions for Expatriate Evaluation

Firms will want to consider features in addition to judging the difficulty of the assign-
ment location. First, while many experts recommend multiple home- and host-country
evaluators be involved in expatriate assessment, some place more weight on evaluations
performed by host-country managers because they are in a better position to observe
an expatriate’s actual performance. A related idea, especially if the home office is
502
responsible for expatriate evaluation, is to involve another person who has experience
in the same country that an expatriate is posted to. This increases the local knowledge
and expertise that can be brought to bear when the home office is evaluating expatri-
ates. Conversely, if host-country personnel have primary responsibility for conducting
expatriate evaluations, they should seek input from home-office personnel before
conveying any feedback to expatriates. This has the twin benefit of helping local pro-
fessionals understand how parent company values should shape the performance
evaluation, as well as sharing any corporate norms about actual delivery of
feedback.
Often overlooked in the evaluation process are expatriates themselves. Regardless
of how performance is evaluated, it is important that multinationals:
■ communicate up front with expatriates about what performance criteria are impor-
tant to both host- and home-country managers, as well as what constitutes success
relative to those criteria;
■ fully explain how the process of performance appraisal will work for expatriates—
ideally integrate it into expatriates’ assignment plans;
■ conduct training for both performance evaluators and expatriates about how their
respective frames of reference (including cultural values) can impact both the assess-
ment of performance and how employees react to it;
■ emphasize that performance evaluations will be conducted more frequently given the
challenges of expatriate assignments while also telling expatriates that their initial
evaluation will be delayed somewhat to give them time to adjust.26
Evaluating Foreign- Born Employees

Parent-country expatriates are not the only employees that multinationals have to man-
age successfully. Indeed, they may have to manage foreign nationals in the parent country
(such as a Chinese national posted to the headquarters of an American multinational)
as well as host-country nationals working for expatriates in a foreign subsidiary. While
both scenarios represent just the tip of the personnel iceberg, they nevertheless highlight
two common performance evaluation scenarios for multinational firms. Naturally, one
of the key challenges in each of these circumstances is how to effectively deliver feedback—
regardless of whether the news is good or bad.
As countries develop economically, more seem to be adopting formal performance
evaluation processes. This is not to say that economic giants, such as China and India,
have large swaths of the business landscape that still embrace local or traditional meth-
ods. This may reflect the influence of cultural values. For example, state-owned enterprises
in China tend to involve more evaluators, such as peers, and include moral dimensions,
such as honesty, compared to private firms operating there. Foreign multinationals
operating in China tend to be more frequent users of individual performance evaluations
compared to other types of companies—something that Chinese employees appear to
generally accept. Overall, like everything else in China, performance evaluation and
503
feedback practices are changing dramatically. In any case, it may be safe to assume that
some cultural differences exist that may impact the effectiveness of evaluation and feed-
back methods used with foreign-born employees.27
Compared to the U.S., performance evaluation systems in Middle Eastern countries
are usually more informal, with less use of evaluation metrics, forms, and documenta-
tion. As a result, feedback can be subjective and informal, with an emphasis on the
interpersonal aspects of performance. At a performance appraisal, paper and written
evaluations are less likely to change hands or be filed for future reference. This presents
an interesting situation because some multinational firms simply export their formal and
explicit performance appraisal forms to their foreign subsidiaries. This can create potential
for conflict when an implicit and informal culture meets an explicit and formal perfor-
mance evaluation system.28
Likewise, the feedback method itself may be moderated by culture. For example,
given the strong emphasis on collective values in Japan, it should come as no surprise
that performance evaluations are much more likely to be conducted in a group setting
than in Europe or the U.S. While team-based work approaches are popular in many
Western countries, performance evaluations are still primarily done at the individual
level. Interestingly, over the past 10–15 years, Japanese firms have been slowly shifting
toward a greater emphasis on individual performance evaluations—despite the potential
disruption to group harmony (a trend Japanese refer to as “performance-ism” or
seikashugi).29
Culture can also shape how foreign employees react to performance feedback and
the various types of delivery mechanisms. Consider the U.K., a nation that is culturally
similar to the U.S. One study found that British and American employees react some-
what differently to performance feedback. Americans became more productive after
receiving either praise or criticism. In general, the more feedback they received, the
higher their subsequent performance. This finding was observed for British employees
only after they received praise for their behavior—they did not respond well to
criticism.30
Many other differences in reactions to feedback also exist, particularly if we compare
Western approaches to the more face-conscious and collective orientations found in some
Asian countries. Yet, there are often wide differences in reactions to performance apprais-
als across Asian countries (e.g., Indonesia, Malaysia, the Philippines, and Thailand).
Consequently, it would be a mistake to lump these nations together and assume reactions
to feedback will be the same across Asia.31
Figure 12.3 summarizes performance appraisal characteristics commonly found in
four different countries, particularly in local firms. In the U.S., for example, the emphasis
in the appraisal is on evaluation, not on development or improvement per se. Criticism
is direct, with relatively lower concern with face-saving of the employee. In other coun-
tries, however, the process of providing the feedback is monitored much more carefully
for its effect on the recipient. For example, feedback is often more indirect in South
Korea, with considerable concern for saving face. The International Insights feature offers
some general guidelines for providing feedback to foreign employees that are worth
considering.
504
Characteristic Country
United States Saudi Arabia South Korea China
General Evaluation of Evaluation, Coaching Financial reward,

purpose performance coaching Retention
Feedback from Considerable Considerable Relatively little Little, but may
superiors amount amount receive some from
peers
Face-saving Low High High High
concern
Employee Medium to high High Low Medium self-
involvement evaluation expected
Type of Criticism is direct Criticism less Criticism mostly Criticism mostly
feedback direct indirect indirect
Level of Formal; probably Informal; not Informal; not Largely informal
formality written written written, but this
is changing
Determinants Performance Seniority, Seniority; ability, Age, seniority,
of positive criteria connections performance but becoming
appraisal becoming more performance
important oriented
Figure 12.3 Differences in Performance Evaluation Systems: A Four-Country Snapshot.

Sources: Adapted from Cooke, F. L. (2008). Performance management in China. In Varma, A., Budhwar, P. S., and
DeNisi, A. (eds) Performance Management Systems: A Global Perspective, 193–209. New York: Routledge; Harris,
P. R., and Moran, R. T. (1991). Managing Cultural Differences (3rd ed.). Houston, TX: Gulf; Yang, H., and Rowley, C.
(2008). Performance management in South Korea. In Varma, A., Budhwar, P. S., and DeNisi, A. (eds) Performance
Management Systems: A Global Perspective, 210–222. New York: Routledge.
Some Advice for Providing Performance Feedback to Foreign-Born Employees

In the U.S., the rule of thumb for feedback is to reward in public and criticize in private. This
human resources truism, however, may not always be the best for foreign-born employees.
The following are some recommendations for crafting feedback that might be delivered as
part of performance evaluation. Although these recommendations will not be appropriate
for every foreign national, they are very good starting points for U.S. as well as many Euro-
pean managers:
• Give feedback through a third party. In many countries, receiving direct feedback from a
superior—even if it is positive—can be uncomfortable. That is especially true for employees
who embrace collectivistic values and find the prospect of being singled out for feedback
disconcerting. Consequently, feedback may often be best delivered through a trusted third
party.
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• Communicate to the whole group. Another way to blunt the effect of direct feedback
is to provide feedback on a group basis. A work group can be gathered together and
the messages delivered that management thinks reflects their performance. This may be
particularly appropriate if tasks are performed in teams or groups—something that can
work well even in more individualistic cultures.
• Change the form of feedback. In most cases, the same message can be delivered in
several different ways. Trying several different approaches, even if employees give the
appearance of grasping what they are being told, increases the odds that the core message
will be understood.
• Simplify the feedback. This recommendation can apply to anyone, but is especially
important for foreign-born employees. Messages can almost always be shortened and
simplified to improve clarity. For example, the phrase “in spite of the fact that . . .” could
be simplified to “although” instead. Other examples include changing “the reason why is
that” to “because” and “this is a subject that” to “this subject.” Shorter, simpler messages
increase comprehension, particularly for foreign employees.
• Avoid slang. Phrases such as “the bottom line,” “they’ll eat this one up,” “the home
stretch,” “I’m all ears,” and “let’s get rolling” are often very difficult to interpret across
cultural, linguistic, or national boundaries. Although these phrases are common and carry
obvious meaning for many Western managers, foreign employees may have little or no
cultural or experiential context in which to interpret what is really being said.32
Compensation of International Employees

Performance evaluations are one of the main inputs into the process of setting and
managing compensation for employees around the world, so it is appropriate to discuss
this. Compensation includes everything the firm does to recognize and reward employees
for their performance, including pay. As employees rise in a firm, compensation may
also include additional perquisites, such as extra vacation time and stock options, just
to name a few examples.
What is more challenging for multinationals, at least relative to domestic firms, is that
their compensation systems need to account for the fact that living costs, attitudes about
pay, and laws governing compensation and benefits can vary considerably from country to
country. So, multinationals must account for all the diversity that exists across the locations
where they do business. On top of that, they must deal with the special compensation
challenges associated with their expatriates, a topic addressed later. Overall, compensation
systems are typically designed and implemented with several key goals in mind:
■ to attract and retain the best people to staff positions worldwide;

■ to make it as easy as possible to transfer people to various locations;
■ to be consistent and fair toward all employees wherever they are; and
■ to set compensation levels that match well with competitors while also holding down
costs.33
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The Meaning of Compensation
The understanding of “compensation” can vary across cultures. Compensation in the

U.S. is seen as a swap—employees provide effort and output while receiving wages and
benefits in return. While this “exchange” model of compensation is very common in
Western cultures, differences in perspective remain. In Germany, the word for compensa-
tion also implies achievement, originating among shoemakers who custom-fit shoes to
the buyer’s feet. Shoes that “measured up” were ones that deserved compensation. In
contrast, the Japanese word for compensation suggests protection, consistent with a
traditional paternalistic employment system. Other cultures may view compensation as
something beyond an exchange-driven process. They may view entitlement and obliga-
tion as important components of their compensation. To meet the goals discussed previ-
ously, firms need to be aware of these different views and expectations about the
employment relationship that comes with doing business across borders.34
Pay Levels across Countries
Wage levels themselves can vary considerably across countries—something that multi-
nationals are keenly aware of as they scour the world for the best talent at a cost-effective
price. This has, in part, led to the offshoring of jobs and their migration as companies
chased low-cost labor around the world. Granted, some companies have reversed their
decisions to go to lower-wage locations because of logistical, cultural, and control chal-
lenges that acted to increase their costs. But others will doubtless continue to move their
facilities abroad because of wage differentials. In 2009, for instance, Whirlpool announced
plans to close a plant in Indiana and move the work to a facility in Mexico during 2010.
Company representatives cited the need to “reduce excess capacity and improve costs,”
noting some $275 million that would be saved per year by moving those 1,100 jobs to
Mexico. And while the company did not break down individual labor cost savings, it
is likely that less expensive Mexican worker salaries played a role in Whirlpool’s deci-
sion. Mexican manufacturing workers earn, on average, roughly 11 percent of what
their American counterparts make.35
There are many nations in which workers earn little relative to U.S. workers and
others. As of 2008, average wages in Sri Lanka (2 percent) and Poland (19 percent)
were only a fraction of those of the average U.S. hourly rate, whereas countries such as
Norway (166 percent) and Denmark (150 percent) each have pay rates much higher
than the U.S. While these data do not paint the complete cost picture for firms that are
interested in foreign relocation, they are instructive. Labor cost differences help explain
why American firms sometimes seek lower-priced talent elsewhere and likewise why
some foreign firms, such as BMW, have built factories in the U.S. German manufactur-
ing wage rates are 140 percent of comparable American wages. But for American com-
panies, the much lower costs in Mexico for labor—combined with easy access to the
U.S. market—are among the reasons why thousands of U.S. firms have established
maquiladoras (plants) set up in Mexico that are close to the U.S. border.36
Average wage data are not very helpful if companies are trying to establish precise
compensation patterns in specific industries. Moreover, even within countries, large
507
differences in compensation rates can exist, such as between northern states and southern
states within the U.S. Likewise, estimates vary about true wage differences across coun-
tries, particularly in certain industries. For example, some estimates place Mexican wage
rates closer to their American counterparts (roughly 25–40 percent of U.S. wages)
compared to the U.S. Department of Labor estimate of 11 percent. The higher estimates
include bonuses commonly distributed in Mexico, such as the custom of providing a
Christmas bonus equal to one month’s pay. Also, Mexico requires that firms distribute
a share of their pretax profits to employees, as well as mandates that workers be paid
365 days a year. Nevertheless, these higher estimates still yield significant wage savings
for those moving to Mexico.37
Executive Compensation across Countries
Cross-national differences also emerge when we consider the compensation of executives

at U.S. firms relative to executives of foreign companies. It was previously discussed that
CEO total compensation in the U.S. was twice as high as the next-highest paying country
in Europe (Britain). Part of this reflects differences across countries regarding how senior
executive compensation is structured. These differences may be closely connected to
underlying cultural values in a society (e.g., individualistic and performance-oriented
norms in the U.S.) and how “compensation” is viewed as a result.38
In U.S. firms, senior executive compensation is often heavily weighted to variable,
long-term performance measures connected to stock prices—with performance bonuses and
base salary as smaller considerations. According to one survey, roughly 60 percent of a top
executive’s compensation in the U.S. comes from such long-term incentives, with base salary
and performance bonuses splitting the remaining 40 percent. This can produce some mind-
boggling results. For instance, one American CEO took home a “small” base salary of $4.6
million while also pocketing over $650 million in long-term compensation in one year.
In contrast, almost 60 percent of the compensation earned by Nordic executives comes
from base salary, while in Germany just over 80 percent of compensation comes from
base salary and bonuses, with relatively little exposure to long-term incentives. In recent
years, there has been a backlash in the U.S. against the heavy reliance on long-term incen-
tives and bonuses for executives, particularly in the wake of a deep recession and financial
crisis. Some American firms have even scaled back their compensation packages. But
whether this makes a long-term dent in the compensation advantage that American execu-
tives have traditionally enjoyed over their foreign counterparts remains to be seen.39 As
we continue to move past the “Great Recession,” however, 2012 data shows that executive
compensation is again seeing big jumps over the pay of average employees. This is a
divergence first observed in the late 1960s and into the 1970s within the U.S.
Perks and Other Forms of Compensation
Although not large enough to make up for the compensation lead enjoyed by American
executives, foreign companies often provide a variety of perks to help offset the bite
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taken by taxes. Perks are typically non-monetary forms of compensation that are given
to executives in recognition of their status or performance. Consider a typical signing
package received by a Portuguese executive—this may include a maid, a gardener, and
a laundress. The executive might also have a company car (with a gas stipend), company-
provided housing, a monthly expense allowance, and paid utilities. Likewise, a Mexican
executive may receive a company car and chauffeur, along with a certain value of gro-
ceries and liquor delivered to his or her home twice a month. In Japan, high tax rates
mean that firms sometimes pay up to 50 percent of mortgage interest for all employees,
and as they move up within the company they receive much more financial help. Executives
may also have access to a car with a chauffeur, a larger expense account, and paid
memberships in exclusive golf and social clubs (known in Japan as “castles”). In fact,
an American working in Japan said this about one of his Japanese colleagues: “Each
time he got promoted, he moved to a better house. And as his expense account grew,
the bars he’d visit would get better.”40
Vacation Time: Less in the U.S., More in Europe
Vacation time is another important component of a compensation package. Like all

other forms of compensation, vacation time also varies considerably in and across coun-
tries. Workers in the U.S. and Canada have among the fewest paid days off of any
country in the world. Figure 12.4 shows that many countries offer experienced employees
30–40 paid days off (combining paid vacation days and paid public holidays) compared
to the 25 days that their American counterparts enjoy away from their jobs in large
American firms. Moreover, in the U.S., companies are not required by law to give work-
ers a minimum number of days off, either paid or unpaid, whereas European firms often
must follow legally mandated minimums.
On a regional basis, Figure 12.4 reveals that companies in European, Middle
Eastern, and African countries tend to be the most generous with vacation time and
companies in North America the least generous. In between are companies in the Asia/
Pacific region, although wide variability also exists among nations there, with some
(such as Japan) providing more vacation time than the U.S. and others (such as Thai-
land) less.41
Of course, just because the days are provided by firms does not mean that employees
actually use those days. Work hours vary dramatically across countries, and sometimes
vacation time suffers as a result. The travel website Expedia recently commissioned a
survey of over 7,000 employees in 20 countries. U.S. respondents were given an average
of 14 days of vacation but took only 12 of those days, whereas the Japanese were given,
on average, 15 days of vacation but took only 5. The French and Spanish, on the other
hand, each averaged 30 days of paid vacation and most employees took all 30. South
Korea provides an interesting perspective on the issue of vacation time. There, firms in
partnership with the government have developed some innovative ways to get South
Koreans to actually take their vacations. The following International Insights feature
explores this further.42
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Country/Region Paid Vacation Days Public Holidays Total Days Off
(Minimum/Avg.) (With Pay)
The Americas
United States* 15 10 25
Canada* 10 10 20
Asia/Pacific
Australia 20 11 31
Hong Kong 14 12 26
India 12 19 31
Indonesia 12 13 25
Japan 20 15 35
Philippines 5 14 19
Singapore 14 12 26
South Korea 19 11 30
Taiwan 14 11 25
Thailand 6 13 19
Vietnam 14 8 22
Europe/Scandinavia
Bulgaria 20 12 32
Czech Republic 20 11 31
Denmark 25 10 35
France 30 10 40
Germany 24 10 34
Greece 25 12 37
Ireland 20 9 29
Italy 20 11 31
Malta 24 14 38
Netherlands 20 8 28
Romania 21 7 28
Slovenia 20 16 36
Spain 22 14 36
Sweden 25 11 36
Middle East/Africa
Egypt 21 16 37
Israel 24 16 40
Lebanon 15 18 33
Morocco 21 19 40
South Africa 21 12 33
United Arab Emirates 30 9 39
Figure 12.4 Paid Days Off Around the World for Employees with Ten Years on the Job.
*Numbers for the U.S. reflect common practice among big companies—unlike in most countries, U.S. federal law
does not require employers to provide a minimum number of vacation days and holidays off, either unpaid or paid.
In contrast, countries in the E.U. require paid public holidays plus a minimum of 20 paid days off annually. Several
other countries have local rules relating to vacation time.
Source: Adapted from Jeanne Sahadi. (2007). Who Gets the Most (and Least) Vacation. CNNMoney.com, June 14,
available at: http://money.cnn.com/2007/06/12/pf/vacation_days_worldwide.
Taking a Holiday from Vacations: Working Overtime to Change a National Habit

The government of South Korea is cracking down on the amount of vacation time taken by
workers. The problem is that people are not taking enough vacation—some not at all! Years
of government pleading, combined with the cultural propensity of its people to sacrifice and
to work hard for the future, has had an impact that has lasted into today’s more prosperous
times. It is making Koreans ask, “Should I stay or should I go?”
In fact, according to the Organisation of Economic Co-operation and Development
(OECD), South Koreans work more hours in one year than in any other developed country.
Workers averaged about 2,300 hours of work per year, down from a historic high of 2,500
hours a decade ago but still well above the 1,768 average found among the 30 OECD
countries (and the 1,794 average in the U.S.). If you consider an 8-hour-per-day work period
over 52 weeks (with no holidays or vacation days factored in), Koreans work about 45 hours
per week. Americans average about 35 hours per week. Koreans work an average of one
and a quarter days per week more than do Americans.
Merely working more, however, does not necessarily translate into greater productivity.
For example, South Korea’s productivity ranks below all but a few of the former Soviet
bloc countries among all OECD members. The government is trying to change this situa-
tion, and it thinks the solution may be encouraging employees to take time off in order
to recharge before returning to work more vigorously and with greater creative juices
flowing. The ministry in charge of human resources recently issued a request to the over
1 million government workers—employees were directed to prepare a plan to take 16 days
off the coming fiscal year and to submit that plan to their respective boss. This was a real
challenge because the average worker was only taking 6 of his or her allotted 23 paid
days off.
In addition to previous government efforts to rally workers under the national advance-
ment flag, there are also some cultural drivers of this workaholic attitude among employees.
Chapter 2 studied the hierarchical nature of Korean society, and it seems to play a role
in the paid time off numbers explained here. In Korean society, superiors are greatly
respected and are regularly followed and listened to. Yet, many business and government
leaders do not take any vacation at all—including a member of South Korean President
Lee’s cabinet, the very minister who was responsible for issuing the vacation directive.
When asked about this by The Wall Street Journal, he stated that, “I want them to take
more time off . . . but as for me? I don’t know.” On top of all this, there are some
government employees who received pay for their unused vacation days and who view
this vacation push by leaders as a money-saving technique. Among the newer Korean
companies, however, there is some sign of unfreezing of these attitudes. At LG, the average
number of vacation days taken is 10 and, at SK Telecom, workers take between 5 and
15 of their 22 possible days off.43
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All of this suggests that a complete understanding of a country’s laws and customs is
needed to fully grasp the compensation costs. We do not, however, wish to overstate
the impact of the laws and customs of each individual country. Some evidence suggests
that there is increasing similarity in compensation practices among countries with similar
cultures. In fact, one study found that cultural grouping (e.g., Asian, Latin, European,
etc.) explained compensation practices much better than country-level customs and laws.44
Explaining Compensation Differences

Across Countries
Cultural values may explain some of the compensation practices seen across countries.
These differences persist despite evidence of some ongoing convergence across countries
(e.g., toward more performance-based compensation) as well as the desire of multina-
tionals to simplify their systems to better manage them globally. Some studies suggest
that while up to half of multinationals manage some aspect of employee performance
appraisal on a global basis, 75 percent or more allow base pay, bonuses, sales incentives,
and perks to be set locally or regionally. This reflects the strength and longevity of
culture-driven nuances and overtones, which are features that have woven their way
into compensation practices around the world. Consequently, multinationals that abandon
local or regional practices may do so at their peril.45
In the U.S., compensation is commonly viewed as an exchange based on deservingness—
greater contributions to the company should result in greater compensation of the
employee. In essence, this is an equity norm—something strongly embraced in American
culture and, hence, by American firms that are more likely to operate on this equity
principle than most other countries (see Chapter 10).
In countries where other cultural values are more prominent and equity norms are
weaker, compensation approaches have evolved differently. Consider France and its strong
norms of equality and the rights of workers to voice opinions. The traditional bonus
system used by many French companies is not tied closely to performance. Instead, many
French employees receive an extra month’s salary before their vacation time in July or
August and again before Christmas. This pattern leads many French employees to think
in terms of net pay. In fact, when they are offered a monthly salary, new French employ-
ees may be quick to ask, “Is it net or gross?” and “How many times a year do I get
this salary?” Many French employees have become used to these bonuses and consider
them as part of their base pay. This has caused problems for French companies trying
to implement performance-based bonuses. For instance, in one company a performance-
based bonus was paid for two straight years because the company did well. The third
year, however, saw a drop in performance and therefore no bonuses was paid. French
workers did not accept this and threatened to close down the plant. Apparently, the
“bonus” had become viewed as an entitlement; as a result, the company relented and
paid the bonus anyway.46
Mexico carries this practice a step further by systematizing worker acquisition of
compensation extras. In particular, Mexico has an “acquired rights” law that mandates
that if a bonus or benefit is given out at least two years in a row, it becomes the
512
employee’s right to receive it in the future. This reflects the paternalistic aspects of
Mexican work culture, including the tendency of the government to step in and facilitate
disputes between management and unions.47
The Japanese view of compensation is traditionally paternalistic as well as egalitarian—
one that provides slowly increasing rewards for length of service (which demonstrates
loyalty and commitment to a company) and skill acquisition rather than performance,
per se. Consequently, wage increases are graduated and a higher percentage of total
compensation is fixed (up to 80 percent). One study, for example, examined the pay
raise decisions of Japanese and American managers asked to distribute raises to employ-
ees, including people described as low and high performers. Not surprisingly, American
managers gave much bigger raises to the high performers and much lower raises to the
poor performers than did Japanese managers. In particular, the Japanese gave roughly
twice as high a raise to low performers and about 80 percent less to the high performers
than did the Americans. In essence, there was a stronger link between performance and
pay decisions for U.S. than Japanese managers.48
While some traditional practices persist in Japan and other Asian countries, such as
China, the pressures for change also exist—often due to the rapidly growing economies
of these nations. Chinese firms, for example, are under great pressure to find and to
secure talent, as are the multinational firms located there. As a result, wage levels con-
tinue to dynamically grow in China.49 Some local and regional practices will persist and
perhaps even thrive. Nevertheless, a recent survey of Japanese HR managers shows that
the relative impact of seniority to merit in determining pay raises has been dropping.
Moreover, top Japanese firms such as Mitsubishi, Toshiba, and Toyota have been offer-
ing higher salaries and larger incentive packages to younger employees, including raising
the proportion of compensation that is “at risk” and tied to performance.50
The Challenges of Expatriate Compensation

This section tackles a complicated and important issue for multinationals—how to con-
struct compensation and benefit packages for expatriates, which are a key group of
employees. This presents multinationals with key challenges, especially as their interna-
tional operations become more complex.
Multinationals have to deal with a multitude of cross-national differences in laws,
taxes, and compensation practices. But, they also need to ensure that their employees
around the world believe that the various compensation and benefits packages being
used are fair. Companies do not want expatriates to somehow feel cheated after agreeing
to a post in a foreign country. This is not a trivial or isolated concern. According to
one study, nearly 80 percent of the expatriates surveyed were unhappy with their com-
pensation and benefits package.51
Nor do multinationals relish the thought of local employees bristling at “overpaid”
expatriates who seem to parachute in from the parent company with fat salaries and
plenty of special perks. One study found that local employees working for foreign expa-
triates in China felt that the huge pay gap between the two groups was unfair. Moreover,
this had negative effects on Chinese employees’ morale and commitment to the firm. To
513
combat this, experts recommend that expatriates work hard to build trust with local
employees and to redirect their pay comparisons to other local employees who are often
paid less than the salaries offered by multinationals.52
Overall, multinationals have to juggle very real location cost issues (for example,
Tokyo is a more expensive city than Houston) and fairness comparisons made by
employees (inside and outside of the firm). One way that some multinationals are deal-
ing with these issues is by moving away from expatriate packages that are tied to home-
country wages and benefits. Some firms now feel that they can offer less in the way of
inducements to recruit expatriates in the first place, or simply reduce large pay gaps
between expatriates and local employees. But high costs are likely the biggest reasons
that multinationals are always looking for new ways to compensate expatriates. For
instance, according to one survey, the cumulative net additional cost of sending and
supporting one expatriate abroad (accompanied by a spouse and children) for three years
averages around $750,000. In some expensive locations, the total additional cost for
three years may run $1 million or more. Generally speaking, an international relocation
costs up to five times as much as a domestic move.53
But what exactly accounts for all of these costs? There are the usual things involved
in staffing a job, including the interview process and the hiring phase, as well as actual
moving costs themselves. Each of these factors is more expensive for an expatriate than
for a domestic relocation. A majority of firms, however, go well beyond this by provid-
ing a variety of costly benefits, such as housing allowances and tax benefits. These can
also include financial allowances, assistance with acclimating to the foreign culture, and
costs of an occasional trip home. Figure 12.5 presents examples of additional costs often
incurred with expatriates.
In any case, multinationals should first focus on creating a consistent and compre-
hensive compensation and benefits policy for expatriates that will help educate and
Direct Payments/Reimbursements Support for Adjustment to Global Assignment
Tax reduction/equalization Home leave (4–6 weeks)

Housing allowance Emergency leave
Furnishing allowance Personal security
Education allowance Car/driver
Hardship/foreign service premium Domestic help
Currency protection Spouse employment
Goods and services differential Child care provider
Temporary living allowance Language/translation services
Car/transportation allowance Cultural training
Assignment completion bonus Repatriation assistance
Extension bonus Social club fees
Help renting U.S. home Imported food and other goods
Figure 12.5 Potential Sources of Costs Associated with Expatriation.

Source: Adapted from Milkovich, G. T., and Newman, J. M. (1999). Compensation. Chicago: Irwin.
514
inform all employees about company goals and what expatriates can expect. This would
include how much customization across locations is allowed and would convey the mes-
sage that expatriates will not profit more by going to one location over another. Regard-
less, an effective compensation plan for expatriates will often include these features:
■ some form of incentive to accept an expatriate assignment (e.g., monetary, benefits,

career mobility/advancement);
■ maintenance of a reasonable standard of living;
■ support for the needs of any trailing family members (spouses, partners, children); and
■ provisions to successfully repatriate the employee back into the home country after
the foreign assignment concludes.54
Methods for Compensating Expatriates

There are a variety of options available that follow from these recommended criteria.
Three of the most popular approaches are discussed next, including the ad hoc, localiza-
tion, and balance sheet methods. Compensation elements overlap among the methods, and
firms may also end up using all of them in different situations. But in choosing between
these methods, multinationals should think about the answers to the following:
■ How long will the assignment last? Longer assignments are generally more expensive
and may involve more complicated tax issues for both the employee and the company.
■ Who is the expatriate? Is he or she an inexperienced employee or a seasoned execu-
tive? Will he or she be rotated to the next foreign post after the assignment or return
home? Answers may determine compensation level and degree of supporting benefits
and perks.
■ Why is the expatriate being sent? Is the assignment a career development move? Or
is it need-driven (e.g., for expertise not found locally, to better control the subsidiary,
etc.)? The latter may require a more lucrative compensation package to attract needed
personnel.
■ What country is the expatriate departing from and going to? This will help determine
relevant wages, living allowances, benefits, and taxes given the laws and regulations
of both nations.
■ What will be the benefits of this assignment? Management should carefully weigh the
goals and potential benefits against costs.55
The Ad Hoc Method
This method tends to be more frequently used by smaller or still emerging multinationals
that have relatively little experience overseas and that must often send an expatriate to
address issues abroad. That can mean doing a quick search and then paying whatever
is necessary to entice an employee to go. How this actually happens with the ad hoc
method is simple—the company and its expatriates negotiate on a case-by-case basis to
cover the costs inherent in a foreign assignment.56
515
While the ad hoc method has some merit, the specific drawbacks include:
■ the potential for unequal treatment of expatriates (based on their negotiation skills or
lack thereof);
■ an inability to systematically track expatriate compensation packages; and
■ inadequate development of country-specific knowledge (e.g., about taxes, cost of liv-
ing, etc.) on the parts of both the firm and the employee.
Companies may come out ahead in the short run by successfully negotiating down their
costs with expatriates. Yet, having employees find out later that their overseas costs are
much higher or that others negotiated a much better deal can have negative effects on
morale and overall performance. This method has serious drawbacks and complications,
especially for larger multinationals with many expatriates. Some smaller firms, however,
cannot afford the price of engaging firms that provide accurate cost-of-living and other
data—instead, they do the best they can.57
The Localization Method
A more systematic approach to expatriate compensation is the localization method. This

method involves paying the expatriate essentially the same as local employees in similar
positions. Localization may be especially useful when expatriates want to extend their
stay in particular locations or are interested in being permanent expatriates who travel
from assignment to assignment. In both cases, the expatriate is less likely to use home-
country wage standards to evaluate his or her compensation. Localization is much easier
to apply when an expatriate moves to a country with a higher standard of living, such
as moving from Mexico to the United States. If, for example, expatriates are moving to
Vietnam from Europe or the U.S., it will be more difficult for them to accept a lower
level of compensation. Localization is rarely used in its pure form, however; instead,
adjustments are often made to base pay, allowances, and retirement packages.58
Despite drawbacks, localization is increasingly being used in developing markets
such as Indonesia and China—where local talent, especially at senior levels, might be
less available. As China’s living conditions have improved greatly and the country is
often viewed as a launch to career development, expatriates are increasingly interested
in extending their stays. These factors, combined with a desire to reduce costs, have led
many multinationals to consider localization in China. In a 2009 survey, 57 percent of
the Asia-based multinationals responding considered localization for expatriates in China,
up from 39 percent in 2007. Likewise, over a quarter of the Western multinationals
responding also considered localization in China.
There are complexities associated with localization. For example, foreigners typically
cannot participate in local pension plans or the Chinese versions of social security pro-
grams found in the U.S. and Europe. Being posted in China may also preclude expatriates
from participating in their home-country retirement plans. Consequently, multinationals
will sometimes make extra payments to compensate for this, enroll expatriates in third-
country pension plans, or, if possible, retain them on the home-country pension system.
Of course, this offsets some of the cost advantages of localization, including the savings
516
from paying expatriates at local wage rates. Clearly, multinationals will need to carefully
consider whether localization is a good choice or not.59
The Balance Sheet Method
By far the most popular approach for expatriate compensation is the balance sheet (or
build-up) method. Used by almost 75 percent of the multinationals that participated in
a recent worldwide survey, the balance sheet method’s core principle is that expatriates
should not suffer a loss of income or lifestyle as a result of an international assignment.
The idea is to provide them with roughly the same purchasing power in the foreign
location as they would enjoy at home. In other words, the objective of the balance sheet
method is to “balance out” the cost differences between an expatriate’s home country
and his or her foreign location. This is particularly important because expatriates often
find themselves in places where living costs are higher than at home—or where the costs
of duplicating their home lifestyles are very expensive. Indeed, the general goal of “keeping
the expatriate whole” is the stated objective of many multinationals.60
Traditionally, multinationals not only tried to duplicate the expatriate’s home lifestyle
and purchasing power as best they could, they also provided additional incentives to entice
employees to accept assignments or to recognize them for the hardship of being posted
abroad. As costs have escalated in recent years, however, firms have been backing away
from duplicating lifestyles and adding on extra incentives. According to one survey, between
25 and 30 percent of multinationals either do not offer expatriates any additional incentive
pay or are in the process of phasing such incentives out. Even if they still offer expatriates
incentives, many multinationals have been focusing on making “sufficient” living cost adjust-
ments while encouraging expatriates to adapt to local lifestyles and standards when possible.
For this reason, it is important to consider how the balance sheet method actually works.61
The balance sheet method starts the process of smoothing out cost-of-living and tax
differences across countries by dividing expatriate expenses into four basic categories:
housing, income taxes, goods and services, and a savings reserve/discretionary component.
Typically, expatriates would receive allowances to cover the increased taxes, more expen-
sive housing, and higher living costs (for food, utilities, etc.) encountered abroad. How
multinationals calculate these allowances is complex and somewhat controversial—if
they calculate them at all. Instead, some rely on consulting firms such as Mercer to do
this for them. Indeed, these firms are willing to help multinationals design their specific
balance sheet methodology, provide up-to-date information on local compensation prac-
tices and living costs, secure housing and relocation support, provide tax services, and
even administer the entire program. Monetary incentives are considered next, before
examining expatriate expense categories in more detail.62
Foreign Service Premiums, Hardship, and Danger Pay

One thing that the balance sheet does not impact is the expatriate’s base salary. Using
the balance sheet method, salary would be determined in the same way as it would for
domestic employees. That is, if domestic employees receive 4 percent (average) pay raises,
then so would expatriates. Simply put, the particular economic conditions in the foreign
517
location to which expatriates are assigned do not shape their base salary. Beyond base
pay, however, the balance sheet can have a big impact on expatriates’ overall compensa-
tion abroad if multinationals are offering one of more of the following incentives: foreign
service premiums, hardship pay, and danger pay.
Even at today’s often reduced incentive levels, their total value can be impressive,
especially over several years. Many multinationals still pay a premium or incentive to
the expatriate for taking the foreign assignment (often ranging between 10 and 30 per-
cent of base pay). Expatriates may also receive hardship pay if posted to locations where
living conditions are significantly harsher or more difficult than in the home country,
whether due to extreme weather, limited access to common goods and services, or weak
health care, etc. In locations where expatriates may be physically at risk due to civil
unrest, war, or violence aimed at foreigners, danger pay may be stacked on top of foreign
service premiums and hardship pay.63
It is often difficult to make such hardship judgments. Consequently, many multina-
tionals look to available rating schemes, such as the U.S. Department of State’s (DOS)
Hardship Post Differentials Guidelines, which include “allowances and benefits” for
personnel being posted abroad in difficult locations. Anyone can look up the specific
incentives offered by the DOS based on location or type of benefit. The information is
updated every two weeks. The DOS posts thousands of employees overseas and offers
danger and hardship pay in 5 percent increments of base pay, starting at 0 percent and
going up to 35 percent. For example, being posted to Melbourne, Australia, would yield
no extra danger pay or hardship pay, not surprisingly. At the other extreme, however,
being posted to Baghdad, Iraq, would provide a 70 percent premium to base pay (35 per-
cent for hardship pay and another 35 percent for danger pay).64
Purchasing Power and the Balance Sheet

These challenges aside, the balance sheet method’s main goal is to smooth out expenses
and to protect the expatriate from incurring significant additional costs in the foreign
country. Figure 12.6 lays out this approach. The first column presents the base costs in
the home country. Home-country purchasing power changes depending on one’s income,
family size, and other variables. But for purposes of discussion, consider how purchasing
power at home can be translated into purchasing power abroad. Column 2 in Figure 12.6
depicts a common situation—where host-country housing, taxes, and goods and services
are all more expensive than at home. Consequently, the balance sheet method makes
adjustments (as depicted in Column 3), typically in the form of company-paid allow-
ances, to offset these higher costs and allow the expatriate to maintain his or her home
lifestyle overseas without additional out-of-pocket spending (creating what is known as
purchasing power parity). This resulting purchasing power equivalence is shown in
Column 4 of the figure, along with any premiums or incentive pay the company may
provide on top of everything else.65
Housing Costs and the Balance Sheet

Housing usually involves considerable expense for companies. According to one survey,
over 80 percent of multinationals either provide free housing abroad for their expatriates
518
INCOME FIRM PAYS

TAXES
in
HOME
and/or INCENTIVES,
HOST INCOME PREMIUMS
COUNTRY TAXES OFFERED
BY FIRM
HOUSING FIRM PAYS
INCOME COSTS INCOME
TAXES HOUSING TAXES
COSTS
HOUSING HOUSING
COSTS GOODS AND FIRM PAYS COSTS
SERVICES
GOODS AND EXPENSES GOODS AND GOODS AND
SERVICES SERVICES SERVICES
EXPENSES EXPENSES EXPENSES
SAVINGS SAVINGS SAVINGS SAVINGS

RESERVE RESERVE RESERVE RESERVE
Home Country Costs Host Country Costs Host Country Costs Expatriate maintains
and Expenses and Expenses as Paid by Expatriate Home Country
and Employing Firm Equivalent
Purchasing Power in
Host Country
Figure 12.6 The Balance Sheet Approach to Expatriate Compensation: Keeping People “Whole”.
Source: Adapted from Reynolds, C. (1994). Compensation basics for North American expatriates: Developing an
effective program for employees working abroad. American Compensation Association. ACA Building Block #15.
Scottsdale, AZ: American Compensation Association.
or a location-specific housing allowance supplemented by the expatriate. That said, there

are regional differences among multinationals. Asian, Latin American, and European
multinationals are more likely to provide free housing for their expatriates than housing
allowances, while the reverse is true for U.S. firms. Either way, housing can be a larger
cost than allowances for goods and services or taxes. Indeed, housing alone may account
for 50 percent of the total additional compensation package for an expatriate. One
reason is that housing is typically rented and often covered by a shorter-term lease due
to the nature of the position, as opposed to bought, which drives up prices. Second,
expatriates often expect larger and more luxurious residences than their counterparts in
a foreign country. That is especially true for U.S. expatriates, who enjoy some of the
largest and least expensive housing anywhere in the world while at home, making it
difficult and much more expensive to find comparable housing for them in pricey cities
such as Tokyo or Hong Kong.66
The costs for housing expatriates around the world can vary dramatically. Figure 12.7
presents some estimates of housing costs in selected cities in the world outside of North
America. As you can see, housing in many cities is quite expensive, even for Americans
coming from more metropolitan U.S. cities such as Chicago or Atlanta. In any case,
519
Location Type of Housing Rental Rental Costs Per Month/Year in U.S. $
Beijing 1 bedroom apartment $700–1,000/month, $8,400–12,000/year

3–4 bedroom suburban home $3,500–8,000/month, $42,000–96,000/year
Dubai, United 1 bedroom apartment $2,250/month, $27,000/year
Arab Emirates Multi-bedroom villa $5,600–$11,300/month, $68,000–136,000/
year
Hong Kong 2 bedroom apartment $2,500–5,000/month, $30,000–60,000/year
4 bedroom townhouse $32,000/month, $384,000/year
London 2 bedroom apartment $4,000–6,400/month, $48,000–76,800/year
4 bedroom house $10,000–40,000/month, $120,000–480,000/
year
Moscow 2 bedroom apartment $3,000–10,000/month, $36,000–120,000/year
3 bedroom house $10,000/month, $120,000/year
5 bedroom house $17,000/month, $204,000/year
Mumbai, India Multi-bedroom, $6,400/month, $76,800/year
2,000-square-foot apartment
Sao Paulo, Brazil 2 bedroom apartment $1,200–2,000/month, $14,400–24,000/year
Tokyo 4 bedroom apartment $12,000/month, $144,000/year
Figure 12.7 Expatriate Housing Costs in Selected Foreign Cities Outside North America.
Note: These figures are for rentals in areas generally favored by expatriates. Price ranges reflect location-specific
or neighborhood differences and/or quality of the housing. Not all locations will have comparable housing types
to choose from.
Source: Adapted from Rosman, K. (2007). Expat life gets less cushy. The Wall Street Journal, October 26, W1, W10;
Tanaka, S. (2013). Big rent increases for expat housing around the world. The Wall Street Journal, available at:
http://online.wsj.com/ (retrieved 29 September 2013); The Economist. (2013). Home truths: Global house prices,
January 12, 61–62.
multinationals would typically either pick up the cost of foreign housing for their expa-
triates, or provide a housing allowance designed to partially or wholly offset the addi-
tional housing costs incurring in the foreign location.67
The Balance Sheet Approach to Taxes

A second major category of expatriate expenses addressed by the balance sheet method
is income taxes. The most common approach for dealing with taxes under the balance
sheet method is tax equalization. In essence, the goal is to tie expatriates’ tax burdens
to their home countries regardless of where they are posted and to simplify their report-
ing requirements. This makes a good deal of sense because tax laws, regulations, and
rates vary considerably from country to country and are constantly in flux. Generally
speaking, countries in Western Europe and Scandinavia have the highest personal income
tax rates, while at the other end of the spectrum, many oil-rich countries of the Middle
East have no income tax.68 Tax management is probably the most technical and complex
aspect of the balance sheet method.69
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Implementing tax equalization requires that multinationals first determine the total
hypothetical income tax burden facing expatriates had they stayed home. Next, compa-
nies need to assess what an expatriate’s total tax obligation will likely be while posted
overseas (which may include higher income taxes in foreign countries). Once that is
established, multinationals will deduct an amount equal to what the expatriate’s home-
country income tax would be from his or her salary while paying off taxes owed to
both home-country and host-country tax authorities. In other cases, expatriates may
have to pay host-country tax authorities themselves before being reimbursed by the
company for this additional cost. Either way, end-of-year reconciliation is often required
to see if the firm owes tax equalization money to the expatriate or vice versa once total
actual income for the year is available.70
Tax agreements that allow for tax equalization or the avoidance of double taxation
when citizens are posted to foreign countries can help reduce an expatriate’s tax expo-
sure. For instance, the U.S. has tax agreements with over 60 countries that give U.S.
citizens tax exemptions or lower rates from foreign tax burdens (with the reverse also
true for expatriates posted to the U.S.). In particular, France and Belgium are leaders in
making “totalization” agreements. France has included the following items in its laws
regarding expatriates:
■ an agreement that companies with an office in France can avoid French taxation on
expatriates’ housing, schooling, and other allowances;
■ provisions to eliminate taxes (in France) of expatriate income from sources such as
dividends, interest, and capital gains;
■ a totalization agreement to eliminate social security taxes in France; and
■ a system to greatly reduce French taxes on income from stock options.71
Even when foreign tax rates are lower, however, the total tax burden for an expatriate
may be higher. Many countries tax not only income but also all allowances, adjustments,
and incentives. The U.S. is among the few countries in the world that taxes expatriate
income earned abroad (beyond an exempted amount—which was about $97,000 in
2013). As a result, even if an American expatriate is paying relatively low taxes while
living in Brazil, he or she will also owe tax in the U.S. Fortunately, the balance sheet
method will compensate the expatriate, directly or indirectly, for any additional taxes
incurred.72
How the Balance Sheet Handles Goods and Services

Besides housing, no other piece of the expatriate compensation package causes more
consternation for employees than allowances for goods and services. Multinationals—or
the consultants they engage—construct allowances by comparing the cost of a “market
basket” of goods and services in the home country with the cost of a similar, if not
identical, basket in the assignment country. The ratio of these two cost estimates provides
the basis for paying expatriates a cost-of-living allowance to help offset higher living
costs expatriates often encountered abroad and giving them the same purchasing power
enjoyed at home.73
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Included in the market basket are goods and services items such as food (consumed
at home and in restaurants), alcohol and tobacco, personal care products (such as tooth-
paste), domestic supplies (such as cleaning products), clothing, home services, transporta-
tion, utilities, and entertainment. As you might imagine, coming up with prices for all
of these items, particularly across countries, is time-consuming. Moreover, prices are
continually fluctuating and vary from outlet to outlet in any case—the price of a loaf
of bread may vary considerably depending on where you buy it. You almost need some-
one to constantly monitor these prices for you, which is something that the firm AIRINC
will gladly do for you, for a price. The accompanying Global Innovations feature tells
its story. Currency swings can play havoc with goods and services differentials, swelling
the value of differentials when local currencies drop significantly and shrinking them
when those currencies soar. Consequently, goods and services differentials should be
monitored and periodically adjusted up or down as needed to take currency swings into
account. Sometimes multinationals pay expatriates in both the home and local currency
(referred to as split pay) for this reason—this tends to even out currency fluctuations
between two countries.74
Global Innovations
What Do Zippers, Prozac, a Dozen Roses, and a Box of Titleists Have in Common?
They Are All in a Day’s Survey
How do companies determine what they offer in terms of per diems and reimbursements
for expatriate expenses? Most companies want to treat employees fairly, but they also are
cost-conscious. One solution is provided by the Boston-based Associates for International
Research, Inc. (AIRINC). AIRINC is an international survey research company that collects data
on the prices of goods and services in countries all around the world. It sells this and other
information to clients—including many Fortune 500 companies that in turn use this informa-
tion to calculate expatriates’ cost of living, annual compensation, and other adjustments.
Demand for AIRINC’s services is on the rise as employers try to keep close accounting of
expatriate expenses.
Many firms put their trust in the data provided by AIRINC. One reason is that the firm
goes on location to collect its own data rather than using estimates or employee self-reports.
These estimates can routinely be way off, either because memories of specific prices are a
blur to those traveling across countries in short bursts or because estimates might be inflated
in comparison to vague memories of outdated home-country prices (such as the price of
gasoline in Dallas).
But getting price data directly from overseas retailers and others can be time-consuming
and expensive. Plus, it is just plain hard work. Most of AIRINC’s surveyors are in the 22- to
30-year-old age range—young people with fewer roots and more wanderlust, including
Megan Lipman, who was a surveyor for seven years with AIRINC. Although she quickly
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grew to love the job, Lipman had little idea of what it entailed when she first applied. In
fact, it never entered her mind that such a job even existed. After graduating from college
with dual degrees in Art History and Spanish, and two years of experience as a translator,
she responded to a newspaper ad: “job responsibilities include data collection, analysis,
and preparation of various statistical data for cost-of-living analysis.” It was the last
sentence in the ad that made her apply: “Will spend at least one-third of time in inter-
national travel.” The interviewers fired questions at her such as, “What would you do if
you were stranded in a central African nation with three days until the next flight?” Her
answer: “If there were no other safe ways to get out, I’d get as much work done on the
phone as possible.”
Lipman got the job and quickly began flying around the world from city to city for six
weeks at a time. She traveled for about half the year, to destinations such as Qatar, the
UAE, Bangladesh, New Zealand, Cyprus, Venezuela, to name just a few. Once on site, she
spent about three days collecting price data by visiting supermarkets, gas stations, theaters,
and beauty salons—among other places. One trip to Malta involved tracking down prices
for a 20-centimeter zipper, 20 mg of Prozac, a sleeve of Titleist golf balls, a 14-carat gold
wedding ring, Tabasco sauce, a dozen red roses, and the cost of repairing a washing
machine. She had a regular schedule of items to price, and the Malta list was not that
unusual.
While it may be clear why they collect this data, how AIRINC surveyors get the data is
another story. Consider Lipman’s Malta trip. After settling in, she chose a setting such as a
supermarket. She asked for the manager, presented her business card, and asked if she could
carry out a pricing survey. She then headed up and down the aisles recording price after
price. Most managers were very friendly and helpful. But in some shops, managers resent
young foreigners nosing around the store, partly because they think the survey is being done
by their competition. While she was in a Malta pharmacy, one manager gruffly pulled Lipman
aside and asked to have a word with her. Worried that she would be kicked out of the store
and lose hard-earned data, she was relieved when he asked instead if his son could get an
internship with AIRINC.
Lipman and other surveyors spend a good deal of time in many (luxury) hotel rooms,
collecting even more data. There, hired translators use a phone directory to make calls to
physicians, insurance and real estate agents, and repair shops for more prices. When the
surveyors return home to Boston, the reams of data must be analyzed, average prices deter-
mined, and continued tracking of prices to previous surveys must be prepared. AIRINC then
reports to and makes recommendations for clients (e.g., to raise or lower employee cost-of-
living allowances).
Lipman and other surveyors often like their jobs. They make a good salary, have very
generous expense accounts, and generally enjoy the traveling. But before you search AIRINC
to find where to e-mail your application, consider the drawbacks. Travel hassles today abound
(e.g., flight delays, cancellations, missed connections, etc.), and it involves a lot of time spent
alone. It is also tough to maintain personal relationships, given the demanding travel schedule.
But that is all in a day’s survey!75
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Despite these challenges, multinationals have many sources for price estimates of goods
and services worldwide as well as the differentials that may be necessary when sending
expatriates to particular locations. For example, various consulting firms catalog prices
on hundreds of goods and services as well as providing cost-of-living indices for virtually
every city in the world, based on data that are updated regularly. Using these data, firms
can quickly get a sense of which foreign locations are the most or least expensive to
send expatriates. Figure 12.8 provides just such an example—it lists the 25 most expen-
sive cities in the world in 2009, taking both housing and goods and services costs into
2009 Cost of Living City, Country 2009 Expense Ranking 2013 Expense Ranking
Index Value (1= Most Expensive) (1= Most Expensive)
143.7 Tokyo, Japan 1 1

119.2 Osaka, Japan 2 3
115.4 Moscow, Russia 3 4
109.2 Geneva, Switzerland 4 5
108.7 Hong Kong 5 9
105.2 Zurich, Switzerland 6 6
105.0 Copenhagen, Denmark 7 21
100.0 New York, U.S. 8 33
99.6 Beijing, China 9 17
98.0 Singapore, Singapore 10 6
96.9 Milan, Italy 11 38
95.2 Shanghai, China 12 16
95.1 Paris, France 13 37
94.2 Oslo, Norway 14 18
93.3 Caracas, Venezuela 15 29
92.7 London, United Kingdom 16 25
91.9 Tel Aviv, Israel 17 31
91.2 Rome, Italy 18 42
90.5 Helsinki, Finland 19 65
90.1 Dubai, UAE 20 94
89.3 Vienna, Austria 21 48
89.0 Shenzhen, China 22 30
87.6 Los Angeles, U.S. 23 68
87.6 Guangzhou, China 24 31
87.4 Dublin, Ireland 25 72
Figure 12.8 Most Expensive Cities in the World: 2009–2013.

Note: The cost of living index sets New York City as the base rating of 100 and is calculated using the average price
of over 200 goods and services plus housing costs.
Sources: Adapted from Mercer. (2009). Mercer’s 2009 Cost of Living Survey Highlights—Global. Updated July 7,
2009, available at: www.mercer.com; Mercer. (2013). Mercer’s 2012 Cost of Living Survey, available at: www.
mercer.com.
524
account. The figure uses an index value to capture cost of living, with New York City
set to 100 (a higher number means that the location is more expensive than New York
and a lower number means that the location is less expensive in terms of goods and
services, including rental accommodations). We also present the ranking of those cities
only three years later in 2012. While there is consistency across years among the top
six or so cities, after that values can differ greatly, which is a good selling point for the
firms who produce and sell these ratings.76
If this list is too hard to swallow, consider the Big Mac “economic index” that is
constructed by The Economist magazine. The rationale of the index (which is partly
tongue in cheek) is to provide a quick and “easily digestible” method that can be used
to compare currency valuations across countries. For our purposes, the data can also
provide an index of costs of a familiar product in the U.S. (a Big Mac costs $3.54 on
average) with prices in other countries. Figure 12.9 presents U.S. dollar equivalent prices,
Country (Exchange Rate to U.S. $) Cost of Big Mac, Cost of Big Mac, Implied Purchase
Local Currency U.S. Dollars Power Parity
U.S. $3.54 $3.54 —

Argentina (3.49) Peso 11.50 $3.30 3.25 (–7%)
Australia (1.57) A$3.45 $2.19 0.97 (–38%)
Brazil (2.32) Real 8.02 $3.45 2.27 (–2%)
Britain (1.44) £2.29 $3.64 1.55 (–7%)
Canada (1.24) C$4.16 $3.36 1.18 (–5%)
Chile (617) Peso 1,550 $2.51 438 (–29%)
China (6.84) Yuan 12.5 $1.83 3.53 (–48%)
Hong Kong (7.75) HK$13.3 $1.72 3.76 (–52%)
Indonesia (11,380) Rupiah 19,800 $1.74 5.59 (–51%)
Japan (89.8) ¥290 $3.23 81.9 (–9%)
Mexico (14.4) Peso 33.0 $2.30 9.32 (–35%)
Norway (6.91) Kroner 40.0 $5.79 11.3 (63%)
Philippines (47.4) Peso 98.0 $2.07 27.7 (–42%)
Russia (35.7) Ruble 62.0 $1.73 17.5 (–51%)
Saudi Arabia (3.75) Riyal 10.0 $2.66 3.75 (–25%)
South Africa (10.2) Rand 16.95 $1.66 4.79 (–53%)
South Korea Won 3,300 $2.39 932 (–32%)
Switzerland (1.16) CHF 6.50 $5.60 1.84 (58%)
Thailand (35) Baht 62.0 $1.77 17.5 (–50%)
Turkey (1.64) Lire 5.15 $3.13 1.45 (–12%)
Figure 12.9 Do You Want Fries with That Foreign Assignment? The Big Mac in Various Countries.
Note: Prices and currency rates are as of February, 2009; purchasing price parity (ppp) = local price/price in U.S.;
comparisons between ppp and actual exchange rate are then reported as a percentage in parentheses; positive
values are an indicant of overvaluation and negative percentages undervaluation against the dollar.
Source: Adapted from: Economist.com. (2009). Big Mac Index, February 4, 2009, available at: www.economist.
com/markets/indicators/displaystory.cfm?story_id=13055650 (retrieved September 9, 2009).
525
as well as the cost in local currency, for a Big Mac in selected countries. While a Big
Mac in Norway will cost almost $6, South Africa offers a relative bargain in comparison
with a $1.66 Big Mac. This is hardly a perfect index of purchasing power parity, but it
certainly is food for thought. If your tastes are more highbrow, consider the price of a
Starbucks grande latte in New York ($4.30) vs. one in Oslo, Norway ($9.83), Moscow,
Russia ($7.27), New Delhi, India ($2.50) or Istanbul, Turkey ($3.75).77
Both these values and the costs of goods and services indexes in general that have
been released by a number of firms have been criticized. For example, the numbers were
calculated for expatriates, a small group of people who seek out similar products and
lifestyles wherever they are. This presumes a lot. Plus, currency market fluctuations can
render the rankings out of date very quickly. For example, efforts by the Swiss govern-
ment to drive down the value of the franc have made Zurich and Geneva less expensive
worldwide, yet prices locally have not budged. Said differently, currency value drops
don’t make for a dip in the cost of living for those in Geneva.78
Regardless of what index is used, goods and services will inevitably be more expen-
sive in some countries than in others. Yet, even in those countries with relatively low-cost
goods and services, some expatriates tend to spend more anyway. Experts believe that
some expatriates keep their relatively high-living home-country consumption tastes when
posted overseas, even if it costs them more. They may be willing, for instance, to buy
expensive imports from their home country, a habit that in turn drives up expenses much
higher than locally driven cost-of-living indexes would suggest. In such cases, expatriates
might expect to receive an adjustment to their average domestic living expenses while
on foreign assignment.
That said, multinationals are increasingly pushing back against these kinds of costs.
Indeed, some firms are taking steps to encourage more frugal expatriate behavior. For
instance, some multinationals calculate goods and services differentials using an efficient
purchaser index (EPI). In essence, the prices used for calculating these allowances are
from cheaper or on-sale products that are included in the market basket. The idea is to
encourage expatriates to become better and more efficient shoppers over time, finding
cheaper places to buy goods, eat out, and more in their foreign location. Naturally, this
only works in locations that have plenty of shopping options and sophisticated markets.
Nevertheless, it can lead to smaller cost-of-living allowances for expatriates, saving their
employers money. Other cost-saving steps that multinationals often take would be to
substitute in cheaper transportation options or to exclude pricier items altogether from
the market basket (e.g., alcohol).79
The Balance Sheet on Balance

All in all, the major goal of the balance sheet method is to treat expatriates fairly.
Certainly, the effect of many of the adjustments is to make a foreign posting less of a
hardship. This is not to say, however, that the balance sheet approach is without prob-
lems. For instance, the approach is complex, expensive, and difficult for multinationals
to administer and explain. As we have noted, the balance sheet method requires either
collecting or buying sets of data on cost of living and housing. Likewise, the transfer of
payments for the various adjustments is also challenging to manage and monitor.80
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Moreover, some practical problems also emerge when expatriates are sent to places
where costs are generally lower than at home. In this case, housing as well as goods and
services produce negative differentials. Should the payments to the employee be reduced
to reflect a lower cost of living in Mexico? While it would be entirely consistent with the
balance sheet method to eliminate “windfalls” to the employee, many multinationals refuse
to do this and take no action. Indeed, according to one recent survey, only about 25 per-
cent of firms deduct money or allowances from other parts of the expatriate package (such
as from foreign service premiums) to compensate for such negative differentials.81
What seems to be more popular among multinationals is to move away from think-
ing about foreign assignment as something automatically deserving of a special premium.
In fact, the number of firms that do not pay any incentive premium at all to work
overseas has nearly doubled in recent years. As globalization increases, their rationale
is that employees should relish an opportunity to work overseas. If a firm makes the
foreign assignment a significant part of its management development track, this may be
a reasonable position to take.82
Chapter Summary
Few managers enjoy conducting performance evaluations—adding foreign employees into

the mix only makes the task more burdensome. There are many problems involved in an
appraisal of expatriate performance and they are not easily overcome. These basic questions
loom large: who will evaluate the expatriate, how often will the evaluation be done, and,
most importantly, what will be evaluated and how? The chapter presents some of the pros
and cons associated with each question and presented guidelines for delivering feedback.
Likewise, culture may have an impact on the compensation decisions that evolve from
performance evaluation. Multinationals need to be aware of differences, especially ones that
persist despite evidence of some convergence toward more performance-based compensa-
tion practices. This may explain why performance appraisal and compensation decisions in
multinationals take place at multiple levels—with evaluation more likely to be managed on
a global basis while pay and perks are more likely to be managed locally.
Finally, the chapter discusses the nuances involved in compensating expatriate employees.
Several methods exist and are considered in detail, including the balance sheet method,
which remains the most popular. The goal is to maintain the same lifestyle for expatriates
overseas as they have at home, without any significant additional expense.
1. What are some of the problems encountered in evaluating employee performance, and
how are these problems complicated by an international setting?
527
2. How might cultural beliefs about the basis for compensation affect your approach to
rewarding expatriates and host-country nationals in the same firm?
3. What are some of the ways in which employees and executives alike can be compensated
for their international service?
4. How should expatriates be compensated? What do you think is the best approach, and why?
Are American Expatriates Becoming Too Expensive for Multinationals?

At the beginning of this chapter we asked you to take the perspective of a 45-year-old
American marketing manager and her family (including school-age kids) in considering an
expatriate assignment in Seoul, South Korea. We suggested that this manager might have a
tough time accepting the offer given that expatriate packages are not nearly as lucrative as
they used to be. Moreover, with a trailing spouse who would have to give up his job, added
to concerns about pulling the kids out of their schools in Pittsburgh, the answer might be
“no” regardless. But are there circumstances when it might be worth the risk of saying “yes”?
And what about multinationals—how can they make expatriate assignments more attractive
while still keeping costs down?
If our Pittsburgh manager concluded that a posting to Seoul might prove a life-changing
event and would position her well for future promotion, she may go ahead and take the
plunge. Indeed, the clearer and more positive the company can be about how this move
might impact her career, the better. If, for example, the company says she is being groomed
for a senior position and that foreign experience is vital for high-level executives, this might
sweeten the offer.
Yet, most of the time, the impact of expatriation on a manager’s career will be
murky—a job may not even be waiting when the manager returns. It is increasingly likely
that some multinationals would get around concerns raised by potential middle-aged
expatriates by simply not asking them to travel in the first place. Targeting employees in
their 30s (and either childless or single) instead could improve the chances of a “yes”
while also cutting expatriate costs. That means smaller home or apartment expenses abroad
for the company to pick up, in addition to no worries about expensive schools. At the
other end of the spectrum, however, companies are also looking harder at employees in
their 50s—a time when kids are grown and trailing spouses or partners are more willing
to move.
PricewaterhouseCoopers (PwC), the giant accounting firm, is one of the firms sending
some of its expatriates overseas at an earlier age. The company started Life Experience Abroad
Program (LEAP) which is aimed at identifying high-potential employees early (only a few years
528
after joining the firm) and then posting them overseas. Upon return, many LEAP employees
are promoted. PricewaterhouseCoopers hopes to have 5,000 LEAP expatriates working abroad
in a few years.
Other options that also sidestep common objections include sending expatriates on
shorter assignments lasting only a few months (thereby preventing the need to uproot an
entire family) or using “commuter” expatriates who work in a foreign location, but usually
return home every month. The commuter approach is particularly popular within Europe
because travel distances are relatively short. An executive posted to Amsterdam could take
a quick flight home to Vienna on many weekends.
For American multinationals, another option for cutting costs is to simply not use Ameri-
cans on expatriate assignments whenever possible. Instead, they can hire locals or rely on
nationals from developing countries who often require far less to step into expatriate roles.
Indians, Russians, Chinese, and Brazilians can all be posted to developed markets at a fraction
of the cost of an American, German, or Italian. Naturally, this has risks—including having
your expatriates picked off by competing companies willing to pay more in those developed
markets.
Nevertheless, the risks may be worth it simply because sending an American citizen
abroad may cost a multinational $30,000–$40,000 more because of tax equalization payments
alone in some locations. Plus, annual rent in some expensive locations can run well over
$50,000 per year, considerably above the tax exclusion for housing allowances permitted by
the U.S. government (although higher limits are now permitted in certain expensive locations).
If the company does not pay, then the expatriate has to cough up the difference—something
that could easily cause the American to refuse to go. As one executive put it, if American
expatriates cost so much more to multinationals, “people who hire will think, ‘Am I better
off with an Australian or New Zealander who’s going to cost me less?’” Indeed, the president
of the American Chamber of Commerce office in Korea described U.S. tax laws as a “deter-
rent for hiring Americans overseas” and noted that U.S. firms in Korea had been “systemati-
cally replacing Americans with Australians, Indians, and just about any other nationality to
keep a lid on total costs of expatriates.”
In the final analysis, perhaps the best strategy for Americans interested in becoming
expatriates is to search high and low for a company to work at that still provides generous
expatriate packages—one with superb housing allowances, tax equalization payments, and
plenty of incentives and other benefits. With the right package, one expatriate consulting
expert observed, “you could be saving 70 [percent] to 80 [percent] of your entire salary and
that’s paying all your taxes and being totally legal.”
Of course, this will not be an easy task. At a broader level, what do some of the
actions that firms are taking mean for the future, especially for Americans who might want
to be expatriates? Are there other actions that these multinationals can take to have their
cake on costs and still provide opportunities for Americans abroad? Should both sides be
lobbying the U.S. government for tax relief for expatriates? Regardless, in the short run it
will behoove everyone to think creatively about how best to structure expatriate
assignments.83
529
Giving Negative Performance Feedback Across Cultures

Purpose
To get a sense of what it is like to provide performance feedback to employees and to develop
the skills needed to do this effectively across cultures.
Instructions
Assume that your multinational company has instituted a 360-degree feedback performance
evaluation system. Consequently, one of your jobs as a manufacturing division manager is
to meet with subordinates individually to go over their results. You are about to meet with
a manufacturing supervisor who has been with the company for seven years. A review of
his past performance evaluations indicates an employee who has been reliable and has had
above-average productivity. Results from his 360, however, have a definitely negative consis-
tency, including comments such as “avoids trying new ideas,” “uses coercion with peers and
subordinates,” “doesn’t listen well,” “ignores feedback,” “often fails to return phone calls
or other inquiries,” “blames mistakes on others or tries to cover them up,” and “is often
unavailable when questions arise.”
Part A: Evaluation of an American Supervisor
Assume that the manufacturing supervisor described in the instructions is an American based at
a company facility outside of Atlanta. Your instructor will put you into groups of three to six
students and ask you to prepare an action plan regarding this situation that will help the supervisor
improve. Your instructor may ask you to assign someone to speak for the group in summarizing
your plan to the class. The instructor may also ask a member of your group to role-play the
meeting with the supervisor. Consider some or all of these questions as you work on the plan:
1. How should the manager approach the meeting with the supervisor? What problems might
come up? How can the manager ensure that any messages (including ones that are not
so positive) will be heard?
2. How can the manager and the supervisor listen to one another without becoming con-
frontational or defensive?
3. How clear are the goals of the action plan? Why will it be helpful?
4. How should the manager proceed if the goals set with the supervisor are met? What if he
fails to meet them?
Part B: Cross-Cultural Evaluation of a Turkish Supervisor
In this section of the exercise, you are being asked to again prepare a plan to communicate
performance feedback to the manufacturing supervisor with the same 360 report as described
above. Only this time, please assume that the supervisor is a Turkish national who is based
530
at a company plant outside Istanbul. On your visit to the plant, you have the chance to meet
with this supervisor. As you prepare your action plan, consider these questions:
1. What might need to be done differently given that the supervisor is Turkish and that Istanbul
is the context?
2. What are the key differences between this plan and the one you devised for the American
employee? What cultural differences or concerns are reflected in your plan?
Source: Adapted from French, W. (1998). Human Resources Management (4th ed.) 362–363. Boston:
Houghton Mifflin.
Assembling an Expatriate Compensation Package

Purpose
To improve your understanding of how salary, tax, and living cost differentials across countries
make it challenging to construct an expatriate compensation package.
Instructions
You will write a report summarizing your research on the compensation of expatriates assigned
to different countries. Depending on your instructor’s directions, this exercise can be completed
in small groups or as an individual assignment. Regardless, the scenario is as follows:
An American multinational has plans to send four managers on an expatriate assignment.
Below are the pairs of foreign cities under consideration for each manager:
Manager 1: Cape Town, South Africa or Frankfurt, Germany

Manager 2: Moscow, Russia or Jakarta, Indonesia
Manager 3: Cairo, Egypt or Mumbai, India
Manager 4: Santiago, Chile or Shanghai, China.
Assume that you work in human resources for this company and your boss would like your
advice on how to structure a compensation package for one of these managers. Your instructor
will indicate which pair of cities and countries you will be assigned to research. Unless your
instructor specifies otherwise, you can assume that all four potential expatriates are based in
Chicago, are married with two school-age children between the ages of 6 and 15, and have a
base salary of $150,000. Of this amount, approximately 60 percent is spent on living expenses,
about 30 percent goes to cover various taxes, and the remaining 10 percent is allotted to savings.
As noted within the chapter, living expenses are complex and vary dramatically from
country to country. Your report will have to account for transportation, clothing, housing,
531
food, school costs, and many other elements that could play a role in this category. Remember
that the tax situation for many foreign assignments is complex, and this will have to be
factored into your report. All in all, how should the compensation packages differ across the
two countries you are assigned to, if at all? In what areas might differences exist and why?
What would your recommendations be for handling them and why? Again, be sure to describe
why there are differences across countries (or why not) in the specific aspects of the package.
In addition to the text and other reference sources, you may find many of the websites below
useful for completing your report:
U.S. Department of State Foreign Allowances and Per Diem Pages
• aoprals.state.gov
This main website provides information for living, housing, and education allowances, among
other things, by city/country. Detailed quarterly reports produced by the DOS are also avail-
able on the allowance page. Other topics of related interest may be found by searching the
DOS’s subject index page:
• www.state.gov/
STAT-USA/Internet (a service of the U.S. Department of Commerce)
• www.stat-usa.gov/
Here you will find country and market research information as well as detailed summaries of
general background information on most countries in the world.
International Tax and Accounting Site Directory
• www.taxsites.com/
This is an international tax site directory, with country-specific data.
OECD (Organisation for Economic Cooperation and Development)
• www.oecd.org
This site presents purchasing power parity data that allows one to compare the cost of a
basket of consumer goods and services across a number of countries. A variety of other
information is available as well, including on tax treaties and income taxes across countries.
This site is easily searchable.
Notes
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532
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Americans abroad; Rosman, Expat life gets less cushy.
536
chapter 13
managing cultural
groups
from small work
MANAGING TEAMS AND SMALLER WORK GROUPS ACROSS

CULTURES 539
GROUP PRODUCTIVITY ACROSS CULTURES 541
DIVERSITY: WORKING WITH OTHERS FROM DIFFERENT GROUPS 544
LABOR RELATIONS IN AND ACROSS CULTURES 547
LABOR UNIONS ACROSS COUNTRIES 551
PUTTING AGREEMENTS INTO PRACTICE 566

Learning Objectives
■ recognize the impact of groups in a cross-cultural environment;

■ be aware of the promise and pitfalls presented by diversity in and among groups;
■ describe the importance of relations between groups of employees and management
across countries;
■ recognize the various forms and effects of unions across a large number of countries;
■ identify various forms of employee decision-making input, beyond unions.
SAP’s Plans Hit a Cultural Barrier

Founded in 1972, SAP is Germany’s largest software company. The firm grew through the
1980s and 1990s, with most software created by tight-knit groups of developers at company
headquarters in Walldorf, Germany. Consequently, SAP’s software had a distinctly German
flavor. It took more than one year to perfect its programs, with developers trouble-shooting
alongside teammates at coffee bars that were strategically placed within SAP’s Walldorf facility.
Complex and expensive, SAP’s software systems often took months to install and debug, but
once they were ready for public use they worked well and offered a one-stop shop for
corporate customers. At the time, the fact that SAP products did not integrate well with
other firms’ software was not a big problem.
But in the late 1990s, businesses started focusing more on interconnectedness and
integration, thanks to the Internet. This became a problem for SAP’s stand-alone software
model. Moreover, companies were backing away from buying pricey, complex software suites
every five years, turning instead to more flexible web-based software that was offered by
SAP’s competitors. After tinkering with its business model, SAP decided in 2003 that the
answer to these challenges was to become “less German.” Implementing this strategy over
the next several years produced plenty of change and conflict.
SAP co-CEOs Hasso Plattner and Henning Kagermann felt that their cautious approach
to competitive threats had been holding back the firm, especially in the U.S. market. An injec-
tion of innovation was needed to shake up the company. This did not come easy because
Kagermann (an ex-physics professor) and Plattner (a hot-tempered tech guru) were both known
for their cautious management styles. But they acquired a diverse chunk of non-German
innovation in one fell swoop by purchasing an Israeli firm that developed web-based applica-
tions. This firm was led by Shai Agassi, a young entrepreneur with a brash style that CEOs
Kagermann and Plattner took to. They gave Agassi tough management roles and made him
538
M A N A G I N G C U L T U R A L G R O U P S
responsible for hundreds of SAP programmers. Along the way, Agassi continued to pitch ideas
for different and innovative products to his German bosses, despite being repeatedly rebuffed.
Finally, one idea caught the eye of Kagermann and Plattner —an idea that became SAP’s
NetWeaver, a web-based software tool more flexible than traditional SAP software. Agassi was
promoted and given more control at SAP.
While SAP was becoming less German thanks to Agassi, it was also becoming more
diverse by hiring thousands of programmers from different parts of the world, particularly
the United States and India. These programmers were put into development teams to tackle
key projects that previously would have been given only to German employees in Walldorf.
Agassi also insisted on changing the official language of the company to English, even in
SAP’s German headquarters. Soon non-Germans occupied 50 percent of top executive posi-
tions at SAP. The hope was that this injection of newcomers would increase diversity in SAP
and quicken the pace of innovation.
But these moves also created conflict, especially in Walldorf. Most firms start to globalize
by building sales or manufacturing units first while keeping research and development (as
well as the development of company strategy) close to home. SAP did not follow this model.
Instead, it tried to globalize away from its German roots from top to bottom—something
that came as a big shock to German employees embedded in the insular SAP culture at
Walldorf. As you read this chapter, think about some of the effects that these sweeping
changes might have brought about, as well as the inter-group challenges that they brought
to SAP. At the end of this chapter in the Up to the Challenge? closing feature, we will
review some of those problems faced by SAP and the resulting effects on their various
teams.1
Managing Teams and Smaller Work

Groups Across Cultures
Experts define a group as two or more people who interact together in order to pursue
common goals. This broad definition is expansive enough to cover small cross-functional
teams that disband after solving specific problems all the way to larger groups, such as
international offices, divisions, and even international labor unions with hundreds of
thousands of members. This wide scope is the purview of this last chapter.
Groups are important to the life of most firms—multinational or not—and they
come in many different flavors. There are task forces, cross-functional teams, self-directed
work teams, special committees, boards, production crews, and many more. One reason
for so many variations is because groups offer extraordinary potential to get things done.
Groups provide opportunities to pool knowledge among a set of people, to make more
considered decisions, and to leaven any individual tendency to make mistakes. The result
can be a harder-working, smarter, more productive set of people.
At the same time, this description can be in contradiction with some uniformly lousy
group experiences that some students reading this book (and others) may have
539
encountered. How can we reconcile the potential of groups with experience that is
contrary? The real challenge for a manager is to set the stage so that the promise of
groups can be realized. It is naïve to assume that everyone will work together well and
problematic to simply form a group with the hope that somehow you will get a set of
people that will not have any conflict. Conflict is not a rare thing that happens only
when things go very wrong or when you have the “wrong set of people.” Conflict, in
fact, is normal and inherent in the social interaction process. To not understand and
account for this is not a failure of groups per se, but it is a failure of management to
set the stage and to help groups capitalize on differences that will likely emerge. As
noted in earlier chapters on communication, training, and performance appraisal, the
challenges that management ordinarily faces in these areas is magnified severalfold in
multicultural groups. Consequently, the chapter reviews cultural differences in the ways
that groups typically operate and then outlines techniques that allow managers to build
more effective work teams.
Differences in Group Behavior Across Cultures
If some cultures value groups and accord more importance and attention to those than
do other cultures, then right away we might expect some additional sources of conflict
to emerge in same-culture teams.
Individuals and Collectivists

As discussed in Chapter 4, one of the most important cultural distinctions is the differ-
ence between individualism and collectivism. Examples of countries that tend toward
individualistic values include the U.S., Britain, the Netherlands, and Belgium, while col-
lectivistic countries include Taiwan, Mexico, the Philippines, and many South American
countries. In more collectivistic countries, people see group goals as more important
than individual goals. And, in individualistic countries, people are expected to take care
of themselves and the emphasis is on autonomy, individual achievement, and privacy.
People in individualistic cultures tend to apply the same value standards to everyone,
while collectivists take a different approach depending on whether they interact with an
in-group or an out-group.2
In-groups and Out-groups

Collectivist cultures put great emphasis on the needs of the group and they value
cooperation among members—including sometimes over self-interest. But for collectiv-
ists, all groups are not the same. Some place their family first (e.g., many Chinese),
while others place their organization first (e.g., many Japanese). Regardless of how
the in-group is defined, collectivists draw sharper boundaries between their own in-
group and an out-group than do most individualists. In general, there is a noticeable
distinction between family and neighbors in collectivistic cultures. Of course, family
is very important in individualistic cultures too, but not as much as for collectivists.
Chapter 5 showed that the self-attitudes of collectivists tend to be more influenced by
540
their standing in groups than is true for individualists. For instance, when asked to
describe themselves, collectivists are more likely to use group-based descriptions (e.g.,
“I am happy when I work with friends”) than are individualists (“I am a happy
person”).
In an individualistic culture, such as the U.S., it is easy to underestimate the pervasive
effect of collectivist norms on the lives of people. This does not mean that individualists
cannot work well in groups to accomplish tasks—clearly, they can. But when people get
together, the process of group interaction differs substantially when individualists and
collectivists are involved. This difference in group interaction is learned early in life. To
illustrate, one study looked at group interaction patterns of 10- to12-year-old Chinese
and American children who worked on the same task.3 The Chinese children approached
the task in a cooperative, group-enhancing way, while the American children chose
strategies that reflected self-enhancing, competitive motives. This pattern underscores
both the individualistic and achievement-oriented upbringing that most Americans expe-
rience, as well as the traditional Chinese saying, “Friendship first and competition sec-
ond.”4 Knowing what makes groups tick can help managers learn to function better in
a diverse, international setting.5
Group Productivity Across Cultures

So, how might groups affect the quality and quantity of work done in various cultures?
Let’s look at some general answers to this question next.
Social Loafing
In research done within the U.S., people are more productive working alone than when
working with others in groups. This phenomenon is known as social loafing and is a
very reliable effect observed in study after study. Apparently people “loaf” because they
assume that the group will get the job done with or without them and because they can
then redirect their efforts toward their own goals—even if that just involves relaxing.
Similar results have been found in over 50 different studies, encompassing many different
types of jobs and organizations but comprising mostly American workers.6
But is social loafing a uniquely American (or Western) effect? There is good reason
to believe it is because U.S. culture emphasizes individuality, leading Americans to have
trouble working and playing well with others, both at home and on the international
stage. Other cultures (such as Japanese) tend to be more team-oriented, with the work-
place being organized accordingly. At least one study shows that in contrast to Americans,
Japanese perform better in groups than when working alone.7 Likewise, several studies
show that social loafing does not occur among Chinese (collectivists) either.8
In-groups and Social Loafing

The social loafing research discussed so far only compares people who work alone versus
those in groups.9 But, group effects do not always translate into an advantage for
541
collectivist cultures. For example, there may be surprisingly poor communication among
collectivistic employees who work for the same company but who are members of dif-
ferent in-groups.10 This is what researchers found: collectivists were more competitive
than individualists when facing members of out-groups in their company.11 In general,
the type of group matters to collectivists. They are more likely to loaf when they par-
ticipate in a group that is of no special significance to them (such as an out-group).
In one study examining this issue, managers from China, Israel, and the U.S. were
observed when asked to work by themselves vs. when they were placed in two different
group situations.12 An in-group situation was created by leading managers to believe
that they shared several characteristics that usually lead to close friendships. An out-
group condition was created by telling managers that other group members had different
characteristics and that they came from very different backgrounds. In all cases, the
managers worked on simulated management tasks such as rating job applications. The
Chinese and Israelis were chosen to participate because they came from collectivist cul-
tures, and Americans were chosen to represent an individualistic culture.
People from all three of these countries vary in how collective or individualistic they
are, but nevertheless the findings were as the researchers expected. First, the study rep-
licated the common finding that there was a reduction in group performance (loafing)
for Americans but not for the more collective Israeli or Chinese managers. The important
finding of this study, however, was that the collectivists also loafed, but under special
circumstances. They showed evidence of social loafing when they worked with an out-
group. The collectivists (from China and Israel) were likely to reduce their effort on a
work team project when that group held few ties of any importance to them. When
they completed work with an in-group, however, the performance of collectivists was
not reduced—they did not show evidence of social loafing.
Implications of Social Loafing Research

What does this all mean for international managers? First, management strategies based
on individual performance may be less effective in collectivist cultures. For example, the
belief that individual incentives would be uniformly effective in China or Israel fails to
recognize the impact and importance of groups to these cultures. Using a traditional
American pay-for-performance approach in China, for example, may be counterproduc-
tive. That said, this research also suggests that care must be taken when adopting a
group incentive plan in a collective culture. The type of group in which collectivists
work, not just being in a group per se, may affect their performance. Consequently,
forming a group around a natural collection of individuals (i.e., an in-group) may be
the best bet for improving performance in a collectivist culture.13
Based on this reasoning, a manager might be wise to employ group-based incentive
schemes in a location such as China. Nevertheless, workforce diversity appears to be
increasing in many rapidly growing economies (such as China) as work and travel pat-
terns change in response to job opportunities. In China, for example, although many
people need a work permit to move from the countryside to big cities like Shanghai,
there is still remarkable (albeit, illegal) movement of the labor force. As a result, manag-
ers will have to be especially clever and insightful when they introduce group performance
542
strategies in such settings, not to mention that traditional values in China might also be
undergoing great change.14
Conversely, what might be the impact of using group-based management schemes
in the highly individualistic U.S.? Team-based approaches have been increasing in the
U.S., with about 10 percent of all employees in American firms now organized into
self-directed work groups or other team-based approaches.15 Given the emphasis on
individualism in American culture, ensuring that team-based approaches work well in
the U.S. can be a challenge. On the other hand, the U.S. is becoming less culturally
homogeneous, thanks in part to a steady flow of immigrants. So, another challenge for
American managers—as well as foreign expatriate managers—is to understand and to
match methods and tasks in an increasingly diverse workforce. One area where this
cultural mix has already taken place is among flight crews of commercial airlines. The
following International Insights feature illustrates some of the life and death challenges
that these groups deal with every day.
Team Dynamics at 35,000 Feet

The operation of large commercial jet aircraft is complex, highly technical, and dependent
upon a team of experienced professionals. The flight crew of some modern aircraft can
exceed 20 people, each playing an important role in operation and safety. The analysis of
commercial aviation accidents shows that flight crew behavior, rather than technical failure,
has been the cause of nearly 70 percent of all accidents.16 Consequently, communication,
leadership, and decision making have been studied in an attempt to reduce behavioral issues
that can lead to accidents. As shown already within this chapter, many of these interpersonal
issues are affected by culture.
Following this reasoning, one study looked at the attitudes of flight crews from a variety
of countries, including the U.S. and several Asian nations.17 Commercial aviation is a highly
regulated industry, and as a result flight crews perform very similar tasks in very similar envi-
ronments. Because their job differences are minimized across cultures, any differences in
attitudes noted among these workers probably have a cultural base. The researchers asked
all crew members, including pilots and flight attendants, to complete a questionnaire about
optimal behavior on the flight deck. The results were very interesting. For one, Asian pilots
and flight attendants were more similar in their attitudes than were the American crews. This
finding might reflect the now familiar need for social harmony among collectivist cultures.
Moreover, the results showed that American flight attendants preferred a captain who
encouraged their questions but who also took charge in any emergency. American pilots
actually stood out from all the other groups, including American flight attendants. They
generally showed highly individualistic attitudes, reflective of the solo flyer of the old days
of aviation. In the Asian cultures, however, both the attendants and pilots preferred to see
an autocratic but communicative captain in almost all circumstances. These differences present
543
problems for the most common training methods used for today’s flight crews. This approach,
called crew resource management, or CRM training, emphasizes recognition, acceptance, and
the free flow of information among the crew. Accordingly, CRM appears to reflect collectivism
and low power distance. As such, the CRM technique may create problems or be an advan-
tage, depending upon the culture of the crew being trained.
Highly individualistic American pilots are asked to forgo their “flyboy” images and work
more in teams. Although this may be tough for them, CRM training can also capitalize on
the American orientation toward low power distance—via their natural tendency to share
flight information. And although Asian crews appear to be more team-oriented and therefore
a better fit with CRM training, their high power distance orientation may discourage the open
sharing of information. Indeed, CRM training that develops more forceful action by junior
officers may be too foreign for a Korean flight crew to adopt. At the same time, the CRM
concept of group input may be too much for American pilots to accept. So, in an emergency
the groups have both cultural assets and liabilities to fall back on. The challenge for CRM is
to make sure all aspects of the training sink into crews from all cultures.
Not only is air travel relatively safe, it has gotten safer over the years, with 2009 being
the best in decades. And, CRM (along with many other contributors) has played a role in
this increase in safety. The percentage of accidents worldwide due to human error dropped
from 70 percent in 1997 to about 54 percent in 2007.18
Diversity: Working with Others from

Different Groups
Previously, we discussed differences in group behavior across cultures. Yet, often inter-
national managers have to deal with more complex diversity as they effectively lead
groups of workers, including home-country nationals, third-country nationals, and expa-
triates. Likewise, staying at home is no escape from diversity issues. Managers in many
developed countries, including the U.S., are often faced with leading groups consisting
of foreign nationals and members of varying racial and ethnic groups (among other
forms of diversity).
Pros and Cons of Diversity
Managers who are responsible for building work groups composed of people from dif-
ferent cultures often have their hands full. Many practical problems need to be overcome
in order for groups to run smoothly and effectively (see Chapter 11 for some of these).
Some road blocks could be expected simply from the definition of diversity itself.
Synonyms include “varied,” “dissimilar,” and “divergent.” In general, these three adjec-
tives can mean a heavy lift for managers. Indeed, international executives often have an
easier time recalling disadvantages associated with cultural diversity than in pinpointing
544
pluses. As a French executive put it, “I have been involved in many situations over the
years, but I can’t think of one made easier because it involved more than one
culture.”19
One reason that disadvantages may be easy to recall is that they are so salient.
Communication itself is more problematic in multicultural groups, something largely
taken for granted (incorrectly) in homogenous groups. Likewise, the potential confusion
and conflict that can emerge with cross-cultural groups stands out and is easy to remem-
ber because it is distinctive and not like the plain old conflict so often experienced in
like-minded groups. In contrast, the benefits associated with diversity take longer to
manifest and are more difficult to observe. For example, decisions are likely to be more
considered and well rounded and stand the test of time and location better—even if they
take longer and are rife with conflict. The many different perspectives brought to the
problem offer a kind of built-in brainstorming—the very kind of activity that can lead
to creative ideas. The following International Insights feature presents a story of diversity,
including pluses and downsides, encountered in an alliance formed by Siemens, Toshiba,
and IBM.
Cross-Cultural Teams Open in the Catskills

Some years ago, three companies that ordinarily compete with each other formed a strategic
alliance to develop a revolutionary computer chip. They called this team the Triad, and it was
composed of employees from Siemens AG of Germany, Toshiba of Japan, and IBM of the
U.S. The unit would all come together and work on the project in upstate New York at an
IBM facility. Nearly 100 scientists were formed into teams that included representatives of
the three companies (and continents) in this project. Project managers worried that the diverse
cultural backgrounds of the teams might create problems—it turned out that they had reason
for concern!
Consider some of the behavior of the Toshiba scientists. The Germans were shocked to
find them closing their eyes and apparently sleeping during important meetings. Yet, this is
common practice for overburdened Japanese workers when the discussion does not center
on them. The Japanese themselves, who ordinarily work in large teams, found it very difficult
to sit in small, individual offices and speak English. As a result, they often withdrew whenever
possible to the more comfortable confines of all-Japanese groups. Further undercutting the
team synergy were the feelings of the American scientists. They felt that the Germans planned
way too much and that the Japanese—who typically prefer to review proposals constantly—
would not make a specific or clear decision. The Germans and the Japanese complained that
their American counterparts didn’t spend enough time getting to know them, either at work
or at social events.20 Unfortunately, all this led to a climate of misunderstanding and mistrust.
There were even some suspicions that information and progress were being held back from
the group by various company cliques.
545
In theory, the pooling together of a diverse and intelligent group of people to design
new advanced technology should pay creative dividends. The reason that this did not work
in the Triad project, at least initially, was that people wanted to (and were able to) stay in
their separate in-groups. In analyzing the situation, the lack of attention to group interaction
and team building was fingered as the culprit. Instead, great efforts were made on the
technical and logistical side of things, with only the normal (brief) courses on working and
living abroad. One HR executive for Toshiba said, “We should have done more with HR people
from Siemens and IBM to develop cooperative training programs.” Siemens also briefed their
employees on living abroad and on what they called the American “hamburger style of
management.” Americans, they said, start their criticism gently. They start with “how’s the
family” small talk; that is the “top of the hamburger bun.” Then they go right to the “meat,”
namely, the criticism, topped off with more “bun” which is words of encouragement. With
Germans, in contrast, it is all “meat,” and with Japanese you have to learn to find the
“meat.” Despite all of the obstacles, Triad members said that they learned a lot from their
experiences—both about technology and about cooperating with different groups of people
from around the world.21
Using Diversity to Your Advantage
Research shows that particular diversity composition of a group does impact perfor-
mance. Across a number of definitions (gender, age, culture), the more varied a group
is, the more difficult time they have—at least initially.22 Diverse groups have more
trouble communicating and a tougher time building unit cohesion, and take longer
to set up than do more homogenous groups.23 Nevertheless, once an understanding
and structure are put in place, the diverse group becomes as effective as the homog-
enous group. Because of their ability to bring a variety of perspectives to the table,
diverse groups may perform best over the long run, especially on projects requiring
creativity and problem solving rather than simple routine tasks. This is exactly what
one study of top management teams found—that cultural diversity was responsible
for higher team performance and that when conflict did occur, it was also more
functional.24
Other studies have found that while homogeneous teams (i.e., members who have
similar demographic characteristics) outperformed diverse groups at first, over time
the performance of highly heterogeneous teams improved and equaled that of the less
diverse teams.25 Teams defined as “moderately” heterogeneous did not perform nearly
as well as the other two types of teams. But, getting to that higher productivity is
tough going, partially because people have built-in views depending on their back-
ground. To illustrate, researchers conducted in-depth interviews of employees in mul-
tinational firms in the U.S., France, the Philippines, and Puerto Rico.26 Coding and
analysis of the interviews revealed that different metaphors by country were associated
with teams.
546
People in individualistic countries tend to use sports metaphors to think about and
refer to groups. In high power distance countries (such as the Philippines), groups are
thought of more as families or referred to with military metaphors. Because of the vari-
ous meanings of teams, there are different behaviors of members and these are better
markers of success. For example, one study found that Mexicans thought that compli-
ments and expressions of support were important for group success, whereas Anglos
placed lower emphasis on these and were more likely to see task-type behavior of
members as important for sucess.27
Given this, how can you cleverly manage diversity to your advantage? Below are
guidelines you should consider to get the most out of multicultural teams:28
■ Choose appropriate tasks. It is a mistake to choose a multicultural team based solely

on ethnicity. Instead, choose members who have similar high ability levels but diverse
perspectives.
■ Explicitly recognize differences. Instead of minimizing cultural differences, members
should be encouraged to describe and recognize differences. This will push team mem-
bers toward understanding those differences and appreciating what different cultures
can contribute. This must be done carefully, however, as it may accentuate existing
differences and create “fault lines” within the group.
■ Give team members equal status. Power differences among team members can be a
problem if that stifles creativity. For example, while there are good reasons for inter-
national teams to be led by someone from the parent company, that culture may end
up dominating the proceedings. This is more likely for high power distance cultures
where there is a strong norm to defer to leaders.
■ Provide feedback. Culturally diverse teams have difficulty agreeing on the benefit of
various ideas—perhaps because the methods they use to gauge benefits are different.
So, to help develop similar judgment criteria, give frequent feedback to members on
their ideas.29
It is clear that managing diversity in multicultural teams is difficult. Nevertheless, when

correctly set up and managed, diverse teams have much to contribute. That said, these
smaller teams are only one part of the equation when it comes to managing groups
across cultures.
Labor Relations in and Across Cultures

Working with small multicultural teams is tough enough, but when larger labor forces
are involved, the management challenges may cut across entire companies, industries,
or countries. The field of labor relations deals with employee–employer relationships
and there are wide differences in laws, enforcement, and penalties associated with viola-
tions across countries. To address these topics, we will first outline the perspectives of
management and workers. We will then discuss agreements or structures that have been
devised for soliciting employee input or control. Despite the best intentions of firms,
unions, and governments, there are times when conflicts arise and action is taken, either
by workers (strikes) or by management (lockouts).
547
Management and Worker Perspectives on Labor Relations
Worker Control and Input

Workers in all countries are concerned with pay, job security, and working conditions
and some join labor unions in order to have input about these work outcomes.30
Sometimes they wish to extend this power to that of having a say in important decisions
facing the firm. Setting aside the possibility of lobbying government for changes in law
and/or other indirect tactics, workers often have one main method of getting their way
on key issues—by threatening to reduce work output or stop it all together. This threat
may be less credible, however, when the employer is a multinational that has many
resources at its disposal. These can help the firm outlast a strike by temporarily increas-
ing production elsewhere. The firm may also threaten to permanently move its operations
to another country in response to labor strife. Consequently, multinationals typically
have considerable power over employees and unions.
Power of the Multinational

An example involving Hyster Corporation of Portland, Oregon, illustrates this power.
They operated a 500-person forklift/truck plant in Irvine, Scotland. Thanks to a grant
from the British government, Hyster was ready to invest $60 million in that plant,
thereby creating another 100 jobs. But, the resulting increase in production would create
overcapacity in Hyster’s European market. Consequently, enlarging its Scottish plant
meant that Hyster would cut back production at its factory in the Netherlands. They
determined that this shift of Dutch production capacity to Irvine would mean that
Scottish workers had to take a 14-percent pay cut. Hyster gave the workers 48 hours
to accept the deal.
As if this were not enough, the next day each Scottish employee got a letter from
the company. The letter said, “Hyster is not convinced at this time that Irvine is the
best of the many alternatives open to it. It has not made up its mind. The location of
the plant to lead Europe is still open.” At the bottom of the page, employees were asked
to vote for or against consolidation of production (and pay cut) at the Scottish plant.
Facing potential job loss, only 11 employees voted no. Employees complained that they
had had no warning and no real input into the company’s decision process. While Hys-
ter’s employees were not unionized, many felt it would not have made a difference. “It
was do-or-else,” said some employees. In Hyster’s defense, they faced incredible competi-
tion from the Japanese in the form of lower-cost, higher-efficiency forklifts. Hyster won
an anti-dumping case that it filed with the International Trade Commission, resulting in
50-percent import duties on Japanese products. Nevertheless, the company was subse-
quently bought by another firm.31
Tempering the Power of the Multinational

To combat this considerable power of multinationals, unions and other employee groups
have tried to use legal means to improve their position. For instance, French unions
have begun coordinating lawsuits by members to seek redress for alleged breaches of
548
contract about benefits.32 Other countries have enacted laws that provide generous
protection for workers (such as in France, where 35 hours is the legal weekly work limit
for all employees). They also make it very difficult to fire anyone after a probationary
period has passed. Even if the required termination conditions are met, the employee
may be due a large severance payment.33 The average American worker who has been
laid off receives one week’s severance pay for every year of service. German workers,
however, get more than four times as much (on average). When you add in other man-
dated benefits (such as relocation and retraining) that are available in Germany, termina-
tion costs in the U.S. seem modest. As one executive recruiter in Germany put it, “U.S.
firms are shocked by the termination rules. The possibility of firing someone quickly
without cause is impossible.”
Legal Constraints
U.S. federal law includes the WARN Act (Worker Adjustment and Retraining Notification).
This law requires firms who plan to lay off 50 or more employees to provide those
workers a 60-day notice. Yet, during tough economic times, some companies ignored
the law, in an effort to stay afloat. Mazer Corporation of Dayton, Ohio, for example,
sent an e-mail to their 300 employees at 5 p.m. one day telling them that it was their
last day, apologizing for the short notice. Some workers did not receive their last pay-
check, let alone the notice and 60 days’ pay that is required by WARN. The 20-year-old
law has not been enforced all that often, but it provides exemptions to firms (e.g., those
having “unforeseeable circumstances), and penalties are not strong.34
Enforcement of similar laws elsewhere is stricter and so are the laws. Colgate-
Palmolive experienced this after it announced plans to close a factory in Hamburg and
eliminate 500 jobs. Colgate initially offered German employees about $40,000 each (over
$20 million total). Colgate argued that the plan was similar to, or better than, what
other firms in the area had recently provided. German law, however, gives the union an
opportunity to approve such decisions, and the union felt that the offer was far too low
given that the Hamburg operation was profitable for Colgate. The case involved immense
public attention, including stories in local papers about the impact on employees and
their families who had worked for Colgate for three generations. Eventually, the mayor
of Hamburg publicly condemned the company for its move and the union threatened
to drag out the negotiation process. Eventually, Colgate raised its offer and agreed to a
settlement.35
As this illustrates, managing layoffs can be complex—including navigating the politi-
cal waters of a country. The laws themselves are very complex and vary markedly from
country to country, even in Europe. In France, for example, severance entitlement extends
to those with at least one year of employment. The statutory severance payment is
approximately 30 days for each year and can be graduated for those with ten years of
service or more. So, a 20-year employee making $60,000 a year might be entitled to
minimum termination benefits of $100,000 or more.36 Other European countries are
equally as generous (see Figure 13.1).
As a result of this complexity, firms in Europe become very creative in avoiding
costs. When Dutch IT firm Pinkroccade NV wanted to shed 700 employees, it terminated
549
Country Legal Protections Common Additions/Summary
Belgium • Extensive advanced notice Union-negotiated additions (e.g.,

• Prorated year-end premium closure premiums, employment
• Holiday pay that’s due search costs, etc.) can often double
the total cost of the severance
• Outplacement counseling
package
• Pre-pension payments for workers
> 45 years old
France • 30 days’ pay/each year of service Payments often exceed these
• payments increased if more than 10 years minimums. If court decides there
of service was no genuine/serious reason for
• compensation rises if layoff is large-scale layoffs, damages might be added to
payments – amounting to at least
• If firm > 1,000 employees, it must offer
6 months’ salary. Employees getting
full pay leave of 4–6 months
increasingly militant at notice of
layoff
Germany • Notice of up to 7 months Payments vary a good deal on
• 2 weeks’ pay/each year of service specific characteristics of the
• Employer can’t choose employees based employee (age, years of service,
on individual performance alone, must more)
use social criteria (disability, age)
The • 1 month’s salary for 35–45-year-olds; Must select employees via last-in
Netherlands 1.5 months 45–55; and 2 months for first-out system (those with less
those > 55 service first). Dutch labor law
• Many other social plans provide additional does not allow unilateral breaking
benefits to workers of employment agreement by
employer; must consult with works
councils
Russia • 2 months’ minimum notice for workers Large number of filters used to
• 1 month’s pay + another from layoff until determine who to lay off (e.g., no
new job women employees with children,
• Additional month if employee files for single mothers, etc.)
unemployment quickly
Figure 13.1 Legal Protections for Worker Severance in Several European Countries.
Sources: Adapted from Freshfields Bruckhaus Deringer LLP. (2009). Managing Mass Redundancies Across Europe
(2nd ed.). Brussels: Freshfields Bruckhaus Deringer LLP; Bush, J., Scott, M., Rowley, L., Lakshman, N., Matlack, C.,
Ewing, J., and Zhe, H. (2009). The hidden perils of layoffs. BusinessWeek, March 2, 52–53.
people in batches of 19—a process that took almost a year. The reason? Dutch law
requires firms to enter negotiations with unions to obtain approval for layoffs if more
than 20 employees are let go at a time. Other Dutch firms have simply placed unneeded,
but perfectly healthy, employees on disability, shifting the cost to the government.37 While
the U.S. increased its spending and assistance to the unemployed as it sought to prop
up the economy through 2008–2010, most of Europe already had a strong social safety
net. This is illustrated in Figure 13.2, which shows the percentage of government
550
Japan
U.S.
U.K.
Australia
Canada
Sweden
Germany
France
Netherlands
Spain
Denmark
0 0.5 1 1.5 2 2.5 3 3.5 4

Expenditure as % of GDP
Figure 13.2 Public Expenditures on Labor Market Programs as a Percentage of GDP.

Source: Adapted from OECD. (2013). www.dol.gov.asp/archive/reports/chartbook (based on 2011 data; latest
reported).
expenditures as a percentage of GDP in several OECD countries as of 2011. That said,

the influence of unions and restrictive laws may be waning across Western Europe, in
part due to the ability of multinationals to quickly shift production to lower-wage loca-
tions to the east. Volkswagen AG was able to persuade union members at its plant in
Spain to accept a 5 percent pay cut by threatening to move jobs to Slovakia where wages
are 50 percent less. This power, in combination with governments committed to austerity
can render even big strikes ineffective.38
Labor Unions Across Countries

We have shown that both unions and multinationals have ways to exert influence over
each other. Still, multinationals have the upper hand, with greater overall influence than
any employee group or union.39 This influence varies among countries, so we will review
some of the differences in the structure of employee input and control.
As suggested, there are many mechanisms by which employees try to wrest control
from management, with unions being the most common approach. Unions in the U.S.
were originally established to bring about reform in the workplace before laws existed
to protect worker interests and rights. Now, American unions have a relatively high
profile, and that profile is not always positive. In fact, national surveys indicate a nega-
tive view of unions by Americans and may partly explain why union membership in the
U.S. has been steadily declining in recent years. Today, union members make up only
about 11 percent of the U.S. workforce.
Other industrialized countries have also seen a general decline in union membership.
Figure 13.3 presents data on union “density rates” in a large number of countries. The
percentage of workers who are unionized varies greatly across countries, but most have
551
Country 2011 Density (%) Change Last Decade (%)
Australia 18.1 –25.2

Belgium 50.4 +2.0
Canada 26.8 –6.0
Denmark 68.5 –7.2
Finland 69.0 –7.4
France 7.8 –2.5
Germany 18.0 –25.0
Ireland 32.6 –13.8
Italy 35.6 +4.1
Japan 18.1 –13.8
Korea 9.9 –17.5
Netherlands 18.2 –13.3
Norway 54.6 +1.1
Spain 15.6 –2.5
Switzerland 17.1 –14.5
United Kingdom 25.6 –15.2
United States 11.3 –12.4
Figure 13.3 Union Density Rates Around the World.

Note: Density reflects estimates of the percentage of wage and salary workers who are union members, with
negative numbers reflecting declines.
Source: Adapted from OECD. (2013). OECD Labor Statistics, available at: http://stats.oecd.org/ (retrieved October
29, 2013).
seen a decline in union membership over the last decade. The oldest and most well-
developed union systems occur in the EU countries, but even there you will note large
differences in the percentage of workers covered by unions. France, for example, has
only about 8 percent of its workforce covered by unions, while Belgium has a figure
over 50 percent. These national differences have been tied to a number of factors, includ-
ing the political leanings of the government, how wages are determined, and the size of
the public employment sector.
These union density rates should not be taken at face value. For one thing, bargain-
ing agreements reached by the union and management often end up covering many more
employees than just union members.40 More importantly, a high union density does not
necessarily mean that unions are more effective or influential. In fact, in some cases, a
relatively low density rate (e.g., France at 8 percent) may belie the true, important degree
of union influence (see the section on France that follows). Also, in some countries,
labor may be represented by an entire political party, which also increases union influ-
ence. Clearly, however, not all unions across borders are structured the same nor are
equally influential. Western countries in particular have been in existence longer and/or
are well developed.
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Unions Among European Union Countries
Because union influence is difficult to index precisely, there is some debate about which
unions are influential and why. Nevertheless, it appears that union power, while dimin-
ished in recent years, is still a force to be reckoned with.41
Unions in France
The French workplace is influenced by five main national unions. And, as in Japan and
other countries, most large employers also have a company union. These unions are among
the most political in the world. In fact, the chief distinction among these unions is not the
industry or the occupations that they cover, but instead their political and social leanings.42
This can be clearly traced to past ideological issues and conflicts, and the degree to which
they reflect the pattern of social division in France. These five major confederations have
competed with one another for membership and it is common for all five to be present
in any one work setting. Employees may choose to join one depending on their political
viewpoint. Presently, this group has expanded to eight notable union federations.
Membership in any of these unions is not large by the standards of other countries. The
largest union, the CFDT (Confédération française démocratique du travail), a largely industry/
public service union with a communist leaning, has only about 890,000 members. Its 8-percent
density rate places France at the low end of OECD countries (see Figure 13.3). Partly, this
statistic reflects the fact that unions really do not have to push for new members and work-
ers do not feel a strong need to seek out a union. For much of the time since the mid-1970s
until recently, the French government has embraced the idea of protecting, if not enhancing,
the rights of employees. In combination with a tradition of extending collective agreements
to companies and industries that were not party to the accord, a worker can benefit from
the union’s influence without having to be a member. As a result, real union influence is
much greater than the 8 percent density figure would suggest.
That said, French unions, like their German counterparts, have been under pressure in
recent years to cooperate with government efforts to reform onerous labor laws and regula-
tions.43 When President Nicolas Sarkozy took office in 2007, his government took hard
stands against unions through his term, which ended in 2012, those energized unions,
including the CGT (Confédération générale du travail), which protested with strikes involv-
ing upwards of 1 million people marching in Paris. The CGT also took creative steps in its
fight with the giant state-owned power company (EDF). The government wanted to sell a
30 percent stake and the union mobilized in fear of losing its large set of benefits (such as
lifetime employment; early retirement for 55 percent of the workforce; pensions of 75 percent
of the last year’s salary; 32-hour work weeks for a quarter of employees; 90-percent discounts
on power bills; free healthcare; subsidized housing, meals, vacations).44 It is widely believed
that the economic tough times have weakened the position of unions in France.
Unions in Germany
Unlike in the U.S., where union contracts are negotiated on a company-by-company
basis, Germany relies on a centralized system in which some 60,000 contracts are set
using industry-wide bargaining. Unions will typically bargain with a group of employers
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in an industry. There is only one union for workers in most major industries, and mem-
bership is entirely voluntary. As in the U.S., the contract will include most major work
issues, including pay, benefits, and conditions of employment. As such, the main goals
of the union are economic in form, as opposed to some of the more politically motivated
union activity found in countries such as France or Italy. The most important union is
the German Confederation of Trade Unions (Deutscher Gewerkschaftsbund [DGB]) which
covers more than 6 million workers (about 20 percent of all German employees).
The nature of the relation between unions and management has been fairly coopera-
tive over the last 20 years or so, with just a handful of days lost to strikes every year.
One reason is that workers have a number of avenues of input into how the business is
run, including representation on the board of directors. Companies in Germany with over
2,000 employees are required to give 50 percent of supervisory board seats to worker
representatives. This policy, unique to Germany, is called codetermination and was set
up by the Allies after World War II. Codetermination was designed to prevent industrial
might from working in concert with a potentially threatening government. The system is
most predominant in the steel and coal industries, sectors that were critical to pre- and
post-war enterprises. There, unions select five board members, shareholders select another
five members, and this body then selects an eleventh member. Outside of steel and coal,
union membership on boards varies by industry and company size.45
In recent years, German unions have been willing to make concessions on working
conditions and pay for increased job security. Indeed, in some areas, important German
unions, such as the giant IG Metall union (Industrial Union of Metal Workers), have
been conciliatory on certain issues, such as fighting for shorter workweeks. Nevertheless,
research continues to show that Germans value free time and are willing to trade off
money and overtime pay.46 Overall, attitudes in Germany toward labor unions have
hardened, with unions being blamed for higher unemployment rates, expensive wage
rates, rigid labor laws, and a (perceived) weakening of German competitiveness. Con-
sequently, union participation rates continue to decline, nearly 25 percent over the last
decade (see Figure 13.3).47
Unions in the United Kingdom

The union movement in the U.K. has a long history, having been legalized in 1871. British
unions are also relatively powerful, although their influence has waned in the last several
years. The union movement can be seen as political in Britain, although not as much as
some other countries. In fact, the desire for unions to push their political agenda led to the
formation of the Labour Party in Britain in 1883. Since then, the trade unions have played
a significant role in the party and to this day provide considerable financial support.
Union density in the United Kingdom is over twice that of U.S. union participation
but has seen a big dip recently. At the height of its influence in 1979, membership was
around 57 percent, dropping to 30 percent in 2001, and to 25 percent in 2011. This
drop is due to several factors, but perhaps the biggest has to do with the political envi-
ronment, with the government passing legislation that reduced union power. Additionally,
the economy fared reasonably well in recent years, further reducing the appeal of union
membership. Nevertheless, unions still wield considerable power and influence. Because
554
a large firm may negotiate with several unions, the process is complex. Cross-union
dealings can be fractionated and this has played into the hands of companies that have
successfully pushed collective bargaining down from a national to a business level.
Likewise, many new businesses have tried to maintain a nonunion status consistent with
the “enterprise culture” of recent governments.48
Other Unions in Europe

Because Europe was the first continent to industrialize, there is great complexity and
variety of union representation beyond the samples already discussed. In the Netherlands,
for example, trade unions were initially formed and developed by religious and political
groups. A good case in point is the largest union in Holland, the FNV, which is a merger
between a socialist and a Catholic union. These unions, however, are not as ideological
as those of the French, and they participate with the government in many initiatives
(including the extensive social support mechanisms in Holland). Unions are important
in the Netherlands, and several experts have claimed that their influence is much greater
than their 18-percent density rate suggests.49 Likewise, Dutch employees can exert control
over the workplace via other unique outlets, as discussed later in the chapter.
Unions in Sweden began as a socialist movement among manual workers. And because
of a largely friendly government, they flourished in a mutually cooperative environment.
This can perhaps account for why Sweden has such a high density rate (73 percent).
Although there has been some hostility between government and the unions in recent years,
union membership rates have stayed high. Unions have been in the forefront of recognizing
global competitive pressures by embracing management initiatives to improve productivity,
such as technological advances.50 Belgium, too, has a relatively high union density rate
(about 50 percent). It might be even higher, however, if there were not as many laws pro-
tecting labor. The workplace in Belgium is one of the most highly controlled in the world,
covering topics such as compensation, severance pay, and other human resource concerns.
The following International Insights feature shows one company’s experience in Belgium.
Despite the fact that the most important unions are organized around religious or political
bases, there is a “culture of compromise” in their interactions.51
Labor Relations on the Brink in Belgium: A Cautionary Tale for Firms Doing
Business in Europe
Brink’s, Inc., currently based in Richmond, Virginia, was founded in 1859 in Chicago, Illinois,
and is famous for its armored-car delivery business. Now one of the largest providers of
logistics solutions and secure transport services, it employs 60,000 people in over 150 coun-
tries. About three-quarters of Brink’s revenue comes from business outside of North America.
In fact, about 17 percent of its 2010 revenue came from France and 40 percent total from
555
Europe. And, while the EU is one coordinated zone with free movement of goods and services,
for businesses on the ground (especially foreign firms like Brink’s) features such as taxes, labor
costs, and employment laws vary.
The variance can create challenges and hurdles, as it did for Brink’s in 2010 in its Belgium
business. Since the mid-1970s, the firm had two subsidiaries there: a money-making diamond
delivery business (mostly in Antwerp) and Brink’s Belgium, a cash delivery unit that provides
services to banks. The latter had been losing money (up to $10 million a year), which the
firm attributed to high labor costs. Belgium does have the highest labor costs in the EU. The
percentage of employer-paid social security is 31 percent, nearly twice that of the United
Kingdom (17 percent). About 50 percent of workers were unionized in Belgium (among the
highest in Europe at the time). The law also provides for generous and lengthy paid sick
leave, severance for a lost job, and full benefits.
Willem Candel, a senior director at Brink’s, characterized the problem: “[Sixty-five percent]
of our costs was labor. We were no longer competitive.” In the first half of 2010, the firm
had losses of $7 million on $32 million in sales, making it clear to management that some-
thing had to be done. Its analysis showed that one thing was driving many of the problems:
the nearly 500 staff members who drove the armored cars and serviced the ATMs were
classified as white collar (professional) instead of blue collar (hourly/manual labor). This distinc-
tion was the result of a late 1800s law that (at the time) was very favorable to employers
and one that made Belgium a low-labor-cost country. Blue-collar workers were to be paid
by the hour, less for overtime, and could be laid off more freely than white-collar employees.
Brink’s claimed that its large number of white-collar employees cost the company $4.5 million
more per year than if the drivers and some other workers were correctly classified as blue
collar. Brink’s also argued that this mistake prevented the company from winning contracts
because its bids were too high relative to competition.
While unions continued their efforts to retain the existing job classifications, Brink’s
developed a strategy. In late 2010, it announced a plan to lay off about 60 workers and to
reclassify staff from white collar to blue collar. The unions were stunned and announced a
strike. Fearing a prolonged conflict and more losses, Brink’s declared bankruptcy in order to
escape additional financial problems. Employees of the cash-handling business were laid off,
and management moved to the Netherlands. The lucrative diamond delivery business was
retained ahead of bankruptcy proceedings.
The union quickly filed suit, contending that changing employees’ job status and not
providing severance pay was illegal. The union’s representative stated that “Brink’s acted as
if we wouldn’t be vigilant, but we have lawyers too.” Expert observers say that the company
probably erred in not providing severance, but Brink’s defended itself, arguing that “we never
refused a dialog with the unions . . . they refused to work.” Those same experts point out
that U.S. firms cannot act the same way about a bankruptcy in Europe, with one suggesting
that “U.S. law treats employees as unsecured creditors . . . it’s very different in Europe.”
A Brussels court rejected the firm’s bankruptcy filing. It held that Brink’s had no grounds
to turn its more profitable diamond transport business into a new firm ahead of the bank-
ruptcy plea. The court suspended Brink’s license to operate this business. Court-appointed
administrators filed a nearly $29 million claim against Brink’s. A settlement was reached in
mid-2011, whereby Brink’s would pay $10 million to employees in order to drop the suit.52
556
Spain is perhaps on the other end of the regulated spectrum. Recently, there has been
more unified union activity, especially in response to the worldwide financial turmoil of
the late 2000s. Spain has one of the highest unemployment rates in Europe and concern
about this is very high. Worse yet, the government does not expect this problem to abate
any time soon (some estimate the rate at 26 percent). The effects have been uneven,
with immigrants and the young being the first to be let go by struggling firms. The
population of foreign immigrants (about 5 million) has increased by a factor of about
ten over the last decade and public spending is at its limit. Offers of lump sum payments
to unemployed immigrants to go home didn’t work and may have been difficult to
finance anyway.53
In general, the long history of union organizing has left many full-time, permanent
European workers covered by an extensive set of regulations and protections, especially
relative to those of the U.S. Many multinationals have long complained about this state
of affairs, and there are signs that European countries will slowly roll back many of
these expensive protections. In the meantime, however, firms are coping with the current
state of affairs by relying on contract, temporary, and part-time workers—in short,
workers with fewer legal protections.54 For instance, in the Netherlands, part-time and
short-term workers occupy about one-third of all jobs, compared to less than 15 percent
in the U.S.55
Unions in Asia
Unions also exert influence in Asia, although this too varies from country to country.
Japanese Unions
As of 2010, there were about 55,000 unions in Japan, a drop of about 18 percent since
1990. Since the 1950s, the vast majority of these have been enterprise unions.56 This
refers to the fact that many different workers in a company, regardless of their profes-
sion or vocation, are represented by one omnibus union. While there are some large
national unions in the public and private sectors (such as municipal workers, teachers,
iron and steel workers, and railway workers) upwards of 90 percent of all unions have
followed the tradition of “one company, one union.” In other words, these in-house
unions represent only the employees of their respective companies and membership is
limited to regular and permanent employees of that firm. A large number of workers in
any given company are part time or temporary and are not covered by union agreement
or by human resource practices that are often associated with Japanese firms (such as
lifetime employment). Toyota, for example, has tripled the number of short-term contract
workers since 2001.
As might be expected from past discussions of Japanese culture in this book, the
relationship between union and management is largely harmonious. Yet, this has not
always been the case. After World War II, many Japanese unions were both militant and
violent. The labor movement was led by radical and militant union organizers whose
agendas frequently included socialist revolution. One of the worst strikes, called the
100-day strike, occurred in 1953 at Nissan where management locked employees out
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of plants for over three months. Finally, after other strikes similar to that at Nissan,
many large Japanese employers basically struck a deal with their unions—they gave
lifetime employment and good benefits in exchange for no labor strife.
Both sides have largely kept to the bargain. Indeed, there is relatively little labor
strife in Japan. This is partially the case because junior-level managers often occupy
union leadership roles. The training received in such union positions is viewed favorably
by management and is factored into promotions. Data show that over 15 percent of
directors of large enterprises were former union officials.57 Observers criticize this rela-
tionship as being too cozy; they say that Japanese unions function as a management
control mechanism rather than a way to represent workers.
Consistent with this view, when Japanese unions go out on strike, they do so for
short periods of time—often a half-day or less. For example, a union leader at the Japa-
nese subsidiary of Royal Dutch/Shell claimed that the union was getting “tough” with
management over wages: “We went on strike the day before yesterday. We stayed out
for 45 minutes. Yesterday we struck again for 15 minutes.” The next day, the workers
struck briefly again (for higher wages) at lunchtime so that the demonstrators would
not have to miss any work. This attitude characterizes most Japanese unions. The aver-
age Japanese employee strikes about 4 minutes a year, compared to 9 minutes for the
U.S., and 23 minutes for Spain.58 Strikers often work full shifts after walking a picket
line. In addition, productivity often stays steady during a strike. Through all their eco-
nomic troubles of the last two decades, there is still a high level of consultation among
management and employees about company decisions, experts believe, although union
density has decreased about 14 percent the last decade.
Unions in China
As in many other aspects of business, China is unlike any other country. One of the
traditional hallmarks of China’s labor relations approach was full employment. This
employment orientation has been referred to as the iron rice bowl, a cradle-to-grave
employment system with an egalitarian wage system. In the past, employees could expect
that their needs and jobs were taken care of—they were secure and permanent. An
employee could not be fired, and pay and housing were guaranteed.
As is widely known, over the last three decades China has been dramatically impacted
by its economic reforms, rising to the world’s second largest economy (having done so
faster than any country in history). While a few vestiges of the old iron rice bowl system
persist, for some time now workers can be laid off (made “redundant”) and other
Western-type managerial prerogatives have become available.
Laws do provide for treatment of laid-off workers and also provide a system for
arbitrating any disputes that occur in this process. Employers, for example, must give
30 days’ notice or at least one month’s wages to affected workers. The number of
employees involved in labor disputes handled by arbitration committees is large, nearly
700,000 in 2006 alone, up from 250,000 in 2000.59
There are unions in China, including ten national industrial unions in industries
such as communications, manufacturing, banking, and construction. There are no inde-
pendent unions, but instead all are sections under a large national union, the only one
558
allowed by law. The All-China Federation of Trade Unions (ACFTU) is the world’s
largest national trade union with over 140 million members, at least on paper. The
ACFTU recently has been more impactful, playing a role in new legislation to protect
women’s rights, and other worker issues. But, having said this, the industrial unions
have a poor reputation, often playing a supporting role at best and conforming to the
ACFTU/party line. Although unions are ostensibly the link between the party and the
masses, they are often ridiculed as unnecessary (pao loong tao—“a body to fill a tem-
porary vacancy”). The right to strike is still officially unlawful and independent unions
are discouraged and suppressed. Even internal union dissent is discouraged, in spite of
some leeway offered to the ACFTU. The role of this union—at least in the eyes of the
government—is to prevent worker unrest.60
From the government perspective, therefore, unions have not done their job because
there has been considerable worker unrest over the past decade in China. Some of these
have been very high profile, involving thousands of workers, and clashes with authori-
ties. To protest the planned privatization of a state-run steel company in Tonghua, and
fearing job losses and pay reductions, nearly 30,000 workers took part in a protest that
turned violent. Workers blocked roads and destroyed police cars; more than 100 people
were injured and there was one death (a company executive, at the hands of workers).61
Another example occurred at the HonHai (Foxconn) factory, a major supplier for Apple,
where 5,000 police were sent to quell employee unrest and violence over conditions at
the plant. These included underage workers, long shifts, improper handling of chemicals,
and air quality—among others. Apple had experienced pressure from workers and activ-
ists inside and out of China—a market of growing significance to Apple. Indeed, Apple’s
own annual supplier audit showed that 62 percent were compliant with working-hour
limits, 35 percent did not meet standards to prevent injuries, and over 30 percent did
not comply with hazardous substance practices. In another recent case, Chinese employees
locked the U.S. founder and CEO in his office for days, refusing to let him go until they
received severance benefits. In the first third of 2013, 201 cases of labor disputes were
officially recorded—eclipsing the total of all 2012. This situation is likely to
continue.62
Unions in Other Asian Countries

Countries such as India, Indonesia, the Philippines, Thailand, and Vietnam are examples
of economies—and labor relations—on the move. Likewise, the so-called “Asian Tigers”
(Singapore, South Korea, and Taiwan) have become major influences in the world
economy. Although a good deal of government influence is exerted on workplaces in
these countries, there are big differences in the state of their labor relations. Labor issues
in Singapore and, to a lesser extent, Taiwan have been relatively calm, with emphasis
on social partnership and political stability.63 In contrast, labor relations in South Korea
have been more confrontational. A particularly well-publicized strike against Hyundai
over a decade ago illustrates this high profile of union activity (yet, only a 10-percent
union density rate). The length of the strike and the poor manner in which it was handled
by the company was reminiscent of some earlier bad examples in the U.S. Korean work-
ers also violently resisted GM’s initial efforts to make a bid for Daewoo, the troubled
559
Korean car firm. As one Daewoo worker put it, “[s]elling the company to GM would
mean handing over a piece of Korea to the U.S.” This confrontational style of labor
relations has continued through the 2000s, with a fair number of strikes and loss of
working days.64
Central/South American Unions
Since the passage of the North American Free Trade Agreement (NAFTA), much atten-
tion has been focused on Mexico. A variety of federal laws govern labor relations in
Mexico, many of which favor labor—including wage and benefits guarantees. Union
density rate in Mexico has not declined as have others in North or South America, and
remains at about 15 percent, which is roughly where it has been for over a decade.
It takes only 20 employees to form a union in Mexico. As a result, Mexican firms
are used to negotiating with many different unions within one unit or factory. If the
official union declares a strike, all personnel—including management—must vacate the
premises. Flags are stationed at each locked entrance signifying that the plant is under
strike. Union members receive pay during the time they are out on a (legal) strike. Unions
have won many worker rights, mostly through federal legislation rather than direct union
activity. In the maquiladoras near the U.S. border, companies are often able to choose
submissive, government-affiliated unions for their factories. Other major South American
economies (Brazil, Argentina) have varying levels of government control and input into
labor relations activity.65
African Unionism
Overall, union activity in Africa is relatively underdeveloped. Nevertheless, there are

differences across countries, ranging from the relatively compliant approach in Kenya
to the more activist unions in South Africa.
In the 1970s, when South African apartheid was at its height, white groups were
permitted to form unions and engage in collective bargaining. Blacks, the vast majority
of citizens, however, were denied those rights. In 1980, black groups gained limited
union rights, and union membership tripled in five years. In the shadow of apartheid,
the power of the black unions grew quickly, as did strike activity, some of it violent.
Yet, the effects of unions was dramatic: wage increases for black workers approached
the percentage gains realized by American workers, which in turn were greater than for
Europeans.66 These occurred mainly among poor, low-skill workers, whose very low
wages increased dramatically. So, even while future South African President Nelson
Mandela was still in prison, black union workers were winning concessions.
Once he became president, Mandela’s challenge was to balance the increasingly
strident demands made by both unions and businesses—especially foreign ones. Yet, his
priorities were clear. For example, when the national union (COSATU) staged a nation-
wide strike against a proposed law allowing companies to lock out strikers, Mandela
appeared with workers wearing COSATU colors. The provision was quickly deleted.
Many businesses and foreign investors felt that this underscored their concern that South
560
African unions had too much influence. They argued that if South Africa was to be
more competitive globally, government needed to adopt more flexible labor rules and
perhaps dump some state-run enterprises. The unions countered that such moves would
create more unemployment, leaving many of apartheid’s inequities unaddressed.
Mandela’s successors, Presidents Mbeki and Motlanthe, continued to try to balance
competing demands, but challenges remain for current president Jacob Zuma. Months
after Zuma was elected in 2009, he faced a strike by the municipal workers union. Police
fired rubber bullets at protesters in the townships outside Johannesburg and the strike
lingered. Zuma was able to sidestep another problem when the National Union of
Mineworkers (NUM) agreed to wage concessions. These problems returned, however,
in 2012 after 4,000 miners at the Lonmin platinum mine walked off the job, in violation
of labor laws. When miners charged at police with makeshift weapons, police opened
fire; 34 miners were shot and another dozen also died during the nearly 50-day strike.
A deal was finally reached to increase worker pay, but not before strikes spread else-
where. Sadly, only a month later, the strike was reinstated to protest the arrest of a
striking miner charged in the murder of an NUM officer. This and related effects have
been bad for Zuma and the country. Even though he is seen as a workers’ president, is
from the provinces, and himself spent ten years in notorious Robben Island prison with
Mandela (who was prisoner for 27 years), Zuma’s hardly been given a pass and is
unlikely to get one. His impact has been dramatically lessened by both administration
and personal scandals.67
International Employee Unions
As noted, unions around the world have had varying degrees of strength and success in
recent years. Perhaps the largest challenge to domestic unions, however, is the multina-
tional itself. As explained, one of the main cards multinationals can play is the threat
to move some or all of their operations away from the union to another country.68
There have been a variety of responses by unions to this challenge. The most noteworthy
has been the development of international organizations of workers. As far back as 1919,
part of the peace agreement ending World War I was to create the International Labor
Organization (ILO). The ILO is composed of groups of employees, employers, and govern-
ments, with each having a say in labor policies that are developed.69 There are now over
170 member countries in this organization. The ILO has mainly been responsible for
developing standards for labor conditions and treatment. These guidelines, however, have
the same legal status as an international treaty. Accordingly, they must be ratified and agreed
to on a nation-by-nation basis. Given the controversial issues that the ILO deals with (such
as equal pay, child labor, and discrimination against groups) many countries fail to embrace
all the guidelines. Even if a country ratifies a guideline, making sure that it complies with
the guideline’s stipulations is even tougher. In many ways, the ILO operates like its larger
parent organization, the United Nations. Other international organizations have similar
goals (such as the Organisation for Economic Cooperation and Development, OECD).
Some unions also maintain international membership, including the International
Confederation of Free Trade Unions (ICFTU). Their goal is to help national unions in
their dealings with multinationals. Most members come from North America and Europe
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and it can be a powerful voice for labor. Closely associated with these groups are Inter-
national Trade Secretariats (ITSs), which often cover major industry types (such as the
International Metal Workers Federation). Regardless of the form these organizations
take, their general goal is to emulate the organization of a multinational and, in so
doing, to develop a transnational bargaining system.
There are some examples of cross-border coordination among unions to meet this
goal. For example, the German union IG Metall provided significant financial and other
support to striking workers at British Aerospace, and the United Electrical Workers
union in the U.S. recently supported a Mexican union’s efforts to organize a General
Electric plant in Mexico.70 Likewise, Chiquita signed (and abided by) a global agreement
among a consortium of international food unions. That said, most observers believe that
international unions have been largely ineffective.71 There are a number of complex
reasons, including the laws of specific countries and multinational opposition. One of
the most insidious reasons, however, has been the ability of multinationals to effectively
play one country and its unions against another.
Many powerful unions within countries are, in effect, political groups and, as a
result, are more concerned with national issues, not necessarily international labor orga-
nizations. It is common for a union in one country to gain jobs by dealing with a
multinational that is having labor trouble in another country. This competitive attitude
is summed up by a Canadian union member: “An American union is not going to fight
to protect Canadian jobs at the expense of American jobs.”72 For example, some years
ago Hoover Appliances (then owned by Maytag Corporation, now by a Chinese firm,
Techtronic) announced plans to close a 600-employee factory in Dijon, France, and to
move its operations to Glasgow, Scotland. Hoover’s Scottish workers traded changes in
work conditions for job security and the 400 new jobs that would result. The French
were outraged and took to the streets to protest. They also crossed the channel to take
part in a TV debate, during which they accused their Scottish colleagues of taking their
jobs. British union leaders were rather quiet about the incident, except to say that “we
have nothing to be ashamed of.”73
Many workers likely see their foreign counterparts as competitors, rather than as
allies, and this remains a major obstacle to success for international unions.74 Neverthe-
less, several American unions have recently begun to join forces with their European
and international counterparts. The AFL-CIO, for example, has made connections with
European unions, something it has rarely done, and has also supported immigration
amnesty in the U.S. Plus, the Union Network International (UNI) has had some success
in obtaining a wide agreement that includes all subsidiaries of several multinationals.
The UNI represents nearly 1,000 unions and 15 million members globally and has agree-
ments with multinationals such as Carrefour, Telefonica, and Metro AG.75
Other Forms of Employee Input
Unions are not the only means by which employees can obtain desired outcomes. There
are a variety of other ways they can have an impact. These methods are known by dif-
ferent terms, including industrial democracy, self-management, and worker participation.
562
The last term is the most relevant for our purposes because it refers to methods by which
workers participate in the management of the firm. Participation can include many dif-
ferent forms of input, ranging from having little to no say, all the way to having the
right to veto management action. Although there are many forms, we will discuss three
different types of participation: (1) joint consultation committees (JCCs), (2) works
councils, and (3) board membership.76
Joint Consultation Committees

JCCs are common in many Western countries. These are groups of workers who sit on
a committee that deals with topics of mutual interest to employees and management.
Their charge can range from concerns about product quality (such as quality circles) to
working conditions, plant safety, and even the general quality of work life (as in Sweden).
Typically, JCC members make suggestions that may be adopted by management. In turn,
management is often expected to keep workers informed about developments via the
committee. The effectiveness of these committees depends on the goodwill of a firm and
is most likely to be successful in paternalistic companies with relatively good employee
relations.77
Works Councils
This form of employee participation is more common in Western European countries
(e.g., Belgium, France, Germany, the Netherlands). These groups are similar to JCCs in
many ways, but works councils often have significant power to block management deci-
sions and actions and to forward solutions to employee concerns. The councils typically
originated as a result of national laws that mandated their creation. This step was seen
as necessary because of a perceived societal obligation to seek employee input, rather
than as a way to necessarily improve competitiveness or the bottom line.78
In the Netherlands, for example, Dutch law requires that any firm with 100 or more
employees must create a works council (some firms with 35 or more employees must
also construct councils, and in even smaller firms the employer is required to hold con-
sultations at least twice a year with employees). The council consists of members who
are elected by employees and must be consulted in decisions of importance to the orga-
nization. These issues are often related to personnel policy (such as safety and training
programs, pay and benefits issues, work relocation, plant closures, etc.). If a firm has
100 or more employees, this consultation could include major financial decisions (such
as new capital investments or business acquisitions). Theoretically, the works council
should represent the interest of all employees. Members of the council, however, may
be managers or production employees. In practice, councils can be co-opted by manage-
ment via this and other means.79
In powerful works councils, such as some in Germany, an employee may effectively
hold two jobs—their regular job and a job as council representative. As a result, it is
not uncommon to have a second office and perhaps even two staffs, right on company
grounds. The council representative may be similar to a shop steward in the U.S. union
environment. The difference is that the works council member has more real input in
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company decisions.80 Research on the impact of works councils on productivity is mixed,

with some studies showing a positive impact and others showing a weak relation.81
Board Membership
Board membership is a third, less common mechanism by which workers have input
into the business. In this case, input is often extensive. In seven European countries
(Austria, Denmark, France, Germany, Luxembourg, Norway, and Sweden) law dictates
that workers must have some kind of representation on the board of directors of firms.
In most cases, these boards are supervisory boards—the group responsible for selecting
a management board that will run day-to-day operations. Codetermination in Germany
is an example of a board membership method. Typically, workers have only a minority
membership on the board. Employee representatives, however, control half the seats of
the advisory boards of firms greater than 2,000 employees. Even though this might seem
like a radical idea, research shows that board memberships for workers generally have
relatively little effect on the business one way or another. Typically, boards meet very
infrequently (often just a few hours a year), and equally often when talk does turn to
substantive issues, worker representatives may be at a disadvantage. Some feel they lack
the background to fully evaluate the complex information (e.g., financials) discussed in
these meetings. Nevertheless, workers can provide valuable input that has changed health,
safety, and investment decisions by the firm. At the minimum, boards appear to provide
a symbolic function for workers, with some unions (e.g., in Britain, Sweden) viewing
them as a valuable source of information rather than as a lever for wielding power.
Finally, several inventive approaches that involve input via a consortium of unions,
government, and the private sector seemed to emerge during the height of the Great
Recession. The following Global Innovations feature spotlights a Dutch example of such
partnerships who worked together to save jobs.
Global Innovations
A New Twist on “Dutch Treat”: Government and Private Support Combines to

Save Jobs in the Netherlands
Governments around the world are looking for ways to improve the job outlook and reduce
joblessness. While many solutions involve a time-honored formula heavily weighted on direct
government bailouts, the Netherlands is trying a new twist on the usual formula.
When unemployment rates jumped between 2008 and 2009, in some cases dramatically,
governments reacted. Canada, Japan, the U.K., Ireland, Spain, and the U.S. all saw increases
in unemployment. In the U.S., for example, the unemployment rate rose from 6.2 percent
to 10.2 percent. Many businesses cut back personnel and sought loans and bailouts from
the federal government. Those in Germany and the Netherlands, for instance, relied heavily
on “short-work programs” to keep people employed. These are a set of actions that combine
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reduced work hours and/or hiring of temporary workers with government support. These
countries were able to keep unemployment down, with the Dutch leading the pack. Unlike
the drastic increase in the U.S., France, and Ireland, unemployment in the Netherlands rose
from 2.7 percent to only 3.6 percent during the same time.
Short-work programs represent a big change in the general European mind-set. For
example, take Theo Witkamp, a 60-year-old machine operator at DAF Trucks in Eindhoven.
Although his work hours were cut, he still earned about 85 percent of what his regular
wages would have been from his job, through a combination of company and state contribu-
tions. Notably, this is also more than he would earn without the job, a reality that might
have happened had the firm not undertaken this joint approach to tackling joblessness. As
Witkamp said, “it beats being unemployed.”
The Netherlands spent nearly $3 billion on this job-saving program in 2010, a pittance
relative to the billions provided to financial and other firms in the U.S. The money does seem
to be well spent, although some experts also give credit to other measures taken during the
height of the worldwide crisis. It is true that the Netherlands has of late trimmed back
unemployment and other government-provided benefits in an effort to cut costs and keep
people working. With such cuts inevitable in a volatile global economy, there is all the more
reason to work to save jobs.
After the global crisis hit, the government, unions, and firms worked to reach an
agreement on wage subsidies. Some said this was a harkening back to the Middle Ages
for the Dutch, when rival cities and classes grouped to save the dikes when massive floods
came. Interestingly, short-work laws were passed in the 1940s, originally during the Nazi
occupation, but have been rarely used until now. Regardless, they were not applied
haphazardly. Qualifications for subsidies were set up (firms had to show 30 percent drop in
revenues over three months), and the subsidies were limited to a six-month period. Firms
were responsible for paying a substantial percentage of employees’ salaries. Plus, the
government set up a network of advisors to work with firms. Nearly 1,500 firms participated
in the plan, some even paying a higher portion of their employees’ salaries than required
by the law.
By many accounts, the program was successful, including the low unemployment figures
noted previously. There were, of course, critics—including some economists who slammed
the efforts, saying that it was “a form of creeping communism” and that it was “sharing
poverty, pure and simple.” Perhaps so, said Dutch finance minister Wouter Bos, adding that
it makes it tough for markets to assess firm performance. But, even Bos changed his opinion,
saying that “you put in some extra money at an early stage, but then you save some money
later because people do not have to go for unemployment.” Either way, the cost was relatively
small compared to some other major bailouts of world economies, including in the U.S. And,
perhaps Bos’s traditional Dutch optimism will play out with more firms getting back on their
feet in the short and long run. It certainly did for DAF trucks, which saved Theo Witkamp’s
job. DAF was one of the firms that decided to provide more pay than was required by the
state. Better yet, because the firm’s orders picked up during the second part of the year, it
did not seek further government support.82
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Putting Agreements into Practice

As discussed in the last section, there are many ways that agreements between manage-
ment and employees can evolve. Unfortunately, there are also a variety of ways that
disagreements can come about. The result may be conflict and strife between manage-
ment and labor.
Relations Between Management and Labor
It is common for multinational firms to consider the general state of relations between
management and employees before they choose to invest in a foreign subsidiary. These
relations show great variability. Figure 13.4 presents data obtained from a sample of
over 12,000 top business executives in 134 countries who were asked to rate how
cooperative labor–management relations were across countries. This figure presents a
sample of the rankings received by a set of 28 countries, some of which are often referred
to in this book. As you will see, Denmark and Japan rank very high—there is a good
deal of cooperation between management and labor, a ranking that they have both
received for decades now. While there may be good reasons not to locate a plant in
Country Ranking Country Ranking
Denmark 1 India 44
Switzerland 3 Chile 51
Sweden 5 Belgium 55
Japan 6 China 66
Hong Kong 7 Nigeria 67
The Netherlands 9 Mexico 68
Norway 10 Spain 74
Taiwan 12 Russia 82
Malaysia 13 Brazil 84
U.S. 16 Pakistan 88
Indonesia 19 Turkey 116
Germany 27 South Africa 119
Canada 34 France 132
U.K. 35 Venezuela 134
Figure 13.4 Rankings of the Degree of Cooperative Relations between Labor and Employers in 28
Selected Countries.
Note: Rankings are determined by a survey of over 10,000 business executives based on their knowledge of and
experience with the country (only 134 countries ranked).
Source: Adapted from: World Economic Forum. (2009). The Global Competitiveness Report, 2008–2009. Geneva:
The World Economic Forum.
566
these countries, poor employee relations is not one of them. On the contrary, Venezuela
and France rank at the very bottom on this dimension. As you can see, the U.S. comes
in at sixteenth place out of the 134 countries ranked in this study—a relatively high
showing, and a marked improvement over the previous decade.
Deterioration of Relations
Sometimes labor–management relations can deteriorate to the point at which work

slowdowns, sabotage, or even violence occur. These outcomes, however, are difficult to
track (slowdowns) and some are not all that common (violence). Strikes, on the other
hand, are more common and are easier to observe because they have some easily docu-
mented features, such as their frequency, size, and length. But while these variables seem
relatively objective, directly comparing strikes across countries isn’t that easy.83 There
are many nation-specific definitions of what constitutes a strike or other type of work
stoppage. Danish statistics, for example, exclude any disputes that result in fewer than
100 days being lost. Despite this, Denmark regularly ranks among the highest in the
world on work days lost because of strikes. Nevertheless, some groups, including the
ILO and the OECD, have worked to clarify definitions and make strike data more
comparable. For the most part, strike data are usually based on the number of strikes
and the number of work days lost because of the strike.
Based on these data, several conclusions can be reached about strikes. First, strike
activity has generally been diminishing since the 1970s.84 The number of days lost to
strikes, for example, has declined in recent years, particularly in the European Union,
and accelerated by the recession of the late 2000s.85 Consider the U.K. where about
750,000 working days were lost to strikes in 2008. While this number is large and
impacted the British economy, it pales in comparison to the 30 million days lost in 1979.
This drop is due to a number of causes, including a decline during economic downturns
and increase in times of prosperity.86 Data also show that there has been a shift in the
nature of strikes, which these days are more likely to involve public services (e.g., public
transportation systems), and work process issues (e.g., job security, worker participation)
rather than workplace outcomes per se (e.g., higher pay). Consider Britain again where
in 2008, 94 percent of all strikes were by public-sector employees, many concerned with
job security.
In Figure 13.5 we present a ranking of a variety of countries on two measures: the
number of strikes and lockouts and the number of work days lost from these actions.
Note that some countries that are thriving economically have a relatively high number
of strikes. Year in and year out, Denmark, Spain, France, and Italy rank high among
all countries in strikes. The number of lost work days can be in the millions as a result
of these work stoppages. These statistics do not always count shorter, less-than-one-day
strikes that seem to be occurring more often. These “just-in-time” strikes inflict a lot of
disruption for the lost pay that they cost workers and are not uniformly counted as
official strike days. This and other features are affected by cultural and legal structures
in place across countries and we turn to this next.
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Country Strikes and Lockouts Working Days Lost Days Not Worked
(per 1,000 employees) (in millions)
Denmark* 862 21 0.092

Spain 811 62 1.5
France 699 # 1.4
Italy 621 56 0.930
Canada 187 280 0.875
Australia 177 28 0.197
Portugal 174 7 0.045
U.K. 144 6 0.759
Finland 92 322 0.016
Netherlands 20 6 0.026
Japan* 18 # 0.002
U.S. 16 10 1.26
Belgium* 10 # 0.670
Sweden 5 2 0.107
Switzerland 2 1 0.007
Figure 13.5 Strike Activity and Effects in a Variety of Countries.

Note: Number of strikes/lockouts excludes work stoppage involving < 500 workers and lasting < 1 full day or shift.
Days lost (in millions) refers to the number of 8-hour days lost due to strikes/lockouts. Most data are for 2008;
some (*) are from 2006/7. Working days lost/1,000 workers = 2006; # = no data available.
Source: Adapted from International Labor Organization. (2008). Statistical Tables, available at: http://laborsta.ilo.
org/STP.
Germany
Despite a long and powerful tradition of union influence, strike activity in Germany is
not as common as in other Western European nations (approximately 130,000 work days
were lost in 2008). For example, days lost per 1,000 employees was about ten times as
much in France as Germany. This is due partly to the many input and control mechanisms
of German workers (such as the works councils, codetermination). In addition, however,
German labor relations are also covered by many legal regulations, making more extreme
steps such as strikes and lockouts less necessary. For example, laws prohibit either strikes
or lockouts when a contract is in effect. Consequently, strikes usually occur when contracts
have expired and negotiations are ongoing. In the 1980s, German unions struck with an
existing contract in place. During this period of high inflation, workers wanted their wages
to keep up with this inflation, but these situations are rare in Germany.
Japan
As touched upon previously, union–management relations in Japan are quite good.
Figure 13.5 shows that there were only 18 strikes that produced very few lost work
days (only about 2,000). Most disagreements are settled amicably. It is rare for relations
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to get caustic enough to result in a strike. Even when they do, the strike is brief and
not bitter—often it is undertaken to either bring issues to the attention of management
or to sometimes embarrass them. Lockouts by management are very rare. In fact, although
emotional behavior of union members is tolerated, management is expected to always
be courteous and civil in their language and behavior.87
The U.K.
Strike activity in the U.K. is quite high, as shown in Figure 13.5, with 144 official strikes
resulting in nearly 760,000 lost work days. The reason for this high frequency might
be the government’s traditional “hands-off” approach to labor relations. This approach
has resulted in fewer legal constraints on labor action relative to some other EU coun-
tries. For example, labor contracts do not prohibit strikes. As a result, they happen more
often. Strikes usually occur during a deadlock in negotiations, although no one type of
strike (in terms of frequency or style) seems to predominate in Britain.88 Despite this,
strike frequency is tracking down over the last decade in Britain.
The U.S.
The U.S. had 16 official strikes in 2008—a figure that has hovered at about 20 for the
last half-decade. But, these resulted in over a million lost work days for the U.S.’s large
labor force. American labor contracts typically prohibit strikes during the period of the
agreement. So, once a contract is in place, a strike (called a wildcat strike) is rare and
usually not authorized by the union. As in Germany, once a contract expires and a new
one is not yet approved, a strike becomes a viable option—an option that is sometimes
exercised. Employees may choose to continue to work during the negotiation period,
while threatening a strike. Lockouts by management do occur on occasion, but they are
also relatively rare.
Effect of Unions on Strikes
An important question from management’s perspective is the overall effect of having a

unionized workforce. Many managers find dealings with unions, regardless of where
they are, to be challenging. Nevertheless, there are some benefits from a unionized
workforce, including a structured bargaining system and clear contractual obligations
that must be fulfilled.
Perhaps a more subtle benefit of union membership, however, is that it may quell
more extreme and militant worker action. For instance, the data presented in Figure 13.6
show the relation between overall level of worker militancy and union density in 12 EU
countries. Militancy is defined as a combination of variables that are indicative of labor
strife and unrest. In general, the figure shows a negative relationship between militancy
and union density. In other words, higher union density is generally associated with a
lower incidence of violence. For example, the five countries on the right-hand portion
of Figure 13.6 (the U.K., France, Greece, Italy, and Spain) all have high levels of mili-
tancy and a (relatively) low percentage of workers who are unionized. The left-hand
569
100
90
80
70
60
50 % Union
40 % Militancy
30
20
10
0
Lux Neth Bel Port Germ Den Ire U.K. Greece Spain
Figure 13.6 The Relationship Between Worker Militancy and Union Density.
Note: Spanish labor relations were considered the most militant and therefore assigned a 100 percent value. Other
countries percentages are presented as a fraction of Spain.
Source: Adapted from Sparrow, P., and Hiltrop, J. M. (1994). European Human Resource Management in Transi-
tion. New York: Prentice-Hall.
side of this graph shows the opposite for several countries (e.g., the Benelux countries).
So, despite all the management resistance to unions, there may be a silver lining. Orga-
nized employee input—perhaps in many forms—may actually make management–worker
relations smoother than would otherwise be the case.
Chapter Summary
Chapter 13 looked at the value and influence of large and small work groups across cultures.
We reviewed research showing that national and cultural differences have the potential to
be both problematic and promising. For example, groups are more important in collectivist
countries than they are in individualistic ones. But even in a collectivist culture, in-groups
and out-groups vary dramatically in their value. Social loafing, a common effect in individu-
alistic countries, also tends to occur among collectivists but only in groups that are unim-
portant to them.
We then shifted our discussion to larger labor relations issues between management
and employees. Employee interests can be represented by unions, although they differ in
number and strength across countries. That said, the percentage of union members is on
the decline worldwide. One reason is that worker interests can be served by other
570
mechanisms. Various forms of worker input exist, ranging from mild forms—such as having
some say or input into work procedures—to having a vote over important firm decisions.
Despite these input methods, sometimes management and employees simply can’t
agree. Labor strikes are one response to a lack of agreement and management lockouts or
plant closures/relocations are another. The nature and prevalence of worker strike activity
and/or management prerogatives again can vary across countries due to laws, union power,
and more.
1. What affects group productivity in various countries? What might increase productivity for
U.S., Chinese, or German groups?
2. What might happen when groups of American, Chinese, and German employees get together
to complete a project? In other words, what factors could explain why a multicultural group
might experience difficulty solving problems in a creative fashion?
3. Why might multinationals have the upper hand in dealing with workers, even if those
workers are unionized and spread across a variety of countries?
4. What are some of the differences between how North American, European, and Asian
unions operate? Why might those differences exist?
SAP’s Decision to Become Less German

The chapter opening introduced some of the challenges faced by the large German software
company SAP. It wanted to change its staid corporate culture in order to more quickly
respond to the web-based software of its rivals and to that increasingly preferred by
customers. New management, such as Mr. Shai Agassi, made some dramatic changes,
including adding thousands of developers from the U.S., India, and other countries. Agassi
changed the official company language to English, took key development tasks away from
the successful but calcified German teams at corporate headquarters in Walldorf, Germany,
and carved up other key tasks. The Palo Alto office handled the look and feel of products,
an India office took responsibility for analytical tools, and the Walldorf office worked on
hard-core coding.
Veteran German developers at Walldorf complained about being shut out of phases of
the development process. Others clashed with Agassi about how SAP units in countries were
571
modifying “their” software. Agassi recalled German developers stating, “they don’t tell us
what to do—we tell them what to build.” Of course, this attitude was exactly what Agassi
and his German superiors wanted to change. In response, SAP made Agassi, the non-German,
responsible for SAP’s traditional software operations in Walldorf as well as all SAP product
strategy—moves Agassi later described as “punishment.”
Yet, Agassi took his newest assignment to heart and hired hundreds of programmers
from Silicon Valley competitors, putting some in senior positions. From California, he created
a plan to develop new products in 100 days, later dropping the target to 50 days. He pinpointed
German managers whose opposition could threaten these changes and created a list of people
to personally win over. To demonstrate that faster development was possible, he created a
showcase project, tasking ten developers to produce 100 programs in 12 weeks, much quicker
than SAP’s traditional approach. The developers pushed back and asked the goal to be set at
30 programs instead. Agassi refused, and they ultimately completed the project.
But the German grousing continued—about the quality of the products SAP was now
turning out and that Palo Alto now called the shots. The CEOs supported Agassi’s changes
and pointed out that employment at Walldorf was higher than ever, yet German veterans
were having none of it. They complained about their loss of autonomy and the “American-
ization” of SAP. As one German noted, “we used to be kings.” They were quick to say that
Agassi pushed key product teams into eight centers around the world, all directed from
California.
More conflict surfaced at a set of meetings between Agassi and Walldorf developers,
called by the CEOs. Agassi was hammered by German employees about goals, jobs at Wall-
dorf, and the behavior of foreign managers. At a later set of town hall meetings, the CEOs
heard more concerns about Americanization. Things got worse when the German media
swooped in with an article entitled “SAP & Globalization: March of the Americans.” A German
manager noted that “it’s clear that Agassi would like to get as many functions to the U.S.
as possible.” Agassi stated that SAP was simply looking for the best talent it could find.
Eventually, SAP sponsored cultural sensitivity training to mitigate these problems. The
training revealed that Indian developers preferred lots of attention and supervision, while
Germans would rather be left alone to work. Differences were also uncovered in how feed-
back was delivered—ones that were off-putting or sent inconsistent messages. Americans
tended to be more effusive with their praise—they would be more likely to compliment a
piece of work by saying that it was “excellent,” whereas Germans were more likely to describe
the same work as “good.” Foreign managers hired by SAP were also advised during training
about how to interact more effectively with German developers—part of the answer was to
work hard and impress them.
But these efforts were apparently too little and too late for Agassi, who had become
increasingly frustrated. He decided to resign. During a subsequent interview with reporters,
CEO Kagermann stated that he would continue his efforts to persuade and convince employees
that SAP could not go back to its old Walldorf-centric ways. When asked about Agassi’s
departure, Kagermann noted, “it’s not easy to manage.” It remains to be seen how similar
insulated companies, such as Toyota, will fare.89
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Understanding Japanese Group Decision-Making

Purpose
To give students the opportunity to work through a meaningful task using the Japanese
approach to consensual decision making, as well as to compare the experience that students
have making group decisions with the Japanese approach of decision making. This will provide
a better understanding of how group processes might differ across cultures.
Instructions
Your instructor will explain the processes of Ringi and Nemawashi and will set up the structure
of the exercise. Group composition includes leaders (Kacho) and student managers (Bucho).
Next, your instructor will divide the class into groups of four to six members. Your group will
design a final exam format that is likely to be a valuable learning tool and appropriate basis
of evaluation for your class (20 minutes).
Next, your instructor will divide the class into new groups of four to six members (the
Kacho groups). In your new group, you will continue with the task, using the results of the
first group as a starting point. After this meeting, groups can choose their own venue for
future meetings. Your instructor will give advice during one or two open-ended class sessions.
Outside class meetings will occur at the initiation of the group and student leaders (20
minutes).
Next, the whole class will generate a Ringi document that specifies the content of the
exam. This document must be signed by all students in the class. Your instructor will discuss
what problems, if any, the Ringi document might cause. Finally, the whole class will discuss
the following questions:
1. How much did your experience resemble the descriptions of Ringi and Nemawashi provided
by your instructor?
2. What difficulties did you encounter?
3. Were those difficulties likely to be present in the Japanese context? If so, how would they
probably be managed?
Source: Van Buskirk, B. (1994). Japanese decision making. In D. Marcic and S. Puffer (eds) Management
International: Cases, Exercises, and Readings. Minneapolis, MN: West Publishing Company. Reprinted by
permission.
573
Developing Expertise in International Labor Trends

Purpose
To become familiar with features about labor conditions and trends worldwide, which can
be valuable knowledge to have, or to know how to get, for an aspiring expatriate.
Instructions
For this exercise, you will examine characteristics about the labor force in four countries,
including features about the quality (education, attitudes, skill sets) and quantity (workforce
size overall and in various sectors; number of available employees; age; growth rate; quantity
of trained workers, etc.). Your instructor may assign the countries or provide you with options
to choose from, although at least one should be a developing country and at least one other
from a developed country. Then use the resources below (or additional ones you may find
in your research) to summarize the state of labor relations in each country. There are a number
of ways to evaluate each country, and some ideas about this are presented below. Regardless
of how you conduct your examination, you should be prepared to present your findings to
class in a 10-minute report (or in a paper if directed by your professor).
For each country, present a set of labor quantity and quality variables that convey an
accurate picture of the situation in your chosen countries. In your report, comment on the
data and, importantly, their implications. For example, if you note that over 40 percent of
the world’s 15- to 20-year-olds live in two developing countries you investigated (China and
India), be sure to discuss why this might be important.
We also recommend that you assess features about labor conditions in your target
countries that may present either opportunities or challenges to firms doing business there.
Among other questions to raise about the conditions are the following: (a) Has the labor
force been shifting from rural to urban? (b) What is the status of immigrant labor in your
target countries and related topics (e.g., brain drain; guest workers)? (c) What about the
serious issues of child/forced labor? (d) What is the nature of laws pertaining to various labor
groups (e.g., gender, race, etc.)? (e) What are the key employment laws that can impact
business functions in your countries (e.g., severance pay, labor force reductions, labor
organizing)?
Deliverable
Create a matrix chart that includes your countries as columns and variable comparisons as
rows. Include a final row that is your rating on a scale from 1 (tough labor market) to 10
(favorable market) for the multinational you might work for. In your (brief) report, rely on
this chart to talk through your rating as well as the key comparison variables that determined
your overall rating.
574
Resources
A number of useful resources are available on the Internet and in your library to help with
this assignment. Here are some especially relevant sources to kick-start your research on this
project:
• U.S. Department of Labor, Bureau Labor Statistics (www.bls.gov/). While this

department focuses mainly on the U.S., it also includes a set of international labor comparisons.
• Michigan State University, Global Edge (http://globaledge.msu.edu/). This

international supersite has many resources and links to those sources that can be of help
with this project and that you should bookmark.
• International Labour Organization (www.ilo.org/). The ILO has a complete set of data
on labor features of many countries and will be very useful for this assignment.
• Organisation for Economic Co-operation and Development (www.oecd.org). This

provides a wealth of information and comparable statistics on the 34 OECD member states
and can be searched easily.
Notes
1. Dvorak, P., and Abboud, L. (2007). Difficult upgrade: SAP’s plan to globalize hits cultural
barriers; software giant’s shift irks German engineers, U.S. star quits effort. The Wall Street
Journal, May 11, A1.
2. Triandis, H. C. (1988). Collectivism v. individualism: A reconceptualism of a basic concept in
cross-cultural social psychology. In G. K. Verma and C. Bagley (eds) Cross-Cultural Studies of
Personality, Attitudes, and Cognition, 60–95. New York: St Martin’s Press.
3. Domino, G. (1992). Cooperation and competition in Chinese and American children. Journal
of Cross-Cultural Psychology, 23, 456–467.
4. Bond, M. H., and Hwang, K. (1986). The social psychology of the Chinese people. In M. H. Bond
(ed.) The Psychology of the Chinese People, 213–266. Hong Kong: Oxford University Press.
5. Earley, P. C., and Mosakowski, E. (2004). Cultural intelligence: Knowing what makes groups
tick is as important as understanding individuals. Harvard Business Review, October, 139–146.
6. Liden, R. C., Wayne, S. J., Jaworski, R. A., and Bennett, N. (2004). Social loafing: A field inves-
tigation. Journal of Management, 30, 285–304.
7. Matsui, T., Kakuyama, T., and Ongltco, M. L. U. (1987). Effects of goals and feedback on
performance in groups. Journal of Applied Psychology, 72, 407–415.
8. Earley, P. C. (1989). Social loafing and collectivism. Administrative Science Quarterly, 34,
565–581; Gabrenya, W. K., Latane, B., and Wang, Y. (1985). Social loafing on an optimiz-
ing task: Cross-cultural differences among Chinese and Americans. Journal of Cross-Cultural
9. Earley, P. C. (1993). East meets West meets Mideast: Further explorations of collectivistic and
individualistic work groups. Academy of Management Journal, 36, 319–348.
10. Triandis, Collectivism v. individualism: A reconceptualism of a basic concept in cross-cultural
social psychology.
11. Espinoza, J. A., and Garza, R. T. (1985). Social group salience and inter-ethnic cooperation.
Journal of Experimental Social Psychology, 23, 380–392.
575
12. Earley, East meets West meets Mideast: Further explorations of collectivistic and individualistic
work groups.
13. See also Earley, P. C. (1994). Self or group? Cultural effects of training on self-efficacy and
performance. Administrative Science Quarterly, 39, 89–117.
14. Earley, East meets West meets Mideast: Further explorations of collectivistic and individualistic
work groups.
15. Silverman, R. E. (2012). Step into the office-less company—how one firm manages employees
scattered across 26 countries and 94 cities. The Wall Street Journal, September 5, B6.
16. Boeing Corp. (2009). Statistical summary of commercial jet airplane accidents: Worldwide
operations, 1959–2008. Boeing Corp., Seattle, WA, available at: www.boeing.com/news/
techissues/pdf/statsum.pdf.
17. Merritt, A. C., and Helmreich, R. L. (1996). Human factors on the flight deck: The influence
of national culture. Journal of Cross-Cultural Psychology, 27, 5–24.
18. Please see: www.airlinesafety.com/editorials/HumanErrorVsTerrorism.htm (retrieved October
24, 2013).
19. Cramton, C. D., and Hinds, P. L. (2005). Subgroup dynamics in internationally distributed
teams: ethnocentrism or cross-national learning? Research in Organization Behavior, 26,
231–263; Von Glinow, M., Shapiro, D. L., and Brett, J. M. (2004). Can we talk, and should
we? Managing emotional conflict in multicultural teams. Academy of Management Review, 29,
578–592.
20. Some of these anecdotal observations have been supported with research findings. See, for
example, Salk, J. E., and Brannen, M. Y. (2000). National culture, networks, and individual
influence in a multinational management team. Academy of Management Journal, 43, 191–202.
21. Browning, E. S. (1994). Computer chip project brings rivals together, but the cultures clash. The
Wall Street Journal, May 3, A1, A8.
22. Dalton, M., Ernst, C., Deal, J., and Leslie, J. (2002). Success for the New Global Manager:
How to Work Across Distances, Countries, and Cultures. San Francisco: Jossey-Bass; Earley,
P. C., and Mosakowski, E. (2000). Creating hybrid team cultures: An empirical test of transna-
tional team functioning. Academy of Management Journal, 43, 26–49; Thomas, D. C. (1999).
Cultural diversity and work group effectiveness: An experimental study. Journal of Cross-
Review of Psychology, 58, 479–514; Jehn, K. A., Chadwick, C., and Thatcher, S. M. B. (1997).
To agree or not to agree: The effects of value congruence, individual demographic dissimilar-
ity, and conflict on workgroup outcomes. International Journal of Conflict Management, 8,
287–305.
24. Earley, P. C., and Mosakowski, E., (2000). Creating hybrid team cultures: An empirical test of
transnational team functioning. Academy of Management Journal, 43, 26–49; Elron, E. (1997).
Top management teams within multinational corporations: Effects of cultural heterogeneity.
Leadership Quarterly, 8, 393–412; Harrison, D. A., Price, K. H., Gavin, J. H., and Florey, A.
(2002). Time, teams and task performance: Changing effects of surface- and deep-level diversity
on group functioning. Academy of Management Journal, 45, 1029–1045,
25. Ayoko, B. O., Hartel, C. E., and Callan, V. J. (2002). Resolving the puzzle of productive and
destructive conflict in culturally heterogeneous workgroups: A communication accommoda-
tion theory approach. International Journal of Conflict Management, 13, 165–195; Earley
and Mosakowski, Creating hybrid team cultures: An empirical test of transnational team
functioning.
26. Gibson, C. B., and Zellmer-Bruhn, M. E. (2001). Metaphors and meaning: An intercultural
analysis of the concept of teamwork. Administrative Science Quarterly, 46, 274–303.
27. Sanchez-Burks, J., Nisbett, R. E., and Ybarra, O. (2000). Cultural styles, relational schemas and
prejudice against outgroups. Journal of Personality & Social Psychology, 79, 174–189.
28. Adler, International Dimensions of Organizational Behavior.
576
29. Earley, P. C. (1999). Playing follow the leader: Status-determining traits in relations to col-
lective efficacy across cultures. Organizational Behavior and Human Decision Processes, 80,
192–212.
30. Tan, H. H., and Aryee, S. (2002). Antecedents and outcomes of union loyalty: A constructive
replication and extension. Journal of Applied Psychology, 87, 715–722.
31. Newman, B. (1993). Border dispute: Single-country unions of Europe try to cope with multina-
tionals. The Wall Street Journal, November 30, A1–A22.
32. Fleming, C. (2004). Europe learns litigious ways. The Wall Street Journal, February 24, A16,
A17.
33. McCann, D. (2005). Working Time Laws: A Global Perspective. Findings from the ILO’s
Conditions of Work and Employment Database. ILO, available at: www.ilo.org/public.
34. Bush, J., Scott, M., Rowley, I., Lakshman N., Matlack, C., Ewing, J., and Zhe, H. (2009).
The hidden perils of layoffs. BusinessWeek, March 2, 52–53; Fact Sheet (2009). The Worker
Adjustment and Retaining Notification Act: Fact Sheet, available at: www.doleta.gov/programs/
factsht/warn.htm. Also see: www.dol.gov/compliance/laws/comp-warn.htm; Eder, S. (2008).
WARN Act falls short as jobs vanish. The Toledo Blade, December 12, B1.
35. Steinmetz, G. (1996). Americans, too, run afoul of rigorous German rules. The Wall Street
Journal, February 2, A6.
36. Freshfields, Bruckhaus, Deringer (2009). Managing Mass Redundancies Across Europe.
Freshfields, Bruckhaus, Deringer, Brussels (2nd ed.), available at: www.breshfields.com/
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costly for companies in Europe, August 18. 44.
37. Coy, P. (2012). Cliff ahead. Speed up. Bloomberg Businessweek, August 13–26, 8–9; Bilefsky,
D. (2003). The Dutch way of firing. The Wall Street Journal, July 8, A14; Walker, M., and
Thurow, R. (2009). U.S., Europe are ocean apart on human toll of joblessness. The Wall Street
Journal, May 7, A1, A14.
38. Moffett, M., Brat, I., and Kowsmann, P. (2012). Big Europe strikes have little effect. The Wall
Street Journal, November 15, A11.
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40. Ferner, A., and Hyman, R. (1992). Industrial Relations in the New Europe. Oxford: Blackwell.
41. Gunnigle, P., Brewster, C., and Morley, M. (1994). European industrial relations: Change and
continuity. In C. Brewster and A. Hegewisch (eds) Policy and Practice in European Human
Resource Management: The Price-Waterhouse Cranfield Survey, Chapter 9, 139–153. London:
Routledge.
42. Hollinshead, G., and Leaf, M. (1995). Human Resource Management: An International and
Comparative Perspective. London: Pitman.
43. Brunstein, I. (ed.) Human Resource Management in Western Europe. Berlin: Walter de Gruyter;
Matlack, C. (2003). France: Labor disarray is giving reform a chance. BusinessWeek, June 16, 48.
44. The Economist. (2009). A time of troubles and protest: As European economies sink, fears of
social unrest arise, January 24, 55–56; The Economist. (2007). The street fights back: Strikes
in France, November 24, 55; Carreyrou, J. (2005). At French utility, union wages war to guard
its perks. The Wall Street Journal, May 10, A1, A10
45. The Economist. (2004). German industrial relations: Slowly losing their chains, February 21,
49; Wachter, H. (1997). German co-determination—Quo vadis? A study of the implementation
of new management concepts in a German steel company. Employee Relations, 19, 27–37.
46. Biehl, J. K. (2003). Germans’ love of leisure worries government. SFGate.com, July 3, available
at: www.sfgate.com.
47. Sims, G. T., and Rhoads, C. (2003). New era for German labor movement? The Wall Street
Journal, July 1, A9; Rohwedder, C. (1999). Once the big muscle of German industry, unions
see it all sag. The Wall Street Journal, November 29, A1; Edmondson, G. (2004). Showdown
in the Ruhr Valley. BusinessWeek, November 1, 54–55.
577
48. Hollinshead and Leaf, Human Resource Management: An International and Comparative
Perspective.
49. Brewster, C., and Hegewisch, A. (1994). Policy and Practice in European Human Resource
Management: The Price-Waterhouse Cranfield Survey. London: Routledge.
50. Reed, S. (1997). Will Stockholm give away the store? BusinessWeek, February 10, 54.
51. Hees, M. (1995). Belgium. In I. Brunstein, Human Resource Management in Western Europe.
52. Miller, J. W. (2010). Brink’s retreat in Belgium backfires. The Wall Street Journal, December 21,
B8; Krawitz, A. (2010). Belgium diamond shipments halted as Brink’s loses its license: Diamonds
worth $200 million being blocked at Zaventem airport, available at: www.diamonds.net/news/
NewsItem.aspx?ArticleID=33529.
53. The Economist. (2009). Spain’s new unemployed: The worrying social fallout from sharply ris-
ing unemployment, January 24, 56; The Economist. (2001). Spain cuts a Gordian labor knot.
March 10, 51.
54. Bush, J. (2007). Russian labor raises its voice: A walkout at a Ford plant near St Petersburg may
herald a new era of union activism. BusinessWeek, December 10, 34–35.
55. The Economist. (2009). A time of troubles and protest: As European economies sink, fears of
social unrest arise, January 24, 55–56; The Economist. (2003). Part-time workers, November 23,
100.
56. Benson, J. (2008). Trade unions in Japan: Collective justice or managerial compliance? In
J. Benson and Y. Zhu (eds) Trade Unions in Asia: An Economic and Sociological Analysis,
Chapter 3, 24–42. London: Routledge.
57. Benson, Trade unions in Japan: Collective justice or managerial compliance?; Rowley, I., and
Hall, K. (2007). Japan’s lost generation: Japan Inc. is back, but millions of young workers have
been left behind. BusinessWeek, May 28, 40–41.
58. Murphy, J. (2009). Joblessness spurs shift in Japan’s views on poverty. The Wall Street Journal,
May 2–3, A5; BusinessWeek. (2007). Time lost to strikes: Minutes of lost work per employed
person from strikes and lockouts in 2006, December 3, 11.
59. Thornton, E. (2009). The hidden perils of layoffs: Ex-workers are hauling their former com-
panies into court over alleged violations of severance laws. BusinessWeek, March 2, 52–53;
Roberts, D. (2007). Rumbles over labor reform: Beijing’s proposed worker protections are
giving multinationals the jitters. BusinessWeek, March 12, 57; The Economist. (2007). China’s
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Journal, July 31, A1, A14; Canaves, S. (2009). Chinese tell workers fight privatization effort:
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of government company. The Wall Street Journal, July 27, A10.
62. Burkitt, L. (2013). Disgruntled Chinese workers lock U.S. founder in office. The Wall Street
Journal, June 25, B1, B8; Mozur, P., and Orlik, T. (2012). Chinese factory erupts. The Wall Street
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maze: Company details labor conditions. The Wall Street Journal, January 14, B1, B2; Vascellaro,
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shift irks German engineers, U.S. star quits effort.
579
Case 4: The Floundering Expatriate

At exactly 1:40 on a warm, sunny Friday he had been a professor of American
afternoon in July 1995, Frank studies in Cairo for five years. Then he
Waterhouse, CEO of Argos Diesel, had returned to the States and joined
Europe, leaves his office on the top floor Argos. Donaldson had helped create the
of the Argos Tower, overlooking the cross-divisional, cross-functional teams
Zürichsee. In the grip of a tension head- that had achieved considerable cost
ache, he rides the glass elevator down reductions and quality improvements.
the outside of the mirrored building. Loun had said that Donaldson was
To quiet his nerves, he studies his just what Argos Europe needed to cre-
watch. In less than half an hour, Water- ate a seamless European team—to
house must look on as Bert Donaldson facilitate communication among the
faces the company’s European different European parts suppliers that
managers—executives of the parts sup- Waterhouse had worked so hard to
pliers that Argos has acquired over the acquire. Waterhouse had proved his
past two years. Donaldson is supposed own strategic skills, his own ability to
to give the keynote address at this event, close deals, by successfully building a
part of the second Argos Management network of companies in Europe under
Meeting organized by his training and the Argos umbrella. All the pieces were
education department. But late yesterday in place. But for the newly expanded
afternoon he phoned Waterhouse to say company to meet its financial goals, the
he didn’t think the address would be units had to work together. The manag-
very good. Donaldson said he hadn’t ers had to become an integrated team.
gotten enough feedback from the various Donaldson could help them. Together
division heads to put together the pre- they would keep the company’s share
sentation he had planned. His summary of the diesel engine and turbine market
of the company’s progress wouldn’t be on the rise.
what he had hoped. Waterhouse deserved to get the best
It’s his meeting! Waterhouse thinks help, the CEO had said. Bert Donaldson
as the elevator moves silently down the was the best. And later, when the num-
second floor. How could he not be pre- bers proved the plan successful, Water-
pared? Is this really the man who every- house could return to the States a hero.
one at corporate headquarters in Detroit (Waterhouse heard Loun’s voice clearly
thinks is so fantastic? in his head: “I’ve got my eye on you,
Waterhouse remembers his introduc- Frank. You know you’re in line.”)
tion to Donaldson just over a year ago. Waterhouse had been enthusiastic.
Argos International’s CEO and chairman, Donaldson could help him reach the
Bill Loun, had phoned Waterhouse him- top. He had met the man several times
self to say he was sending the “pick of in Detroit. Donaldson seemed to have
the litter.” He said that Donaldson had a quick mind, and he was very
a great international background—that charismatic.
580
But that wasn’t the Donaldson who Donaldson: staff morale on the fifth
had arrived in Zürich in August 1994 floor is lower than ever; there seems to
with his wife and two daughters. This be a general malaise; Herr Direktor Don-
man didn’t seem to be a team builder— aldson must be having problems at
not in this venue. Here his charisma home—why else would he work until
seemed abrasive. midnight?
The elevator comes to a stop. Water- Waterhouse takes a seat in the front
house steps into the interior of the build- row and tries to distract himself by
ing and heads toward the seminar room studying the meeting schedule. “Manag-
at the end of the hall. ing Change and Creating Vision: Improv-
Waterhouse keeps thinking of his ing Argos with Teamwork” is the title.
own career. He has spent most of his Donaldson’s “vision” for Argos Europe.
time since Donaldson’s appointment Waterhouse sighs. Lindt nears him and,
securing three major government con- catching his eye, begins to complain.
tracts in Moscow, Ankara, and Warsaw. “A few of the managers have been
He has kept the ball rolling, kept his making noises about poor organization,”
career on track. It isn’t his fault that she says. “And Sauras, the Spanish direc-
Donaldson can’t handle this assignment. tor, called to complain that the meeting
It isn’t his fault that the Germans and schedule was too tight.” Her litany of
the French still can’t agree on a unified problems continues: “Maurizio, the
sales plan. director in Rome, came up to me this
His thoughts turn back to Donald- morning and began to lobby for Don-
son. It can’t be all Bert’s fault either. aldson’s replacement. He feels that we
Donaldson is a smart man, a good man. need someone with a better understand-
His successes in the States were genuine. ing of the European environment.” See-
And Donaldson is worried about this ing Waterhouse frown, Lindt backs off.
assignment; it isn’t as though he’s just “But he’s always stirring up trouble,”
being stubborn. He sounded worried on she says. “Otherwise, the conference
the phone. He cares. He knows his job appears to be a success.” She sits down
is falling apart and he doesn’t know what next to Waterhouse and studies her daily
to do. What can he return to at Argos planner.
in the States if he doesn’t excel in The room slowly fills with whispers
Europe? and dark hand-tailored suits. Groups
Let Donaldson run with the ball— break up and reform. “Grüss Gott,
that’s what they said in Detroit. It isn’t Heinz, wie geht’s?” “Jacques, ça va
working. bien?” “Bill, good to see you . . . Great.”
Waterhouse reaches the doorway of Waterhouse makes a perfunctory inspec-
the seminar room. Ursula Lindt, his tion of the crowd. Why isn’t Donaldson
executive assistant, spots him from the in here schmoozing? He hears a German
other side. Lindt is from a wealthy local accent: “Two-ten. Ja ja. Amerikanische
family. Most of the local hires go to her Pünktlichkeit.” Punctuality. Unlike
to discuss their problems. Waterhouse Donaldson, he knows enough German
recalls a few of her comments about to get by.
581
A signal is given. The chitchat fades the issue of Donaldson’s failure to adjust.
with the lights. Waterhouse turns his He had written a careful letter to Bill
gaze to the front as Donaldson strides Loun suggesting that Donaldson’s assign-
up to the podium. ment might be over his head, that the
Donaldson speaks. “As President timing wasn’t right. The CEO had
Eisenhower once said, ‘I have two kinds phoned him right away. “That’s rubbish,
of problems, the urgent and the impor- Frank,” his voice had boomed over the
tant. The urgent are not important, and line. “You’ve been asking for someone
the important are never urgent.’” He to help make this plan work, and we’ve
laughs, but the rest of the room is silent sent you the best we’ve got. You can’t
save for the sound of paper shuffling. send him back. It’s your call—you have
Donaldson pauses to straighten the bottom-line responsibility. But I’m
his notes and then delivers a flat ten- hoping he’ll be part of your inner circle,
minute summary of the European com- Frank. I’d give him more time. Make it
panies’ organizational structure. He work. I’m counting on you.”
reviews the basics of the team-building More time is no longer an option,
plan he has developed—something with Waterhouse thinks. But if he fires Don-
which all the listeners are already famil- aldson now or sends him back to Detroit,
iar. He thanks his secretary for her he loses whatever progress has been made
efforts. toward a unified structure. Donaldson
Then he turns the meeting over to has begun to implement a team-building
Waterhouse, who apologizes for not hav- program; if he leaves, the effort will col-
ing been able to give the managers any lapse. And how could he fire Donaldson,
notice that this season would be shorter anyway? The guy isn’t working out here,
than planned. He assures them that the but firing him would destroy his career.
rest of the schedule is intact and asks Bert doesn’t deserve that.
them to take this time as a break before What’s more, the European team
their 4 p.m. logistics meeting, which will program has been touted as a major
be run by the French division head. initiative, and Waterhouse has allowed
The managers exchange glances, and himself to be thought of as one of its
Waterhouse detects one or two undis- drivers. Turning back would reflect
guised smiles. Walking out of the seminar badly on him as well.
room, he hears someone say, “At least On the other hand, the way things
the meeting didn’t run overtime.” Water- are going, if Donaldson stays, he may
house fumes. He has put in four years himself cause the plan to fail. One step
of hard work here in Europe. This is the forward, two steps back. “I don’t have
first year of his second three-year con- the time to walk Donaldson through
tract. He is being groomed for a top remedial cultural adjustment,” Water-
management position back in the States. house mumbles under his breath.
The last thing he needs is a distraction Donaldson approaches him in the
like this. hall. “I sent a multiple choice survey to
He remembers how Detroit reacted every manager. One of them sent back
when, a little over a month ago, he raised a rambling six-page essay,” he says. “I
582
sent them in April. I got back only seven attended. He picks up the phone and
of forty from the Germans. Every time places a call to Paul Janssen, vice-presi-
I called, it was ‘under review.’ One of dent of human resources for Argos
them told me his people wanted to dis- Europe. Paul is a good friend, a trusted
cuss it—in German. The Portuguese colleague. The two men often cross paths
would have responded if I’d brought it at the health club.
personally.” A few seconds later, Janssen’s voice
Waterhouse tells Donaldson he booms over the line. “Frank? Why didn’t
wants to meet with him later. “Five you just walk down the hall to see me?
o’clock. In my office.” He turns away I haven’t seen you at the club in weeks.”
abruptly. Waterhouse doesn’t want to chat.
Ursula Lindt follows him toward the “Donaldson’s first training weekend, in
elevator. “Herr Direktor, did you hear February,” he says. “How’d it go?
what Herr Donaldson called Frau Really.”
Schweri?” “Really. Well, overall, not too bad.
Bettina Schweri, who organizes A few glitches but nothing out of the
Donaldson’s programs, is essentially his ordinary for a first run. Bert had some
manager. She speaks five languages flu- problems with his assistant. Apparently,
ently and writes three with style. Lindt Frau Schweri had scheduled the two
and Schweri have known each other trainers to arrive in Zürich two days
since childhood and eat lunch together early to prepare everything, recover from
every day. jet lag, and have dinner at the Baur au
“A secretary,” Lindt says, exasper- Lac. They came the night before. You
ated. “Frau Schweri a secretary? Simply can imagine how that upset her. Bert
not to believe.” knew about the change but didn’t inform
Back in his office, Waterhouse gets Frau Schweri.”
himself a glass of water and two aspirin. Waterhouse has the distinct impres-
In his mind, he’s sitting across from Don- sion that Janssen has been waiting for a
aldson ten months earlier. chance to talk about this. “Go on,”
“Once I reach a goal,” Donaldson Waterhouse says.
says, “I set another one and get back to “Well, there were a few problems
work. I like to have many things going with the workshops.”
on at once—especially since I have only “Problems?”
two years. I’m going for quick results, “Well, yes. One of the managers
Frank. I’ve even got the first project lined from Norway—Dr. Godal, I believe—
up. We’ll bring in a couple of trainers asked many questions during Bert’s pre-
from the Consulting Consortium to run sentation, and he became rather
that team-skills workshop we talked irascible.”
about.” “Bert?” Waterhouse asked.
Waterhouse comes back to the pres- “Yes. And one of the two trainers
ent. That first workshop hadn’t gone too wore a Mickey Mouse sweater—”
badly—at least he hadn’t heard of any “Mickey Mouse?” Waterhouse
problems. But he, Waterhouse, had not laughs without meaning to.
583
“A sweater with a depiction of His résumé looks perfect. He has a

Mickey Mouse on the front.” glowing review from the American Uni-
“What on earth does that have to versity in Cairo. There, Donaldson
do with Bert?” earned the highest ratings for his effec-
“Well, Bert offered them a two-year tiveness, his ease among students from
contract after Frau Schweri advised him forty countries, and his sense of humor.
not to. He apparently told her he was At Argos in the United States, he imple-
satisfied with the trainers, and, so far as mented the cross-divisional team
he was concerned, questions about their approach in record time. Donaldson is
personal habits and clothing weren’t nothing short of a miracle worker.
worth his time.” Waterhouse leans back in his swivel-
“Yes, and—” tilter and lets the scuttlebutt on Donald-
“Well, there were complaints—” son run through his mind. Word is that
“They all went to Frau Schweri?” he’s an Arbeitstier. “Work animal” is the
He is beginning to see. direct, unflattering translation. He never
“One of the managers said the train- joins the staff for leisurely lunch in the
ers provided too much information; he canteen, preferring a sandwich in his
felt as though they were condescending office. Word is he can speak some Arabic
to him. A bombardment of information, from his lecturing days in Cairo but still
he called it. Other managers complained can’t manage a decent “good morning”
that Bert didn’t provide enough back- in Swiss German. Word is he walks
ground information. The French manag- around all day—he says it’s management
ers seemed to think the meeting was walking around—asking for suggestions,
worthwhile. But Bert must think that, ideas, plans, or solutions because he can’t
because his style works with one group, think of any himself.
the others will fall into place automati- Waterhouse remembers an early con-
cally. And everyone was unhappy with versation with Donaldson in which he
the schedule. The trainers always ran seemed frustrated. Should he have paid
overtime, so everybody was displeased more attention?
because there weren’t any coffee breaks “I met with Jakob Hassler, vice-
for people from various offices to net- president of human resources as Schwyz
work. Oh, and the last thing? All the Turbines,” Donaldson had said, pacing
name cards had first names and last the office. “I wanted some ideas for the
names—no titles.” training program. Schwyz is the first
“No titles,” Waterhouse says, and company we acquired here; I wanted
lets out a sigh. “Paul, I wish you’d told to show Hassler that I don’t bite. When
me all this earlier.” I opened the door, he just stood there.
“I didn’t think you needed to hear I offered him a chair beside the coffee
it, Frank. You’ve been busy with the new table, told him to call me Bert. He
contracts.” They agree to meet at the nodded, so I asked him about his family
club later in the week, and they hang and the best place to buy ski boots,
up. Waterhouse stares down at Donald- and he answered but he acted so aloof.
son’s file. I took a chair across from him, listened
584
to ten minutes of one-word answers, with a combined SAT score of over

and then I finally asked him how things 1350.”
were going in general, to which he said, Lindt is done. Waterhouse thanks
‘Everything is normal.’ Can you beat her for the information, then hangs up.
that, Frank? I told him I was interested Julie Ann is usually calm, collected. She
in his ideas, so he pushed the chair has made some friends here. Something
back and said, ‘Please let me know what must have pushed her over the edge. And
you expect.’ I reminded him that we’re their daughter is engaging, bright. Why
all on the same team, have only two is this all coming to a head now?
years for major change, gave him a Waterhouse recalls his most recent
week to get back to me with a few meeting with Donaldson, a couple of
ideas, and you know what he said? He days before Donaldson’s vacation in
said, ‘Ja ja.’” May.
At the time, Donaldson’s frustration “I’ve tried everything, Frank. I’ve
seemed to stem from normal adjustment delegated, I’ve let them lead, I’ve given
problems that expatriates face. But he them pep talks.” Waterhouse remembers
never did adjust. Why doesn’t he just Donaldson sinking deep into his chair,
give Hassler what he needs to know and his voice flat. “No matter what I do—if
get out? Waterhouse knows this; why I change an agenda, if I ask them to have
hasn’t Donaldson figured it out? a sandwich with me at my desk—some-
His phone rings—the inside line. It’s one’s always pissed off. We’re talking
Ursula Lindt. “Frau Direktor Donaldson about streamlining an entire European
just called. She said Herr Direktor Don- company and they’re constantly looking
aldson was expected home at 4. I told at their watches. We run ten minutes
her you had scheduled a meeting with overtime in a meeting and they’re shuf-
him for 5.” She waits. Waterhouse senses fling papers. I tell you, Frank, they’re
that there is more to her message. “What just going to have to join the rest of us
else did she say, Frau Lindt?” in the postindustrial age, learn to do
“I inquired after her health and she things the Argos way. I worked wonders
said she’s near the end of her rope. Bored in Detroit . . .”
without her work. She said they thought The clock in Waterhouse’s office
Zürich would be a breeze after Cairo. reads 4:45. What can he do about Don-
Then she went into a tirade. She said aldson? Let him blunder along for
that they’re having serious problems another year? And take another twelve
with their eldest daughter. She’ll be in months of . . . he closes the door on that
grade 12 at the international school this thought. Send him back and forget?
fall. She’s applying to college. Frau Don- Morale on the fifth floor will improve,
aldson said her daughter’s recommenda- the Europeans will be appeased, but with
tions from her British teachers are so Donaldson will go the training program,
understated that they’d keep her out of such as it is. Corporate will just think
top schools, and she keeps getting Cs that Waterhouse has forgotten how to
because they’re using the British grading play the American way. They’ll think
scale. She reminded me that this is a girl that he mistreated their star. Can he
585
teach Donaldson cultural awareness? 2. What should Waterhouse do with

With the Ankara, Moscow, and Warsaw Donaldson? Be specific and develop
projects chewing up all his time? You an action plan.
can’t teach cultural savvy. No way. 3. What could the company have done
He hears Donaldson enter the outer to better prepare Donaldson?
office. A hanger clicks on the coat tree. 4. What does this case suggest about the
How can he work this out? company’s current policy for recruit-
ing and preparing expatriates? Make
policy suggestions.
Assignment Questions
1. Assess the mistakes Donaldson has “The Case of the Floundering Expatriate” by
Gordon Adler. Reprinted by permission of
made. Why have these occurred?
Harvard Business Review, July/August 1995.
Whose responsibility are they? What Copyright © 1995 by the Harvard Business
are the implications of not satisfactorily School Publishing Corporation. All rights
dealing with the Donaldson problem? reserved.
586
Name Index
Note: Page numbers with f indicate figures.

Accurate Gear Company 348 Awilco Offshore 357 Businessweek 197
Acer 311 AXA SA 24 BYD 308
Adam Opel GmbH 372 Ayub, Tahir 433, 434
Addax Petroleum 357 Cadbury PLC 197, 329
Adobe Systems 60, 453 BAE Systems PLC 20 Callaway 43, 75
Agassi, Shai 538–9, 571–2 Baidu 204 Caltabiano, Greg 212–13,
AG Consulting 74 Baker Hughes 107, 110 242–3
Ages Group 114 Bank of Korea (BOK) 404–5, Candel, Willem 556
Ahmed Ali, Sardar Asif 49 437 Canon Corp. 381
Ahold 354 Barbosa, Fernando 170 Carlsberg 94
Airbus Industries 109, 321 Bayerische Vereinsbank 417 Carnevale, Marcos 200
Air France 87 Beijing Auto 372 Carrefour 354, 562
AIRINC 522–3 Bertelsmann 99 Cartier 68
Air Kazakhstan 221 Betancourt, Ingrid 60 Cartus Corporation 476
Alibaba 13, 204 Bharti Airtel 130 Case, Steven 355, 356
Al-Qassemi, Sooud 51 Big Boy 365 Caterpillar 24, 110, 236, 322,
Alstom 104, 348 BMW 21, 22, 107, 507 359
Amazon 26, 203, 218 Bobcat 373 CEMEX 454
American Airlines 381 Bo Concepts 76 Centrotherm Photovoltaics 319
American Management Boeing 109, 310, 320, 321, CH2M Hill 368
Systems Inc. 373 359, 360, 362, 380 Chang, Horace 68
Anheuser-Busch 75–6 Bond, Michael 144 Chang, Jennifer 433, 434
Apple 24, 27, 43, 94, 456, Bos, Wouter 565 Chavira, Ricardo 200
559 BP 11f, 59 Chemo-Iberica 67
Apple store 197–8 Brannen, Mary 242–3 Chery Automobile 308, 329
Arcelor Mittal 368 Briggs and Stratton Chevron 11f, 60, 92–4, 367
Arnold, George 68 Corporation 66 Chiba Electronics Company
Asia Silicon 319 Brink’s, Inc. 555–6 253–4
AT&T 363, 499 British Aerospace 562 Chiba International Inc.
Au Bon Pain 365 Buena Vista (Disney) 252–62
Aung San Suu Kyi 92–3, 94 Productions 170–1 Chinalco 357
Aviadvigatel 375 Burger King 333 China National Petroleum
Avon 107, 320, 411 Business Software Alliance 11f, 357
A&W 365 (BSA) 69 Chiquita 562
N A M E I N D E X
Chirac, Jacques 104 Enron 107 Hasbro 68

Chonqing Changan 308 Ericsson 349, 383 HCL Technologies 423
Chubb Insurance 61 Ernst & Young 50, 107 Heineken 94
Cisco 43, 90 European Aircraft Consortium Hellmann’s 328
Citigroup 94 236 Hewlett-Packard (HP) 107,
Cnooc 357 ExxonMobil 11f, 93, 111, 448 309, 312, 321, 381, 437,
Coach 43 448
Coca-Cola 68, 93, 328, 332, Facebook 50–1, 152–3, 203, Hiddink, Guus 438
363, 373 204 Hitachi Construction 14
Coherent, Inc. 477 Fast Retailing 418 H. J. Heinz 380
Colgate-Palmolive 10, 453, FedEx 97, 432 Hoechst 217
549 Ferrari S.p.A. 311 Hofstede, Geert 28–9, 138–47
Computer TakeBack Flextronics 156 Honda 23, 218, 314, 333,
Campaign 94 Forbes 60 362, 375
Conoco Phillips 11f Ford 11f, 12, 19, 21, 24, 110, Honda Trading America
Continental 381 308, 333, 362 Corporation (HTAC) 362–3
Convergys Corporation 25 Ford, Harrison 196 HonHai (Foxconn) factory
Coudert Brothers 46 Frontier Foods 362 559
Cross, Marcia 200 HonHai Precision Industry
Curves International 366–7 Gaddafi, Muammar al- 183, Company 369
Cyberoptics 355–6 198 Hoover Appliances 562
Galvin, Robert 86 HP see Hewlett-Packard (HP)
Daewoo 15, 405, 559–60 Gap 96 Huawei 13
DAF Trucks 565 GE see General Electric (GE) Hughes Tool Co. 367
Dai-ichi Mutual Life Insurance GE Aviation 375 Hu Jintao 52
418 GE Capital 351 Hyster Corporation 548
DaimlerChrysler 11f, 107, Geely Group 308, 329 Hyundai 15, 329, 332, 355,
235, 333, 355, 360 GE Honda Aero Engines 375 405, 421
Dairy Fairy 43 General Electric (GE) 9, 11f,
Dairy Queen 43 13, 14, 24, 110, 306–7, IBM 10, 14, 97, 110, 112,
Danisco 374 316, 324, 338–40, 348–9, 146, 359, 360, 381, 433,
Danone SA 462 355, 359, 382–4, 432 435–6, 437, 474, 545–6
Deere & Company 22 General Motors (GM) 11f, 12, ICQ 203
Dell 321 21, 43, 75, 308, 333, 372, IKEA 224
Del Monte Foods 93 559 Immelt, Jeffrey 13
Deloitte LLP 111 Gerstner, Louis 112 Infosys 14, 25
Delta Airlines 24, 381 Ghosn, Carlos 380, 429 Intel Corporation 14, 18, 97,
Deng Xiaoping 52 Global Dining 417–18 320–1, 363, 370–1, 462
Deutsche Bank 417 GM see General Motors (GM) International Trade
DeWoskin, Kenneth 67 Goodwill 96 Commission 548
DHL 107 Google 24, 203, 204 Ispat International 372
Disney 363, 367 Goplana 373 Ito, Takanobu 218
Disneyland Paris 147 Greenpeace 94 Ito, Yumi 229
Disney Parks and Resorts 147 Groupe Danone SA 328,
Dongfang Turbine 384 377–8 Japan Airlines 47, 228, 381
Doosan 373 Grupo Bimbo 12 Japan Export Trade
Dow Chemical 23, 99 Gucci 68 Organization 225
Dow Jones & Co. 55 Gutnick, Joseph 55 JCF Corp. 106
DuPont 67–8, 106, 374 J. C. Penney 99, 354
Haier 7, 13, 357 Jobs, Steve 94
Eachnet 204 Halliburton 60, 107, 111, 453 Johnson & Johnson 107, 110
EADS 236 Hangzhou Wahaha Group Jollibee 333–5
eBay 204 377–8 JT International 75
Economist, The 95, 96, 107, Harbin Power Equipment Ltd.
203, 525 383 Kagermann, Henning 538–9
Electrolux AB 7, 223–4, Harley-Davidson 318–19, Kazak 111
369–70 326, 352–3, 363 KFC 365
588
N A M E I N D E X
Kim Choongsoo 404–5 Merck 67 Oracle 86

Kleinfeld, Klaus 105 Mercosur 13 Otis Elevator 375
Knapp, Ellen 33–4 Metro AG 562
Knight, Phil 99 Mexmil 321 Palm 114
Kola Real 332 Meyers, Linda 448–9 Panasonic Corporation 306,
Kolon Industries, Inc. 106 Michaud, Alain 433 307, 331
Komatsu 359 Microsoft 14, 50, 76–7, 86, Parle Exports 373
Korean Airlines 220–1, 437–8 224–5, 315, 363–4 Payless Shoes 455
Kotchian, Carl 108 Middle East Broadcasting Pepper, John 114–15
KPMG 106 Center (MBC) 193 PepsiCo 92, 94, 97, 332
Kraft Foods 197, 328–9 Mikitani, Hiroshi 218, 219 PetroChina 87
Kroll Associates 86 Mishimura law firm 47 Pfeiffer, Michelle 91
Kuka 319 Misumi Corporation 418 Pfizer 75, 97, 107
Kullman, Ellen 374 Mitsubishi 11f, 43, 310, 321, P&G see Procter & Gamble
349, 355, 513 (P&G)
Lee Ju-yeol 404–5 Mitsubishi Financial 47 Philips Electronics NV 373
Lego’s 410 Mokhtar, Ziad 51 Phoenix Group 115
Lenovo Group 10, 137 Monsanto 86, 476 Pilkington 68
Leo Burnett 196 Morales, Evo 58 Pinkroccade NV 549–50
Levine, Robert 176 Motorola 19, 86–7, 349, 462, Plattner, Hasso 538–9
Levi Strauss 96, 99, 456 475 Porter, Michael 450
LG Display Company 371 Mr. Charbucks 68 Posco 368
LG Electronics 15, 335–6, Mugabe, Robert 20 Pratt & Whitney 375
405, 421, 437, 511 MV Agusta Group 353 PricewaterhouseCoopers
Lincoln Electric 371 (PwC) 33, 433–4, 528–9
Li-Ning Co. 76 Nanjing High Speed 348 Procter & Gamble (P&G) 21,
Linux 364 Nayar, Vineet 423 27, 28, 69, 114–15, 137,
Li Shuguang 52 NCR 24 319, 322, 348, 437, 462,
L. L. Bean 352 NerveWire Inc. 373 468
Lockheed-Martin 108, 110 Nestlé 320, 328, 373, 380 Putin, Vladimir 18
Logitech International 355 New Balance Athletic Shoe,
Lojas Renner 354 Inc. 4–5, 32, 43, 68–9 Qatar Telecommunications 20
London School of Economics New York Times, The 104 Qwest 62
223 Nice Company 240
Longoria, Eva 200 Nihon Keizai Shimbun Rainforest Action Network
Louis Vuitton 70 (business paper) 253 94
Lucent Technologies 110 Nike 32, 50, 62, 70, 90, 95–6, Rakuten Corporation 218–19
Lucient 112 99–100, 368, 369 Rasulo, Jay 147
Nike Golf 76 Raytheon 20, 114, 361
Mace, Michael 114 Nintendo 70 RCA 324
Mandela, Nelson 21, 560–1 Nippon Air 108 Real World Intelligence 86
Marks, Michael 156 Nippon Sheet Glass Company Reebok 68
Marriott 367, 455 218 Renault 380, 429
Marti, Alejandro 60–1 Nissan 218, 314, 333, 368, Reuters Group 223
Mary Kay Cosmetics 411 380, 429, 557–8 Rhone-Poulenc 217
Maslow, Abraham 407 Nokia 70, 75, 383, 432 Rio Tinto 357
Matsushita Electric 253, 331 Nolan, John 114, 115 Rogers, Will 5
Mattel 68 Nordic 508 Rolex 68
Maytag Corporation 562 Northrop Grumman 60, Ronen, S. 133–8
Mazer Corporation 549 360–1 Royal Dutch/Shell 11f, 56,
McDonald's 197, 328, 333–5, Novartis 67, 416 110, 465, 474, 558
364, 366, 432, 455 Novelis 453 Russian Digital Sky Internet
McDonnell-Douglas 380 203
McFarlin, Dean 286–7 Oakley 70
McKinsey & Co. 33, 219 Old Navy 96 Saga Sports 100
Mercedes-Benz 311, 331 Oneworld 381 Salamworld 51
Mercer 517 Optical Associates 360 Sambucks 68
589
N A M E I N D E X
Samsung 15, 349, 371, 405, Tata Consultancy Services 14 Vizio, Inc. 368–9
421, 457, 463 Tata Motors 130, 332 Volkswagen 21, 22, 107, 551
Sanyo Electric 418 Taylor, Aldon 86 Vychodoslovenske zelziarne
SAP 538–9, 571–2 Techtronic 562 AS (VSZ) 367, 372
Sara Lee 12 Teknovus, Inc. 212–13,
Sarkozy, Nicolas 553 242–3 Walibi Schtroumpf 147
Satyam Computer Services 20 Telefonica 562 Wall Street Journal, The 69,
Schlotzky’s Delicatessen 365 Tencent 203–4 79, 405, 511
Schlumberger 60, 453 Tenefusa, Megumu 218–19 Wall Street Journal Online,
7-Eleven 365 Texas Instruments (TI) 332 The 55
Shan, Yan Ming 87 TGI Fridays 332 Wal-Mart 11f, 29, 99, 107,
Shanghai Aviation Industrial Thomson Consumer 197, 312, 330, 354
Corp. 380 Electronics 323–4, 410 Walt Disney Company 146–7,
Shanghai Electric 384 3DGeoDevelopment Inc. 87 234
Shanghai Hero Co. 329 3M 312, 499 Walters, Barbara 183
Shannon, Paula 234, 235 Timberline 96 Wang, Gary 137
Shaw, George Bernard 223 Titan Corp. 110 Wataniya Mobile 20
Shell 60 Titleist 76 Wella Corp. 99
Shenkar, O. 133–8 Toho Mutual 351 Whirlpool 7, 375, 507
Shenyang Liming Aero-Engine Tokyo Disney 147 Willbros Group 60
Group 383 Toshiba 65, 381, 513, 545–6 Wipro Ltd 25, 373
Sherman & Sterling LLP 111 Toyota 11f, 14, 21, 22, 173, Wipro Technologies 14, 20
Siemens AG 18, 104–6, 111, 253, 308, 312, 314, 324, Wish-Bone 328
306, 348, 349, 383, 427, 333, 351, 513, 557 Witkamp, Theo 565
465, 545–6 Transocean 60 Woods, Barry 220–1
Sinopec 10, 11f, 357 Trompenaars, Fons 148–9 Worldcom 107
SK Corporation 106 Truth and Reconciliation
SK Telecom 437, 448–9, 511 Commission 229–30 Xerox 87, 453
Sky Team 381 Tudou 137 Xian Aircraft 321
Sloan, Alfred 252 Twitter 51 Xing Ba Ke stores 68
Snow Brand 229 Tyco 107
Sony 43, 218, 253, 369, 418, Yacimientos Petroliferos
432 Unilever 14, 69, 114–15, 320, Fiscales SA (YPF) 367
Sovereign Risk Insurance 72 328, 348, 380, 437, 474 Yamaha Motor Co. 355–6
Standard and Poor’s (S&P) 50 Union Carbide Corporation Yang, Li 219
Star Alliance 381 (UCC) 54–5 Yasumoto Takagi 47
Starbucks 68, 73, 365–6 Union Carbide India, Limited Yeltsin, Boris 87
Starwood Hotels 72 (UCIL) 54 YPF 357
State Grid 11f Unisys 453 Yuanqing, Yang 137
Subway 43, 333, 365, 366 United 381 Yudhoyono, Susilo Bambam
Sumitomo Bank 47 U.S. Navy 65 103
Sun Microsystems 68, 110 United Technologies 361, 375 Yum! Brands 197, 333,
Suntory Ltd 332 University of Dayton 70 335
SWA 50 Unocal 92, 93
Sweeney, Paul 286–7 US Airways 381 Zeiss Company 98
U.S. Steel 367, 372 Zetsche, Dieter 235
Taobao Marketplace 204 Zong Qinghou 378
Target 96, 99 Vance, Chuck 61 Zuma, Jacob 561
Tata Chemicals 131 Vestas 348 Zynga 204
590
Subject Index
Note: Page numbers with f indicate figures.

abstract self-descriptions 184–5 Asia-Pacific region, economic growth in 13–15
accommodation approach to conflict 271, 271f assertiveness 150f
ACFTU (All-China Federation of Trade attitude 183–99; defined 183; effects of, and
Unions) 559 stereotypes 196–9; “in-group” stereotypes
achievement-ascription culture 149 194–6; stereotypes and 191–3; toward
achievement-oriented cultures 142 Chinese boss 193–4; toward other countries
acquisition approach, to foreign market entry 190–1; toward self 183–5; about work
371–4, 374f 186–8
ad hoc compensation method 515–16 attribution theory 180–3; about others 181–2;
AFL-CIO 562 cross-cultural implications 182; described
Africa: economic growth in 20–1; labor unions 180; self-attribution effects 180–1; on TV
in 560–1 183
agreements 566–70; deterioration of relations Australia: Big Mac economic index 525f;
567; management and labor 566–7; strike competitiveness ranking 26f; corrupt nation
activity 568–9, 568f; union effects on ranking 104f; employee engagement levels
569–70 189f; fair administration of justice rating 52f;
agreement stage of negotiation 287f, 293–4 foreign direct investment 8f; foreign language
Albania, GLOBE cultural dimensions in 150f and culture knowledge 222f; government
Alien Tort Law 56 expenditures on labor market programs
All-China Federation of Trade Unions 551f; lawyers per 100,000 people 48f;
(ACFTU) 559 orientation, long- versus short-term 145f;
alliances, as foreign market entry option paid days off 510f; strike activity in 568f;
374–81; features of 380; financial 381; union density rate 552f
joint ventures 375–8, 377f; marketing 381; Austria: competitiveness ranking 26f;
production 380; R&D 381; strategic 378–9 employees view of supervisors 408f; fair
American-born Chinese (ABCs) 222 administration of justice rating 52f; gross
American-born Thais (ABTs) 222 domestic product 17f
American negotiating style, elements of 292f avoidance approach to conflict 271, 271f
Americas, economic growth in 9–13
apology as communication 228–30 baksheesh 102; see also bribery
Argentina: Big Mac economic index 525f; fair balance sheet compensation method 517–27;
administration of justice rating 52f; GLOBE balance and 526–7; danger pay and
cultural dimensions 150f 517–18; described 517, 519f; foreign service
Asian law 45f premiums and 517–18; goods/services and
S U B J E C T I N D E X
521–6; hardship pay and 517–18; housing per 100,000 people 48f; orientation, long-
costs and 518–20, 520f; purchasing power versus short-term 145f; paid days off 510f;
and 518; taxes and 520–1 piracy rates and losses 69f; positive/negative
Bangladesh, piracy rates and losses in 69f American characteristics by 192f; strike
Basel Convention 63 activity in 568f; union density rate 552f
Beijing: cost of living index 524f; expatriate Caracas, Venezuela, cost of living index in 524f
housing costs in 520f; foreign language and Caterpillar Fundamental English (CFE) 236
culture knowledge 222f; gross domestic Central/South American labor unions 560
product 17f; lawyers per 100,000 people CFDT (Confédération Française Démocratique
48f; tort costs 48f; work goals, importance du Travail Paris) 553
of 154f CGT (Confédération générale du travail) 553
Belarus, employees view of supervisors in 408f chalega 415
Belgium: employees view of supervisors 408f; Chile: Big Mac economic index 525f;
labor-management relations in 566f; labor confiscation and 59; foreign language and
unions in 555–6; strike activity in 568f; culture knowledge 222f; labor-management
union density rate 552f; worker severence relations in 566f
protection 550f China: attraction and engagement drivers to
Big Mac economic index 525–6, 525f firms 413f; car brand sales leaders in 308f;
board membership 564 competitiveness ranking 26f; confiscation
Bombay Exchange 54 and 59; conflict, approach to 270f; corporate
boomerangs 454f, 455–6 social responsibility issues 95f; counterfeiting
boycotts 64, 66 role of 42–3; domestic risk factors in
Brazil: attraction and engagement drivers 63; economic growth 13–15; employee
to firms 413f; Big Mac economic index engagement levels 189f; favorability ratings
525f; conflict styles 271f; corporate by 190f; favorability ratings of 190f; foreign
social responsibility issues 95f; employee direct investment 8f; gift-giving advice 165;
engagement levels 189f; foreign direct guanxi (harmony) 135f; Internet business in
investment 8f; foreign language and culture 203–4; labor-management relations in 566f;
knowledge 222f; labor-management relations labor unions in 558–9; lawyers per 100,000
in 566f; lawyers per 100,000 people 48f; people 48f; orientation, long- versus short-
orientation, long- versus short-term 145f term 145f; performance evaluation systems
bribery 102–7; across countries 103–4, 104f; 505f; piracy rates and losses 69f; positive/
as business model 104––106; criminal negative American characteristics by 192f
conviction incidents of 106–7; described Chuken Kigyo (Japanese electronics firms) 15
102–3 civil law 44–5, 45f
BRIC countries 8 classifying culture: Global Leadership and
Britain: Big Mac economic index 525f; positive/ Organizational Behavior Effectiveness-
negative American characteristics by 192f GLOBE 149–51; Hofstede’s clustering
Bulgaria: fair administration of justice rating approach to 138–47; Ronen and Shenkar’s
52f; gross domestic product 17f; paid days clustering approach to 133–8; Trompenaars’s
off 510f approach to 148–9
Bureau of Export Administration, Department clustering approach, Hofstede’s 138–47;
of Commerce 64 cultural maps 140–4, 143f, 144f; described
business-level competition strategies 310–11 138; individualism-collectivism 138–9, 142f;
bustarella 102; see also bribery limitations of 145–7; masculinity-femininity
bypassing 234 139; orientation, long- versus short-term
144–5, 145f; power distance 139–40;
Cameroon, corrupt nation ranking of 104f uncertainty avoidance 140
Canada: Big Mac economic index 525f; “cocktail party” effect 172
competitiveness ranking 26f; corrupt nation COCOM (Coordinating Committee for
ranking 104f; economic growth 11; employee Multilateral Export Control) 66
engagement levels 189f; fair administration code law 44
of justice rating 52f; foreign direct codes of ethics 98–102; American in South
investment 8f; foreign language and culture America example of 100–2; described 98–9;
knowledge 222f; government expenditures impact and enforcement of 99–100
on labor market programs 551f; labor- codetermination 554
management relations in 566f; lawyers collaboration style to conflict 272
592
collectivism 540 control and evaluation procedures 333

common law 45–8, 45f cooperation with local government 90
communication; see also language: apology as Coordinating Committee for Multilateral
228–30; compliments as 226–7; criticism Export Control (COCOM) 66
as 227–8; embarrassment as 228; in foreign Copenhagen, Denmark, cost of living index in
languages 222–6; forgiveness as 228–30; 524f
nonverbal 236–41; regret as 228–30; spoken core competencies 312
214–21; sports idioms as 234–5; value of, corporate social responsibility (CSR) 91–7;
in international business 213–14; written Burma/Chevron example of 92–4; described
230–6, 232f, 233f 92; Eco-index and 95–7; firm performance
communist/socialist law 45f, 52 and 94–5; important issues of 95f; pressure
comparative perspective of negotiation 281 to engage in 94
compensation: ad hoc method of 515–16; corporate strategy options: global integration
balance sheet method of 517–27; executive, pressures 316–17, 318f; local responsiveness
across countries 508; expatriate, challenges 316–17, 318f; overview of 316
of 513–15, 514f; explaining, differences corrupt nations, most and least 104f
across countries 512–13; of international Costa Rica, employee engagement levels in 189f
employees 506; localization method of 516– cost containment IHR strategy 451, 452f
17; meaning of 507; options for expatriate cost of living index 524f
515; perks and other forms of 508–9; counterfeiting, combatting 42–3, 75–7
vacation time as 509–11, 510f; wage levels country clusters, classification of 134f; see also
across countries 507–8 classifying culture; Ronen and Shenkar’s
competition approach to conflict 271, 271f country clusters
competition strategies: business-level 310–11; criticism, as communication 227–8
concepts for 310; corporate strategy 316–17, Croatia: fair administration of justice rating
318f; culture and 325–6; global strategy 52f; gross domestic product 17f
320–1, 323f; international strategy 318–19; cross-cultural training, of expatriates 472–4, 472f
location factors 313–14, 313f; multidomestic Cuba, confiscation and 59
strategy 319–20, 323f; overview of 307–10; cultural maps, Hofstede’s 140–4; abbreviations
regional strategy 322–4; success of 324, used in 141f; family quadrant 144f;
325f; transnational strategy 321–2; value individualism-collectivism 142f; masculinity-
chain 311–13, 311f femininity index 143f; pyramid of people
competitive countries 26f quadrant 144f; uncertainty avoidance 143f;
competitive intelligence (CI) 86–8, 113–15 village market quadrant 144f; well-oiled
competitiveness, workforce 25–7; rankings 26f machine quadrant 144f
compliments, as communication 226–7 cultural norms, conflict and 269
compromise, meaning of 289–90 cultural toughness 472–4
compromise approach to conflict 271, 271f culture: classifying (see classifying culture);
concrete self-descriptions 184–5 competition strategies and 325–6; defined
Confédération Française Démocratique du 28–9; defining 131–2; impact of leader
Travail Paris (CFDT) 553 behavior and 425–7, 426f; international
Confédération générale du travail (CGT) 553 management and 153–6; understanding
confiscation 59 131–2, 156–8; value convergence and 155–6;
conflict: cultural causes of 268–71, 269f, 270f; Walt Disney theme parks and 146–7; work
face role in 274–7; Fan family example 279– centrality and 153–4; work goals and 154–5,
80; groups and 540; managing 271–4; meaning 154f
of 273; Mexican/American example 266–8, currency volatility 22–3
296–7; negotiation, international 281–94; Cyprus, gross domestic product in 17f
overview of 268; parties involved in 273–4; Czech Republic: employees view of supervisors
responses to 277–8; work-family 278–80 408f; gross domestic product 17f; paid days
conflict styles 271–2, 271f off 510f
Confucianism 279
context, communication and 239–41; danger pay, balance sheet compensation and
characteristics of 241f; high/low cultures of 517–18
239f dash 102; see also bribery
contract manufacturing, as foreign market decision-making methods, conflict and 269
entry option 368–9 delegated arrangement 376
593
demand conditions, location and 313f, 314 Estonia: employees view of supervisors 408f;
Denmark: competitiveness ranking 26f; corrupt gross domestic product 17f
nation ranking 104f; employees view of ethical obligations, international business 89f
supervisors 408f; fair administration of ethics: bribery and 102–7; codes of 98–102;
justice rating 52f; foreign language and corporate social responsibility and 91–7;
culture knowledge 222f; GLOBE cultural cross-national differences in 97–8; Foreign
dimensions 150f; government expenditures on Corrupt Practices Act and 107–12;
labor market programs 551f; gross domestic philosophies and perspectives on 88–91
product 17f; labor-management relations in European Union (EU): economic growth
566f; paid days off 510f; strike activity in 16–18; gross domestic product (GDP) 17f
568f; tort costs 48f; union density rate 552f executive compensation 508
Desperate Housewives (TV show) 170–1, 200–1 expansionism 30f
developed countries, foreign direct investment expatriate compensation, challenges of 513–15,
in 8f 514f
developing countries, foreign direct investment expatriate performance evaluation: challenges
in 8f with 501–2; environment variables of
direct/defensive risk reduction 71–2, 72f 500; foreign-born employees and 503–6;
direct exporting 362 guidelines for 502–3; by home-country
direct/linking risk reduction 72–3, 72f professionals 497–9, 498f; by host-country
diversion 65 professionals 496–7, 498f; multinationals
diversity 544–7; pros and cons of 544–6; and 493–5; options for 495, 495f; personal
synonyms of 544; Triad project and 545–6; characteristic variables of 501; task variables
using, to your advantage 546–7; workforce, of 500–1; timing of 499–500
increasing 27 expatriates: choosing people for 467–71;
Doha Round 6 consequences of failure 466f; criteria,
domestic internationals 454f national differences in 467–8; cross-cultural
Dubai, UAE: cost of living index 524f; training of 472–4, 472f; just-in-time 454f;
expatriate housing costs in 520f need and presence of 464–5; permanent
Dublin, Ireland, cost of living index in 524f 454f; preparation and training programs
471, 474–6; repatriation of 476–7; risks and
“Easy English” 223 rewards with 465–6, 467f; second-generation
Eco-index 95–7 454f; selection and evaluation process
economic conditions as risk factors: domestic 469–71, 470f; traditional 454f
58f, 62–3; external 58f, 63–7 expectancy theory of motivation 416–19
economic growth 9–21; Africa 20–1; Americas export controls 64
9–13; Asia-Pacific region 13–15; Canada exporting, as foreign market entry option
11; China 13–14; Europe 16–18, 17f; India 358–63; costs and challenges of 359–60;
14; Japan 14–15; Mexico 12; Middle East described 358–9; types of 362–3
20; Russia 18; South America 12–13; South export strategy 318
Korea 15; United States 9–11 expropriation 59
efficient purchaser index (EPI) 526 external attribution 180
Egypt: employee engagement levels 189f; extortion see bribery
favorability ratings by 190f; GLOBE cultural
dimensions 150f; paid days off 510f face concept 274–7; advice about 276–7; Asian
El Salvador, GLOBE cultural dimensions in 150f cultures and 275–6; described 274–5; social
embargoes 64–5 complexities of 276
embarrassment, as communication 228 factor conditions, location and 313f, 314
emerging market multinationals 357, 358f fair administration of justice ratings 52f
emotions, as nonverbal communication 237 family quadrant, cultural map 143, 144f
employee: engagement 189f; expatriate favorable working conditions 90
assignments, declining 490–1; performance financial alliances, as foreign market entry
evaluation 492–3 option 381
environment variables of performance Finland: corrupt nation ranking 104f;
evaluation 500 employees view of supervisors 408f; fair
equity norm 274 administration of justice rating 52f; gross
equity theory of motivation 411–14; applying, domestic product 17f; strike activity in 568f;
across cultures 412–14; described 411–12 union density rate 552f
594
firm strategy, structure, and rivalry, location 189f; employees view of supervisors 408f;
and 313f, 314 favorability ratings by 190f; favorability
Foreign Agents Registration Act (FARA) 74 ratings of 190f; foreign language and culture
foreign-born employees: performance evaluation knowledge 222f; GLOBE cultural dimensions
of 503–6; providing feedback to 505–6 150f; government expenditures on labor
Foreign Corrupt Practices Act (FCPA) 107–12; market programs 551f; gross domestic
American firms and 110–12; described product 17f; labor-management relations
107–8; effects of 109–10 in 566f; labor unions in 553–4; lawyers
foreign direct investment (FDI) 7–9; in per 100,000 people 48f; orientation, long-
developed countries 8f; in developing versus short-term 145f; paid days off 510f;
countries 8f piracy rates and losses 69f; positive/negative
foreign market entry options 349–51, American characteristics by 192f; strike
350f; acquisition approach 371–4, 374f; activity in 568; tort costs 48f; union density
alliances and partnerships 374–81; contract rate 552f; worker severence protection 550f;
manufacturing 368–9; exporting 358–63; work goals, importance of 154f
franchising 364–7; Greenfield approach gestures 237
369–71; licensing 363–4; management gift-giving, cultural differences in 163–5
contracts 367; pluses and minuses of 379f; global integration, corporate strategy and
turnkey contracts 367–8; wholly owned 316–17, 318f
foreign subsidiaries 369–74, 370f, 374f; globalization: defined 5; growth of business
without ownership 358–69 and 7–9; international business and 5–6
foreign operations, staffing 453–8 global leadership 420–35; attributes 421f;
foreign service premiums, balance sheet developing, skills 435f; effectiveness of
compensation and 517–18 429–31, 430f; leader behavior 421–7,
forgiveness, as communication 228–30 426f; in multinationals 431–5, 432f, 435f;
France: employees view of supervisors 408f; nurturing style of 422–3; overview of 420–1;
favorability ratings by 190f; favorability path-goal approach 430–1; skills needed for
ratings of 190f; foreign direct investment 433–5, 435f; transformational 427–9
8f; foreign language and culture knowledge Global Leadership and Organizational
222f; government expenditures on labor Behavior Effectiveness (GLOBE) Project
market programs 551f; gross domestic 149–51; cross-cultural leadership and 429;
product 17f; labor-management relations cultural dimensions 150f; described 149–51;
in 566f; labor unions in 553; lawyers per summary of 151
100,000 people 48f; paid days off 510f; Global Mean, employee engagement levels of
positive/negative American characteristics by 189f
192f; strike activity in 568f; tort costs 48f; global strategy 320–1, 323f
union density rate 552f; worker severence “Globish” 223
protection 550f glocalization strategy, GE 306–7, 338–40
franchisee 364 goods/services, balance sheet compensation and
franchising, as foreign market entry option 364–7 521–6
franchisor 364 grease payments see bribery
frequent business travelers 454f Great Britain, orientation in, long- versus
future orientation 150f short-term 145f
Greece: employees view of supervisors 408f;
gai-ben (nick name for foreign lawyer licensed GLOBE cultural dimensions 150f; gross
to practice in Japan) 46 domestic product 17f; paid days off 510f
GATT (General Agreement on Tariffs and Greenfield approach, to foreign market entry
Trade) 53–4 369–71
gender egalitarianism 150f gross domestic product (GDP): defined 9;
General Agreement on Tariffs and Trade European Union members 17f
(GATT) 53–4 groups: agreements, management and
Geneva, Switzerland, cost of living index in 524f employees 566–70; behavior, differences in
Georgia, piracy rates and losses 69f 540–1; defined 539; diversity and 544–7;
German Confederation of Trade Unions 554 employee input, forms of 562–5; labor
Germany: conflict, approach to 270f; corporate relations and 547–51; labor unions and
social responsibility issues 95f; domestic risk 551–62; managing, across cultures 539–40;
factors in 62; employee engagement levels productivity of 541–4
595
Guangzhou, China, cost of living index in 524f values, staffing needs and 461; described
guanxi (importance of in Chinese business 449–50; employees, selecting and developing
relations) 13, 135f, 136–7, 458 458–60; managers, developing 461–2;
Guatemala, GLOBE cultural dimensions of 150f selection and development procedures,
cultural values and 462–4; staffing foreign
halal (Arabic lawful) 51 operations 453–8; strategic look at
haram (Arabic unlawful) 51 449–52, 452f
hardship pay, balance sheet compensation and imams 51
517–18 implementation tactics and plans 332
Hardship Post Differentials Guidelines (DOS) independent self attitude 184, 184f
518 India: attraction and engagement drivers to
harmony 135–6, 135f firms 413f; corrupt nation ranking 104f;
Helsinki, Finland, cost of living index in 524f cultural values 130–1, 160; economic growth
Herzberg’s two-factor theory 409–11; cross- 14; employee engagement levels 189f;
cultural applicability 409–11; described 409 favorability ratings by 190f; foreign direct
Hofstede’s clustering approach 138–47; investment 8f; foreign language and culture
cultural maps 140–4, 143f, 144f; described knowledge 222f; gift-giving advice 165;
138; individualism-collectivism 138–9, 142f; GLOBE cultural dimensions 150f; labor-
limitations of 145–7; masculinity-femininity management relations in 566f; lawyers per
139; orientation, long- versus short-term 100,000 people 48f; orientation, long- versus
144–5, 145f; power distance 139–40; short-term 145f; paid days off 510f; patent
uncertainty avoidance 140 rules in 67; piracy rates and losses 69f;
Hofstede’s cultural maps 140–4; abbreviations positive/negative American characteristics
used in 141f; family quadrant 144f; by 192f
individualism-collectivism 142f; masculinity- indirect exporting 362
femininity index 143f; pyramid of people indirect/linking risk reduction 73–4
quadrant 144f; uncertainty avoidance 143f; individualism 540
village market quadrant 144f; well-oiled individualism-collectivism cultural dimension
machine quadrant 144f 138–9, 142f
home-country evaluations for expatriates individualism-communitarianism culture 149
497–9, 498f Indonesia: Big Mac economic index 525f; fair
home replication strategy 318 administration of justice rating 52f; foreign
Hong Kong: Big Mac economic index 525f; language and culture knowledge 222f; labor-
competitiveness ranking 26f; cost of living management relations in 566f; paid days off
index 524f; expatriate housing costs in 520f; 510f; piracy rates and losses 69f; positive/
fair administration of justice rating 52f; negative American characteristics by 192f;
foreign direct investment 8f; foreign language time perception 177f
and culture knowledge 222f; GLOBE information technology (IT) services 14
cultural dimensions 150f; labor-management in-group 540–1; collectivism 150f; social
relations in 566f; paid days off 510f loafing and 541–2; stereotypes 194–6
host-country evaluations for expatriates 496–7, inhwa (South Korea harmony) 135f, 137
498f inner directed employees 148
host-country nationals (HCNs) 453, 454f, inpatriates 454f
456–7 intellectual property protection 67–70
housing costs, balance sheet compensation and interdependent self attitude 184, 184f
518–20, 520f internal attribution 180
humane orientation 150f, 151 international business: challenges facing 21–7;
Hungary: domestic risk factors in 62; employees evolution of 29–30; foreign direct investment
view of supervisors 408f; GLOBE cultural and 7–9, 8f; globalization and 5–6; growth
dimensions 150f; gross domestic product 17f of 7–9; managing in 27–30; regional
trends 9–21; threats to 6, 7f; World Trade
Iceland, fair administration of justice rating 52f Organization and 6
idealism 91 international commuters 454f
IG Metall union (Industrial Union of Metal International Confederation of Free Trade
Workers, Germany) 554, 562 Unions (ICFTU) 561
IHRM (international human resource international development, stages of 351–7;
management): challenges for 450f; cultural alliances, partners, and consortia 355–7;
596
exporting 352; global or transnational Italy: gross domestic product 17f; lawyers
354–5; international division 353; per 100,000 people 48f; paid days off 510f;
multinational 353–4; overview of 351–2, strike activity in 568f; time perception 177f;
353f; sales subsidiaries 352 tort costs 48f; union density rate 552f
international disputes, resolving 54–6
international employees: compensation 506; Japan: Big Mac economic index 525f; business
labor unions 561–2; selecting and developing cards in 174–5; competitiveness ranking 26f;
458–60; types of 454f conflict, approach to 270f; conflict styles
international gift-giving 163–5 271f; corrupt nation ranking 104f; economic
international human resource management growth 14–15; favorability ratings by 190f;
(IHRM): challenges for 450f; cultural values, favorability ratings of 190f; foreign language
staffing needs and 461; described 449–50; and culture knowledge 222f; gift-giving
employees, selecting and developing 458–60; advice 165; GLOBE cultural dimensions
managers, developing 461–2; selection and 150f; government expenditures on labor
development procedures, cultural values and market programs 551f; labor-management
462–4; staffing foreign operations 453–8; relations in 566f; labor unions 557–8;
strategic look at 449–52, 452f lawyers per 100,000 people 48f; orientation,
International Labor Organization (ILO) 561 long- versus short-term 145f; paid days off
international law 53–4 510f; piracy rates and losses 69f; saying no
international legal systems 45f in 225f; strike activity in 568–9, 568f; time
international management; see also legal perception 177f; tort costs 48f; union density
environment, international management: rate 552f; wa (harmony) 135f; work goals,
challenges 27–8; concepts 28–30; culture importance of 154f
and 153–6; currency volatility and 22–3; Japan Federation of Bar Associations 46
ethics and social responsibility in 88–118; job satisfaction 186–7
goal of 27; in international business 27–30; joint consultation committees (JCCs) 563
stereotypes and 191–3; technology and 21–2; joint ventures (JVs) 375–8, 377f
workforce challenges 23–7 Jordan, positive/negative American
international managers: developing 461–2; skill characteristics by 192f
profile for 459f jurisdiction, source of 54–6
International Metal Workers Federation 562 just-in-time expatriates 454f
international strategy 318–19; see also
international strategy, developing; corporate kaizen (Japanese quality improvement
features supporting 336f; designing fair 337; philosophy) 15
organizational requirements for 335–7 keiretsu (Japanese ownership structure) 310
international strategy, developing 326–35, Kenya, corrupt nation ranking of 104f
327f; control and evaluation procedures 333; kidnapping industry 60–1
goal setting 331; implementation tactics and Korea: competitiveness ranking 26f; corrupt
plans 332; Kraft and 328–9; McDonald’s nation ranking 104f; foreign language and
and 333–5; mission statement 326; SWOT culture knowledge 222f; inhwa (harmony)
analysis 326–8, 329–31 135f; union density rate 552f
International Trade Secretariats (ITSs) 562 Kuwait: employee engagement levels 189f;
interpersonal space 236 GLOBE cultural dimensions 150f
interpretation, conflict and 269f
interruption 178 labor relations 547–51; legal constraints
intracorporate transfer 362 549–51, 550f; power of multinational
invest-in-employees IHR strategy 451, 452f 548–9; worker control and input 548
Iran, GLOBE cultural dimensions of 150f labor unions 551–62; in Africa 560–1; in
Ireland: competitiveness ranking 26f; employees Asian countries 559–60; in Belgium 555–6;
view of supervisors 408f; GLOBE cultural Central/South American 560; in China
dimensions 150f; gross domestic product 17f; 558–9; in Europe 555–7; in France 553; in
paid days off 510f; union density rate 552f Germany 553–4; international employee
Islamic law 45f, 49–51 561–2; Japanese 557–8; overview of 551–2;
Israel: competitiveness ranking 26f; employee in United Kingdom (UK) 554–5
engagement levels 189f; GLOBE cultural la mordida 102; see also bribery
dimensions 150f; paid days off 510f; work language; see also communication: communication
goals, importance of 154f in foreign 222–6; difficulties, conflict and 269;
597
fluency 216–21, 222f; translation errors 224f; Malta: gross domestic product 17f; paid days
world 214–16, 214f, 215f off 510f
Latvia: employees view of supervisors 408f; management contracts, as foreign market entry
gross domestic product 17f option 367
lawyers, number of 48f marketing alliances, as foreign market entry
leader behavior 421–7; aligning, with cultural option 381
context 427; culture and impact of 425–7, masculinity-femininity cultural dimension 139,
426f; dimensions, effectiveness of 430f; 143f
overview of 421; task- vs. relationship- Maslow’s hierarchy of needs 407–9; cross-
oriented 422–5 cultural applicability 407–9, 408f; described
leadership, global 420–35; attributes 421f; 407
developing, skills 435f; effectiveness of master franchisee 364
429–31, 430f; leader behavior 421–7, meishi (business card) 175
426f; in multinationals 431–5, 432f, 435f; Mexico: Big Mac economic index 525f;
nurturing style of 422–3; overview of 420–1; economic growth 12; employee engagement
path-goal approach 430–1; skills needed for levels 189f; fair administration of justice
433–5, 435f; transformational 427–9 rating 52f; foreign direct investment 8f;
LEAP (Life Experience Abroad Program) 528–9 foreign language and culture knowledge
Lebanon: paid days off 510f; positive/negative 222f; labor-management relations in 566f;
American characteristics by 192f piracy rates and losses 69f
legal environment, international management: Middle East economic growth 20
international law 53–4; legal systems 44–51; Milan, Italy, cost of living index in 524f
political issues/risk 56–67; resolving disputes mirror imaging 194–5
54–6; trademark/intellectual property mission statement 326
protection 67–70 Moldova, employees view of supervisors in 408f
legal systems 44–51; Asian law 45f; civil monochronic time culture 178–9, 179f
law 44–5, 45f; common law 45–8, 45f; monozukuri (Japanese manufacturing style;
communist/socialist law 45f, 52; Islamic law state of mind) 15
45f, 49–51; Sub-Saharan African law 45f, 52 Morocco: GLOBE cultural dimensions 150f;
liberalism 30f paid days off 510f
Liberia, corrupt nation ranking of 104f Moscow, Russia: cost of living index 524f;
Libya: corrupt nation ranking 104f; piracy expatriate housing costs in 520f
rates and losses 69f most-favored-nation status 53
licensee 363 motivation across cultures 406–20; conclusions
licensing, as foreign market entry option 363–4 about 419–20; equity theory 411–14;
licensor 363 expectancy theory 416–19; Herzberg’s two-
Life Experience Abroad Program (LEAP) 528–9 factor theory 409–11; Maslow’s hierarchy of
Lithuania: employees view of supervisors 408f; needs 407–9; overview of 406; reinforcement
gross domestic product 17f theory 414–15; Western approaches to
local growth teams (LGTs) 339–40 406–11
localization compensation method 516–17 Mozambique, corrupt nation ranking of 104f
localized employees 454f multidomestic strategy 319–20, 323f
local responsiveness, corporate strategy and multinationals: defined 29; described 30f;
316–17, 318f evolution of 30f; leadership development in
location factors: competitiveness and 313–14, 431–5, 432f, 435f; transnational/traditional
313f; implications of 314–16 skills comparison 432f
London, United Kingdom: cost of living index Mumbai, India, expatriate housing costs in 520f
524f; expatriate housing costs in 520f My Years with General Motors (Sloan) 252
Los Angeles, U.S., cost of living index in 524f
Luxembourg: competitiveness ranking 26f; National Institutes of Health 195
gross domestic product 17f nationalization 57
National Union of Mineworkers (NUM) 561
Maastricht Treaty 16 NCR 24
Malaysia: competitiveness ranking 26f; corrupt negotiation, international 281–94; advance
nation ranking 104f; foreign language and training and 285–6; allowing time and 284;
culture knowledge 222f; labor-management cross-cultural advice 283–4; elements of 281;
relations in 566f familiarity with customs and norms 285;
598
four-stage process model 286–94; hostage organizational commitment 187–8

crisis example 281–2; preparation for 283–6; orientation, long- versus short-term 144–5,
teams and 284; trust factor in 294f 145f
negotiation process model 286–94; agreement Osaka, Japan, cost of living index in 524f
stage 287f, 293–4; nontask sounding stage Oslo, Norway, cost of living index in 524f
286–8, 287f; persuasion stage 287f, 289–93; outer directed employees 148
stage overview 286; task-related exchange of out-groups 540–1
information stage 287f, 288–9 outsourced employees 454f
Netherlands: competitiveness ranking 26f; outsourcing, Middle East 20
employees view of supervisors 408f; Overseas Private Investment Corporation
fair administration of justice rating 52f; (OPIC) 73, 79
foreign language and culture knowledge
222f; GLOBE cultural dimensions 150f; pace of time measures 177f
government expenditures on labor market Pakistan: favorability ratings by 190f; foreign
programs 551f; gross domestic product language and culture knowledge 222f; labor-
17f; labor-management relations in 566f; management relations in 566f; lawyers per
orientation, long- versus short-term 145f; 100,000 people 48f; orientation, long- versus
paid days off 510f; positive/negative short-term 145f; piracy rates and losses 69f;
American characteristics by 192f; strike positive/negative American characteristics
activity in 568f; union density rate 552f; by 192f
worker severence protection 550f; work parent-country nationals (PCNs) 453, 454f
goals, importance of 154f Paris, France, cost of living index in 524f
neutral-emotional culture 148 Paris Convention 67
New York, U.S., cost of living index in 524f particularism 148
New Zealand: competitiveness ranking passive aggressive 272
26f; corrupt nation ranking 104f; fair patent flooding 355–6
administration of justice rating 52f; GLOBE patent trolls 356
cultural dimensions 150f paternalism 30f
Nigeria: GLOBE cultural dimensions 150f; path-goal leadership approach 430–1
labor-management relations in 566f; perception: business cards in Japan and 174–5;
orientation, long- versus short-term 145f; defined 171; described 171–2; of events
piracy rates and losses 69f 173–4; interpretation of 179–80; of others
nontask sounding 286–8, 287f 172–3; research implications on 174; of time
nonverbal communication 236–41; context (see time perception)
and 239–41; described 236; emotions 237; performance evaluation: employee 492–3;
gestures 237; interpersonal space 236; touch expatriates (see performance evaluation,
237–8; vocal qualities as 238–9 expatriates); foreign-born employee 503–6
North American Free Trade Agreement performance evaluation, expatriates: challenges
(NAFTA) 9, 72, 560; Mexico and 12 with 501–2; environment variables of
Norway: Big Mac economic index 525f; 500; foreign-born employees and 503–6;
competitiveness ranking 26f; corrupt nation guidelines for 502–3; by home-country
ranking 104f; employees view of supervisors professionals 497–9, 498f; by host-country
408f; fair administration of justice rating 52f; professionals 496–7, 498f; multinationals
labor-management relations in 566f; union and 493–5; options for 495, 495f; personal
density rate 552f characteristic variables of 501; task variables
nurturing style of leadership 422–3 of 500–1; timing of 499–500
performance-ism 504
OECD (Organisation for Economic performance orientation 150f, 151
Co-operation and Development) 43, 111 perks as compensation 508–9
Office of U.S. Trade Representative 9 permanent expatriates 454f
offshoring 23–5; defined 23 personal characteristics and performance
oligarchs 19 evaluations 501
On the Road in America (TV show) 193 persuasion stage of negotiation 287f, 289–93
OPIC (Overseas Private Investment Peru, confiscation and 59
Corporation) 73, 79 Pew Global Attitude Project 190–1, 190f
Organisation for Economic Co-operation and Philippines: Big Mac economic index
Development (OECD) 43, 111, 511, 561 525f; GLOBE cultural dimensions 150f;
599
orientation, long- versus short-term 145f; Russia: Big Mac economic index 525f;
paid days off 510f confiscation and 59; conflict styles 271f;
piracy rates and losses 69f corruption in 18–19; economic growth 18;
Poland: employees view of supervisors 408f; fair employee engagement levels 189f; employees
administration of justice rating 52f; GLOBE view of supervisors 408f; fair administration
cultural dimensions 150f; gross domestic of justice rating 52f; favorability ratings by
product 17f; positive/negative American 190f; favorability ratings of 190f; foreign
characteristics by 192f; tort costs 48f direct investment 8f; GLOBE cultural
political environment risk 57–60 dimensions 150f; labor-management
political risk: defined 56–7; economic conditions relations in 566f; piracy rates and losses 69f;
58f, 62–7; managing/dealing with 71; political positive/negative American characteristics by
environment 57–60; rating, across countries 192f; worker severence protection 550f
58f; summary of 70–1; types of 57–67
polychronic time culture 178–9, 179f SAIC (State Administration for Industry and
Portugal: corrupt nation ranking 104f; Commerce) 76
employees view of supervisors 408f; fair sanctions 64–5
administration of justice rating 52f; gross Sao Paulo, Brazil, expatriate housing costs in 520f
domestic product 17f; strike activity in 568f Saudi Arabia: Big Mac economic index 525f;
pot au vin 102; see also bribery conflict, approach to 270f; employee
power distance (PD) cultural dimension engagement levels 189f; gift-giving advice
139–40, 150f 165; performance evaluation systems 505f;
production alliances, as foreign market entry piracy rates and losses 69f
option 380 second-generation expatriates 454f
purchasing power, balance sheet compensation security motivation values 142
and 518 seikashugi (Japanese performance pay system) 504
pyramid of people quadrant, cultural map 143, self attitude 183–5; independent 184, 184f;
144f interdependent 184, 184f; self-descriptions
and 184–5; at work 185
Qatar, competitiveness ranking in 26f self-descriptions, self attitude and 184–5
quality, workforce 25–7 self-serving attribution bias 180
questionable payments see bribery Shanghai, China, cost of living index in 524f
sharia (God’s rules) 49
R&D alliances, as foreign market entry option sharia-compliant assets 50
381 Shenzhen, China, cost of living index in 524f
regional strategy 322–4 short-term international assignees 454f
regret, as communication 228–30 shusa system 173
reinforcement theory of motivation 414–15 Sierra Leone, corrupt nation ranking of 104f
related and supporting industries, location and Singapore: competitiveness ranking 26f; cost of
313f, 314 living index 524f; foreign direct investment
relations, deterioration of 567 8f; GLOBE cultural dimensions 150f; lawyers
relationship-oriented behavior 422–5 per 100,000 people 48f; paid days off 510f
relativism 91 Slovakia: employees view of supervisors 408f;
repatriation 476–7, 477f gross domestic product 17f
reputation see face concept Slovenia: employees view of supervisors 408f;
reshoring 24 gross domestic product 17f; paid days off 510f
reverse innovation 339 Small Business Administration 9
riba 49 social loafing 541–4; described 541;
risk factors, summary of 70–1 implications of 542–4; in-groups and 541–2
risk reduction: categorizing 71–4, 72f; direct/ social motivation values 142
defensive 71–2, 72f; direct/linking 72–3, 72f social responsibility issues 95f
Romania: employees view of supervisors 408f; social welfare IHR strategy 451, 452f
fair administration of justice rating 52f; gross societal collectivism 150f
domestic product 17f; paid days off 510f Society for Competitive Intelligence
Rome, Italy, cost of living index in 524f Professionals 115
Ronen and Shenkar’s country clusters 133–8; sogo shosa (Japan trading company) 310
classification of 134f; described 133–5; South Africa: Big Mac economic index 525f;
limitations of 135–6, 137–8 foreign language and culture knowledge
600
222f; labor-management relations in 566f; tariff 63

paid days off 510f task-oriented behavior 422–5
South America, economic growth in 12–13 task-related exchange of information 287f,
South Korea: attraction and engagement drivers 288–9
to firms 413f; Big Mac economic index task variables of performance evaluation 500–1
525f; economic growth 15; GLOBE cultural taxes, balance sheet compensation and 520–1
dimensions 150f; lawyers per 100,000 people technology: currency volatility and 22–3;
48f; leadership skills 437–8; orientation, management and 21–2
long- versus short-term 145f; paid days off Tel Aviv, Israel, cost of living index in 524f
510f; performance evaluation systems 505f Test of English for International
Spain: corrupt nation ranking 104f; employees Communication Exam (TOEIC) 218
view of supervisors 408f; favorability Thailand: Big Mac economic index 525f; conflict
ratings by 190f; foreign direct investment 8f; styles 271f; GLOBE cultural dimensions 150f;
government expenditures on labor market orientation, long- versus short-term 145f; paid
programs 551f; gross domestic product 17f; days off 510f; vs. U.S. culture 157f
labor-management relations in 566f; paid third-country nationals (TCNs) 453, 454f, 457
days off 510f; positive/negative American threat issues 7f
characteristics by 192f; strike activity in time perception 175–9; classifying countries by
568f; tort costs 48f; union density rate 552f 178–9, 179f; overview of 175–6; research on,
specific-diffuse culture 149 across cultures 176–8, 177f
spoken communication 214–21 TOEIC (Test of English for International
sports idioms, as communication 234–5 Communication Exam) 218
State Administration for Industry and Tokyo, Japan: cost of living index 524f;
Commerce (SAIC) 76 expatriate housing costs in 520f
State Grid 11f tort costs 48f
stereotypes 191–3 totalization agreement 521
strategic alliances, as foreign market entry touch, as nonverbal communication 237–8
option 378–9 trademark protection 67–70
strategic industries 19 traditional expatriates 454f
strikes, union effects on 569–70, 570f transformational leadership 427–9
Sub-Saharan African law 45f, 52 translation errors 224f
Sweden: competitiveness ranking 26f; conflict transnational strategy 321–2
styles 271f; employee engagement levels Transparency International (TI) 103
189f; employees view of supervisors 408f; Triad project 545–6
foreign direct investment 8f; foreign language triple bottom line 92
and culture knowledge 222f; GLOBE trolls, patent 356
cultural dimensions 150f; government Trompenaars’s approach to classifying
expenditures on labor market programs culture 148–9; achievement-ascription
551f; gross domestic product 17f; labor- 149; individualism-communitarianism
management relations in 566f; orientation, 149; neutral-emotional 148; outer vs.
long- versus short-term 145f; paid days inner directed 148; specific-diffuse 149;
off 510f; piracy rates and losses 69f; strike universalism-particularism 148
activity in 568f trust factor in negotiation 294f
Switzerland: Big Mac economic index 525f; Turkey: Big Mac economic index 525f;
competitiveness ranking 26f; employees employee engagement levels 189f;
view of supervisors 408f; foreign language favorability ratings by 190f; foreign direct
and culture knowledge 222f; GLOBE investment 8f; foreign language and culture
cultural dimensions 150f; labor-management knowledge 222f; labor-management
relations in 566f; strike activity in 568f; tort relations in 566f; positive/negative American
costs 48f; union density rate 552f characteristics by 192f
SWOT analysis 326–8, 329–31 turnkey contracts, as foreign market entry
option 367–8
Taiwan: competitiveness ranking 26f; foreign
language and culture knowledge 222f; labor- Uganda, corrupt nation ranking of 104f
management relations in 566f; orientation, Ukraine, employees view of supervisors in 408f
long- versus short-term 145f; paid days off uncertainty avoidance cultural dimension 140,
510f; time perception 177f 143f, 150f
601
union density rates 552f Vienna, Austria, cost of living index in 524f
Union Network International (UNI) 562 Vietnam: paid days off 510f; piracy rates and
United Arab Emirates (UAE): competitiveness losses 69f
ranking 26f; employee engagement levels village market quadrant, cultural map 143–4,
189f; paid days off 510f 144f
United Electrical Workers 562 vocal qualities, as nonverbal communication
United Kingdom (U.K.): competitiveness 238–9
ranking 26f; employee engagement levels
189f; employees view of supervisors 408f; wa (Japan harmony) 135f, 136
foreign direct investment 8f; foreign language wage levels across countries 507–8
and culture knowledge 222f; government WARN Act (Worker Adjustment and
expenditures on labor market programs Retraining Notification) 549
551f; gross domestic product 17f; labor- Wassenaar Agreement 66
management relations in 566f; labor unions well-oiled machine quadrant, cultural map 143,
in 554–5; lawyers per 100,000 people 48f; 144f
strike activity in 568f, 569; time perception Western motivation concepts 406–11;
177f; tort costs 48f; union density rate 552f; Herzberg’s two- factor theory 409–11;
work goals, importance of 154f Maslow’s hierarchy of needs 407–9;
United Nations Global Compact (UNGC) code overview of 406–7
90f wholly owned foreign subsidiaries 369–74;
United States (U.S.): attraction and engagement acquisition approach 371–4, 374f; decision
drivers to firms 413f; Big Mac economic matrix 374f; Greenfield approach 369–71;
index 525f; competitiveness ranking 26f; motivation sources for 370f; overview of
conflict, approach to 270f; conflict styles 369
271f; corporate social responsibility issues work, self-views at 185
95f; economic growth 9–11; employee work attitudes 186–8; conclusions about
engagement levels 189f; favorability ratings 188; job satisfaction 186–7; organizational
by 190f; favorability ratings of 190f; foreign commitment 187–8
direct investment 8f; foreign language work centrality 153–4
and culture knowledge 222f; government Worker Adjustment and Retraining
expenditures on labor market programs Notification (WARN) Act 549
551f; intra-corporate transfer sources work-family conflict 278–80
362f; labor-management relations in 566f; workforce challenges: diversity, increasing
lawyers per 100,000 people 48f; orientation, 27; international management and
long- versus short-term 145f; paid days 23–7; offshoring and 23–5; quality and
off 510f; performance evaluation systems competitiveness 25–7
505f; piracy rates and losses 69f; positive/ work goals 154–5, 154f
negative American characteristics by 192f; works councils 563–4
strike activity in 568f, 569; vs. Thai culture World Bank 49
157f; time perception 177f; tort costs 48f; World Customs Organization 43
trade deficit countries with 10f; trade surplus world foreign direct investment 8f
countries with 10f; union density rate 552f; World Health Organization (WHO) 43
work goals, importance of 154f World Trade Organization (WTO) 53–4;
universalism 88–91, 89–90f, 148; defined 88; globalization and 5–6; goals of 6; language
examples of 89; global guidelines 89f; United costs and 219
Nations Global Compact code 90f written communication 230–6, 232f, 233f
Uruguay, corrupt nation ranking of 104f
U.S. Plus 562 yakuza (criminal gangs) 106
Yemen, corrupt nation ranking of 104f
vacation time, as compensation 509–11, 510f Yugoslavia (former), work goals, importance
value chain, building 311–13, 311f of 154f
value convergence 155–6
Venezuela: confiscation and 59; fair Zimbabwe: confiscation and 59; corrupt nation
administration of justice rating 52f; GLOBE ranking 104f
cultural dimensions 150f; labor-management Zurich, Switzerland, cost of living index in
relations in 566f 524f
602

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International Management

As the economies of many countries become more interrelated, international managers

■ Understanding the broad context of international business, including the critical

Paul D. Sweeney is a Professor of Management and Associate Dean at the University of

Dean B. McFarlin is the Dean of the Palumbo-Donahue School of Business at Duquesne

Paul D. Sweeney and

To Laurie, Andrew, Elizabeth and Nathaniel . . . no one

International Insights: Courting Trouble: American-Style Litigation

From Theory to International Practice: Conducting a Cultural Audit

Global Innovations: Getting to “Yes”: Negotiating Safely

Discussion Questions 382

Selecting and Developing International Employees 458

From Theory to International Practice: Assembling an Expatriate

Name Index 587

The field of international management continues to evolve rapidly. The “half-life” of

Strategic Opportunities and Cultural Challenges

Overview of the Fifth Edition

Two Experiential EndofChapter Features As we have done in earlier editions, we

Concise, Engaging, and ActionOriented Presentation Finally, the fifth edition is

The strong focus on applications, with a variety of applications-oriented features, appeals

Organizing the Challenge of International

2 LEGAL AND POLITICAL FOUNDATIONS OF INTERNATIONAL

3 DOING THINGS RIGHT: INTERNATIONAL ETHICS AND

INTERNATIONAL BUSINESS: A WORLD OF CONSTANT CHANGE 5

GLOBALIZATION AND THE GROWTH OF INTERNATIONAL BUSINESS 7

A SNAPSHOT OF REGIONAL TRENDS 9

KEY CHALLENGES FACING INTERNATIONAL BUSINESS 21

MANAGING IN A CHALLENGING INTERNATIONAL ENVIRONMENT 27

After reading this chapter, you should be able to:

■ describe today’s competitive environment in international business;

New Balance: Still Running with Production in the United States

constant theme in international management. Adapting to change often means coming up

International Business: A World of Constant Change

Globalization and the World Trade Organization

In essence, technology facilitates the interconnections between national economies. This

Our Plan for This Chapter

Threat Issue Overall Rank % Mentioning

Over-regulation 1st 18%

Globalization and the Growth of International

The Hottest Areas for Growth and Investment

Country FDI Inﬂow (in $ billions)

U.S. 198 168

A Snapshot of Regional Trends

2013 1998 2013 1998 2013 1998

1. Royal Dutch/ 485.5 Nether- Energy 1. Wal-Mart 240.53 U.S. Retail

9. Conoco 237.3 U.S. Energy 9. GE 131.69 U.S. Diversiﬁed

The AsiaPacific Region

■ Accelerate the sell-off of state-owned enterprises and remove restrictive barriers to

The European Union

Country 2012 GDP Per 2012 GDP

All 28 EU 100.0 $33,700 –0.4 — some yes

Figure 1.5 The European Union: 28 Countries and Counting.

Russia: Corruption in the Wild, Wild East

The Middle East and Africa

The Shadows on the Middle East

Key Challenges Facing International Business

Technological Sophistication and International Volatility

Advances in communications, information technology, and manufacturing processes have

Technological advances, however, do little to eliminate international business prob-

International Workforce Challenges