Distance matters:

Institutions, Cultures, and

Ethics

Dr. Ananda Wickramasinghe

ananda@uow.edu.au
02 42981435
The Four Risks of International Business
Dimensions of Institutions
DEGREE OF FORMALITY EXAMPLES SUPPORTIVE PILLARS

Formal Institutions Laws Regulatory (coercive)

Regulations

Rules

Informal institutions Norms Normative

Cultures Cognitive

Ethics

Table 4.1
Institutions: Definitions
Humanly devised constraints that structure human
interaction (North)
Regulatory, normative, and cognitive structures and
activities that provide stability and meaning to social
behavior (Scott)
Institutions: Role
The role of the Institute is to reduce uncertainty
Through signaling and modelling what is legitimate and what
is not.

Distance still matters: The hard reality of global expansion Harvard Business Review 79 (2001), 147, Pankaj Ghemawat,
Distance components

What is Cultural distance?

Language, religious beliefs, social norms, race etc.
Eg.Australian businesses working in India (in spite of English)
Star TV English Broadcast in China, IP copying etc.

What is Administrative (or institutional) distance?

Societal, Governmental lack of economic/monetary, FTA
agreements etc.
Eg. Trade barriers in Japan, US anti-bribery laws, India/China IP
4laws
 What is Geographic (or spatial) distance?
Lack of transportation, communication links, information
etc.
Eg. Doing business in Africa

What is Economic distance?

Difference in economic activity: (1) scope/scale
(2) economic arbitrage
Eg. Doing business in Indonesia

http://www.youtube.com/watch?v=QlifMpIwPus (Cultural differences going abroad)

 Defining Culture

Culture: The learned, shared,

and enduring orientation
patterns in a society. People
demonstrate their culture
through values, ideas, attitudes,
behaviors, and symbols.
Cross-cultural risk: A
situation or event
where a cultural
miscommunication puts some
human value at stake. It arises
in environments characterised
by unfamiliar languages and
unique value systems, beliefs,
and behaviors.
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 Managerial Orientations

Ethnocentric orientation: Using ones own culture

as the standard for judging other cultures.

Polycentric orientation: A mindset in which the

manager develops a greater affinity for the country in
which he or she works than for the home country.

Geocentric orientation: A global mindset in which

the manager is able to understand a business or
market without regard to national boundaries.
Managers should strive for a geocentric orientation.

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Culture Is

Not right or wrong: It is relative. There is no

cultural absolute. Different nationalities simply
perceive the world differently.
Not about individual behavior: It is about
groups. It is a collective phenomenon of shared
values and meanings.
Not inherited: It derives from the social
environment. We are not born with a shared set of
values and beliefs; we acquire them as we grow
up.

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Culture is Learned

Socialisation: The process of learning the rules

and behavioural patterns appropriate to one's society.

Acculturation: The process of adjusting and

adapting to a culture other than one's own; commonly
experienced by expatriate workers

Culture is like an iceberg : above the surface, certain

characteristics are visible; below the surface is a
massive base of assumptions, attitudes, and values
that strongly influence decision-making, relationships,
and other dimensions of business.

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 Culture as an Iceberg

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Culture Affects Many Managerial Tasks
Developing products and services
Communicating and interacting with foreign
partners
Screening and selecting foreign distributors
Negotiating and structuring international
ventures
Interacting with current and potential
customers
from abroad
Preparing for overseas trade fairs and
exhibitions
Preparing advertising and promotional
materials

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Human Resource Practices Vary Across Cultures

Teamwork (MNEs require intercultural cooperation)

Length of employment (temporary or lifetime)

Pay for performance versus merit

Organisational structure (centralised versus

decentralised; bureaucratic versus entrepreneurial)

Union-management relationships

Attitude toward ambiguity (e.g., at times,

employees receive vague or contradictory instructions)
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National, Professional, and Corporate Culture

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E. T. Halls High- and Low-Context Cultures

Low-context cultures rely on explicit explanations, with emphasis on

spoken words. Such cultures emphasise clear, efficient, logical delivery
of verbal messages. Communication is direct. Agreements
are concluded with specific, legal contracts

High-context cultures emphasise nonverbal or indirect language.

Communication aims to promote smooth, harmonious relationships.
Such cultures prefer a polite, face-saving style that emphasises a
mutual sense of care and respect for others. Care is taken not to
embarrass or offend others.

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Halls High- and Low-Context Typology of Culture

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 Hofstedes Typology of National Culture
Individualism versus collectivism refers to
whether a persons primarily function is as an
individual or as a member of a group.
In individualistic societies, each person emphasises his or
her own self-interest; competition for resources is the norm;
and individuals who compete best are rewarded. Examples:
Australia, Britain, Canada, and the U.S.
In collectivist societies, ties among individuals are
important; business is conducted in a group context; life is a
fundamentally cooperative experience; and conformity and
compromise help maintain harmony. Examples: China,
Panama, Japan, and South Korea.

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Hofstedes Typology (cont.)
Power distance describes how a society deals
with inequalities in power that exist among people.
High power distance societies exhibit big gaps between
the weak and powerful. In firms, top management tends to
be autocratic, giving little autonomy to lower-level
employees. Examples: Guatemala, Malaysia, Philippines,
and several Middle Eastern countries.
Low-power distance societies have small gaps between
the weak and the powerful. Firms tend toward flat
organisational structures, with relatively equal relations
between managers and workers. For example,
Scandinavian countries have instituted various systems to
ensure socioeconomic equality.

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 Hofstedes Typology (cont.)
Uncertainty avoidance refers to the extent to which people
can tolerate risk and uncertainty in their lives.

High uncertainty avoidance societies create

institutions to minimise risk and ensure security. Firms
emphasise stable careers and regulate worker actions.
Decisions are made slowly. Examples are Belgium, France,
and Japan.

In low uncertainty avoidance societies, managers are

relatively entrepreneurial and comfortable with risk. Firms
make decisions quickly. People are comfortable changing
jobs. Examples are Ireland, Jamaica, and the U.S.

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 Hofstedes Typology (cont.)
Masculinity versus femininity refers to a societys orientation
based on traditional male and female values.
Masculine cultures value competitiveness, ambition,
assertiveness, and the accumulation of wealth. Both men
and women are assertive, focused on career and earning
money. Examples are Australia and Japan.
Feminine cultures emphasise nurturing roles,
interdependence among people, and caring for less fortunate
peoplefor both men and women. Examples are
Scandinavian countries, where welfare systems are highly
developed and education is subsidised

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 Hofstedes Typology (cont.)
Long-term versus short-term orientation describes the degree to
which people and organisations defer gratification to achieve long-
term success.
Long-term orientation emphasises the long view in planning
and living, focusing on years and decades. Examples are
traditional Asian cultures, such as China, Japan, and
Singapore, which base these values on the teachings of the
Chinese philosopher Confucius (500 BCE), who espoused
long-term orientation, discipline, hard work, education, and
emotional maturity.
Short-term orientation is typical in the United States and most
other Western countries.

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 Hofstedes Typology (cont.)
Indulgence versus restraints describes a societys view on gratification
of basic and natural human drives related to the enjoyment of life.
Indulgence signifies a society that tend to allow free gratification of
basic and natural human drives that are related to enjoying life and
having fun.
Restraints refers to a society that, through strict social norms,
regulates and suppresses the gratification of needs.
Indulgence scores are high in Australia, the United States and much
of the Western countries.
Restraints is mostly found in East Asia, Eastern Europe and the
Muslim world.

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 Key Dimensions of Culture
Values represent a persons judgments about what is good or bad,
acceptable or unacceptable, important or unimportant, and normal or
abnormal.
Attitudes and preferences are developed based on values. They are
similar to opinions, except that attitudes are often unconsciously held
and may not have a rational basis.

Examples
Values common to Japan, North America, and Northern
Europe include hard work, punctuality, and wealth
acquisition.

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 Deal vs. Relationship Orientation

In deal-oriented cultures, managers focus on the task at hand, are

impersonal, typically use contracts, and want to just get down to
business. Examples are Australia, Northern Europe, and North
America.
In relationship-oriented cultures, managers value affiliations with
people, rapport, and getting to know
the other party in business interactions. Relationships are more
important than individual deals, and trust is valued highly in
business agreements. Examples are China, Japan, and Latin
American countries. It took nine years for Volkswagen to negotiate a
car factory in China.

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 Perceptions of Time
Time dictates expectations about planning, scheduling, profit streams,
and what constitutes tardiness in arriving for work and meetings.

Monochronic: A rigid orientation to time in which the individual is

focused on schedules, punctuality, and time as a resource. Time is
linear, and time is money. For example, people in Australia and New
Zealand are focused on punctuality and schedules

Polychronic: A flexible, non-linear orientation to time in which the

individual takes a long-term perspective. Time is elastic, and long
delays are tolerated before taking action. Punctuality is relatively
unimportant. Relationships are valued. Examples are Africa, Latin
America, and Asia.

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 Perceptions of Space
Culture differs in terms of their perception of physical
space.
Conversational distance is closer in Latin America
compared to Australia, northern Europe and United
States.
In Japan it is common for employee workspaces to be
crowded together in the same room.
North American firms partition individual workspaces
and provide private offices to more important
employees.
In Islamic countries close proximity may be discouraged
between a man and a woman who are not married.

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 Language as a Key Dimension of Culture
Language is the mirror or expression of culture; it is
essential for communications and provides insights into
culture.
Linguistic proficiency is a great asset in international
business.
Language has both verbal and nonverbal components (i.e.,
facial expressions and gestures).
There are nearly 7,000 active languages, including over
2,000 in both Africa and Asia.

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 Blunders in International Advertising

27
 Examples of Differences in Meaning Between British and U.S. English

28
 Contemporary Issues:
Technology and the Internet

Technological advances strongly influence culture. The Internet,

multimedia, and other communications systems encourage
convergence in global culture.

The death of distance is the demise of boundaries that once

separated people, due to the integrating effects of information,
communications, and transportation technologies. Culture is
becoming more homogenous around the world.

The Internet also promotes local culture by increasing the

availability of high culture and folk culture.

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 Contemporary Issues:
Are Cultures Converging?

Critics argue globalisation promotes the replacement of indigenous

cultures with homogeneous, often Americanised, culture. Worldwide,
consumption patterns are converging. People exhibit uniformity in
preferences for food, soft drinks, clothing, cars, hotels, websites,
movies, TV shows, music, and other goods.

Others argue globalisation encourages the worldwide free flow of

ideas, beliefs, values, and products. Today, people around the world
are exposed to a diversity of beliefs, values, approaches, and
products, and adopt the best of what the world has to offer.

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 Culture: Converging or Diversifying?
Cultural homogeneity and heterogeneity are not
mutually exclusive; they generally occur together.

But cultural flows are diversejust as McDonalds is

popular in Japan, so too is Vietnamese food in the
United States and Japanese sushi in Europe.

While globalisation will eclipse some past ways

of life, the process can also liberate people by
providing new ideas and challenging conformity and
nationalism.

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 Managerial Guidelines for
Cross-Cultural Success
Acquire factual and interpretive knowledge
about the other culture; try to speak its language.

Avoid cultural bias.

Develop cross-cultural skills, such as

perceptiveness,
interpersonal skills, and adaptability

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Managerial Guidelines (cont.)

Self-reference criterion: The tendency to view other cultures

through the lens of one's own culture understanding this is the
first step.
Critical incident analysis: A method for analysing awkward
situations in cross-cultural interactions by developing empathy for
other points of view.
1. Identify situations where you need to be culturally aware to
interact effectively with people from another culture.
2. When confronted with strange or awkward behaviour,
discipline yourself to not make judgments.
3. Develop your best interpretation of the foreigners behaviour
and formulate your response.
4. Learn from this process and continuously improve.

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 Personality Traits for Cross-Cultural Proficiency
Tolerance for ambiguity: Ability to tolerate uncertainty and lack of
clarity in the thinking and actions of others

Perceptiveness: Ability to closely observe and comprehend subtle

information in the speech and behaviour of others

Valuing personal relationships: Ability to appreciate personal

relationships, often more important than achieving one-time goals or
winning arguments

Flexibility and adaptability: Ability to be creative in

devising innovative solutions, be open-minded about outcomes, and
show grace under pressure

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The Costs and Benefits of Informal, Relationship-Based,
Personalized Exchange

Figure 4.1
The Costs and Benefits of Formal, Rule-Based,
Impersonal Exchange

Figure 4.2
 The Porter Diamond:
Determinants of National Competitive Advantage

Source: Reprinted by permission of Harvard Business Review from The competitive advantage of nations (p. 77) by Michael Porter,
March/April 1990. Copyright 1990 by the Harvard Business School Publishing Corporation; all rights reserved.
Figure 4.3
 The Diamond Model:
Sources of National Competitive Advantage (cont.)
Factor conditions: Quality and quantity of labor,
natural resources, capital, technology, know-how,
entrepreneurship, and other factors of production

Example
An abundance of cost-effective and well-educated
workers gives China a competitive advantage in the
production of laptop computers.

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 The Diamond Model:
Sources of National Competitive Advantage (cont.)

Related and supporting industries: The presence of

suppliers, competitors, and complementary firms that
excel within a given industry
Example
Silicon Valley in California is a great place to
launch a computer software firm because it is
home to thousands of knowledgeable firms and
workers in the software industry.

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 The Diamond Model:
Sources of National Competitive Advantage (cont.)
Demand conditions at home: The strengths and
sophistication of customer demand

Example
Japan is a densely populated, hot, and humid country
with very demanding consumers. These conditions led
Japan to become one of the leading producers of
superior, compact air conditioners.

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 The Diamond Model:
Sources of National Competitive Advantage (cont.)
Firm strategy, structure, and rivalry: The nature of
domestic rivalry and the conditions that determine how
a nations firms are created, organised, and managed

Example
Italy has many top firms in design industries
such as textiles, furniture, lighting, and fashion.
Vigorous competitive rivalry puts these firms
under constant pressure to innovate, which has
propelled Italy to a leading position in design
worldwide.

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Institutions, Firms, and Strategic Choices

Figure 4.4
 Institutional theory of
organisational growth
Institutional Theory:
Growth from
Development of core
competencies, and
Gaining legitimacy in eyes of
stakeholders

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 Institutional theory of
organisational growth
Legitimacy:
Satisfaction of stakeholder needs
Increases in technical efficiency
Adoption of rules & codes of conduct
found in the institutional environment

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 Institutional isomorphism

What is institutional isomorphism?

The tendency of other firms to
replicate the strategies of leading
organisations (DiMaggio & powell
1983)
 Institutional isomorphism

What are the 3 types of isomorphism?

Coercive Isomorphism
Conforming due to: formal and informal
pressures exerted on organisations by other
companies and by the public. These can be
force; persuasion, or invitations to comply.
Example, all airlines are similar because they
each have to abide by the same regulations
and expectations
 Institutional isomorphism

What are the 3 types of isomorphism?

Mimetic Isomorphism
Copying due to: factors such as first-mover;
competitive advantage; and environmental
uncertainty. These all force firms to look for
quick solutions to increase survival.
For example: benchmarking is a form of
mimetic isomorphism
 Institutional isomorphism

What are the 3 types of isomorphism?

Normative Isomorphism
Compliance due to: firms hiring people with
similar skills and tendencies e.g.
professionals, Uni graduates (especially
when from the same Uni).
For example the widespread use of corporate
lawyers increases the consistency among
corporations, and drives out less orthodox
practices
 Institutional theory
Organizational Isomorphism:
Coercive Isomorphism
External pressure forces conformity
Eg. NIKE & Sweatshops - also ( & Envir)
Mimetic Isomorphism
Intentional copying to affect
legitimacy
Eg StGeorge Building Society to Bank
Normative Isomorphism
Similarities grow through
commonalities like staff & MGMT915
training:
- Week 8 -
2008
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 Institutional isomorphism
How does it work in organisations?
It increases legitimacy and confidence in
change.
It enables firms to take the best features of
successful competitors and apply them to
change strategies.
The two propositions of Institution-
based View
Proposition One:
People are guided by formal constraints
Rules provide greater certainty
Rational choices are preferred
Bounded-Rational Decision Making Presides

Proposition Two:
Where formal guidelines fade, people opt for
guidance via informal constraints
Following others provides greater certainty
Intuition and hermiotics is preferred
Culture and Norms preside
The Strategic Role of Ethics
Ethics: Norms, principles, and standards of conduct that

govern individual and firm behavior

All agree - ethics can make or break a firm

Value of an ethical reputation is magnified during crisis

Views on Business Ethics
Managing Ethics Overseas
What is ethical in one country may be unethical or illegal
in other countries
Two perspectives on dealing with ethical dilemmas
overseas (Donaldson)
Ethical relativism - when in Rome, do as the Romans do
Ethical imperialism - absolute belief that there is only one
set of Ethics, and we have it!
Donaldsons three guiding principles:
Respect for human dignity and basic rights
Respect for local traditions
Respect for institutional context
Views on Business Ethics (contd)
Ethics and Corruption
Corruption distorts the basis for competition

Corruption: tendency for inverse relationship

with economic development. There are
exceptions
U.S. firms are subject to the Foreign Corrupt
Practices Act (FCPA)
Strategic Responses to Ethical Challenges

STRATEGIC STRATEGIC EXAMPLES IN

RESPONSES BEHAVIORS THE TEXT

Reactive Deny responsibility, do less Ford Pinto fire

than required (the 1970s)

Defensive Admit responsibility, but fight Nike (the early 1990s),

it, do the least that is required Facebook (2011)

Accept responsibility, do all Ford Explorer roll-overs

Accommodative
that is required (the 2000s)

Proactive Anticipate responsibility, do BMW (the 1990s)

more than is required

Table 4.5
 Tutorial
Critical Questions:
1. Discuss guanxi, it is unique to China. How, Why? Why not? Is strong guanxi
reflect a lack of institutional framework in business inside China?

2. If you are CEO of foreign electricity utility looking for opportunities around the
world, would Pakistan government invites for FDI in power sector attract you
to consider investing in Pakistan?

Discuss: Opening case Cut salaries or cut jobs

Case 4.3 Institution based motivation behind EMNEs