Impact of Culture on International Business

Importance of culture in multinationals

We live in a globalized world in which, the interdependencies between what is going on in different places are getting stronger day by day. Therefore, multinational companies have adopted a very important role. Although it seems that people seem similar to us in spite of their origin, the fact is that the cultural differences exist and culture is the variable that best explains the differences in many aspects of business.

What defines a company as multinational is the fact that it operates in different environments and has to deal with different ways of doing things and understanding reality.

The way in which companies design their organizational structures, coordinate relationships between the headquarters and subsidiaries and develop human resource policies and establish their strategic priorities, is different in each company. If we compare them and develop models to understand these behaviors, we find what influences is not size, activity, industry or the maturity of the company, it is culture.

Understanding culture will not only help us to explain the differences between companies, it will help prevent conflict. Cultural differences affect the relationship between the headquarters and its subsidiaries, they are an important factor in the failure of strategic alliances between companies, have a deep effect on the success of marketing strategies, influence the relationships between expatriates and the local staff of subsidiaries, condition the viability of human resources policies, determine the ability of companies to learn from their competitors and other agents in the environment.

Concept of culture 

Culture is a process of collective programming, to the extent that we perform our actions within the limits set for us by culture.

The term culture refers to a human group that individuals necessarily identify with. Given that we all form part of a group with which we share norms and values, we all form part of a culture.

The set of norms and values shared by a group determining how these individuals behave and interpret the behavior of others.

In the centre, we have the individual, who obviously has a particular personality distinguishing him or her from any group to which he/she belongs. The smaller and more close-knit the group with which they share norms and values, the stronger the identification and the greater the similarities in the behavior of these individuals.

The purpose of developing intercultural awareness is to minimize mistakes in our interactions with people from other countries. To do this we need to understand the general traits of the culture:

Although individuals from the same culture share certain behavioral traits, culture is distinct from the personality of the individual. An individual’s personality is unique and may often include features that conflict with what is common to most members of the culture.

• Culture is not inherited in a genetic sense.

• Culture is a simplification of the reality.

• Culture is a complex system.

• Culture remains relatively stable over time.

• There are certain taboos and unspeakable topics in different cultures, which should be always respected.

Grouping of countries based on their culture 

Developing cultural awareness requires experience and knowledge of other cultures. Obtaining this level of knowledge is possible through immersion in a given society, so an individual cannot be fully identified with many different cultures.

Power distance 

Tells us how the members of a society view differences in power and status. It is logical for superiors in organizations to try to increase these differences while subordinates will want to reduce them. These two trends create a balance that will differ from society to society.

In cultures with a high power distance, the differences in power and status are high and accepted by both superiors and their subordinates.

Power distance has clear organizational implications. In the cultures with the highest scores in this dimension, superiors tend to exert an autocratic and paternalistic leadership that leaves little room for subordinate initiative. The superior also closely supervises subordinate activities. Given that a large amount of time is spent supervising, the number of employees reporting to each manager cannot be high, which leads to a high degree of stratification in organizational structures, with lots of hierarchical levels. In cultures with low power distance, however, these structures tend to be very flat.

In cultures with a high power distance, not only many hierarchical levels, but can be also found great importance is attached to each person’s position in the structure. When establishing relationships with professionals from other companies, managers expect to negotiate with people having the same rank and consider it a sign of contempt to be assigned a contact of a lower level. By contrast, a culture with low power distance will have no problem in establishing contact with staff from different levels.

Uncertainty avoidance 

Our inability to anticipate what could happen in the future generates reactions towards the attitude we adopt regarding what the future has in store for us.

Uncertainty avoidance measures our degree of insecurity in relation to the unknown. Some cultures have a high uncertainty avoidance, characterized by the fact that anything new or unknown is regarded with suspicion. In other cultures, new situations are seen as challenges or opportunities (EEUU).

Cultures with a high uncertainty avoidance are more conservative and always try to keep risk under control.

One of the countries with the highest scores in this dimension is Japan. Japanese companies try to establish stable relationships over time with their suppliers, customers and other economic agents. Offering lifelong employment is common practice and company loyalty is considered a virtue.

Assertiveness 

Assertiveness is a cultural dimension that indicates the extent to which individuals act with determination and a clear focus on success and achieving goals.

An assertive attitude attaches value to power, money and material things, in short, anything that can be used to measure what a person can achieve by acting competitively. Assertiveness is often equivalent to aggressiveness, but we need to be clear on the fact that assertiveness, must exclude violence to be considered as such.

Rewards in more assertive cultures are linked to performance, and new challenges and initiatives are continuously created and proposed, so behavior is more opportunistic. Issues such as sensitivity to the environmental impact of activities or concern for the vulnerable are regarded as secondary.

Individualism-Collectivism 

The individualism measures the degree to which people identify only with their own interests and, those of their most immediate family. In contrast with collectivism, which indicates that the interests of the individual converge with those of a larger group which the latter identifies completely.

When individualistic people plan their actions, they act independently and, in all events, involve few people in their decisions. This does not mean that their actions are necessarily negative for others. In more collective societies, the size of the group with which they share their reflections is larger, so the number of people involved is greater.

In individualistic societies, the individual is expected to be self-sufficient. In the more developed economies, in which protection systems are anonymous and widespread, these behaviors are more common. However, in societies in which the system does not provide individual support, people have to seek this from their closest communities.

Individualism-collectivism has more important implications for organizations. The higher the index of individualism, the more responsible a person is considered to be for his/her actions; by comparison, in collective societies, responsibilities and initiatives are distributed among the group. Staff motivation and remuneration policies must take this into account and be based on the person rather than the team. Promotions are made on the basis of personal merit rather than seniority, as is the case in more collective societies.

The differences between countries in this dimension are very significant, with the United States and Anglo-Saxon countries obtaining the highest scores. In all Western societies, students of business management have higher index of individualism than any particular country.

Short-/long-term orientation

The time perspective according to which we orient our actions varies significantly from culture to culture. In those with a short-term orientation, the immediate results of our decisions are given the highest consideration, whereas in long-term oriented cultures, we think about the future consequences of our actions.

In short-term oriented cultures, the only time reference that counts is the present, so value is attached to our ability to enjoy the moment. This often hinders our ability to make plans in order to achieve our desired goals and to detect the negative effects that today’s actions can have on our future goals.

In long-term oriented cultures, people have greater skills and are more prepared to anticipate future events and design actions allowing them to achieve their future aspirations. This approach has the disadvantage that it can lead us to neglect current social and personal relations.

Performance/relationship orientation 

Performance or relationship orientation tells us the extent to which the most important aspect of an issue in certain cultures is the business or the people involved.

In performance, or business-oriented cultures, which are usually also the most individualistic, there is a clear dividing line between the commercial or business relationship and the personal lives of the individuals. Collectivist cultures, however, are more relationship-oriented.

It is easier to establish business relations in performance-oriented cultures than in relationship-oriented cultures because there is no need to have consolidated a relationship beforehand and because there is a willingness to connect with strangers. However, having contacts and trusting the other party is usually a prerequisite in relationship-oriented cultures.

In business-oriented cultures, negotiations are impersonal and no time is spent socialising before the meeting: they go straight to the point, without further ado. In a relationship-oriented culture, trust is required, so a warmer atmosphere has to be created beforehand, in which the parties take an interest in the personal aspects of each others’ lives. These differences have an enormous influence on the role of contracts in each culture.

Time consideration 

The way people manage time is very different. Cultures in which people are constantly watching the clock are considered monochronic, in contrast to polychronic cultures, in which things are much more relaxed in this sense.

In monochronic cultures, there is a tendency to concentrate on what we are doing, so we do not usually do more than one thing at a time. In polychronic cultures, however, work and meetings can be constantly interrupted by other activities, which overlap and converge. In this context, punctuality plays an important role. In monochronic cultures, the typical examples of which are Germany or Switzerland, punctuality is extremely important.

In monochronic cultures, punctuality is not the only inflexible element of time management. When scheduling activities, especially meetings, besides setting the start time, the meeting agenda is also clarified and only these items will be dealt with. The end time is also part of the planning. In polychronic cultures, the agenda has a vague, on-the-go design, and items that had not been thought of previously can be added as we go along. Any prior estimate of an end time would be naive.

Expressivity 

The way in which we communicate varies according to our expressivity. In more expressive cultures, verbal communication is accompanied by numerous gestures and the tone of voice is usually high. In reserved cultures, however, the tone is more moderate.

Paraverbal communication and non-verbal communication have very different meanings in expressive and reserved cultures. A high vocal pitch may be used in expressive cultures to draw attention to something important, reinforce an argument or indicate interest in what is being said. In a reserved culture, the same gestures will be interpreted as aggressive or as signs that the person is annoyed.

In conversations, silence as well as language plays a different role in each culture. Reserved cultures accept silence as natural and it can be a sign of interest and reflection on what is being said. By contrast, in more expressive cultures, in which speakers talk over each other and conversations can become heated without incurring any hostility, silence is a sign of alarm and caution.

Interpersonal distance in expressive cultures is usually minimal, so conversations take place face to face and speakers are positioned very close to each other; physical contact in the form of embraces and pats on the back is not unusual. In reserved cultures, this behaviour can be intimidating and the person may feel intimidated.

Universalism-Particularism 

Universalism tells us how far a society is governed by rules and how widely they are accepted. In universalistic societies, norms and obligations act as a moral benchmark because they are regarded as an expression of how things should be done correctly, with justice and equality, beyond private interests. In particularistic societies, private circumstances are considered more important than rules, and personal relationships are stronger than any abstract rule. This means that reactions can differ depending on the circumstances and the people involved.

This dimension has important implications for business. In universalistic cultures, abiding by the rules and following the law is of prime importance, so we cannot expect a flexible interpretation of the rules or of contracts. By contrast, particularistic cultures are much more lax in this respect, as shown by the lack of respect for intellectual property rights in certain countries.

Specificity-Holism 

Specific cultures tend to analyze facts in isolation, so peoples’ considerations on a particular issue will be limited to this issue. For example, if at a meeting in which we are discussing the best strategy for introducing our products into a certain country, somebody thinks that a particular strategy is pointless, in a specific culture, the person who suggested the idea will only feel that his or her proposal has been challenged. By contrast, in holistic cultures, things are analyzed in a more global way and the person whose strategy was criticized will not only consider it to be directed at the idea he or she suggested; instead, this person will interpret it more widely and could even regard it as a personal attack. In specific cultures, things are not taken personally because evaluations relate only to the issue in question and are not extended to other facets.

In specific cultures, we need to specify every aspect involved in the negotiation process because if it is not specifically included, it will not be considered to form part of the deal. In holistic cultures, relationships are much more diffuse and go beyond the specific. It is important to be aware of the context and other issues that relate to what we are doing as the holistic perspective implies that the whole is greater than the sum of its parts and, hence, we cannot explain everything in isolation. These considerations affect the way contracts are designed. In specific cultures, every detail is important while there is a tendency in holistic cultures to establish a general framework to guide relations.

Culture and local business practices 

The management principles we all study and which are widespread in management practices the world over are based on norms and values of Western culture. The globalization process that has created the increasingly integrated world in which we live has extended these practices as the only valid model wherever we are. But while it is certain that, to an extent, globalization has transmitted a Western view of the world, it is also true that in recent years – and this trend is expected to intensify in coming decades – emerging countries like the BRICs (Brazil, Russia, India and China) have played a greater role on the international stage.

These cultures are more representative than Western culture of the way the majority of people on the planet understand the world. The collectivism of most cultures contrasts with the dominant individualistic values of the Western business. While it is true that, compared to their fellow citizens, businessmen and women in emerging countries have a more individualistic orientation, they have to perform their activities in companies that are not as individualistic.

Guanxi 

Guanxi (關係) is a system of interpersonal relations deeply rooted in Chinese culture. The key concept of the guanxi system are connections, as it is developed essentially through networks. The ingredient that keeps guanxi going is the exchange of favours.

The exchange of favours (renging) leads to the development of mutual obligations between members of the network. We should not, however, confuse guanxi networks with corruption networks; these exchanges are usually legal and it is only when contacts are used outside the law that guanxi can be considered illegitimate. In addition, the origin of guanxi networks does not lie in business but in personal or affective relationships, in which the family plays a key role. Thus, the considerations generated through the networks also have a strong affective component.

In contrast to other collectivistic societies, the development of guanxi networks has a long-term perspective. It is not easy to enter a network and it cannot be done without first establishing strong bonds with some of its members. However, once in a network, each member looks out for the interests of the others and can expect the others to do the same for him or her.

At the root of guanxi networks, besides a sense of collective, there is also a clear particularistic orientation. Hence, guanxi is sometimes equated to corruption, because the sense of duty towards friends or relatives is considered to be above everything else, even the law. If the latter stands in the way of supporting a network member, it must come second. Guanxi also has an element of social reference.

In guanxi networks, the status of an individual is considered very important, so guanxi is also an instrument to protect, enhance, share and award social prestige. As a person becomes capable of doing favours and giving prestige to the network, he or she will also gain social recognition, which is why it is said that guanxi is a plant that needs care and attention to grow.

Sharia 

Sharia (ةَعيِرَش), or Islamic law, regulates many aspects of life for the followers of this religion. Although application of the precepts of Sharia to business is not mandatory in most Muslim-majority countries, it does introduce prohibitions that significantly affect transactions in these countries.

The Sharia doctrine includes areas that contradict basic principles of Western democratic societies, such as gender equality, which casts a shadow over the role of women in business, the extent of which depends on how strictly the country applies Sharia.

When doing business in predominantly Muslim countries, we must also take into account activities that are expressly forbidden by the Koran, the sacred book of Islam. Prohibited activities and products include alcoholic beverages, pork products, gambling, tobacco, pornography, weapons, etc.

Dharma 

Dharma is a concept rooted in Hindu and Buddhist philosophy that puts the individual at the centre of the universe. Individuals are responsible for their own actions and the consequences of these. According to Hindu philosophy, Western thought puts rationality above all other considerations. Dharma philosophy, however, adopts a more spiritual vision of things. The goal of a company is not so much individual benefit as to become a means for fulfilling personal obligations, thus bringing the individual into line with the universe. The Hindu vision is far more holistic than the Western one and involves the feeling of belonging to a group.

Dharma is based on the notion of obligation or responsibility. This includes obligations to family, business partners and society in general. Hindu philosophy believes that dharma protects those protect it because the consequences of our actions always come back to us in the end. Hence, business success is seen as a reward for personal virtues while transforming family obligations into successful results is considered a moral obligation.

Ubuntu 

In the past, Africa’s role on the international stage has been very marginal, receiving little attention from investors and researchers until China arrived on the continent looking for raw materials and markets for its products.

Companies that have invested in Africa have often lacked competitiveness due to the endemic low productivity. Some authors have suggested that the root of the problem lies in the fact that the implicit values in the way the West does business are not aligned with African values.

Western business practices are based on individualism, so the stakeholder- oriented mentality that prevails in the West does not work in societies with a strong sense of community.

In countries like South Africa, the Ubuntu philosophy is being applied to business management in an attempt to reconcile African values with effective management. This perspective is based on the idea of considering the company as a community, not as a mere sum of individuals. Thus, the role of the company is not to reward the interests of the individuals who comprise it, but to reward the community and other communities to which it belongs. The values that inspire the philosophy are respect, humanity, compassion, sharing and care of others.

How cultural differences impact international business in 2017

Multinational and cross-cultural teams are likewise becoming more common, meaning businesses can benefit from a diverse knowledge base and new insightful approaches to business problems. However, along with the benefits of insight and expertise, global organizations also face potential blocks when it comes to culture and international business.

In an international business context, what is common and accepted for a professional from one country, could be very different for a colleague from overseas. Recognizing and understanding how culture affects international business in three core areas: communication, etiquette, and organizational hierarchy can help you avoid misunderstandings with colleagues and clients from abroad and excel in a globalized business environment.

Communication

Effective communication is essential to the success of any business, but it is particularly critical when there is a real risk of your message getting “lost in translation”.

What might be commonplace in your culture could be unusual or even offensive to a foreign colleague or client. Where possible, do your research in advance of professional interactions with individuals from a different culture. Remember to be perceptive to body language, and when in doubt, ask. While navigating cross-cultural communication can be a challenge, approaching cultural differences with sensitivity, openness, and curiosity can help to put everyone at ease.

Workplace etiquette

Different approaches to professional communication is just one of the innumerable differences in workplace norms from around the world.

The formality of address is a big consideration when dealing with colleagues and business partners from different countries. Do they prefer titles and surnames or is being on first-name basis acceptable? While it can vary across organizations, Asian countries such as South Korea, China, and Singapore tend to use formal “Mr./Ms. Surname,” while Americans and Canadians tend to use first names. When in doubt, erring on the side of formality is generally safest.

The concept of punctuality can also differ between cultures in an international business environment. Different ideas of what constitutes being “on time” can often lead to misunderstandings or negative cultural perceptions.

Along with differences in etiquette, come differences in attitude, particularly towards things like confrontation, rules or regulations, and working hours. While some may consider working long hours a sign of commitment and achievement, others may consider these extra hours a demonstration of a lack of efficiency or the deprioritization of essential family or personal time.

Organizational hierarchy

Organizational hierarchy and attitudes towards management roles can also vary widely between cultures. Whether or not those in junior or middle-management positions feel comfortable speaking up in meetings, questioning senior decisions, or expressing a differing opinion can be dictated by cultural norms. Often these attitudes can be a reflection of a country’s societal values or level of social equality.

Top ten ways that culture can affect international business:

1. Negotiating goal: Contract or relationship?

Negotiators from different cultures may tend to view the purpose of a negotiation differently. For deal makers from some cultures, the goal of a business negotiation, is a signed contract between the parties. Other cultures tend to consider that the goal of a negotiation is not a signed contract but rather the creation of a relationship between the two sides. Although the written contact expresses the relationship, the essence of the deal is the relationship itself.

It is important to determine how both parts view the purpose of your negotiation. If relationship negotiators sit on the other side of the table, convincing them of your ability to deliver on a low-cost contract may not be enough to land you the deal. You may also have to persuade them, from the very first meeting, that your two organizations have the potential to build a rewarding relationship over the long term. On the other hand, if the other side is basically a contract deal maker, trying to build a relationship may be a waste of time and energy.

2. Win-Lose or Win-Win?

Because of differences in culture, personality, business persons appear to approach deal making with one of two basic attitudes: that a negotiation is either a process in which both can gain (win-to-win) or a struggle in which, of necessity, one side wins and the other side loses (win-lose).

3. Informal or formal?

It concerns the way a negotiator talks to others, uses titles, dresses, speaks, and interacts with other persons. Culture strongly influences the personal style of negotiators. It has been observed that Germans have a more formal style than Americans. A negotiator with a formal style insists on addressing counterparts by their titles, avoids personal anecdotes, and refrains from questions touching on the private or family life of members of the other negotiating team. A negotiator with an informal style tries to start the discussion on a first-name basis, quickly seeks to develop a personal, friendly relationship with the other team, and may take off his jacket and roll up his sleeves when deal making begins in earnest. Each culture has its own formalities with their own special meanings.

4. Communication: Direct or indirect?

The methods of communication vary among cultures. Some emphasize direct and simple methods of communication; others rely heavily on indirect and complex methods.

The confrontation of these styles of communication in the same negotiation can lead to friction. For example, the indirect ways Japanese negotiators express disapproval have often led foreign business executives to believe that their proposals were still under consideration when in fact the Japanese side had rejected them.

5. High or low sensitivity?

Discussions of national negotiating styles treat a particular culture’s attitudes toward time. It is said that Germans are always punctual, Latins are habitually late, Japanese negotiate slowly, and Americans are quick to make a deal.

Commentators sometimes claim that some cultures value time more than others, but this observation may not be an accurate characterization of the situation. Rather, negotiators may value differently the amount of time devoted to and measured against the goal pursued. For Americans, the deal is a signed contract and time is money, so they want to make a deal quickly. Americans therefore try to reduce formalities to a minimum and get down to business quickly. Japanese and other Asians, whose goal is to create a relationship rather than simply sign a contract, need to invest time in the negotiating process so that the parties can get to know one another well and determine whether they wish to embark on a long-term relationship. They may consider aggressive attempts to shorten the negotiating time as efforts to hide something.

6. High or low emotionalism?

Accounts of negotiating behavior in other cultures almost always point to a particular group’s tendency to act emotionally. According to the stereotype, Latin Americans show their emotions at the negotiating table, while the Japanese and many other Asians hide their feelings. Obviously, individual personality plays a role here. There are passive Latins and hot-headed Japanese. Various cultures have different rules as to the appropriateness and form of displaying emotions, and these rules are brought to the negotiating table as well.

7. General or specific forms of agreement?

Whether a negotiator’s goal is a contract or a relationship, the negotiated transaction in almost all cases will be encapsulated in some sort of written agreement. Cultural factors influence the form of the written agreement that the parties make.

Generally, Americans prefer very detailed contracts that attempt to anticipate all possible circumstances and eventualities, no matter how unlikely. Why? Because the deal is the contract itself, and one must refer to the contract to handle new situations that may arise. Other cultures, such as the Chinese, prefer a contract in the form of general principles rather than detailed rules. Why? Because, it is claimed, that the essence of the deal is the relationship between the parties. If unexpected circumstances arise, the parties should look primarily to their relationship, not the contract, to solve the problem. So, in some cases, a Chinese negotiator may interpret the American drive to stipulate all contingencies as evidence of a lack of confidence in the stability of the underlying relationship.

8. Building an agreement: Bottom up or top down?

Related to the form of the agreement is the question of whether negotiating a business deal is an inductive or a deductive process. Does it start from an agreement on general principles and proceed to specific items, or does it begin with an agreement on specifics, such as price, delivery date, and product quality, the sum total of which becomes the contract? Different cultures tend to emphasize one approach over the other. Some observers believe that the French prefer to begin with agreement on general principles, while Americans tend to seek agreement first on specifics. For Americans, negotiating a deal is basically making a series of compromises and trade-offs on a long list of particulars. For the French, the essence is to agree on basic principles that will guide and indeed determine the negotiation process afterward.

9. Team organization: One leader or group consensus?

In any negotiation, it is important to know how the other side is organized, who has the authority to make commitments, and how decisions are made. Culture is one important factor that affects how executives organize themselves to negotiate a deal. Some cultures emphasize the individual while others stress the group. These values may influence the organization of each side in a negotiation. One extreme is the negotiating team with a supreme leader who has complete authority to decide all matters. Many American teams tend to follow this approach. Other cultures, like the Japanese and the Chinese, stress team negotiation and consensus decision making.

10. High or low risk taking?

In deal making, the negotiators’ cultures can affect the willingness of one side to take risks—to divulge information, try new approaches, and tolerate uncertainties in a proposed course of action. The Japanese, with their emphasis on requiring large amount of information and their intricate group decision-making process, tend to be risk averse. Americans, by comparison, are risk takers.

How should a deal maker proceed? The following are a few steps to consider:

1 Don’t rush the negotiating process. A negotiation that is moving too fast for one of the parties only heightens that person’s perception of the risks in the proposed deal.

2 Devote attention to proposing rules and mechanisms that will reduce the apparent risks in the deal for the other side.

3 Make sure that your counterpart has sufficient information about you, your company, and the proposed deal.

4 Focus your efforts on building a relationship and fostering trust between the parties.

5 Consider restructuring the deal so that the deal proceeds step by step in a series of increments, rather than all at once.

Negotiating styles, like personalities, have a wide range of variation. The ten negotiating traits discussed above can be placed on a spectrum or continuum, as illustrated in the chart below. Its purpose is to identify specific negotiating traits affected by culture and to show the possible variation that each trait or factor may take. With this knowledge, you may be better able to understand the negotiating styles and approaches of counterparts from other cultures. Equally important, it may help you to determine how your own negotiating style appears to those same counterparts.

References

How cultural differences impact international business in 2017

International Management (UOC)

http://iveybusinessjournal.com/publication/the-top-ten-ways-that-culture-can-affect-international-negotiations/

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