Chapter 03 - International business

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COUNTRY DIFFERENCES

PART TWO

Guanxi—Ties That Bind

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n 1992, McDonald’s Corporation opened its first restaurant in Beijing, China, after a decade of market research. The restaurant, then the largest McDonald’s in the world, was located on the corner of Wangfujing Street and the Avenue of Eternal Peace, just two blocks from Tiananmen Square, the very heart of China’s capital. The choice of location seemed auspicious, and within two years, sales at the restaurant were surpass-

ing all expectations. Then the Beijing city government dropped a bombshell; officials abruptly informed McDonald’s that it would have to vacate the location to make way for a commercial, residential, and office complex planned by Hong Kong developer Li Ka-shing. At the time, McDonald’s still had 18 years to run on its 20-year lease. A stunned McDonald’s did what any good Western company would do—it took the Beijing city government to court to try to enforce the lease. The court refused to enforce the lease, and McDonald’s had to move. Chinese observers had a simple explanation for the outcome. McDonald’s, they said, lacked the guanxi of Li Ka-shing. Given this, the company could not expect to prevail. Company executives should have accepted the decision in good grace and moved on, but instead, McDonald’s filed a lawsuit—a move that would only reduce what guanxi McDonald’s might have with the city government! This example illustrates a basic difference between doing business in the West and doing business in China. In the advanced economies of the West, business transactions are conducted and regulated by the centuries-old framework of contract law, which specifies the rights and obligations of parties to a business contract and provides mechanisms for seeking to redress grievances should one party in the exchange fail to live up to the legal agreement.

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Differences in Culture

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In the West, McDonald’s could have relied on the courts to enforce its legal contract with the city government. In China, this approach didn’t work. China does not have the same legal infrastructure. Personal power and relationships or connections, rather than the rule of law, have always been the key to getting things done in China. Decades of Communist rule stripped away the basic legal infrastructure that did exist to regulate business transactions. Power, relationships, and connections are an important, and some say necessary, influence on getting things done and enforcing business agreements in China. The key to understanding this process is the concept of guanxi. Guanxi literally means relationships, although in business settings it can be better understood as connections. McDonald’s lost its lease in central Beijing because it lacked the guanxi enjoyed by the powerful Li Ka-shing. The concept of guanxi is deeply rooted in Chinese culture, particularly the Confucian philosophy of valuing social hierarchy and reciprocal obligations. Confucian ideology has a 2,000-year-old history in China, and more than half a century of Communist rule has done little to dent its influence on everyday life in China. Confucianism stresses the importance of relationships, both within the family and between master and servant. Confucian ideology teaches that people are not created equal. In Confucian thought, loyalty and obligations to one’s superiors (or to family) is regarded as a sacred duty, but at the same time, this loyalty has its price. Social superiors are obligated to reward the loyalty of their social inferiors by bestowing “blessings” upon them; thus, the obligations are reciprocal. Today, Chinese will often cultivate a guanxiwang, or “relationship network,” for help. Reciprocal obligations are the glue that holds such networks together. If those obligations are

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not met—if favors done are not paid back or reciprocated—the reputation of the transgressor is tarnished and he or she will be less able to draw on their guanxiwang for help in the future. Thus, the implicit threat of social sanctions is often sufficient to ensure that favors are repaid, that obligations are met, and that relationships are honored. In a society that lacks a rule-based legal tradition, and thus legal ways of redressing wrongs such as violations of business agreements, guanxi is an important mechanism for building long-term business relationships and getting business done in China. There is a tacit acknowledgment that if you have the right guanxi, legal rules can be broken, or at least bent. Li Ka-shing had the right guanxi; McDonald’s apparently did not. As they have come to understand this, many Western businesses have tried to build guanxi to grease the wheels required to do business in China. Increasingly, guanxi has become a commodity that is for sale to foreigners. Many of the sons and daughters of high-ranking government officials have set up “consulting” firms and offered to mobilize their guanxiwang or those of their parents to help Western companies navigate their way through Chinese bureaucracy. Taking advantage of such services, however, requires good ethical judgment. There is a fine line between relationship building, which may require doing favors to meet obligations, and bribery. Consider the case of a lucrative business contract that was under consideration for more than a year between a large Chinese stateowned enterprise and two competing multinational firms. After months of negotiations, the Chinese elected to continue discussions with just one of the competitors—the one that had recently hired the son of the principal Chinese negotiator at a significant salary. This occurred even though the favored firm’s equipment was less compatible with Chinese equipment already in place than that offered by the rejected multinational. The clear implication is that the son of the negotiator had mobilized his guanxiwang to help his new employer gain an advantage in the contract negotiations. While hiring the 92
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son of the principal negotiator may be viewed as good business practice by some in the context of Chinese culture, others might argue that this action was ethically suspect and could be viewed as little more than a thinly concealed bribe.
Sources: S. D. Seligman, “Guanxi: Grease for the Wheels of China,” China Business Review, September–October 1999, pp. 34–38; L. Dana, “Culture Is the Essence of Asia,” Financial Times, November 27, 2000, p. 12; L. Minder, “McDonald’s to Close Original Beijing Store,” USA Today, December 2, 1996, p. 1A; and M. W. Peng, Business Strategies in Transition Economies (Thousand Oaks, CA: Sage Publications, 2000).

LEARNING OBJECTIVES 1. Understand that substantial differences between societies arise from cultural differences. 2. Know what is meant by the term culture. 3. Appreciate that cultures vary because of differences in social structure, religion, language, education, economic philosophy, and political philosophy. 4. Understand the relationship between culture and the values found in the workplace. 5. Appreciate that culture is not a constant, but changes over time. 6. Appreciate that much of the change in contemporary social culture is being driven by economic advancement, technological change, and globalization. 7. Understand the implications for international business management of differences among cultures.

INTRODUCTION
International business is different because countries are different. In Chapter 2 we saw how national differences in political, economic, and legal systems influence the benefits, costs, and risks associated with doing business in different countries. In this chapter, we will explore how differences in culture across and within countries can affect international business. Several themes run through this chapter. The first theme is that business success in a variety of countries requires cross-cultural literacy. By cross-cultural literacy, we mean an understanding of how cultural differences across and within nations can affect the way in which business is practiced. In these days of global communications, rapid transportation, and global markets, when the era of the global village seems just around the corner, it is easy to forget just how different various cultures really are. Underneath the veneer of modernism, deep cultural differences often remain. Westerners in general, and Americans in particular, are quick to conclude that because people from other parts of the world also wear blue jeans, listen to Western popular music, eat at McDonald’s, and drink Coca-Cola, they also accept the basic tenets of Western (or Cultural differences often affect management American) culture. But this is not true. For example, increasexpectations and styles. © Fujifotos/K. Kai/ ingly, the Chinese are embracing the material products of modThe Image Works. ern society. Anyone who has visited Shanghai cannot fail to be struck by how modern the city seems, with its skyscrapers, department stores, and freeways. But as the opening case demonstrates, beneath the veneer of Western modCROSS-CULTURAL ernism, long-standing cultural traditions rooted in a 2,000-year-old ideology continue LITERACY Understanding how the to have an important influence on the way business is transacted in China. In China, culture of a country guanxi, or relationships backed by reciprocal obligations, are central to getting busiaffects the way business ness done. As the opening case demonstrates, firms that lack sufficient guanxi, as Mcis practiced. Donald’s apparently did, may find themselves at a disadvantage when doing business in China. In this chapter, we shall argue that it is important for foreign businesses to gain an understanding of the culture that prevails in countries where they do business. The opening case also illustrates another important theme that we shall develop further in the next chapter: The old adage of “when in Rome do as the Romans do” may have ethical ramifications. Prevailing cultural mores in a country may put a foreign business in a difficult ethical position. For example, while it is important to build guanxi in China, there is a thin line between giving gifts to support the establishment of relationships, which is culturally normal behavior, and bribery or corruption, which is viewed dimly in the West and is against the law in some nations such as the United States, where the Foreign Corrupt Practices Act makes it illegal for a U.S. company to bribe government officials to gain business in a foreign nation. Another theme developed in this chapter is that a relationship may exist between culture and the cost of doing business in a country or region. Different cultures are more or less supportive of the capitalist mode of production and may increase or lower the costs of doing business. For example, some observers have argued that cultural factors lowered the costs of doing business in Japan and helped to explain Japan’s rapid economic ascent during the 1960s, 70s, and 80s.1 By the same token, cultural factors can sometimes raise the costs of doing business. Historically, class divisions were an important aspect of British culture, and for a long time, firms operating in Great Britain found it difficult to achieve cooperation between management and

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labor. Class divisions led to a high level of industrial disputes in that country during the 1960s and 1970s and raised the costs of doing business in Great Britain relative to the costs in countries such as Switzerland, Norway, Germany, or Japan, where class conflict was historically less prevalent. The British example, however, brings us to another theme we will explore in this chapter. Culture is not static. It can and does evolve, although the rate at which culture can change is the subject of some dispute. Important aspects of British culture have changed significantly over the past 20 years, and this is reflected in weaker class distinctions and a lower level of industrial disputes. Between 1992 and 2001, the number of days lost per 1,000 workers due to strikes in the United Kingdom was on average 24 each year, significantly less than in the United States (where the figure was 48), France (where 84 days were lost), and Canada (where 183 were lost).2 Similarly, there is evidence of changes in the culture of Japan, with the traditional Japanese emphasis on group identification giving way to greater emphasis on individualism.

W H AT I S C U LT U R E ?
Scholars have never been able to agree on a simple definition of culture. In the 1870s, the anthropologist Edward Tylor defined culture as “that complex whole which includes knowledge, belief, art, morals, law, custom, and other capabilities acquired by man as a member of society.”3 Since then hundreds of other definitions have been offered. Geert Hofstede, an expert on cross-cultural differences and management, defined culture as “the collective programming of the mind which distinguishes the members of one human group from another. . . . Culture, in this sense, includes systems of values; and values are among the building blocks of culture.”4 Another definition of culture comes from sociologists Zvi Namenwirth and Robert Weber who see culture as a system of ideas and argue that these ideas constitute a design for living.5 Here we follow both Hofstede and Namenwirth and Weber by viewing culture as a system of values and norms that are shared among a group of people and that when taken together constitute a design for living. By values we mean abstract ideas about what a group believes to be good, right, and desirable. Put differently, values are shared assumptions about how things ought to be.6 By norms we mean the social rules and guidelines that prescribe appropriate behavior in particular situations. We shall use the term society to refer to a group of people who share a common set of values and norms. While a society may be equivalent to a country, some countries harbor several societies (i.e., they support multiple cultures), and some societies embrace more than one country.

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VALUES Abstract ideas about what a society believes to be good, right, and desirable.

NORMS Social rules and guidelines that prescribe appropriate behavior in particular situations.

Values and Norms
Values form the bedrock of a culture. They provide the context within which a society’s norms are established and justified. They may include a society’s attitudes toward such concepts as individual freedom, democracy, truth, justice, honesty, loyalty, social obligations, collective responsibility, the role of women, love, sex, marriage, and so on. Values are not just abstract concepts; they are invested with considerable emotional significance. People argue, fight, and even die over values such as freedom. Values also often are reflected in the political and economic systems of a society. As we saw in Chapter 2, democratic free market capitalism is a reflection of a philosophical value system that emphasizes individual freedom. Norms are the social rules that govern people’s actions toward one another. Norms can be subdivided further into two major categories: folkways and mores. Folkways are the routine conventions of everyday life. Generally, folkways are actions of little

SOCIETY Group of people who share a common set of values and norms.

FOLKWAYS Routine conventions of everyday life.

moral significance. Rather, folkways are social conventions ANOTHER CULTURAL PERSPECTIVE concerning things such as the appropriate dress code in a particular situation, good social manners, eating with the corCoke gets guanxi to work for it rect utensils, neighborly behavior, and the like. While folkIn the east coast Fujian province of China, ways define the way people are expected to behave, violation Coca-Cola was doing fine in the major cities of folkways is not normally a serious matter. People who such as Xiamen, but in the larger, rural areas it violate folkways may be thought of as eccentric or illwas held hostage by eight wholesalers. These mannered, but they are not usually considered to be evil or wholesalers acted in ways that felt normal to bad. In many countries, foreigners may initially be excused them and, in accord with their culture, placed for violating folkways. great value on relationships (guanxi). They had A good example of folkways concerns attitudes toward established their distribution networks within time in different countries. People are keenly aware of the their circle of personal relationships—smaller passage of time in the United States and Northern European distributors who, in turn, had relationships with cultures such as Germany and Britain. Businesspeople are other, smaller distributors and so on down the very conscious about scheduling their time and are quickly line. This resulted in a long and costly distribuirritated when their time is wasted because a business assocition chain that kept Coca-Cola from getting to ate is late for a meeting or if they are kept waiting. They talk know the final consumer and kept the product’s about time as though it were money, as something that can price high. The wholesalers’ interests were to be spent, saved, wasted, and lost.7 Alternatively, in Arab, take care of their relationship network, not to take care of the imported product they were Latin, and Mediterranean cultures, time has a more elastic distributing. Coca-Cola realized that it needed character. Keeping to a schedule is viewed as less important to be close to the consumer and not leave its than finishing an interaction with people. While an Ameribrand under the control of powerful wholecan businessperson might feel slighted if she is kept waiting salers, so it decided to terminate its wholesaler for 30 minutes outside the office of a Latin American execurelationships, a courageous move in China. tive before a meeting, the Latin American may simply be Coca-Cola took an initial, massive hit, but is completing an interaction with an associate, and view the beginning to regain control of its product. Initial information gathered from this as more important than sticksales were down 60 percent, but after three ing to a rigid schedule. The Latin American executive inyears, they are poised for growth. Coca-Cola tends no disrespect, but due to a mutual misunderstanding set up a 350-member partnership network of about the importance of time, the American may see things grocers (a guanxiwang) that gives Coke direct differently. contact through the partner with the consumer. Folkways include rituals and symbolic behavior. Rituals and Coca-Cola also reduced the serving size to a symbols are the most visible manifestations of a culture and 6.5-ounce returnable bottle, which sells for the constitute the outward expression of deeper culturally held yuan equivalent of 12 cents. (Financial Times, values. For example, upon meeting a foreign business execFebruary 26, 2004, p. 9) utive, a Japanese executive will hold his business card in both hands and bow while presenting the card to the foreigner.8 This ritual behavior is loaded with deep cultural symbolism. The card specifies the rank of the Japanese executive, which is a very important piece of information in a hierarchical society such as Japan ( Japanese often have business cards with Japanese printed on one side, and English printed on the other). The bow is a sign of respect, and the deeper the angle of the bow, the greater the reverence one person shows for the other. The person receiving the card is expected to examine it carefully, which is a way of returning respect and acknowledging the card giver’s position in the hierarchy. The foreigner is also expected to bow when taking the card, and to return the greeting by presenting the Japanese executive with his own card, similarly bowing in the process. To not do so, and to fail to read the card that he has been given, instead casually placing it in his jacket, violates this important folkway and is considered rude. Mores are norms that are seen as central to the functioning of a society and to its MORES Norms seen as central to the social life. They have much greater significance than folkways. Accordingly, violating functioning of a society mores can bring serious retribution. Mores include such factors as indictments against and to its social life. theft, adultery, incest, and cannibalism. In many societies, certain mores have been

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enacted into law. Thus, all advanced societies have laws against theft, incest, and cannibalism. However, there are also many differences between cultures. In America, for example, drinking alcohol is widely accepted, whereas in Saudi Arabia the consumption of alcohol is viewed as violating important social mores and is punishable by imprisonment (as some Western citizens working in Saudi Arabia have discovered).

Culture, Society, and the Nation-State
We have defined a society as a group of people that share a common set of values and norms; that is, people who are bound together by a common culture. There is not a strict one-to-one correspondence between a society and a nation-state. Nation-states are political creations. They may contain a single culture or several cultures. While the French nation can be thought of as the political embodiment of French culture, the nation of Canada has at least three cultures—an Anglo culture, a French speaking “Quebecois” culture, and a Native American culture. Similarly, many African nations have important cultural differences between tribal groups, as exhibited in the early 1990s when Rwanda dissolved into a bloody civil war between two tribes, the Tutsis and Hutus. Africa is not alone in this regard. India is composed of many distinct cultural groups. During the first Gulf War, the prevailing view presented to Western audiences was that Iraq was a homogenous Arab nation. But over the past 15 years we have learned there are several different societies within Iraq, each with its own culture. The Kurds in the north do not view themselves as Arabs and have their own distinct history and traditions. There are two Arab societies: the Shiites in the South and the Sunnis who populate the middle of the country and who ruled Iraq under the regime of Sadam Hussein (the terms Shiites and Sunnis refer to different sects within the religion of Islam). Among the southern Sunnis is another distinct society of 500,000 Marsh Arabs who live at the confluence of the Tigris and Euphrates rivers, pursuing a way of life that dates back 5,000 years.9 At the other end of the scale, we can speak of cultures that embrace several nations. Several scholars argue that we can speak of an Islamic society or culture that is shared by the citizens of many different nations in the Middle East, Asia, and Africa. As you will recall from the last chapter, this view of expansive cultures that embrace several nations underpins Samuel Huntington’s view of a world that is fragmented into different civilizations including Western, Islamic, and Sinic (Chinese) civilizations.10 To complicate things further, it is also possible to talk about culture at different levels. It is reasonable to talk about “American society” and “American culture,” but there are several societies within America, each with its own culture. One can talk about Afro-American culture, Cajun culture, Chinese-American culture, Hispanic culture, Indian culture, Irish-American culture, and Southern culture. The relationship between culture and country is often ambiguous. One cannot always characterize a country as having a single homogenous culture, and even when one can, one must also often recognize that the national culture is a mosaic of subcultures.

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The Determinants of Culture
The values and norms of a culture do not emerge fully formed. They are the evolutionary product of a number of factors, including the prevailing political and economic philosophies, the social structure of a society, and the dominant religion, language, and education (see Figure 3.1). We discussed political and economic philosophies at length in Chapter 2. Such philosophies clearly influence the value systems of a society. For example, the values found in Communist North Korea toward freedom, justice, and individual achievement are clearly different from the values found in the United States, precisely because each society operates according to different political and economic philosophies. Below we will discuss the influence of so-

Religion

FIGURE 3.1 The Determinants of Culture

Social Structure Culture Norms and Value Systems Language

Political Philosophy

Economic Philosophy

Education

cial structure, religion, language, and education. The chain of causation runs both ways. While factors such as social structure and religion clearly influence the values and norms of a society, the values and norms of a society can influence social structure and religion.

SOCIAL STRUCTURE
A society’s social structure refers to its basic social organization. Although social structure consists of many different aspects, two dimensions are particularly important when explaining differences between cultures. The first is the degree to which the basic unit of social organization is the individual, as opposed to the group. In general, Western societies tend to emphasize the primacy of the individual, while groups tend to figure much larger in many other societies. The second dimension is the degree to which a society is stratified into classes or castes. Some societies are characterized by a relatively high degree of social stratification and relatively low mobility between strata (e.g., Indian), while other societies are characterized by a low degree of social stratification and high mobility between strata (e.g., American).

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GROUP An association of two or more individuals who have a shared sense of identity and who interact with each other in structured ways on the basis of a common set of expectations about each other’s behavior.

Individuals and Groups
A group is an association of two or more individuals who have a shared sense of identity and who interact with each other in structured ways on the basis of a common set of expectations about each other’s behavior.11 Human social life is group life. Individuals are involved in families, work groups, social groups, recreational groups, and so on. However, while groups are found in all societies, societies differ according to the degree to which the group is viewed as the primary means of social organization.12 In some societies, individual attributes and achievements are viewed as being more important than group membership, while in others the reverse is true. THE INDIVIDUAL In Chapter 2, we discussed individualism as a political philosophy. However, individualism is more than just an abstract political philosophy. In many Western societies, the individual is the basic building block of social organization. This

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is reflected not just in the political and economic organization of society, but also in the way people perceive themselves and relate to each other in social and business settings. The value systems of many Western societies, for example, emphasize individual achievement. The social standing of individuals is not so much a function of whom they work for, as of their individual performance in whatever work setting they choose. The emphasis on individual performance in many Western societies has both beneficial and harmful aspects. In the United States, the emphasis on individual performance finds expression in an admiration of rugged individualism and entrepreneurship. One benefit of this is the high level of entrepreneurial activity in the United States and other Western societies. New products and new ways of doing business (e.g., personal computers, photocopiers, computer software, biotechnology, supermarkets, and discount retail stores) have repeatedly been created in the United States by entrepreneurial individuals. One can argue that the dynamism of the U.S. economy owes much to the philosophy of individualism. Individualism also finds expression in a high degree of managerial mobility between companies, and this is not always a good thing. While moving from company to company may be good for individual managers, who are trying to build impressive résumés, it is not necessarily a good thing for American companies. The lack of loyalty and commitment to an individual company, and the tendency to move on for a better offer, can result in managers who have good general skills but lack the knowledge, experience, and network of interpersonal contacts that come from years of working within the same company. An effective manager draws on company-specific experience, knowledge, and a network of contacts to find solutions to current problems, and American companies may suffer if their managers lack these attributes. One positive aspect of high managerial mobility is that executives are exposed to different ways of doing business. The ability to compare business practices helps U.S. executives identify how good practices and techniques developed in one firm might be profitably applied to other firms. The emphasis on individualism may also make it difficult to build teams within an organization to perform collective tasks. If individuals are always competing with each other on the basis of individual performance, it may be difficult for them to cooperate. A study of U.S. competitiveness by the Massachusetts Institute of Technology concluded that U.S. firms are being hurt in the global economy by a failure to achieve cooperation both within a company (e.g., between functions; between management and labor) and between companies (e.g., between a firm and its suppliers). Given the emphasis on individualism in the American value system, this failure is not surprising.13 The emphasis on individualism in the United States, while helping to create a dynamic entrepreneurial economy, may raise the costs of doing business due to its adverse impact on managerial stability and cooperation. THE GROUP In contrast to the Western emphasis on the individual, the group is the primary unit of social organization in many other societies. For example, in Japan, the social status of an individual is determined as much by the standing of the group to which he or she belongs as by his or her individual performance.14 In traditional Japanese society, the group was the family or village to which an individual belonged. Today the group has frequently come to be associated with the work team or business organization to which an individual belongs. In a now classic study of Japanese society, Nakane noted how this expresses itself in everyday life:
When a Japanese faces the outside (confronts another person) and affixes some position to himself socially he is inclined to give precedence to institution over kind of occupation. Rather than saying, “I am a typesetter” or “I am a filing clerk,” he is likely to say, “I am from B Publishing Group” or “I belong to S company.”15

Social Stratification
All societies are stratified on a hierarchical basis into social categories—that is, into social strata. These strata are typically defined on the basis of characteristics such as family background, occupation, and income. Individuals are born into a particular stratum. They become a member of the social category to which their parents belong. Individuals born into a stratum toward the top of the social hierarchy tend to have better life chances than individuals born into a stratum toward the bottom of the hierarchy. They are likely to have better education, health, standard of living, and work opportunities. Although all societies are stratified to some degree, they differ in two related ways. First, they differ from each other with regard to the degree of mobility between social strata, and second, they differ with regard to the significance attached to social strata in business contexts. SOCIAL MOBILITY The term social mobility refers to the extent to which individuals can move out of the strata into which they are born. Social mobility varies significantly from society to society. The most rigid system of stratification is a caste
SOCIAL STRATA Hierarchical social categories often based on family background, occupation, and income.

SOCIAL MOBILITY The extent to which individuals can move out of the social strata into which they are born.

CHAPTER 3 Differences in Culture

Nakane goes on to observe that the primacy of the group to which an individual belongs often evolves into a deeply emotional attachment in which identification with the group becomes all important in one’s life. One central value of Japanese culture is the importance attached to group membership. This may have beneficial implications for business firms. Strong identification with the group is argued to create pressures for mutual self-help and collective action. If the worth of an individual is closely linked to the achievements of the group (e.g., firm), as Nakane maintains is the case in Japan, this creates a strong incentive for individual members of the group to work together for the common good. Some argue that the success of Japanese enterprises in the global economy during the 1970s and 1980s was based partly on their ability to achieve close cooperation between individuals within a company and between companies. This found expression in the widespread diffusion of self-managing work teams within Japanese organizations, the close cooperation among different functions within Japanese companies (e.g., among manufacturing, marketing, and R&D), and the cooperation between a company and its suppliers on issues such as design, quality control, and inventory reduction.16 In all of these cases, cooperation is driven by the need to improve the performance of the group (i.e., the business firm). The primacy of the value of group identification also disANOTHER PERSPECTIVE courages managers and workers from moving from company to company. Lifetime employment in a particular company Online view of a new culture was long the norm in certain sectors of the Japanese econVisit the online versions of some Englishomy (estimates suggest that between 20 and 40 percent of all language daily newspapers in major foreign Japanese employees have formal or informal lifetime emcities to get a sense of their cultures and their ployment guarantees). Over the years, managers and workmarkets. Look at the ads and business names. ers build up knowledge, experience, and a network of Check out the classifieds. A good list link is at interpersonal business contacts. All these things can help www.geocities.com/Hollywood/Boulevard/ managers perform their jobs more effectively and achieve 1529/newspapers.html. In addition, check out cooperation with others. the Nation (Nairobi, Kenya) at www. However, the primacy of the group is not always benefinationaudio.com/News/DailyNation/Today. cial. Just as U.S. society is characterized by a great deal of dynamism and entrepreneurship, reflecting the primacy of values associated with individualism, some argue that Japanese society is characterized by a corresponding lack of dynamism and entrepreneurship. Although the longrun consequences are unclear, the United States could continue to create more new industries than Japan and continue to be more successful at pioneering radically new products and new ways of doing business.

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CASTE SYSTEM A system of social stratification in which social position is determined by the family into which a person is born, and change in that position is usually not possible during an individual’s lifetime.

CLASS SYSTEM A system of social stratification in which social status is determined by the family into which a person is born and by subsequent socioeconomic achievements. Mobility between classes is possible.

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system. A caste system is a closed system of stratification in which social position is determined by the family into which a person is born, and change in that position is usually not possible during an individual’s lifetime. Often a caste position carries with it a specific occupation. Members of one caste might be shoemakers, members of another might be butchers, and so on. These occupations are embedded in the caste and passed down through the family to succeeding generations. Although the number of societies with caste systems diminished rapidly during the 20th century, one partial example still remains. India has four main castes and several thousand subcastes. Even though the caste system was officially abolished in 1949, two years after India became independent, it is still an important force in rural Indian society where occupation and marital opportunities are still partly related to caste. A class system is a less rigid form of social stratification in which social mobility is possible. A class system is a form of open stratification in which the position a person has by birth can be changed through his or her own achievements and/or luck. Individuals born into a class at the bottom of the hierarchy can work their way up, while individuals born into a class at the top of the hierarchy can slip down. While many societies have class systems, social mobility within a class system varies from society to society. For example, some sociologists have argued that Britain has a more rigid class structure than certain other Western societies, such as the United States.17 Historically, British society was divided into three main classes: the upper class, which was made up of individuals whose families for generations had wealth, prestige, and occasionally power; the middle class, whose members were involved in professional, managerial, and clerical occupations; and the working class, whose members earned their living from manual occupations. The middle class was further subdivided into the upper-middle class, whose members were involved in important managerial occupations and the prestigious professions (e.g., lawyers, accountants, doctors), and the lower-middle class, whose members were involved in clerical work (e.g., bank tellers) and the less prestigious professions (e.g., schoolteachers).

Britain’s royal family inherited power and prestige. What are the similarities between the class systems in Britain and the United States? Scott Barbour/Getty Images.

Historically, the British class system exhibited significant divergence between the life chances of members of different classes. The upper and upper-middle classes typically sent their children to a select group of private schools, where they wouldn’t mix with lower-class children, and where they picked up many of the speech accents and social norms that marked them as being from the higher strata of society. These same private schools also had close ties with the most prestigious universities, such as Oxford and Cambridge. Until recently, Oxford and Cambridge guaranteed to reserve a certain number of places for the graduates of these private schools. Having been to a prestigious university, the offspring of the upper and upper-middle classes then had an excellent chance of being offered a prestigious job in companies, banks, brokerage firms, and law firms run by members of the upper and upper-middle classes. In contrast, the members of the British working and lower-middle classes typically went to state schools. The majority left at 16, and those who went on to higher education found it more difficult to get accepted at the best universities. When they did, they found that their lower-class accent and lack of social skills marked them as being from a lower social stratum, which made it more difficult for them to get access to the most prestigious jobs. Because of this, the class system in Britain perpetuated itself from generation to generation, and mobility was limited. Although upward mobility was possible, it could not normally be achieved in one generation. While an individual from a working-class background may have established an income level that was consistent with membership in the upper-middle class, he or she may not have been accepted as such by others of that class due to accent and background. However, by sending his or her offspring to the “right kind of school,” the individual could ensure that his or her children were accepted. According to many commentators, modern British society is now rapidly leaving this class structure behind and moving toward a classless society. However, sociologists continue to dispute this finding and present evidence that this is not the case. For example, a study reported that in the mid-1990s, state schools in the London suburb of Islington, which has a population of 175,000, had only 79 candidates for university, while one prestigious private school alone, Eton, sent more than that number to Oxford and Cambridge.18 This, according to the study’s authors, implies that “money still begets money.” They argue that a good school means a good university, a good university means a good job, and merit has only a limited chance of elbowing its way into this tight little circle. The class system in the United States is less extreme than in Britain and mobility is greater. Like Britain, the United States has its own upper, middle, and working classes. However, class membership is determined to a much greater degree by individual economic achievements, as opposed to background and schooling. Thus, an individual can, by his or her own economic achievement, move smoothly from the working class to the upper class in a lifetime. Successful individuals from humble origins are highly respected in American society. Another society where class divisions have historically been of some importance has been China, where there has been a long-standing difference between the life chances of the rural peasantry and urban dwellers. Ironically, this historic division was strengthened during the high point of Communist rule because of a rigid system of household registration that restricted most Chinese to the place of their birth for their lifetime. Bound to collective farming, peasants were cut off from many urban privileges—compulsory education, quality schools, health care, public housing, varieties of foodstuffs, to name only a few, and they largely lived in poverty. Social mobility was thus very limited. This system crumbled following reforms of the late 1970s and early 1980s, and as a consequence, migrant peasant laborers have flooded into China’s

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cities looking for work. Sociologists now hypothesize that a new class system is emerging in China based less on the rural-urban divide and more on urban occupation.19 SIGNIFICANCE From a business perspective, the stratification of a society is significant if it affects the operation of business organizations. In American society, the high degree of social mobility and the extreme emphasis on individualism limits the impact of class background on business operations. The same is true in Japan, where most of the population perceives itself to be middle class. In a country such as Great Britain, however, the relative lack of class mobility and the differences between classes have resulted in the emergence of class consciousness. Class consciousness refers to a condition where people tend to perceive themselves in terms of their class background, and this shapes their relationships with members of other classes. This has been played out in British society in the traditional hostility between upper-middle-class managers and their working-class employees. Mutual antagonism and lack of respect historically made it difficult to achieve cooperation between management and labor in many British companies and resulted in a relatively high level of industrial disputes. However, as noted earlier, the last two decades have seen a dramatic reduction in industrial disputes, which bolsters the arguments of those who claim that the country is moving toward a classless society (the level of industrial disputes in the United Kingdom is now lower than in the United States). Alternatively, as noted above, class consciousness may be reemerging in urban China, and may ultimately prove to be significant there. An antagonistic relationship between management and labor classes, and the resulting lack of cooperation and high level of industrial disruption, tends to raise the costs of production in countries characterized by significant class divisions. In turn, this can make it more difficult for companies based in such countries to establish a competitive advantage in the global economy.

CLASS CONSCIOUSNESS A tendency for individuals to perceive themselves in terms of their class background.

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RELIGIOUS AND ETHICAL SYSTEMS
RELIGION A system of shared beliefs and rituals concerned with the realm of the sacred.

ETHICAL SYSTEMS Cultural beliefs about what is proper behavior and conduct.

Religion may be defined as a system of shared beliefs and rituals that are concerned with the realm of the sacred.20 Ethical systems refer to a set of moral principles, or values, that are used to guide and shape behavior. Most of the world’s ethical systems are the product of religions. Thus, we can talk about Christian ethics and Islamic ethics. However, there is a major exception to the principle that ethical systems are grounded in religion. Confucianism and Confucian ethics influence behavior and shape culture in parts of Asia, yet it is incorrect to characterize Confucianism as a religion. The relationship among religion, ethics, and society is subtle and complex. Among the thousands of religions in the world today, four dominate in terms of numbers of adherents—Christianity with 1.7 billion adherents, Islam with 1 billion adherents, Hinduism with 750 million adherents (primarily in India), and Buddhism with 350 million adherents (see Map 3.1). Although many other religions have an important influence in certain parts of the modern world (for example, Judaism, which has 18 million adherents), their numbers pale in comparison with these dominant religions (however, as the precursor of both Christianity and Islam, Judaism has an indirect influence that goes beyond its numbers). We will review these four religions, along with Confucianism, focusing on their business implications. Some scholars have argued that the most important business implications of religion center on the extent to which different religions shape attitudes toward work and entrepreneurship and the degree to which the religious ethics affect the costs of doing business in a country.

J J J J J J M C M H M M B H M C C M HM C C C J M

Predominant Religions

Christianity (C)*

Roman Catholic

Protestant Mormon (LDS)

Eastern Churches Mixed Sects

Islam (M) Sunni

Shi’a

Buddhism (B) Hinayanistic

Lamaistic

Hinduism (H) Judaism (J) Sikhism C J H J

Animism (Tribal) Chinese Complex (Confucianism, Taoism, and Buddhism)

Korean Complex (Buddhism, Confucianism, Christianity, and Chondogyo)

Japanese Complex (Shinto and Buddhism)

Vietnamese Complex (Buddhism, Taoism, Confucianism, and Cao Dai)
0 1000 2000 Miles

Unpopulated Regions

Scale: 1 to 180,000,000
0 1000 2000 3000 Kilometers

* Capital letters indicate the presence of locally important minority adherents of nonpredominant faiths.

MAP 3.1 World Religions

Source: From Student Atlas of World Geography, 2nd ed., by John L. Allen. Copyright © 2001 by McGraw-Hill Companies. Reprinted by permission of McGraw-Hill/Dushkin, a division of the McGraw-Hill Companies, Guilford, CT 06437.

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It is hazardous to make sweeping generalizations about the nature of the relationship between religion and ethical systems and business practice. While some scholars argue that there is a relationship between religious and ethical systems and business practice in a society, in a world where nations with Catholic, Protestant, Muslim, Hindu, and Buddhist majorities all show evidence of entrepreneurial activity and sustainable economic growth, it is important to view such proposed relationships with a degree of skepticism. While the proposed relationships may exist, their impact is probably small compared to the impact of economic policy. Alternatively, recent research by economists Robert Barro and Rachel McCleary does suggest that strong religious beliefs, irrespective of the particular religion in question, have a positive impact on economic growth rates.21 Barro and McCleary looked at religious beliefs and economic growth rates in 59 countries during the 1980s and 1990s. Their conjecture was that higher religious beliefs stimulate economic growth because they help to sustain aspects of individual behavior that lead to higher productivity.

Christianity
Christianity is the most widely practiced religion in the world. Approximately 20 percent of the world’s people identify themselves as Christians. The vast majority of Christians live in Europe and the Americas, although their numbers are growing rapidly in Africa. Christianity grew out of Judaism. Like Judaism, it is a monotheistic religion (monotheism is the belief in one god). A religious division in the 11th century led to the establishment of two major Christian organizations—the Roman Catholic church and the Orthodox church. Today the Roman Catholic church accounts for more than half of all Christians, most of whom are found in Southern Europe and Latin America. The Orthodox church, while less influential, is still of major importance in several countries (e.g., Greece and Russia). In the 16th century, the Reformation led to a further split with Rome; the result was Protestantism. The nonconformist nature of Protestantism has facilitated the emergence of numerous denominations under the Protestant umbrella (e.g., Baptist, Methodist, Calvinist). ECONOMIC IMPLICATIONS OF CHRISTIANITY: THE PROTESTANT WORK ETHIC Several sociologists have argued that of the main branches of Christianity—Catholic, Orthodox, and Protestant—the latter has the most important economic implications. In 1904, a German sociologist, Max Weber, made a connection between Protestant ethics and “the spirit of capitalism” that has since become famous.22 Weber noted that capitalism emerged in Western Europe. He also noted that in Western Europe:
Business leaders and owners of capital, as well as the higher grades of skilled labor, and even more the higher technically and commercially trained personnel of modern enterprises, are overwhelmingly Protestant.23

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According to Weber, there was a relationship between Protestantism and the emergence of modern capitalism. Weber argued that Protestant ethics emphasize the importance of hard work and wealth creation (for the glory of God) and frugality (abstinence from worldly pleasures). According to Weber, this kind of value system was needed to facilitate the development of capitalism. Protestants worked hard and systematically to accumulate wealth. However, their ascetic beliefs suggested that rather than consuming this wealth by indulging in worldly pleasures, they should invest it in the expansion of capitalist enterprises. Thus, the combination of hard work and the accumulation of capital, which could be used to finance investment and expansion, paved the way for the development of capitalism in Western Europe and subsequently in the United States. In contrast, Weber argued that the Catholic promise of salvation in the next world, rather than this world, did not foster the same kind of work ethic.

Protestantism also may have encouraged capitalism’s development in another way. By breaking away from the hierarchical domination of religious and social life that characterized the Catholic church for much of its history, Protestantism gave individuals significantly more freedom to develop their own relationship with God. The right to freedom of form of worship was central to the nonconformist nature of early Protestantism. This emphasis on individual religious freedom may have paved the way for the subsequent emphasis on individual economic and political freedoms and the development of individualism as an economic and political philosophy. As we saw in Chapter 2, such a philosophy forms the bedrock on which entrepreneurial free market capitalism is based. Building on this, some scholars claim there is a connection between individualism, as inspired by Protestantism, and the extent of entrepreneurial activity in a nation.24 Again, one must be careful not to generalize too much from this historical sociological view. While nations with a strong Protestant tradition such as Britain, Germany, and the United States were early leaders in the industrial revolution, nations with Catholic or Orthodox majorities show significant and sustained entrepreneurial activity and economic growth in the modern world.

Islam
With nearly 1 billion adherents, Islam is the second largest of the world’s major religions. Islam dates back to 610 AD when the prophet Mohammed began spreading the word, although the Muslim calendar begins in 622 AD when, to escape growing opposition, Mohammed left Mecca for the oasis settlement of Yathrib, later known as Madina. Adherents of Islam are referred to as Muslims. Muslims constitute a majority in more than 35 countries and inhabit a nearly contiguous stretch of land from the northwest coast of Africa, through the Middle East, to China and Malaysia in the Far East. Islam has roots in both Judaism and Christianity (Islam views Jesus Christ as one of God’s prophets). Like Christianity and Judaism, Islam is a monotheistic religion. The central principle of Islam is that there is but the one true omnipotent God. Islam requires unconditional acceptance of the uniqueness, power, and authority of God and the understanding that the objective of life is to fulfill the dictates of his will in the hope of admission to paradise. According to Islam, worldly gain and temporal power are an illusion. Those who pursue riches on earth may gain them, but those who forgo worldly ambitions to seek the favor of Allah may gain the greater treasure—entry into paradise. Other major principles of Islam include: (1) honoring and respecting parents, (2) respecting the rights of others, (3) being generous but not a squanderer, (4) avoiding killing except for justifiable causes, (5) not committing adultery, (6) dealing justly and equitably with others, (7) being of pure heart and mind, (8) safeguarding the possessions of orphans, and (9) being humble and unpretentious.25 Obvious parallels exist with many of the central principles of both Judaism and Christianity. Islam is an all-embracing way of life governing the totality of a Muslim’s being.26 As God’s surrogate in this world, a Muslim is not a totally free agent but is circumscribed by religious principles—by a code of conduct for interpersonal relations—in social and economic activities. Religion is paramount in all areas of life. The Muslim lives in a social structure that is shaped by Islamic values and norms of moral conduct. The ritual nature of everyday life in a Muslim country is striking to a Western visitor. Among other things, orthodox Muslim ritual requires prayer five times a day (business meetings may be put on hold while the Muslim participants engage in their daily prayer ritual), requires that women should be dressed in a certain manner, and forbids the consumption of pork and alcohol. ISLAMIC FUNDAMENTALISM The past three decades have witnessed the growth of a social movement often referred to as Islamic fundamentalism.27 In the West, Islamic fundamentalism is associated in the media with militants, terrorists, and violent

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Despite the rise of Islamic fundamentalism, the majority of the Muslim population supports peace. What was your level of understanding of Islam prior to September 11, 2001? Has your knowledge of this religion changed since then? Jack Star/Photo Link/Getty Images.

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upheavals, such as the bloody conflict occurring in Algeria, the killing of foreign tourists in Egypt, or the September 11, 2001, attacks on the World Trade Center and Pentagon in the United States. This characterization is at best misleading. Just as Christian fundamentalists are motivated by sincere and deeply held religious values firmly rooted in their faith, so are Islamic fundamentalists. The violence that the Western media associates with Islamic fundamentalism is perpetrated by a very small minority of radical “fundamentalists” who have hijacked the religion to further their own political and violent ends. (Some Christian “fundamentalists” have done exactly the same, including Jim Jones and David Koresh.) The vast majority of Muslims point out that Islam teaches peace, justice, and tolerance, not violence and intolerance, and that Islam explicitly repudiates the violence that a radical minority practices. The rise of fundamentalism has no one cause. In part, it is a response to the social pressures created in traditional Islamic societies by the move toward modernization and by the influence of Western ideas, such as liberal democracy, materialism, equal rights for women, and attitudes toward sex, marriage, and alcohol. In many Muslim countries, modernization has been accompanied by a growing gap between a rich urban minority and an impoverished urban and rural majority. For the impoverished majority, modernization has offered little in the way of tangible economic progress, while threatening the traditional value system. Thus, for a Muslim who cherishes his traditions and feels that his identity is jeopardized by the encroachment of alien Western values, Islamic fundamentalism has become a cultural anchor. Fundamentalists demand a rigid commitment to traditional religious beliefs and rituals. The result has been a marked increase in the use of symbolic gestures that confirm Islamic values. In areas where fundamentalism is strong, women have resumed wearing floor-length, long-sleeved dresses and covering their hair; religious studies have increased in universities; the publication of religious tracts has increased; and public religious orations have risen.28 Also, the sentiments of some fundamentalist

groups are increasingly anti-Western. Rightly or wrongly, Western influence is blamed for a range of social ills, and many fundamentalists’ actions are directed against Western governments, cultural symbols, businesses, and even individuals. In several Muslim countries, fundamentalists have gained political power and have used this to try to make Islamic law (as set down in the Koran, the bible of Islam) the law of the land. There are good grounds for this in Islam. Islam makes no distinction between church and state. It is not just a religion; Islam is also the source of law, a guide to statecraft, and an arbiter of social behavior. Muslims believe that every human endeavor is within the purview of the faith—and this includes political activity— because the only purpose of any activity is to do God’s will.29 (Some Christian fundamentalists also share this view.) The Muslim fundamentalists have been most successful in Iran, where a fundamentalist party has held power since 1979, but they also have had an influence in many other countries, such as Algeria, Afghanistan (where the Taliban established an extreme fundamentalist state until removed by the U.S.-led coalition in 2002), Egypt, Pakistan, the Sudan, and Saudi Arabia. ECONOMIC IMPLICATIONS OF ISLAM The Koran establishes some explicit economic principles, many of which are pro-free enterprise.30 The Koran speaks approvingly of free enterprise and of earning legitimate profit through trade and commerce (the prophet Mohammed was once a trader). The protection of the right to private property is also embedded within Islam, although Islam asserts that all property is a favor from Allah (God), who created and so owns everything. Those who hold property are regarded as trustees, rather than owners in the Western sense of the word. As trustees they are entitled to receive profits from the property but are admonished to use it in a righteous, socially beneficial, and prudent manner. This reflects Islam’s concern with social justice. Islam is critical of those who earn profit through the exploitation of others. In the Islamic view of the world, humans are part of a collective in which the wealthy and successful have obligations to help the disadvantaged. Put simply, in Muslim countries, it is fine to earn a profit, so long as that profit is justly earned and not based on the exploitation of others for one’s own advantage. It also helps if those making profits undertake charitable acts to help the poor. Furthermore, Islam stresses the importance of living up to contractual obligations, of keeping one’s word, and of abstaining from deception. Given the Islamic proclivity to favor market-based systems, Muslim countries are likely to be receptive to international businesses as long as those businesses behave in a manner that is consistent with Islamic ethics. Businesses that are perceived as making an unjust profit through the exploitation of others, by deception, or by breaking contractual obligations are unlikely to be welcomed in an Islamic country. In addition, in Islamic countries where fundamentalism is on the rise, hostility toward Western-owned businesses is likely to increase. In the previous chapter, we noted that one economic principle of Islam prohibits the payment or receipt of interest, which is considered usury. This is not just a matter of theology; in several Islamic states, it is also becoming a matter of law. In 1992, for example, Pakistan’s Federal Shariat Court, the highest Islamic law-court in the country, pronounced interest to be un-Islamic and therefore illegal and demanded that the government amend all financial laws accordingly. In 1999, Pakistan’s supreme court ruled that Islamic banking methods should be used in the country after July 1, 2001.31 The accompanying Country Focus looks at how Pakistan’s banks are dealing with this issue.

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Hinduism
Hinduism has approximately 750 million adherents, most of them on the Indian subcontinent. Hinduism began in the Indus Valley in India more than 4,000 years ago,

making it the world’s oldest major religion. Unlike Christianity and Islam, its founding is not linked to a particular person. Nor does it have an officially sanctioned sacred book such as the Bible or the Koran. Hindus believe that a moral force in society requires the acceptance of certain responsibilities, called dharma. Hindus believe in reincarnation, or rebirth into a different body after death. Hindus also believe in karma, the spiritual progression of each person’s soul. A person’s karma is affected by the way he or she lives. The moral state of an individual’s karma determines the challenges he or she will face in their next life. By perfecting the soul in each new life, Hindus believe that an individual can eventually achieve nirvana, a state of complete spiritual perfection that renders reincarnation no longer necessary. Many Hindus believe that the way to achieve nirvana is to lead a severe ascetic lifestyle of material and physical self-denial, devoting life to a spiritual rather than material quest. ECONOMIC IMPLICATIONS OF HINDUISM Max Weber, who is famous for expounding on the Protestant work ethic, also argued that the ascetic principles embedded in Hinduism do not encourage the kind of entrepreneurial activity in pursuit of wealth creation that we find in Protestantism.32 According to Weber, traditional Hindu values emphasize that individuals should not be judged by their material achievements, but by their spiritual achievements. Hindus perceive the pursuit of material well-being as making the attainment of nirvana more difficult. Given the emphasis on an ascetic lifestyle, Weber thought that devout Hindus would be less likely to engage in entrepreneurial activity than devout Protestants. Mahatma Gandhi, the famous Indian nationalist and spiritual leader, was certainly the embodiment of Hindu asceticism. It has been argued that the values of Hindu asceticism and self-reliance that Gandhi advocated had a negative impact on the economic development of post-independence India.33 But one must be careful not to read too much into Weber’s arguments. Modern India is a very entrepreneurial society and millions of hardworking entrepreneurs form the economic backbone of India’s rapidly growing economy. Historically, Hinduism also supported India’s caste system. The concept of mobility between castes within an individual’s lifetime makes no sense to traditional Hindus. Hindus see mobility between castes as something that is achieved through spiritual progression and reincarnation. An individual can be reborn into a higher caste in his next life if he achieves spiritual development in this life. In so far as the caste system limits individuals’ opportunities to adopt positions of responsibility and influence in society, the economic consequences of this religious belief are somewhat negative. For example, within a business organization, the most able individuals may find their route to the higher levels of the organization blocked simply because they come from a lower caste. By the same token, individuals may get promoted to higher positions within a firm as much because of their caste background as because of their ability. However, the caste system, which has been abolished in India, and its influence are now fading into history.

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Buddhism
Buddhism was founded in India in the sixth century BC by Siddhartha Gautama, an Indian prince who renounced his wealth to pursue an ascetic lifestyle and spiritual perfection. Siddhartha achieved nirvana but decided to remain on earth to teach his followers how they too could achieve this state of spiritual enlightenment. Siddhartha became known as the Buddha (which means “the awakened one”). Today Buddhism has 350 million followers, most of whom are found in Central and Southeast Asia, China, Korea, and Japan. According to Buddhism, there is suffering everywhere that originates in people’s desires for pleasure. Cessation of suffering can be achieved by

COUNTRY FOCUS

I S L A M I C B A N K I N G I N P A K I S TA N

The Koran clearly condemns interest, which is called riba in Arabic, as exploitative and unjust. For many years, banks operating in Islamic countries conveniently ignored this condemnation, but starting about 25 years ago with the establishment of an Islamic bank in Egypt, Islamic banks started to open in predominantly Muslim countries. By 2001, some 170 Islamic financial institutions worldwide managed over $150 billion in assets, making an average return on capital of more than 16 percent. Even conventional banks are entering the market— both Citigroup and HSBC, two of the world’s largest financial institutions, now offer Islamic financial services. Until mid-2001, only Iran and the Sudan enforced Islamic banking conventions, but in many other countries, customers could choose between conventional banks and Islamic banks. In July 2001, Pakistan became the third country to require its banks to adopt Islamic methods. The transition to Islamic banking in Pakistan may determine the fate of Islamic banking elsewhere in the world. Conventional banks make a profit on the spread between the interest rate they have to pay to depositors and the higher interest rate they charge borrowers. Because Islamic banks cannot pay or charge interest, they must find a different way of making money. Pakistan’s banks are set to experiment with two different Islamic banking methods—the mudarabah and the murabaha. A mudarabah contract is similar to a profit-sharing scheme. Under mudarabah, when an Islamic bank lends money to a business, rather than charging that business interest on the loan, it takes a share in the profits that are derived from the investment. Similarly, when a business (or individual) deposits money at an Islamic bank in a savings account, the deposit is treated as an equity investment in whatever activity the bank uses the capital for. Thus, the depositor receives a share in the profit from the bank’s investment (as opposed to interest payments) according to an agreed-on ratio. Some Muslims claim this is a more efficient system than the Western banking system, since it encourages both long-term savings and long-term investment. However, there is no hard evidence of this, and many believe that a mudarabah system is less efficient than a conventional Western banking system. The second Islamic banking method, the murabaha contract, is the most widely used among the world’s Islamic banks. It seems set to become the most popular method in Pakistan, primarily because it is the easiest to implement. In a murabaha contract, when a firm wishes to purchase something using a loan—let’s say a piece of equipment that costs $1,000—the firm tells the bank after having negotiated the price with the equipment manufacturer. The bank then buys the equipment for $1,000, and the borrower buys it back from the bank at some later date for, say, $1,100, a price that includes a $100 markup for the bank. A cynic might point out that such a markup is functionally equivalent to an interest payment, and it is the similarity between this method and conventional banking that makes it so much easier to adopt. Whichever method is most widely used, observers expect the transition from traditional to Islamic banking to be challenging. One fear is that there could be large-scale withdrawals by depositors, driven by worries that they could suffer in the absence of fixed interest rates. Another concern is that the country needs to have a tight regulatory regime to ensure that unscrupulous borrowers using a mudarabah contract do not declare themselves bankrupt, even when their businesses are running a profit. A third concern is that the uncertainty created by the transition will scare off foreign investors, leaving Pakistan starved of capital.
Sources: “Forced Devotion,” The Economist, February 17, 2001, pp. 76–77; “Islamic Banking Marches On,” The Banker, February 1, 2000; and F. Bokhari, “Bankers Fear Introduction of Islamic System Will Prompt Big Withdrawals,” Financial Times, March 6, 2001, p. 4.

following a path for transformation. Siddhartha offered the Noble Eightfold Path as a route for transformation. This emphasizes right seeing, thinking, speech, action, living, effort, mindfulness, and meditation. Unlike Hinduism, Buddhism does not support the caste system. Nor does Buddhism advocate the kind of extreme ascetic behavior that is encouraged by Hinduism. Nevertheless, like Hindus, Buddhists stress the afterlife and spiritual achievement rather than involvement in this world.
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Because of this, the emphasis on wealth creation that is embedded in Protestantism is not found in Buddhism. Thus, in Buddhist societies, we do not see the same kind of historical cultural stress on entrepreneurial behavior that Weber claimed could be found in the Protestant West. But unlike Hinduism, the lack of support for the caste system and extreme ascetic behavior suggests that a Buddhist society may represent a more fertile ground for entrepreneurial activity than a Hindu culture.

Confucianism
Confucianism was founded in the fifth century BC by K’ung-Fu-tzu, more generally known as Confucius. For more than 2,000 years until the 1949 communist revolution, Confucianism was the official ethical system of China. While observance of Confucian ethics has been weakened in China since 1949, more than 200 million people still follow the teachings of Confucius, principally in China, Korea, and Japan. Confucianism teaches the importance of attaining personal salvation through right action. Although not a religion, Confucian ideology has become deeply embedded in the culture of these countries over the centuries, and through that, has an impact on the lives of many millions more. Confucianism is built around a comprehensive ethical code that sets down guidelines for relationships with others. The need for high moral and ethical conduct and loyalty to others are central to Confucianism. Unlike religions, Confucianism is not concerned with the supernatural and has little to say about the concept of a supreme being or an afterlife. ECONOMIC IMPLICATIONS OF CONFUCIANISM Some scholars maintain that Confucianism may have economic implications as profound as those Weber argued were to be found in Protestantism, although they are of a different nature.34 Their basic thesis is that the influence of Confucian ethics on the culture of China, Japan, South Korea, and Taiwan, by lowering the costs of doing business in those countries, may help explain their economic success. In this regard, three values central to the Confucian system of ethics are of particular interest—loyalty, reciprocal obligations, and honesty in dealings with others. In Confucian thought, loyalty to one’s superiors is regarded as a sacred duty—an absolute obligation. In modern organizations based in Confucian cultures, the loyalty that binds employees to the heads of their organization can reduce the conflict between management and labor that we find in more class-conscious societies. Cooperation between management and labor can be achieved at a lower cost in a culture where the virtue of loyalty is emphasized in the value systems. However, in a Confucian culture, loyalty to one’s superiors, such as a worker’s loyalty to management, is not blind loyalty. The concept of reciprocal obligations is important. Confucian ethics stress that superiors are obliged to reward the loyalty of their subordinates by bestowing blessings on them. If these “blessings” are not forthcoming, then neither will be the loyalty. As we saw in the opening case, in China this Confucian ethic is central to the concept of guanxi, which refers to relationship networks supported by reciprocal obligations. Similarly, in Japan this ethic finds expression in the concept of lifetime employment. The employees of a Japanese company are loyal to the leaders of the organization, and in return the leaders bestow on them the “blessing” of lifetime employment. The lack of mobility between companies implied by the lifetime employment system suggests that, over the years, managers and workers build up knowledge, experience, and a network of interpersonal business contacts. All of these can help managers and workers perform their jobs more effectively and cooperate with others in the organization. One result is the company’s improved economic performance.

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A third concept found in Confucian ethics is the importance attached to honesty. Confucian thinkers emphasize that, although dishonest behavior may yield short-term benefits for the transgressor, dishonesty does not pay in the long run. The importance attached to honesty has major economic implications. When companies can trust each other not to break contractual obligations, the costs of doing business are lowered. Expensive lawyers are not needed to resolve contract disputes. In a Confucian society, people may be less hesitant to commit substantial resources to cooperative ventures than in a society where honesty is less pervasive. When companies adhere to Confucian ethics, they can trust each other not to violate the terms of cooperative agreements. Thus, the costs of achieving cooperation between companies may be lower in societies such as Japan relative to societies where trust is less pervasive. For example, it has been argued that the close ties between the automobile companies and their component parts suppliers in Japan are facilitated by a combination of trust and reciprocal obligations. These close ties allow the auto companies and their suppliers to work together on a range of issues, including inventory reduction, quality control, and design. The competitive advantage of Japanese auto companies such as Toyota may in part be explained by such factors.35 Similarly, the opening case showed how the combination of trust and reciprocal obligations is central to the workings and persistence of guanxi networks in China. Someone seeking and receiving help through a guanxi network is then obligated to return the favor and faces social sanctions if that obligation is not reciprocated when it is called upon. If the person does not return the favor, his reputation will be tarnished and he will be unable to draw on the resources of the network in the future. It is claimed that these relationship-based networks can be more important in helping to enforce agreements between businesses than the Chinese legal system. Some claim that guanxi networks are a substitute for the legal system.36
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LANGUAGE
One obvious way in which countries differ is language. By language, we mean both the spoken and the unspoken means of communication. Language is one of the defining characteristics of a culture.

Spoken Language
Language does far more than just enable people to communicate with each other. The nature of a language also structures the way we perceive the world. The language of a society can direct the attention of its members to certain features of the world rather than others. The classic illustration of this phenomenon is that whereas the English language has but one word for snow, the language of the Inuit (Eskimos) lacks a general term for it. Instead, because distinguishing different forms of snow is so important in the lives of the Inuit, they have 24 words that describe different types of snow (e.g., powder snow, falling snow, wet snow, drifting snow).37 Because language shapes the way people perceive the world, it also helps define culture. In countries with more than one language, one also often finds more than one culture. Canada has an English-speaking culture and a French-speaking culture. Tensions between the two run quite high, with a substantial proportion of the Frenchspeaking minority demanding independence from a Canada “dominated by English speakers.” The same phenomenon can be observed in many countries. Belgium is divided into Flemish and French speakers, and tensions between the two groups exist; in Spain, a Basque-speaking minority with its own distinctive culture has been

FIGURE 3.2 Percentage of the World’s Population for Whom This Is a First Language
Source: The Economist Atlas (London: The Economist Books, 1991), p. 116. Copyright © 1989 and © 1991 The Economist Books, Ltd.

Other 62%

Chinese 20% English 6% Hindi 5% Russian 4% Spanish 3%

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agitating for independence from the Spanish-speaking majority for decades; on the Mediterranean island of Cyprus, the culturally diverse Greek- and Turkish-speaking populations of the island engaged in open conflict in the 1970s, and the island is now partitioned into two parts. While it does not necessarily follow that language differences create differences in culture and, therefore, separatist pressures (e.g., witness the harmony in Switzerland, where four languages are spoken), there certainly seems to be a tendency in this direction.38 Chinese is the mother tongue of the largest number of people, followed by English and Hindi, which is spoken in India (see Figure 3.2). However, the most widely spoken language in the world is English, followed by French, Spanish, and Chinese (i.e., many people speak English as a second language). English is increasingly becoming the language of international business. When a Japanese and a German businessperson get together to do business, it is almost certain that they will communicate in English. However, while English is widely used, learning the local language yields considerable advantages. Most people prefer to converse in their own language and being able to speak the local language can build rapport, which may be very important for a business deal. International businesses that do not understand the local language can make major blunders through improper translation. For example, the Sunbeam Corporation used the English words for its “Mist-Stick” mist-producing hair curling iron when it entered the German market, only to discover after an expensive advertising campaign that mist means excrement in German. General Motors was troubled by the lack of enthusiasm among Puerto Rican dealers for its new Chevrolet Nova. When literally translated into Spanish, Nova meant star. However, when spoken it sounded like “no va,” which in Spanish means “it doesn’t go.” General Motors changed the name of the car to Caribe.39

Unspoken Language
Unspoken language refers to nonverbal communication. We all communicate with each other by a host of nonverbal cues. The raising of eyebrows, for example, is a sign of recognition in most cultures, while a smile is a sign of joy. Many nonverbal cues, however, are culturally bound. A failure to understand the nonverbal cues of another culture can lead to a communication failure. For example, making a circle with the thumb and the forefinger is a friendly gesture in the United States, but it is a vulgar sexual invitation in Greece and Turkey. Similarly, while most Americans and Europeans use the thumbs-up gesture to indicate that “it’s all right,” in Greece the gesture is obscene.

Another aspect of nonverbal communication is personal space, which is the comfortable amount of distance between you and someone you are talking to. In the United States, the customary distance apart adopted by parties in a business discussion is five to eight feet. In Latin America, it is three to five feet. Consequently, many North Americans unconsciously feel that Latin Americans are invading their personal space and can be seen backing away from them during a conversation. Indeed, the American may feel that the Latin is being aggressive and pushy. In turn, the Latin American may interpret such backing away as aloofness. The result can be a regrettable lack of rapport between two businesspeople from different cultures.

E D U C AT I O N
Formal education plays a key role in a society. Formal education is the medium through which individuals learn many of the language, conceptual, and mathematical skills that are indispensable in a modern society. Formal education also supplements the family’s role in socializing the young into the values and norms of a society. Values and norms are taught both directly and indirectly. Schools generally teach basic facts about the social and political nature of a society. They also focus on the fundamental obligations of citizenship. Cultural norms are also taught indirectly at school. Respect for others, obedience to authority, honesty, neatness, being on time, and so on, are all part of the “hidden curriculum” of schools. The use of a grading system also teaches children the value of personal achievement and competition.40 From an international business perspective, one important aspect of education is its role as a determinant of national competitive advantage.41 The availability of a pool of skilled and educated workers seems to be a major determinant of the likely economic success of a country. In analyzing the competitive success of Japan since 1945, for example, Michael Porter notes that after the war, Japan had almost nothing except for a pool of skilled and educated human resources.
With a long tradition of respect for education that borders on reverence, Japan possessed a large pool of literate, educated, and increasingly skilled human resources. . . . Japan has benefited from a large pool of trained engineers. Japanese universities graduate many more engineers per capita than in the United States. . . . A first-rate primary and secondary education system in Japan operates based on high standards and emphasizes math and science. Primary and secondary education is highly competitive. . . . Japanese education provides most students all over Japan with a sound education for later education and training. A Japanese high school graduate knows as much about math as most American college graduates.42

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ANOTHER

PERSPECTIVE

Porter’s point is that Japan’s excellent education system is an important factor explaining the country’s postwar economic success. Not only is a good education system a determinant of national competitive advantage, but it is also an important factor guiding the location choices of international businesses. It would make little sense to base production facilities that require highly skilled labor in a country where the education system was so poor that a skilled labor pool wasn’t available, no matter how attractive the country might seem on other dimensions. It might make sense to base production operations that require only unskilled labor in such a country.

Sticky problems in culture research Conducting research across cultural borders is difficult for many reasons. The more obvious issues are connected to travel and building collaborative relationships in other countries, both of which are time-consuming and always full of surprises. One of the most difficult issues, though, is how to be certain that the concept about which you want to communicate has a similar meaning when it crosses a cultural border. This challenge is more than one of word translation; it is concept translation, which researchers term concept equivalence. Take the concept of bribery. Does it have the same meaning in the middle of Manhattan as it does in an underdeveloped, centralized economy such as North Korea? What do you think?

The general education level of a country is also a good index of the kind of products that might sell in a country and of the type of promotional material that should be used. For example, a country such as Pakistan where more than 70 percent of the population is illiterate is unlikely to be a good market for popular books. Promotional material containing written descriptions of mass-marketed products is unlikely to have an effect in a country where almost three-quarters of the population cannot read. It is far better to use pictorial promotions in such circumstances.

C U LT U R E A N D T H E W O R K P L A C E
Of considerable importance for an international business with operations in different countries is how a society’s culture affects the values found in the workplace. Management process and practices may need to vary according to culturally determined work-related values. For example, if the cultures of the United States and France result in different work-related values, an international business with operations in both countries should vary its management process and practices to take these differences into account. Probably the most famous study of how culture relates to values in the workplace was undertaken by Geert Hofstede.43 As part of his job as a psychologist working for IBM, Hofstede collected data on employee attitudes and values for more than 100,000 individuals from 1967 to 1973. These data enabled him to compare dimensions of culture across 40 countries. Hofstede isolated four dimensions that he claimed summarized different cultures—power distance, uncertainty avoidance, individualism versus collectivism, and masculinity versus femininity. Hofstede’s power distance dimension focused on how a society deals with the fact that people are unequal in physical and intellectual capabilities. According to Hofstede, high power distance cultures were found in countries that let inequalities grow over time into inequalities of power and wealth. Low power distance cultures were found in societies that tried to play down such inequalities as much as possible. The individualism versus collectivism dimension focused on the relationship between the individual and his or her fellows. In individualistic societies, the ties between individuals were loose and individual achievement and freedom were highly valued. In societies where collectivism was emphasized, the ties between individuals were tight. In such societies, people were born into collectives, such as extended families, and everyone was supposed to look after the interest of his or her collective. Hofstede’s uncertainty avoidance dimension measured the extent to which different cultures socialized their members into accepting ambiguous situations and tolerating uncertainty. Members of high uncertainty avoidance cultures placed a premium on job security, career patterns, retirement benefits, and so on. They also had a strong need for rules and regulations; the manager was expected to issue clear instructions, and subordinates’ initiatives were tightly controlled. Lower uncertainty avoidance cultures were characterized by a greater readiness to take risks and less emotional resistance to change. Hofstede’s masculinity versus femininity dimension looked at the relationship between gender and work roles. In masculine cultures, sex roles were sharply differentiated and traditional “masculine values,” such as achievement and the effective exercise of power, determined cultural ideals. In feminine cultures, sex roles were less sharply distinguished, and little differentiation was made between men and women in the same job. Hofstede created an index score for each of these four dimensions that ranged from 0 to 100 and scored high for high individualism, high power distance, high uncertainty

POWER DISTANCE Theory of how a society deals with the fact that people are unequal in physical and intellectual capabilities. High power distance cultures are found in countries that let inequalities grow over time into inequalities of power and wealth. Low power distance cultures are found in societies that try to play down such inequalities as much as possible.

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INDIVIDUALISM VERSUS COLLECTIVISM Theory focusing on the relationship between the individual and his or her fellows. In individualistic societies, the ties between individuals are loose and individual achievement is highly valued. In societies where collectivism is emphasized, ties between individuals are tight, people are born into collectives, such as extended families, and everyone is supposed to look after the interests of his or her collective.

PART 2 Country Differences

UNCERTAINTY AVOIDANCE Extent to which cultures socialize members to accept ambiguous situations and to tolerate uncertainty.

avoidance, and high masculinity. He averaged the score for all employees from a given country. Table 3.1 summarizes these data for 20 selected countries. Western nations such as the United States, Canada, and Britain score high on the individualism scale and low on the power distance scale. At the other extreme are a group of Latin American and Asian countries that emphasize collectivism over individualism and score high on the power distance scale. Table 3.1 also reveals that Japan’s culture has strong uncertainty avoidance and high masculinity. This characterization fits the standard stereotype of Japan as a country that is male dominant and where uncertainty avoidance exhibits itself in the institution of lifetime employment. Sweden and Denmark stand out as countries that have both low uncertainty avoidance and low masculinity (high emphasis on “feminine” values). Hofstede’s results are interesting for what they tell us in a very general way about differences between cultures. Many of Hofstede’s findings are consistent with standard Western stereotypes about cultural differences. For example, many people believe Americans are more individualistic and egalitarian than the Japanese (they have a lower power distance), who in turn are more individualistic and egalitarian than Mexicans. Similarly, many might agree that Latin countries such as Mexico place a higher emphasis on masculine value—they are machismo cultures—than the Nordic countries of Denmark and Sweden. However, one should be careful about reading too much into Hofstede’s research. It has been criticized on a number of points.44 First, Hofstede assumes there is a oneto-one correspondence between culture and the nation-state, but as we saw earlier,

MASCULINITY VERSUS FEMININITY Theory of the relationship between gender and work roles. In masculine cultures, sex roles are sharply differentiated and traditional “masculine values” such as achievement and the effective exercise of power determine cultural ideals. In feminine cultures, sex roles are less sharply distinguished, and little differentiation is made between men and women in the same job.

POWER DISTANCE Argentina Australia Brazil Canada Denmark France Germany (F.R.) Great Britain Indonesia India Israel Japan Mexico Netherlands Panama Spain Sweden Thailand Turkey United States 49 36 69 39 18 68 35 35 78 77 13 54 81 38 95 57 31 64 66 40

UNCERTAINTY AVOIDANCE 86 51 76 48 23 86 65 35 48 40 81 92 82 53 86 86 29 64 85 46

INDIVIDUALISM 46 90 38 80 74 71 67 89 14 48 54 46 30 80 11 51 71 20 37 91

MASCULINITY 56 61 49 52 16 43 66 66 46 56 47 95 69 14 44 42 5 34 45 62

TABLE 3.1 Work-Related Values for 20 Selected Countries
Source: G. Hofstede, Culture’s Consequences. Copyright 1980 by Sage Publications. Reprinted by permission of Sage Publications. Cited in G. Hofstede, “The Cultural Relativity of Organizational Practices and Theories,” Journal of International Business Studies 14 (Fall 1983), pp. 75–89. Reprinted by permission of Dr. Geert Hofstede.

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CONFUCIAN DYNAMISM Theory that Confucian teachings affect attitudes toward time, persistence, ordering by status, protection of face, respect for tradition, and reciprocation of gifts and favors.

many countries have more than one culture. Hofstede’s results do not capture this distinction. Second, the research may have been culturally bound. The research team was composed of Europeans and Americans. The questions they asked of IBM employees and their analysis of the answers may have been shaped by their own cultural biases and concerns. So it is not surprising that Hofstede’s results confirm Western stereotypes, since it was Westerners who undertook the research! Third, Hofstede’s informants worked not only within a single industry, the computer industry, but also within one company, IBM. At the time, IBM was renowned for its own strong corporate culture and employee selection procedures, making it possible that the employees’ values were different in important respects from the values of the cultures from which those employees came. Also, certain social classes (such as unskilled manual workers) were excluded from Hofstede’s sample. A final caution is that Hofstede’s work is now beginning to look dated. Cultures do not stand still; they evolve, albeit slowly. What was a reasonable characterization in the 1960s and 1970s may not be so today. Still, just as it should not be accepted without question, Hofstede’s work should not be dismissed either. It represents a starting point for managers trying to figure out how cultures differ and what that might mean for management practices. Also, several other scholars have found strong evidence that differences in culture affect values and practices in the workplace, and Hofdstede’s basic results have been replicated using more diverse samples of individuals in different settings.45 Still, managers should use the results with caution, for they are not necessarily accurate. Hofstede subsequently expanded his original research to include a fifth dimension that he argued captured additional cultural differences not brought out in his earlier work.46 He referred to this dimension as “Confucian dynamism” (sometimes called long-term orientation). According to Hofstede, Confucian dynamism captures attitudes toward time, persistence, ordering by status, protection of face, respect for tradition, and reciprocation of gifts and favors. The label refers to these “values” being derived from Confucian teachings. As might be expected, East Asian countries such as Japan, Hong Kong, and Thailand scored high on Confucian dynamism, while nations such as the United States and Canada scored low. Hofstede and his associates went on to argue that their evidence suggested that nations with higher economic growth rates scored high on Confucian dynamism and low on individualism—the implication being Confucianism is good for growth. However, subsequent studies have shown that this finding does not hold up under more sophisticated statistical analysis.47 During the past decade, countries with high individualism and low Confucian dynamics such as the United States have attained high growth rates, while some Confucian cultures such as Japan have had stagnant economic growth. In reality, while culture might influence the economic success of a nation, it is just one of many factors, and while its importance should not be ignored, it should not be overstated either. The factors discussed in Chapter 2—economic, political, and legal systems—are probably more important than culture in explaining differential economic growth rates over time.

C U LT U R A L C H A N G E
Culture is not a constant; it evolves over time.48 Changes in value systems can be slow and painful for a society. In the 1960s, for example, American values toward the role of women, love, sex, and marriage underwent significant changes. Much of the social turmoil of that time reflected these changes. Change, however, does occur and can often be quite profound. For example, at the beginning of the 1960s, the idea that

women might hold senior management positions in major ANOTHER CULTURAL PERSPECTIVE corporations was not widely accepted. Many scoffed at the idea. Today, it is a reality and few in the mainstream of AmerU.S.-style management consulting: a no-go in ican society question the development or the capability of Germany women in the business world. American culture has changed In February 2004, major leading U.S. consulting (although it is still more difficult for women to gain senior firms, including McKinsey and Boston management positions than men). Similarly, the value sysConsulting Group (BCG) who have contracts tems of many ex-communist states, such as Russia, are unwith the government of Chancellor Gerhard dergoing significant changes as those countries move away Schröder, were the source of a political from values that emphasize collectivism and toward those firestorm from the opposition party. The opposithat emphasize individualism. While social turmoil is an intion and the press charged that the contracts to evitable outcome of such a shift, the shift will still probably these American companies were awarded occur. unfairly, were based on personal connections, Some claim that a major cultural shift is occurring in and were not worth taxpayers’ money. ChanJapan, with a move toward greater individualism.49 The cellor Schröder had to fire the consultants. It model Japanese office worker, or “salaryman,” is pictured as seems Germans think that the American being loyal to his boss and the organization to the point of corporate model should not be involved in their giving up evenings, weekends, and vacations to serve the orpublic sector. Part of the issue is that the U.S. ganization, which is the collective of which he is a member. firms tend to recommend downsizing, that is, firing people. Culture may play a role here, However, a new generation of office workers does not seem along with politics and nationalism. The to fit this model. An individual from the new generation is German and U.S. understandings of the role of more direct than the traditional Japanese. He acts more like business in society and the relationship a Westerner, a gaijian. He does not live for the company and between the employer and the employee differ will move on if he gets the offer of a better job. He is not keen considerably. Note the differences in workon overtime, especially if he has a date. He has his own plans related values between Germany and the for his free time, and they may not include drinking or playUnited States, especially on Hofstede’s ing golf with the boss.50 ambiguity and individualism measures. A more detailed example of the changes occurring in Japan is given in the Management Focus that looks at the impact of Japan’s changing culture on Matsushita, one of Japan’s most traditional firms. Several studies have suggested that economic advancement and globalization may be important factors in societal change.51 For example, there is evidence that economic progress is accompanied by a shift in values away from collectivism and toward individualism.52 Thus, as Japan has become richer, the cultural emphasis on collectivism has declined and greater individualism is being witnessed. One reason for this shift may be that richer societies exhibit less need for social and material support structures built on collectives, whether the collective is the extended family or the paternalistic company. People are better able to take care of their own needs. As a result, the importance attached to collectivism declines, while greater economic freedoms lead to an increase in opportunities for expressing individualism. The culture of societies may also change as they become richer because economic progress affects a number of other factors, which in turn impact on culture. For example, increased urbanization and improvements in the quality and availability of education are both a function of economic progress, and both can lead to declining emphasis on the traditional values associated with poor rural societies. A 25-year study of values in 78 countries, known as the World Values Survey, coordinated by the University of Michigan’s Institute for Social Research, has documented how values change, and linked these to changes in a country’s level of economic development.53 According to this research, as countries get richer, a shift occurs away from “traditional values” linked to religion, family, and country, and toward “secular rational” values. Traditionalists say religion is important in their lives. They have a strong sense of national pride, think children should be taught to obey, and that the

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first duty of a child is to make his or her parents proud. They say abortion, euthanasia, divorce, and suicide are never justified. At the other end of this spectrum are secular rational values. Another category looked at by the World Values Survey is quality of life attributes. At one end of this spectrum are “survival values,” the values people hold when the struggle for survival is of paramount importance. These values tend to stress that economic and physical security are more important than self-expression. People who cannot take food or safety for granted tend to be xenophobic, they are wary of political activity, have authoritarian tendencies, and believe that men make better political leaders than women. “Self-expression” or “well-being” values stress the importance of diversity, belonging, and participation in political processes. As countries get richer, there seems to be a shift from “traditional” to “secular rational” values, and from “survival values” to “well-being” values. The shift, however, takes time, primarily because individuals are socialized into a set of values when they are young and find it difficult to change as they grow older. Substantial changes in values are linked to generations, with younger people typically being in the vanguard of a significant change in values. Figure 3.3 illustrates the position of a number of countries on these dimensions, and shows how they have changed over time. With regard to globalization, some have argued that advances in transportation and communication technologies, the dramatic increase in trade that we have witnessed since World War II, and the rise of global corporations such as Hitachi, Disney, Microsoft, and Levi Strauss, whose products and operations can be found around the globe, are creating conditions for the merging of cultures.54 With McDonald’s hamburgers in China, Levi’s in India, Sony Walkmans in South Africa, and MTV everywhere helping to foster a ubiquitous youth culture, some argue that the condi118
PART 2 Country Differences FIGURE 3.3 Changing Values
Source: Reprinted with permission of Ronald Inglehart, Modernization and Postmodernization, 1997. www.worldvaluessurvey.org.

+0.3
ex-communist
Moscow Czecho90 slovakia 90 East Germany 90

TRADITIONAL vs. SECULAR RATIONAL AUTHORITY

+0.2

+0.1

0

– 0.2

Poo

r
South Africa 90

La Am t eriin ca

– 0.1

Sweden Sweden 90 81 Finland 90 NetherWest China Eastern Europe Japan 90 lands Germany 90 90 90 Belarus Denmark Estonia Confucian Norway 90 90 90 Russia 90 Slovenia Finland Japan 81 90 West 90 South 81 Bulgaria Germany France 81 Korea Norway 81 90 Latvia 90 81 France 90 90 Iceland 90 Netherlands South 81 Hungary Korea 81 Iceland Switzerland Catholic Austria 90 Belgium 90 90 81 90 Spain 90 Hungary Britain Europe Lithuania Italy Britain 81 81 90 Romania Italy 81 90 90 Canada 90 Argentina 90 Belgium Australia Portugal 81 81 81 90 Argentina South 90 Canada 81 Spain Asia Mexico 81 U.S.A. 90 North Turkey 90 90 Poland America India 90 South Africa 81 90 U.S.A. 81 Chile 90 Brazil 90 Mexico 81 N. N. Ireland Ireland 90 81 Ireland 90 English-

Northern Europe

Ric

h

speaking
Ireland 81

Africa

– 0.3

Nigeria 90

– 0.4 –0.3

–0.2

–0.1

0

0.1

0.2 DEFINITION

SURVIVAL vs. WELL-BEING

Some have argued that the rise of global corporations, whose products can be found around the world, has created the conditions for the merging of cultures and a reduction in cultural variation. Do you think that this is so? Or could globalization of companies and products foster a shift toward and a reemphasis of a culture’s roots and customs? © Paul Chelsey.

tions for less cultural variation have been created. At the same time, one must not ignore important countertrends, such as the shift toward Islamic fundamentalism in several countries; the separatist movement in Quebec, Canada; or the continuing ethnic strains and separatist movements in Russia. Such countertrends in many ways are a reaction to the pressures for cultural convergence. In an increasingly modern and materialistic world, some societies are trying to reemphasize their cultural roots and uniqueness. Cultural change is not unidirectional, with national cultures converging toward some homogenous global entity. Also, while some elements of culture change quite rapidly—particularly the use of material symbols— other elements change slowly if at all. Thus, just because people the world over wear blue jeans and eat at McDonald’s, one should not assume that they have also adopted American values—for more often than not, they have not.

MANAGEMENT FOCUS

M AT S U S H I TA’ S A N D J A P A N ’ S C H A N G I N G C U LT U R E

Established in 1920, the consumer electronics giant Matsushita was at the forefront of the rise of Japan to the status of major economic power during the 1970s and 1980s. Like many other long-standing Japanese businesses, Matsushita was regarded as a bastion of traditional Japanese values based on strong group identification, reciprocal obligations, and loyalty to the company. Several commentators attributed Matsushita’s success, and that of the Japanese economy, to the existence of Confucian values in the workplace. At Matsushita, employees were taken care of by the company from “cradle to the grave.” Matsushita provided them with a wide range of benefits including cheap housing, guaranteed lifetime employment, seniority-based pay systems, and generous retirement bonuses. In return, Matsushita expected, and got, loyalty and hard work from its employees. To Japan’s postwar generation, struggling to recover from the humiliation of defeat, it seemed like a fair bargain. The employees worked hard for the greater good of Matsushita, and Matsushita reciprocated by bestowing “blessings” on employees. 119

However, culture does not stay constant. According to some observers, the generation born after 1964 lacked the same commitment to traditional Japanese values as their parents. They grew up in a world that was richer, where Western ideas were beginning to make themselves felt, and where the possibilities seemed greater. They did not want to be tied to a company for life, to be a “salaryman.” These trends came to the fore in the 1990s, when the Japanese economy entered an economic slump from which it has yet to recover. As the decade progressed, one Japanese firm after another was forced to change its traditional ways of doing business. Slowly at first, troubled companies started to lay off older workers, effectively abandoning lifetime employment guarantees. As younger people saw this happening, they concluded that loyalty to a company might not be reciprocated, effectively undermining one of the central bargains made in postwar Japan. Matsushita was one of the last companies to turn its back on Japanese traditions, but in 1998, after years of poor performance, it too modified traditional practices. First, Matsushita changed the pay scheme for its 11,000 managers. In the past, the traditional twice-a-year bonuses had been based almost entirely on seniority, but now Matsushita said they would be based on performance. In 1999, Matsushita announced this process would be made transparent; managers would be shown what their performance rankings were and how these fed into pay bonuses. As elementary as this might sound in the West, for Matsushita it represented the beginning of a revolution in human resource practices. About the same time Matsushita took aim at the lifetime employment system and the associated perks. Under the new system, recruits were given the choice of three employment options. First, they could sign on to the traditional option. Under this, they were eligible to live in subsidized company housing, go free to company-organized social events, and buy subsidized services such as banking from group companies. They also still would receive a retirement bonus equal to two years’ salary. Under a second scheme, employees could forgo the guaranteed retirement bonus in exchange for higher starting salaries and keep perks such as cheap company housing. Under a third scheme, they would lose both the retirement bonus and the subsidized services, but they would start at a still higher salary. In its first two years of operation, only 3 percent of recruits chose the third option—suggesting there is still a hankering for the traditional paternalistic relationship —but 41 percent took the second option. In other ways Matsushita’s designs are grander still. As the company has moved into new industries such as software engineering and network communications technology, it has begun to sing the praises of democratization of employees, and it has sought to encourage individuality, initiative taking, and risk seeking among its younger employees. But while such changes may be easy to articulate, they are hard to implement. For all of its talk, Matsushita has still not changed its lifetime employment commitment to those hired under the traditional system; nor does it seem likely to do so anytime soon. This was underlined in early 2001 when, in response to continued poor performance, Matsushita announced it would close 30 factories in Japan, cut 1,000 marketing jobs, and sell a “huge amount of assets” over the next three years. While this seemed to indicate a final break with the lifetime employment system, the company also said unneeded marketing staff would not be laid off but instead would be transferred to higher growth areas such as health care. With so many of its managers a product of the old way of doing things, a skeptic might question the ability of the company to turn its intentions into a reality. As growth has slowed, Matsushita has had to cut back on its hiring, but its continued commitment to long-standing employees means that the average age of its workforce is rising. In the 1960s it was around 25; now it is 35, a trend that might counteract Matsushita’s attempts to revolutionize the workplace, for surely those who benefited from the old system will not give way easily to the new.
Sources: “Putting the Bounce Back into Matsushita,” The Economist, May 22, 1999, pp. 67–68; “In Search of the New Japanese Dream,” The Economist, February 19, 2000, pp. 59–60; and P. Landers, “Matsushita to Restructure in Bid to Boost Thin Profits,” The Wall Street Journal, December 1, 2000, p. A13.

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FOCUS ON MANAGERIAL IMPLICATIONS
International business is different from national business because countries and societies are different. In this chapter, we have seen just how different societies can be. Societies differ because their cultures vary. Their cultures vary because of profound differences in social structure, religion, language, education, economic philosophy, and political philosophy. Three important implications for international business flow from these differences. The first is the need to develop cross-cultural literacy. There is a ANOTHER PERSPECTIVE need not only to appreciate that cultural differences exist, but also to appreciate what such differences mean for international business. A secThe Masai response to 9–11 ond implication centers on the connection between culture and national A small, nomadic tribe of herders in Kenya, the competitive advantage. A third implication looks at the connection beMasai had not seen skyscrapers (buildings that tween culture and ethics in decision making. In this section, we will exreach far into the clouds) and knew little of plore the first two of these issues in depth. The connection between New York City. So when they heard the radio culture and ethics is explored in the next chapter.

C R O S S - C U LT U R A L L I T E R A C Y

One of the biggest dangers confronting a company that goes abroad for the first time is the danger of being ill-informed. International businesses that are ill-informed about the practices of another culture are likely to fail. Doing business in different cultures requires adaptation to conform with the value systems and norms of that culture. Adaptation can embrace all aspects of an international firm’s operations in a foreign country. The way in which deals are negotiated, the appropriate incentive pay systems for salespeople, the structure of the organization, the name of a product, the tenor of relations between management and labor, the manner in which the product is promoted, and so on, are all sensitive to cultural differences. What works in one culture might not work in another. To combat the danger of being ill-informed, international businesses should consider employing local citizens to help them do business in a particular culture. They must also ensure that home-country executives are cosmopolitan enough to understand how differences in culture affect the practice of international business. Transferring executives overseas at regular intervals to expose them to different cultures will help build a cadre of cosmopolitan executives. An international business must also be constantly on guard against the dangers of ethnocentric behavior. Ethnocentrism is a belief in the superiority of one’s own ethnic group or culture. Hand in hand with ethnocentrism goes a disregard or contempt for the culture of other countries. Unfortunately, ethnocentrism is all too prevalent; many Americans are guilty of it, as are many French people, Japanese people, British people, and so on. Ugly as it is, ethnocentrism is a fact of life, one that international businesses must be on guard against. Simple examples illustrate how important cross-cultural literacy can be. Anthropologist Edward T. Hall has described how Americans, who tend to be informal in nature, react strongly to being corrected or reprimanded in public.55 This can cause problems in Germany, where a cultural tendency toward correcting strangers can shock and offend most Americans. For their part, Germans can be a bit taken aback by the tendency of Americans to call everyone by their first name. This is uncomfortable enough among executives of the same rank, but it can be seen as insulting when a young and junior American executive addresses an older and more senior German manager by his first name without having been invited to do so. Hall concludes it can take a long time to get on a first-name basis with a German; if you rush the process you will be perceived as overfriendly and rude, and that may not be good for business.

news of the September 11, 2001, terrorist attacks on the World Trade Center, they did not realize the full meaning these attacks had. How a person could die from jumping off a building was beyond them, since in their villages buildings are one-story high. They learned about the scope of the attacks and what these attacks meant for New Yorkers and Americans from their kinsman, Kimeli Naiyomah, a student at Stanford University who was returning to his Masai village for the summer. He told them about this tragedy using the patterns of their oral tradition, much as Homer did in The Odyssey and The Iliad. Once the Masai grasped what had happened, they quickly understood the tragedy’s scope. They were quite saddened and wanted to help. As a condolence gift, they sent the United States 14 cows, an animal central to their lives that they hold almost sacred. Fourteen cows is a large herd for the Masai, where the herd represents the majority of their wealth. (“Where 9/11 News Is Late, but Aid Is Swift,” NYTimes.com, June 3, 2002. www. nytimes.com/2002/06/03/international/africa/ 03KENY.html?ex=1024119140&ei=1&en= 6d047bb51c12016b)

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CHAPTER 3 Differences in Culture

ETHNOCENTRIC BEHAVIOR Behavior that is based on the belief in the superiority of one’s own ethnic group or culture; often shows disregard or contempt for the culture of other countries.

Hall also notes that cultural differences in attitude to time can cause a myriad of problems. He notes that in the United States, giving a person a deadline is a way of increasing the urgency or relative importance of a task. But in the Middle East, giving a deadline can have exactly the opposite effect. The American that insists an Arab business associate make his mind up in a hurry is likely to be perceived as overly demanding and exerting undue pressure. The result may be exactly the opposite of what the American intended, with the Arab going slow as a reaction to the American’s arrogance and rudeness. For his part, the American may believe that an Arab associate is being rude if he shows up late to a meeting because he met a friend in the street and stopped to talk. The American, of course, is very concerned about time and scheduling. But for the Arab, who lives in a society where social networks are a major source of information, and maintaining relationships is important, finishing the discussion with a friend is more important than adhering to a strict schedule. Indeed, the Arab may be puzzled as to why the American attaches so much importance to time and schedule.

C U LT U R E A N D C O M P E T I T I V E A D V A N TA G E
One theme that continually surfaces in this chapter is the relationship between culture and national competitive advantage. Put simply, the value systems and norms of a country influence the costs of doing business in that country. The costs of doing business in a country influence the ability of firms to establish a competitive advantage in the global marketplace. We have seen how attitudes toward cooperation between management and labor, toward work, and toward the payment of interest are influenced by social structure and religion. It can be argued that the class-based conflict between workers and management in class-conscious societies, when it leads to industrial disruption, raises the costs of doing business in that society. Similarly, we have seen how some sociologists have argued that the ascetic “other-worldly” ethics of Hinduism may not be as supportive of capitalism as the ethics embedded in Protestantism and Confucianism. Also, Islamic laws banning interest payments may raise the costs of doing business by constraining a country’s banking system. Japan presents an interesting example of how culture can influence competitive advantage. Some scholars have argued that the culture of modern Japan lowers the costs of doing business relative to the costs in most Western nations. Japan’s emphasis on group affiliation, loyalty, reciprocal obligations, honesty, and education all boost the competitiveness of Japanese companies. The emphasis on group affiliation and loyalty encourages individuals to identify strongly with the companies in which they work. This tends to foster an ethic of hard work and cooperation between management and labor “for the good of the company.” Similarly, reciprocal obligations and honesty help foster an atmosphere of trust between companies and their suppliers. This encourages them to enter into long-term relationships with each other to work on inventory reduction, quality control, and design— all of which have been shown to improve an organization’s competitiveness. This level of cooperation has often been lacking in the West, where the relationship between a company and its suppliers tends to be a short-term one structured around competitive bidding, rather than one based on long-term mutual commitments. In addition, the availability of a pool of highly skilled labor, particularly engineers, has helped Japanese enterprises develop cost-reducing process innovations that have boosted their productivity.56 Thus, cultural factors may help explain the competitive advantage enjoyed by many Japanese businesses in the global marketplace. The rise of Japan as an economic power during the second half of the 20th century may be in part attributed to the economic consequences of its culture. It also has been argued that the Japanese culture is less supportive of entrepreneurial activity than, say, American society. In many ways, entrepreneurial activity is a product of an individualistic mind-set, not a classic characteristic of the Japanese. This may explain why American enterprises, rather than Japanese corporations, dominate industries where entrepreneurship and innovation are highly valued, such as computer software and biotechnology. Of course, obvious and significant exceptions to this generalization exist. Masayoshi Son recognized the potential of software far faster than any of Japan’s corporate giants; set up his company, Softbank, in 1981; and has since built it into Japan’s top software distributor. Similarly, dynamic entrepreneurial individuals established major Japanese companies such as Sony and Matsushita. But these examples may be the exceptions that prove the rule, for as yet there has been no surge in entrepreneurial high-technology enterprises in Japan equivalent to what has occurred in the United States.

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PART 2 Country Differences

For the international business, the connection between culture and competitive advantage is important for two reasons. First, the connection suggests which countries are likely to produce the most viable competitors. For example, one might argue that U.S. enterprises are likely to see continued growth in aggressive, cost-efficient competitors from those Pacific Rim nations where a combination of free market economics, Confucian ideology, group-oriented social structures, and advanced education systems can all be found (e.g., South Korea, Taiwan, Japan, and increasingly China). Second, the connection between culture and competitive advantage has important implications for the choice of countries in which to locate production facilities and do business. Consider a hypothetical case when a company has to choose between two countries, A and B, for locating a production facility. Both countries are characterized by low labor costs and good access to world markets. Both countries are of roughly the same size (in terms of population) and both are at a similar stage of economic development. In country A, the education system is undeveloped, the society is characterized by a marked stratification between the upper and lower classes, and there are six major linguistic groups. In country B, the education system is well-developed, social stratification is lacking, group identification is valued by the culture, and there is only one linguistic group. Which country makes the best investment site? Country B probably does. In country A, conflict between management and labor, and between different language groups, can be expected to lead to social and industrial disruption, thereby raising the costs of doing business.57 The lack of a good education system also can be expected to work against the attainment of business goals. The same kind of comparison could be made for an international business trying to decide where to push its products, country A or B. Again, country B would be the logical choice because cultural factors suggest that in the long run, country B is the nation most likely to achieve the greatest level of economic growth. But as important as culture is, it is probably far less important than economic, political, and legal systems in explaining differential economic growth between nations. Cultural differences are significant, but we should not overemphasize their importance in the economic sphere. For example, earlier we noted that Max Weber argued that the ascetic principles embedded in Hinduism do not encourage entrepreneurial activity. While this is an interesting academic thesis, recent years have seen an increase in entrepreneurial activity in India, particularly in the information technology sector where India is rapidly becoming an important global player. The ascetic principles of Hinduism and castebased social stratification have apparently not held back entrepreneurial activity in this sector!

KEY TERMS
caste system, p. 100 class consciousness, p. 102 class system, p. 100 Confucian dynamism, p. 116 cross-cultural literacy, p. 93 ethical systems, p. 102 ethnocentric behavior, p. 121 folkways, p. 94 group, p. 97 individualism versus collectivism, p. 114 masculinity versus femininity, p. 115 mores, p. 95 norms, p. 94 power distance, p. 114 religion, p. 102 social mobility, p. 99 social strata, p. 99 society, p. 94 uncertainty avoidance, p. 114 values, p. 94 123

SUMMARY
We have looked at the nature of social culture and studied some implications for business practice. The chapter made these points: 1. Culture is a complex whole that includes knowledge, beliefs, art, morals, law, customs, and other capabilities acquired by people as members of society. 2. Values and norms are the central components of a culture. Values are abstract ideals about what a society believes to be good, right, and desirable. Norms are social rules and guidelines that prescribe appropriate behavior in particular situations. 3. Values and norms are influenced by political and economic philosophy, social structure, religion, language, and education. 4. The social structure of a society refers to its basic social organization. Two main dimensions along which social structures differ are the individual–group dimension and the stratification dimension. 5. In some societies, the individual is the basic building block of social organization. These societies emphasize individual achievements above all else. In other societies, the group is the basic building block of social organization. These societies emphasize group membership and group achievements above all else. 6. All societies are stratified into different classes. Classconscious societies are characterized by low social mobility and a high degree of stratification. Less classconscious societies are characterized by high social mobility and a low degree of stratification. 7. Religion may be defined as a system of shared beliefs and rituals that is concerned with the realm of the sacred. Ethical systems refer to a set of moral principles, or values, that are used to guide and shape behavior. The world’s major religions are Christianity, Islam, Hinduism, and Buddhism. Although not a religion, Confucianism has an impact on behavior that is as profound as that of many religions. The value systems of different religious and ethical systems have different implications for business practice. 8. Language is one defining characteristic of a culture. It has both spoken and unspoken dimensions. In countries with more than one spoken language, we tend to find more than one culture. 9. Formal education is the medium through which individuals learn skills and are socialized into the values and norms of a society. Education plays an important role in the determination of national competitive advantage. 10. Geert Hofstede studied how culture relates to values in the workplace. Hofstede isolated four dimensions that he claimed summarized different cultures: power distance, uncertainty avoidance, individualism versus collectivism, and masculinity versus femininity. 11. Culture is not a constant; it evolves. Economic progress and globalization seem to be two important engines of cultural change. 12. One danger confronting a company that goes abroad for the first time is being ill-informed. To develop crosscultural literacy, international businesses need to employ host-country nationals, build a cadre of cosmopolitan executives, and guard against the dangers of ethnocentric behavior. 13. The value systems and norms of a country can affect the costs of doing business in that country.

CRITICAL THINKING AND DISCUSSION QUESTIONS
1. Outline why the culture of a country might influence the costs of doing business in that country. Illustrate your answer with examples. 2. Do you think that business practices in an Islamic country are likely to differ from business practices in the United States, and if so, how? 3. What are the implications for international business of differences in the dominant religion and/or ethical system of a country? 4. Choose two countries that appear to be culturally diverse. Compare the cultures of those countries and then indicate how cultural differences influence (a) the costs of doing business in each country, (b) the likely future economic development of that country, (c) business practices, and (d) business ethics.

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R E S E A R C H TA S K

globaledge.msu.edu

Use the globalEDGE™ site to complete the following exercises: 1. You are preparing for a business trip to Venezuela where you will need to interact extensively with local professionals. Therefore, you consider collecting information regarding local culture and business habits before your departure. Prepare a short description of the most striking cultural characteristics that may affect business interactions in this country.

2. Asian cultures exhibit significant differences in business etiquette when compared to Western cultures. For example, in Thailand it is considered offensive to show the sole of the shoe or foot to another. Find five additional tips regarding the business etiquette of a specific Asian country of your choice.

CLOSING CASE

M C D O N A L D ’ S A N D H I N D U C U LT U R E
menu conform to local sensibilities such as the “McAloo Tikki Burger,” which is made from chicken. All foods are strictly segregated into vegetarian and nonvegetarian lines to conform with preferences in a country where many Hindus are vegetarian. According to the head of McDonald’s Indian operations, “We had to reinvent ourselves for the Indian palate.” For a while, this seemed to work. Then in 2001 McDonald’s was blindsided by a class-action lawsuit brought against it in the United States by three Indian businessmen living in Seattle. The businessmen, all vegetarians and two of whom were Hindus, sued McDonald’s for “fraudulently concealing” the existence of beef in McDonald’s French fries! McDonald’s had said it used only 100 percent vegetable oil to make French fries, but the company soon admitted that it used a “minuscule” amount of beef extract in the oil. McDonald’s settled the suit for $10 million and issued an apology, which read, “McDonald’s sincerely apologizes to Hindus, vegetarians, and others for failing to provide the kind of information they needed to make informed dietary decisions at our U.S. restaurants.” Going forward, the company pledged to do a better job of labeling the ingredients of its food and to find a substitute for the beef extract used in its oil. However, news travels fast in the global society of the 21st century, and the revelation that McDonald’s used beef extract in its oil was enough to bring Hindu nationalists onto the streets in Delhi, where they vandalized one McDonald’s restaurant, causing $45,000 in damage; shouted slogans outside of another; picketed the company’s headquarters; and called on India’s prime minister to close McDonald’s 27 stores in the country. McDonald’s Indian franchise holders quickly issued denials that they used oil that contained beef extract, and Hindu extremists responded by stating they would submit McDonald’s oil to laboratory tests to see if they could detect beef extract. 125

In many ways, McDonald’s Corporation has written the book on global expansion. Every day, on average, somewhere around the world 4.2 new McDonald’s restaurants are opened. By 2003, the company had 30,000 restaurants in 121 countries that collectively served 46 million customers each day. One of the latest additions to McDonald’s list of countries hosting the famous golden arches is India, where McDonald’s started to establish restaurants in the late 1990s. Although India is a poor nation, the large and relatively prosperous middle class, estimated to number between 150 million and 200 million, attracted McDonald’s. India, however, offered McDonald’s unique challenges. For thousands of years, India’s Hindu culture has revered the cow. Hindu scriptures state that the cow is a gift of the gods to the human race. The cow represents the Divine Mother that sustains all human beings. Cows give birth to bulls that are harnessed to pull plows, cow milk is highly valued and used to produce yogurt and ghee (a form of butter), cow urine has a unique place in traditional Hindu medicine, and cow dung is used as fuel. Some 300 million of these animals roam India, untethered, revered as sacred providers. They are everywhere, ambling down roads, grazing in rubbish dumps, and resting in temples—everywhere, that is, except on your plate, for Hindus do not eat the meat of the sacred cow. McDonald’s is the world’s largest user of beef. Since its founding in 1955, countless animals have died to produce Big Macs. How can a company whose fortunes are built upon beef enter a country where the consumption of beef is a grave sin? Use pork instead? But there are some 140 million Muslims in India, and Muslims don’t eat pork. This leaves chicken and mutton. McDonald’s responded to this cultural food dilemma by creating an Indian version of its Big Mac—the “Maharaja Mac”—which is made from mutton. Other additions to the

The negative publicity seemed to have little impact on McDonald’s long-term plans in India, however. The company continued to open restaurants, and by 2003 had 38 in the country and announced plans to open another 80 by 2005. When asked why they frequented McDonald’s restaurants, Indian customers noted that their children enjoyed the “American” experience, the food was of a consistent quality, and the toilets were always clean!

2. Is there anything that McDonald’s could have done to have foreseen or better prepared itself for the negative publicity associated with the revelation that it used beef extract in its frying oil? 3. How far should a firm such as McDonald’s go in localizing its product to account for cultural differences? At some point, might it not lose an advantage by doing so?
Sources: Luke Harding, “Give Me a Big Mac—But Hold the Beef,” The Guardian, December 28, 2000, p. 24; Luke Harding, “Indian McAnger,” The Guardian, May 7, 2001, p. 1; and A. Dhillon, “India Has No Beef with Fast Food Chains,” Financial Times, March 23, 2002, p. 3.

CASE DISCUSSION QUESTIONS
1. What lessons does the experience of McDonald’s in India hold for other foreign fast-food chains and retail stores?

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