This Document Contains Chapters 1 to 2 CHAPTER 1 MULTINATIONAL MANAGEMENT IN A CHANGING WORLD Learning Objectives • Define multinational management • Understand the characteristics of a multinational company • Understand the nature of the global economy and the key forces that drive globalization • Know the basic classification of the world’s economies • Identify the characteristics of the next generation of multinational managers Introduction • Businesses of all sizes increasingly see the entire world as a source of business opportunities • The world is becoming one connected economy • Any company from any country can become a competitor • The internet crosses national boundaries • A company’s success in their home market doesn’t always equate to long-term profitability • There are significant opportunities for most companies despite challenges and threats such as terrorism, wars, and recessions. • Managers of the next century will need to be multinational in outlook and strategies • Students of business should have at least a basic background in multinational management • Multinational management – the formulation of strategies and the design of management systems that successfully take advantage of international opportunities and that respond to international threats Introduction – Textbook Components • This book introduces students to the latest information on how managers throughout the world respond to the challenges of globalization • Chapter Features • Preview Case in Point – shows examples of how multinational companies deal with a key issue discussed in the chapter • Cases in Point – give information on how actual multinational companies handle other issues raised in the course of the chapter • Multinational Management Briefs – give further details and examples that extend the discussion • Multinational Management Challenges – describe problems and dilemmas that real multinational managers face and for which there are no easy answers • Comparative Management Briefs – provide examples of management issues that are influenced by a unique cultural or social institutional setting • Focus on Emerging Markets – reflects the sustained importance of emerging markets in world trade The Nature of the Multinational Company • Multinational company (MNC) is broadly defined as any company that engages in business functions beyond its domestic borders • Most multinational companies are also multinational corporations; that is, publicly owned through stocks • What kinds of activities might make a company multinational? • The most apparent activity is international sales • Crossing national borders opens up more international options than simply selling internationally Exhibit 1.1 Largest Companies in the World (Lists the top 20 multinational corporations ranked by sales revenue) Exhibit 1.2 Locations of Global 500 Companies (Lists selected countries with most Fortune Global 500 companies) The Globalizing Economy: A Changing (but Not Always Stable) Environment for Business • Globalization – the worldwide trend of cross-economic integration that allows businesses to expand beyond their domestic boundaries. • Trade barriers are falling • World trade among countries in goods and services has grown faster than domestic productions • Money is flowing more freely across national borders • Downsides of Globalization • Not a uniform evolutionary process, and not all economies benefiting or participating equally • Terrorism, wars, and a worldwide economic stagnation limit or reverse progress • Worrisome effects such as scarcity of natural resources, environmental pollution, negative social impacts, and increased interdependence of the world’s economies • Widening of gap between rich and poor countries • The Benefits of Globalization • Lower prices in many countries as multinationals become more efficient • Benefiting many emerging markets such as India and China as these countries enjoy greater availability of jobs and better access to technology • The major reason why many new companies from Mexico, Brazil, China, India, and South Korea are the new dominant global competitors • Several key trends driving globalization of the world economy and driving businesses to become more multinational to survive and prosper • Falling borders • Growing cross-border trade and investment • Rise of global products and global customers • Growing use of Internet and sophisticated information technology • Privatization of formerly government-owned companies • New competitors emerging in the world market • Rise of global standards in quality and production Countries of the World: The Arrived and the Coming, and the Struggling Exhibit 1.3 Selected Economies of the World (Shows some divisions of the world economies based roughly on classifications used by the United Nations and The Economist) • Developed countries – countries with mature economies, high GDPs, and high levels of trade and investment • Developing countries – countries with economies that have grown extensively in the past two decades (i.e. Hong Kong, Singapore, and Taiwan) • Transition economies – countries in the process of changing from government-controlled economic systems to capitalistic (i.e., Central & Eastern Europe – Czech Republic, Hungary, Poland, and Russia) • Emerging markets – countries that are currently between developed and developing countries and are rapidly growing (i.e. India, China, Brazil, and Russia) • The term emerging markets, coined by the World Bank around 25 years ago, represents those markets that present tremendous opportunities for all multinationals • Less developed countries (LDCs) – the poorest nations, often plagued with unstable political regimes, high unemployment, and low worker skills Exhibit 1.4 The Globalizing Economy (Illustrates the driving forces of the new world economy) Disintegrating Borders: The World Trade Organization and Free Trade Areas • General Agreement on Tariffs and Trade (GATT) – tariff negotiations among several nations that reduced the average worldwide tariff on manufactured goods • Beginning in 1947, negotiations began which ultimately reduced average tariffs on manufactured goods from 45% to less than 7% • World Trade Organization (WTO) – a formal structure for continued negotiations to reduce trade barriers and a mechanism for settling trade disputes • Continued negotiations in Uruguay from 1986 – 1993 established the WTO • There are over 150 nations now in the WTO, including 29 of the UN-classified least developed countries. Thirty more countries, including Russia, seek WTO membership • In March 1997, trade ministers from countries representing 92% of world trade in IT products agreed to end tariffs on trade in software, computer chips, telecommunications equipment, and computers • By 2005, this $500 billion a year trade should be mostly tariff free • With tariff eliminated, high-tech exports to Europe from Asia and the U.S. should double • Developing countries will also benefit from reduced prices on products such as phones, faxes, and computers that are produced in tariff-free locations • Is free trade working? • The WTO thinks so – data shows that world trade has grown at more than four times the world’s gross domestic product • Critics argue that the WTO favors more developed nations because poorer nations have more difficulty competing in an unregulated environment • Environmentalists argue that commercial interests have priority over environment, health, and safety • Labor unions warn of migration of jobs to lower-wage countries • Regional trade agreements – agreements among nations in a particular region to reduce tariffs and develop similar technical and economic standards (also called free trade areas) • Such agreements have usually led to more trade among the member nations but are criticized for harming poorer nations who are left out of agreements • The three largest groups – EU, NAFTA, and APEC – account for nearly half of the world’s trade • European Union (EU) – includes 27 members, namely Austria, Belgium, Britain, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, and Sweden. Croatia becomes the 28th member in July of 2013. o Since 1992, the EU countries allow goods and services to move across borders without customs duties and quotas o EU adopted a unified currency called the Euro • North American Free Trade Agreement (NAFTA) – a multilateral treaty that links the United States, Canada, and Mexico in an economic bloc that allows freer exchange of goods and services o The Free Trade Area of Americas (FTAA) will expand NAFTA to include most of the other Caribbean, Central American, and South American nations • Asia-Pacific-Economic Cooperation (APEC) – a confederation of 21 nations with less specific agreements on trade facilitation in the Pacific region. However, the ultimate goal calls for total free trade in the Pacific Region by 2020. Exhibit 1.5 Regional Trade Agreements Around the World (Shows all the major regional trade agreements and their member countries) Sell Anywhere, Locate Anywhere: Trade and Foreign Investment are Growing but Setbacks Are Part of the Challenge • World trade among countries (imports and exports) has grown at an average rate of 6.5% per year between 1990 and 2000, but slowed to 4% by 2004, and grew again to 6 percent in 2005. The forecast for 2013 was 4.5 percent. Exhibit 1.6 Change in Exports and Imports (Developed and Developing Economies) (Shows the changes in exports and imports in developed and developing countries based on data reported by the WTO) • TRIAD – the world’s dominant trading partners: the European Union, the United States, and Japan. • Foreign Direct Investment (FDI) – multinational firm’s ownership, in part or in whole, of an operation in another country • FDI, or cross-border ownership, occurs because multinational companies build global networks that link R&D, supply, production, and sales units around the globe • FDI soared between 1996 and 2000 but has been declining, in part due to the declining rate of mergers and acquisitions • Despite these declines, the importance of emerging markets is reflected in the growth of FDI in these economies. • Developing countries provide great opportunities, but pose significant risk • Two types of risk • Political risk – anything a government might do (or not do) that might adversely affect a company • Economic risk – all factors of a nation’s economic climate that may affect a foreign investor The Internet and Information Technology Are Making It All Easier • Companies and individuals can shop and sell anywhere because anyone in the world can access any Web site. • Electronic communication vehicles allow communication around the world, and information technology expands the global reach of an organization • Organizations are becoming virtual – linked by networks of computers • Information technology is also spurring a borderless financial market • Information technologies make available many new tools that facilitate business operations The Rise of Global Products and Global Customers • Needs of customers for many products and services are growing more similar • Global customers search the world for their supplies paying attention to price and quality without regard for national boundaries New Competitors are Emerging • The free-market reforms in emerging countries are creating a potential group of new competitors in the world market • Global trade has two important effects in developing new competitors • First, when the large multinationals use developing countries as low-wage platforms for high-tech assembly, they facilitate the transfer of technology • Second, aggressive multinational companies from emerging-market countries are also expanding beyond their own borders The Rise of Global Standards • Increasingly, especially in technical industries, global product standards are common • Why? Cheaper to produce fewer product versions, gains in product design efficiencies • The company that can establish its standard as dominant will have a tremendous strategic advantage • Consistency in quality has also become a requirement to do business in many countries • ISO 9001:2000 – the current name for the technical and quality standards of the International Organization for Standardization (ISO) in Geneva, Switzerland • ISO 14000 – the current name for the environmental protection standards of the International Organization for Standardization • In 1992, ISO compliance became part of product-safety laws in many European countries Corporate Social Responsibility and Business Ethics • Multinationals are under increased scrutiny by both the media and the public to be socially responsible. • Companies that do not pay attention to issues such as climate change, environmental degradation and pollution, sweatshop conditions, and bribery can suffer significant loss in terms of both reputation and finance. • Ethics rankings, such as the annual survey of the world’s most ethical corporations as produced by Geneva-based Covalence, are important to multinationals Exhibit 1.7 Ethisphere’s Most Ethical Companies (Shows the list of the top most ethical companies s determined by the Ethisphere Institute) The Next Generation of Multinational Managers • The next generation of successful multinational managers must have the following characteristics: • Global mindset – mindset that requires managers to think globally, but act locally • Emotional intelligence – the ability to manage one’s emotions prepares the manager to better adjust to and deal with new cultures and people • A long-range perspective – successful companies must be persistent if they are to overcome the complexities of dealing with the international environment • The talent to motivate all employees to achieve excellence – always a hallmark of leadership, they will also need to develop motivational strategies that transcend cultures • Accomplished negotiating skills – leaders in the global economy will spend considerable time negotiating cross-culturally • The willingness to seek overseas assignments – they will demonstrate management skills and success in more than one cultural environment • An understanding of national cultures – multinational managers will often need to learn two or more additional languages as well as the nuances of local cultural differences Multinational Management: A Strategic Approach • Why should you study multinational management? Foreign competition and doing business in foreign markets are daily facts of life for today’s managers. • Multinational managers must take a strategic approach to multinational management, namely how they formulate and implement these strategies • Strategy – the maneuvers or activities that managers use to sustain and increase organizational performance • Strategy formulation – process by which managers select the strategies to be used by their company • Strategy implementation – all the activities that managers and an organization must perform to achieve strategic objectives • Strategies must include maneuvers that consider multiple countries and cultures, as well as opportunities and competition located anywhere in the world • Several trends will shape the future business environment • Blurring of industry boundaries – information and other communications technologies make industry boundaries less clear, and harder to identify and understand competitors • Flexibility matters more than size – increased outsourcing, alliances, and partnering allow conversion of fixed costs to variable costs, making scale less useful • Finding your niche – companies are finding they can do well by finding and satisfying the needs in a niche, as opposed to being the leader in their respective industries • Hypercompetition – the new environment is characterized by intense competition coming from companies located in all parts of the world • Emphasis on innovation and the learning organization – multinationals will need to develop the appropriate mechanisms and systems to integrate the local knowledge to produce value for the company • A fundamental assumption of this book is that successful multinational management requires managers to understand their potential competitors and collaborators • This text devotes several chapters to comparative management – the comparison of management practices used by people from different nations Summary and Conclusions • This chapter covered the following items: • Key background information that supports the study of multinational management • Definitions of multinational management and the multinational company • Forces that drive globalization • Key characteristics of successful multinational managers • Global mindset is perhaps the most encompassing characteristic of successful multinational managers. • After reading this text, you should have the foundation for understanding the latest challenges and practices of multinational management. Chapter 1 Case Notes Foreign Direct Investment in the Middle East: Riyadh and Dubai Synopsis This case deals with analyzing the key drivers of foreign direct investment (FDI) of U.S, Japanese, and European multinational financial services and other service providers investing in the Middle East. In this case, the focus is on investing in Riyadh, Saudi Arabia, and Dubai, United Arab Emirates. A sample of the foreign companies is interviewed to determine the key factors in their decision process, why they selected the form of operation they did, and what their business model is. The case is in three sections: the first shows how laws, requirements, and regulations have changed and become more receptive to foreign investment in recent years – this is done by comparing several business environmental characteristic indices and their change over time. The second section examines the exchange arrangements and framework for financial and capital transactions in the countries. The third section examines the experiences of several multinational companies in the financial services sector that have invested in the region. Case Purpose and Objectives 1. This case describes the challenges of foreign direct investment in a volatile area of the world. 2. This case focuses on a particular industry – financial services – and other service sector businesses. 3. This case demonstrates the complexity of the decision-making process in questions regarding entry into a foreign environment, and the primary, driving reasons for a decision to invest. 4. This case illustrates a good example of the impact on the decision-making process of local governmental regulations, especially those limiting ownership control. Case Discussion Questions 1. The global financial crisis of 2007-2009 caused several changes to be made in macroeconomic policy management in Saudi Arabia and the UAE in order to reduce the impact of the global crisis on the global economy. Compare and contrast the approaches to such regulation of the UAE and Saudi Arabia, the reasons for such differences, and the results of each on foreign direct investment. The global financial crisis of 2007-2009 had a significant impact on economies worldwide, including those in the Middle East, prompting changes in macroeconomic policy management in Saudi Arabia and the UAE. Both countries implemented reforms to mitigate the effects of the crisis and stabilize their economies, although their approaches differed due to varying economic structures and goals. Saudi Arabia's Approach: 1. Centralized Government Control: Saudi Arabia's economy is heavily reliant on oil, and during the crisis, the government intervened directly by using its large reserves to stabilize the banking sector and stimulate the economy. The Saudi Arabian Monetary Authority (SAMA) injected liquidity into banks, ensuring the stability of financial institutions. 2. Regulatory Reforms: To attract more foreign direct investment (FDI), Saudi Arabia took steps to modernize its financial and legal systems, although foreign ownership in many sectors remained limited. Saudi authorities continued to limit foreign ownership of companies, but reforms were gradually introduced to allow for greater participation, especially in the financial sector. 3. Investment in Infrastructure: Saudi Arabia also initiated large-scale infrastructure projects to diversify the economy and reduce its dependence on oil. This included initiatives to modernize the financial services industry, which contributed to making the country more attractive to foreign investors over time. 4. FDI Impact: Despite these efforts, Saudi Arabia’s heavy reliance on oil revenues, combined with a more conservative approach to ownership regulations, meant that FDI growth was slower in the immediate aftermath of the crisis. The restrictions on foreign ownership posed barriers to potential investors, particularly in the financial services industry. UAE's Approach: 1. More Open and Liberalized Market: In contrast to Saudi Arabia, the UAE—particularly Dubai—had already positioned itself as a global financial hub with more liberal foreign investment laws prior to the crisis. Dubai had less dependence on oil revenues and more emphasis on sectors like tourism, real estate, and financial services. The government implemented policies aimed at supporting these sectors and continued to encourage foreign investment during and after the crisis. 2. Government Interventions: The UAE Central Bank provided liquidity support to its banking sector, similar to Saudi Arabia, but also undertook measures such as debt restructuring (especially for large government-related entities in Dubai) to safeguard the economy. The emirate of Abu Dhabi, rich in oil reserves, also provided financial support to Dubai during its debt crisis in 2009. 3. Free Zones: One of the UAE’s key strategies was its use of economic free zones, which allowed for 100% foreign ownership and tax exemptions, providing an attractive environment for foreign investors, particularly in financial services. The Dubai International Financial Centre (DIFC) became a magnet for multinational companies seeking a foothold in the Middle East. 4. FDI Impact: The UAE, especially Dubai, recovered relatively quickly and saw an increase in FDI, particularly in the financial services and other service sectors. The country's open policies and infrastructure continued to make it a preferred destination for international companies despite the global financial turbulence. Comparison and Contrast: • Regulatory Flexibility: The UAE's more flexible and open market policies, particularly the creation of free zones, made it easier for foreign companies to invest and operate. Saudi Arabia's more conservative approach, especially with restrictions on foreign ownership, meant that its FDI growth was slower compared to the UAE. • Diversification and Economic Structure: The UAE's diversified economy, with significant investments in real estate, tourism, and finance, made it more resilient to the crisis than Saudi Arabia, which is more dependent on oil. Saudi Arabia’s reliance on oil made its economy more vulnerable during times of global economic uncertainty. • Government Intervention: Both countries provided liquidity to their banking sectors to ensure financial stability, but the UAE's proactive approach in managing debt issues and creating favorable investment environments allowed it to attract more FDI post-crisis. Conclusion: The UAE’s liberal investment policies and diversified economy allowed it to attract more foreign direct investment in the aftermath of the global financial crisis, particularly in financial services. Saudi Arabia’s more conservative regulatory framework, while stabilizing its economy, posed more challenges for foreign investors, though the country began to introduce reforms to improve the investment climate over time. 2. One of the challenges of setting up a business in a foreign country is how much to adapt your product or service and company policies to local conditions. Make a case that companies must adapt to local tastes, traditions, and laws in order to survive. Adapting to Local Tastes, Traditions, and Laws in Foreign Markets When setting up a business in a foreign country, adapting to local tastes, traditions, and laws is essential for survival and long-term success. Why adaptation is necessary: • Cultural Relevance: Businesses must align with local preferences and cultural practices. For example, in Riyadh and Dubai, sensitivity to cultural values (like Islamic traditions and local customs) plays a key role in gaining customer trust and loyalty. Companies that ignore cultural expectations risk alienating their target audience. • Regulatory Compliance: Local laws, especially those governing ownership and operational structures, may differ significantly from home-country laws. In the Middle East, particularly in Saudi Arabia and the UAE, restrictions on foreign ownership require firms to adapt their business models, such as partnering with local firms or modifying ownership stakes. • Market Differentiation: A product or service tailored to the local market is more likely to gain traction. Offering services in the local language, following regional consumer trends, or addressing unique customer needs are crucial steps in ensuring that foreign firms are competitive. Case Examples: • In the case of financial services, companies investing in Saudi Arabia and the UAE must tailor their offerings, ensuring they comply with local Islamic banking principles (such as the prohibition of interest) while simultaneously adapting to the specific demands of the market. Risks of not adapting: • Failure to adapt may result in regulatory pushback, negative consumer perception, and even business closure. For example, a financial service provider that does not comply with local Sharia law could face legal and reputational consequences. 3. One strategy Yahoo could use to deal with the Chinese government is to allow its local joint venture partner, Beijing Founder Electronics, to deal with the Chinese government. What are the benefits and risks of doing so? Yahoo's Strategy with Local Partners in China Benefits of Allowing a Local Partner to Deal with the Chinese Government: • Local Expertise and Relationships: Local partners often have a better understanding of the political, regulatory, and business environment. Beijing Founder Electronics, being a Chinese company, may have closer ties to the government and a better understanding of how to navigate the local regulatory landscape. • Reduced Liability: By allowing the local partner to handle interactions with the government, Yahoo may reduce its direct exposure to regulatory scrutiny and local political risks. • Focus on Core Business: Yahoo can focus on its core operations (technology, content, and customer service) while the local partner manages complex governmental relationships. Risks of Delegating to a Local Partner: • Loss of Control: Allowing the local partner to deal with the government means Yahoo has less control over how the relationship is managed, which could lead to decisions that do not align with Yahoo’s ethical standards or long-term goals. • Reputational Risk: If the local partner makes decisions or compromises with the government that are seen as unethical or violating human rights (e.g., internet censorship), Yahoo could face backlash from international stakeholders and civil rights organizations. 4. A multinational company deals with many constituents. How should Yahoo respond to the criticisms from Human Rights Watch? Yahoo’s Response to Human Rights Criticism Yahoo's Approach to Criticism from Human Rights Watch: • Acknowledgment and Transparency: Yahoo should first acknowledge the concerns raised by Human Rights Watch. Transparency is key, and the company should clearly explain its rationale for its business operations in China, including the complexities of operating in such environments. • Balancing Business and Ethics: Yahoo should emphasize its efforts to comply with local laws while upholding international standards of corporate responsibility and human rights. It should explain the balancing act of working within local legal frameworks while striving to maintain ethical standards. • Collaboration with External Stakeholders: Yahoo can work with non-governmental organizations (NGOs) and international human rights organizations to develop policies that minimize the negative impact of its operations on freedom of expression and privacy rights. This could involve working on public advocacy, supporting internet freedom initiatives, or helping develop technologies that protect user privacy. • Creating Global Standards: Yahoo could also advocate for global business practices and international agreements on human rights standards to reduce the pressure companies face when entering markets with restrictive government regulations. These responses provide a framework for understanding foreign direct investment challenges in the Middle East and the ethical and strategic considerations companies face when entering new markets. Analysis 1. The global financial crisis of 2007-2009 caused several changes to be made in macroeconomic policy management in Saudi Arabia and the UAE in order to reduce the impact of the global crisis on the local economy. Compare and contrast the approaches to such regulation of the UAE and Saudi Arabia, the reasons for such those policy choices, and the impact of each on foreign direct investment. In response to the global financial crisis, both the United Arab Emirates and Saudi Arabia stimulated their economies, and both used monetary and fiscal policy. Saudi Arabia tried to attract FDI for the purpose of natural gas investment and for investment in the petrochemical industry. They chose these actions to try and reduce their dependence on oil exports, in an attempt to stimulate domestic growth of demand. They took these steps for two reasons: first, because their economy was less integrated with the global financial markets than the UAE, and secondly, because they sought a local effect, an improvement in domestic demand. In the UAE, when Dubai’s real estate market crashed in 2009, capital investment fled from the country. UAE quickly made several successful fiscal moves, including a $10 billion dollar rescue from Abu Dhabi, which stabilized the economic situation. Between 2007 and 2010, the real GDP growth was slightly higher in the UAE than in Saudi Arabia. Today, the UAE ranks higher on the Barra multi-factor risk scale than Saudi Arabia. In addition, the significant drop in rents for offices and housing which took place in 2008, make Dubai a more attractive location. 2. Compare the controls on direct investment in Saudi Arabia and the United Arab Emirates. Which encourages more foreign direct investment? In Saudi Arabia: • Approved foreign investments in KSA enjoy the same privileges as domestic capital. • The foreign investment law allows foreign investors to make direct investment in most of the country’s economic sectors with or without local participation. • KSA imposes a tax rate of 20% on most foreign company profits, except that: o Profits on oil and hydrocarbons are 85% o Taxes on natural gas are 30% • There are, however, a list of sectors that are off limits to foreign investors, including drilling for oil, military equipment, explosives, some printing activities, some telecommunications, services, some transportation, real estate investment in Mecca and Medina, and others • Licenses are granted to foreign insurance and reinsurance firms, but Foreign insurance companies are allowed to own only up to 49% of these local companies. • There are no controls on the liquidation of direct investment. In the United Arab Emirates: • At least 51% of the equity of companies other than branches of foreign companies must be held by nationals of the UAE. • GCC nationals are permitted to hold up to 75% of the equity of companies in the industrial, agricultural, fisheries and constructions sectors, and up to 1005 of the equity of companies in the hotel industry. • GCC nationals are also permitted to engage in wholesale and retail trade activities, but not in the form of companies, or they are subject to company law. • In free zones, foreign ownership of up to 100% is permitted. • There are no controls on the liquidation of direct investment. • There are additional provisions specific to the financial sector. Neither system shows a preference for foreign investment in all cases. A decision whether to invest in Saudi Arabia or the UAE will depend first on the industry involved, and second on whether the investor is willing to share ownership. Each country has similar laws regarding the ownership of real estate, though those in Saudi Arabia may be slightly more generous to foreigners. 3. In the case, several firms were surveyed to determine how they determined their choice of foreign country in which to invest. What was the single most important factor to them, and why? The single most important factor for the choice of location of foreign direct investment was market potential. Since the primary reason for investment was market-seeking, this was the primary factor, even in locations considered somewhat unstable or unfriendly. One way to minimize the risk was to locate in the same region as the primary, but risky target, and develop business from relative safety. After a time, some firms expanded their operations into the risky market. These findings are consistent with the Uppsala model of the company internationalization process which states that companies commit increasing amounts of resources to a market as their knowledge of the foreign market increases with experience. Lessons • Illustrates some of the opportunities as well as challenges for companies seeking to directly invest in foreign countries • Provides some understanding of what a multinational is and the inexorable pressure to continuously expand in new countries • Demonstrates some of the difficulties associated with operating in different cultural and political environments CHAPTER 2 CULTURE AND MULTINATIONAL MANAGEMENT Learning Objectives • Define and understand the basic components of culture • Identify instances of cultural stereotyping and ethnocentrism • Understand how various levels of culture influence multinational operations • Apply Hofstede, GLOBE and 7d models to diagnose and understand the impact of cultural differences on management processes • Appreciate the complex differences among cultures and use these differences for building better organizations • Recognize the complexity of understanding new cultures and the dangers of stereotyping and cultural paradoxes Introduction • This chapter considers two basic questions: • What is culture? • How does culture affect management and organizations? What is Culture? • Culture – the pervasive and shared beliefs, norms, and values that guide everyday life of a group • Cultural norms – prescribed and proscribed behaviors, telling us what we can do and what we cannot do • Cultural values – values that tell us such things as what is good, what is beautiful, what is holy, and what are legitimate goals in life • Cultural beliefs – our understandings about what is true • Cultural symbols – these may be physical, such as national flags or holy artifacts. In the workplace, office size and location can serve as cultural symbols • Cultural stories – these include such things as nursery rhymes and traditional legends • Cultural rituals – ceremonies such as baptism, graduation, the tricks played on a new worker, or the pledge to a sorority or fraternity • Pervasive – the idea that culture affects almost everything we do, everything we see, and everything we feel and believe • Shared cultural values, norms, and beliefs – the idea that people in different cultural groups have similar views of the world • To succeed cross-culturally, multinational managers must learn as much as they can about important cultural norms, values and beliefs of the societies in which they work Levels of Culture • Levels of culture – the levels of cultural influence including national, business, and occupational and organizational cultures Exhibit 2.1 Levels of Culture in Multinational Management (Show the levels of culture that affect multinational management) National Culture • National culture – the dominant culture within the political boundaries of the nation-state • Most business takes place within the political boundaries of the nation-state • Dominant culture influences the language of the business transactions, and the nature and types of laws that govern businesses. Business Culture • Business culture – the norms, values, and beliefs that pertain to all aspects of doing business in a culture • Each national culture produces its own business culture • Guides everyday business interactions and business etiquette Occupational Culture and Organizational Culture • Occupational cultures – distinct cultures of occupational groups such as physicians, lawyers, accountants, and craftspeople • The norms, values, beliefs, and expected ways of behaving for people in the same occupational group, regardless of the organizational employer • Occupational cultures are often stronger than national cultures, particularly for professional and technical occupations • Organizational culture – the norms, values, and beliefs concerning the organization that are shared by members of the organization • Discovered and created when members learn to cope with problems • Organizations seldom have only one organizational culture • Organizational culture often has as important an influence as national culture Cultural Differences and Basic Values: Three Diagnostic Models to Aid the Multinational Manager • Hofstede model of national culture – a cultural model mainly based on differences in values and beliefs regarding work goals. • Global Leadership an Organizational Behavior Effectiveness (GLOBE) project – recent large-scale project based on Hofstede’s model to determine nine cultural dimensions of 62 countries • 7d culture model – seven-dimension cultural model based on beliefs regarding how people relate to each other, how people manage time, and how people deal with nature Hofstede’s Model of National Culture • To describe national cultures, Hofstede uses five dimensions of basic cultural values: 1. Power distance: expectations regarding equality among people 2. Uncertainty avoidance: typical reactions to situations considered different and dangerous 3. Individualism: relationship between the individual and the group in society 4. Masculinity: expectations regarding gender roles 5. Long-term orientation: basic orientation toward time Hofstede’s Cultural Model Applied to Organizations and Management 1. Human resources management a. Management selection – how people are chosen for jobs b. Training – what the focus of job training is c. Evaluation and promotion – what counts to get ahead d. Remuneration – what accounts for differences in pay 2. Leadership styles – how leaders behave 3. Motivational assumptions – beliefs regarding how people respond to work 4. Decision making and organizational design – how managers structure their organizations and make decisions 5. Strategy – effects of culture on selecting and implementing strategies Power Distance • Power distance – expectations regarding equality among people. • Power distance focuses on: (1) the norms that tell superiors (bosses, leaders) how much they can determine the behavior of their subordinates (2) the values and beliefs that superiors and subordinates are fundamentally different kinds of people • High-power-distance countries have norms, values, and beliefs such as: • Inequality is fundamentally good • Everyone has a place; some are high, some are low • Most people should be dependent on a leader • The powerful are entitled to privileges • The powerful should not hide their power • Characteristics of high-power distance countries • Strong concern with hierarchy • High respect for authority • Ideal managers come from high social class or elite university graduates • Large wage differences between management and workers • Theory X leadership style (authoritarian – people dislike work) • Centralized decision making in organizations Exhibit 2.2 Management Implications of Power Distance (Gives a summary of the managerial implications for power distance) Uncertainty Avoidance • Uncertainty avoidance – how people react to what is different and dangerous • High uncertainty avoidance countries have norms, values, and beliefs such as: • Conflict should be avoided • Deviant people and ideas should not be tolerated • Laws are very important and should be followed • Experts and authorities are usually correct • Consensus is important • Characteristics of high-uncertainty-avoidance cultures • Entry-level people are chosen for their potential fit with and loyalty to the organization • The belief that conflict and competition should be avoided • Task-directed leaders • Extensive rules and procedures • Conservative decision makers Exhibit 2.3 Management Implications of Uncertainty Avoidance (Summarizes the managerial implications of uncertainty avoidance) Individualism/Collectivism • Individualism – relationship between the individual and the group in society • Individualistic cultures view people as unique • People are valued in term of their own achievement, status, and other unique characteristics • Collectivism – set of cultural values that views people largely through the groups to which they belong • Social groups such as family, social class, organization, and team all take precedence over the individual • Countries high on individualism have norms, values, and beliefs such as: • People are responsible for themselves • Individual achievement is ideal • People need not be emotionally dependent on organizations or groups • Countries high on collectivism have norms, values, and beliefs such as: • One’s identity is based on group membership • Group decision making is best • Group protect individuals in exchange for their loyalty Exhibit 2.4 Management Implications of Individualism (Summarizes the managerial implications of high individualism versus collectivist (low individualism) norms, values, and beliefs) Masculinity • Masculinity – tendency of a society to emphasize traditional gender roles • Higher masculinity means the business culture of a society takes on more traditional masculine values, such as an emphasis on advancement and earnings • High masculinity countries have norms, values, and beliefs such as: • Gender roles should be clearly distinguished • Men are assertive and dominant • Machismo or exaggerated maleness in men is good • People – and especially men – should be decisive • Work takes priority over other duties, such as family • Advancement, success, and money are important • Characteristics of high masculinity culture • Jobs are clearly defined by gender • Work is very central and important to people • Managers act decisively Exhibit 2.5 Management Implications of Masculinity (Shows the major effects of high masculinity on work and organizations) Long-Term Orientation • Long-term (Confucian) orientation – an orientation toward time that values patience • Managers in cultures high on the long-term orientation are selected based more on the fit of their personal and educational characteristics to the company, than on skill • Employees value security and leaders work on developing social obligations • Eastern cultures, which rank highest on long-term orientation, value synthesis in organizational decisions • Countries with more long-term orientations do not ignore financial objectives, but they prioritize growth and long-term paybacks • The long time horizons allow managers to experiment and seek success by developing their “game plans” as they go along • Short-term orientation • Must focus immediately on usable skills, and do not assume that employees will remain with the company for an extended time • Leaders focus on and pay and rapid promotion • Western cultures, which tend to have short-term orientations, value logical analysis in their approach to organizational decisions • Manage purposefully to respond to immediate pressures from the environment • Managers often use quick layoffs of “excess” employees to adjust to shrinking demand for products Exhibit 2.6 Management Implications of Long-Term Orientation (Summarizes the managerial implications of long-term (Confucian) orientation) Exhibit 2.7 Percentile Ranks for Hofstede’s Cultural Dimensions for Selected Countries by Cultural Cluster (Displays the percentile ranks of selected countries on five of Hofstede’s dimensions of natural culture) • Country clusters – groups of countries with similar cultural patterns • Although cultures differ within these broad classifications, such summaries are useful for condensing cultural information GLOBE National Culture Frame Work • The GLOBE project involves 170 researchers who collected data on 17,000 managers from 62 countries around the world • GLOBE researchers developed nine dimensions - only two of these dimensions are independent of the Hofstede model • Five dimensions similar to the Hofstede model are: 1. Assertiveness orientation and gender egalitarianism (similar to masculinity-femininity) 2. Institutional and family collectivism (similar to individualism-collectivism) 3. Future orientation (similar to long-term orientation) 4. Power distance 5. Uncertainty avoidance • Two dimensions unique to the GLOBE project: • Performance orientation • Humane orientation • Performance orientation – the degree to which the society encourages societal members to innovate, to improve their performance, and to strive for excellence. • High performance orientation favors training and development, whereas lower performance orientation views family and background as more important Exhibit 2.8 Management Implications of Performance Orientation (Summarizes some of the management implications of performance orientation) • Humane orientation – and indication of the extent to which individuals are expected to be fair, altruistic, caring, and generous • In high human orientation, the need for belongingness and affiliation is emphasized more then material possessions, self-fulfillment, and pleasure • Less humane oriented societies are more likely to value self-interest and self-gratification Exhibit 2.9 Management Implications of Humane Orientation (Lists some of the management implications of humane orientation) Exhibit 2.10 The Globe Model of Culture (Shows the various clusters and the corresponding cultural scores) 7d Cultural Dimensions Model • Understands cultures by examining how humans deal with basic problems of survival • Five of the 7 dimensions deal with the challenges of how people relate to each other • Universalism vs. particularism – choice of dealing with other people based on rules or based on personal relationships • Collectivism vs. individualism – the focus on group membership vs. individual characteristics • Neutral vs. affective – the range of feelings outwardly expressed in the society • Diffuse vs. specific – the types of involvement people have with each other, ranging from all aspects of life to specific components • Achievement vs. ascription – the assignment of status in a society based on performance vs. assignment based on heritage • Two final dimensions deal with how a culture manages time and how it deals with nature • Past, present, future, or a mixture • “Control of” vs. “accommodation with” nature Exhibit 2.11 The 7d Model of Culture (Gives a summary of the 7d model and the issues addressed by each dimension) Universalism versus Particularism • Universalism – dealing with other people based on rules (i.e. law, religion, cultural principles, etc.) • “Do unto others as you would have them do unto you” • Precise guidelines exist in all situations • Particularism – dealing with other people based on personal relationships • Rules represent a rough guide to life • Exceptions are made based on the individual (i.e. family, friends) and the changing circumstances • No culture is purely universalistic or particularistic, but tendency to lean in one direction or the other influences business practices Exhibit 2.12 Universalism versus Particularism: Differences and Managerial Implications (Gives a brief description of universalism and particularism as cultural dimensions and shows the managerial implications for doing business in each) Individualism versus Collectivism • Considers the same distinctions as Hofstede’s dimensions • Country rankings do not match exactly to Hofstede’s – may be explained by the more recent data used by Trompenaars, which also captures more subtle aspects Exhibit 2.13 Individualism versus Collectivism: Differences and Managerial Implications (Gives a brief descriptions of the individualistic and collectivistic cultural dimensions and the managerial implications of doing business in each) Neutral versus Affective • Neutral versus affective – the acceptability of expressing emotions • In more neutral cultures, people expect that interactions are objective and detached – the focus is more on the task • In more affective orientations, all forms of emotions are appropriate in almost every situation Exhibit 2.14 Neutral versus Affective: Differences and Managerial Implications (Gives a brief description of neutral vs. affective cultural dimensions and the managerial implications of doing business within each) Specific versus Diffuse • Specific versus diffuse – the extent to which all aspects of an individual’s life are involved in his or her work relationships • In specific oriented cultures, business is segregated from other parts of life • In diffuse oriented cultures, business relationships are more encompassing and involving Exhibit 2.15 Specific versus Diffuse: Differences and Managerial Implications (Gives a brief description of the specific vs. diffuse cultural dimensions and the managerial implications of doing business in each) Achievement versus Ascription • Achievement versus ascription – how society grants or gives status • In achievement-oriented societies, people earn status based on their performance and accomplishments • In ascription-oriented societies, one’s inherent characteristics or association define status Exhibit 2.16 Achievement versus Ascription: Differences and Managerial Implications (Gives a brief description of the achievement vs. ascription cultural dimensions and the managerial implications of doing business in each) Time Orientation • Time horizon – the way cultures deal with the past, present, future • In future-oriented societies, organizational change is considered necessary and beneficial • In past-oriented societies, people often assume that life follow a preordained course based on the traditions or will of God Exhibit 2.17 Time Horizon: Differences and Managerial Implications (Summarizes the cultural characteristics of different time horizons and gives managerial implications of differing time horizons) Internal versus External Control • Internal versus external control – beliefs regarding whether one controls one’s own fate • Best reflected in how people interact with their natural environment • Does nature dominate us or do we dominate nature? • In cultures where it is believed that nature dominates people, managers are likely to be fatalistic • In contrast, where cultural values support the notion that people dominate nature, managers tend to be proactive Exhibit 2.18 Internal versus External Control: Differences and Managerial Implications (Summarizes the internal vs. external cultural dimensions and their managerial implications) Exhibit 2.19 Percentile Ranks for the 7d Model Cultural Dimensions in Selected Countries (Gives percentile rankings for the 7 dimensions in selected countries) Exhibit 2.20 Proverbs: Windows into National Cultures (Shows that proverbs provide less formal insights into national cultures) Caveats and Cautions • Cultural paradoxes – when individual situations seem to contradict cultural prescriptions • Stereotyping – when one assumes that all people within a culture behave, believe, feel, and act the same • Ethnocentrism – when people from one culture believe that theirs are the only correct norms, values, and beliefs • Cultural relativism - a philosophical position arguing that all cultures, no matter how different, are correct and moral for people of those cultures • Cultural intelligence – the ability to interact effectively in multiple cultures Summary and Conclusions • After completing this chapter, you should know that culture has a variety of levels that affect multinational managers and organizations • Models of cultural values proposed by the GLOBE researchers, Trompenaars and Hofstede provide basic concepts for analyzing cultural differences • Most successful multinational manager will realize that understanding a different culture is a never-ending learning process CHAPTER 2 Case Notes Jextra Neighbourhood Stores in Malaysia Synopsis Tom Chong is the country manager in Malaysia for Jextra Stores (Jextra), a multinational retailer with supermarkets throughout Asia. The company is based in Hong Kong. Jextra operates ten Neighborhood Market supermarkets in Malaysia. Chong has two issues he must resolve. One involves a recent conversation with the mayor of a town in which Jextra would like to build a new store. The mayor suggested that Jextra's application for rezoning would be more likely to be approved if Jextra contributed to building a new primary school. The mayor also wants Jextra to help pay for a flyover at the road intersection for the proposed site. Chong's other issue involves one of his category managers. The manager may be accepting money and gifts from suppliers. Although Chong has no proof that the manager is acting inappropriately, there are many rumors floating around Jextra's office. Case Purpose and Objectives 1. This case allows students to put themselves in the position of a young, high-potential manager with his first country manager assignment. 2. The case provides two realistic ethical dilemmas which may appear on the surface to be straightforward because the Jextra Business Conduct Code is clear, prohibiting bribery, conflicts of interest and related party transactions. 3. This case demonstrates how challenging ethical dilemmas can be depending on the country involved, and also because not all pertinent information is known. 4. The case also shows the pressures of performance pitted against pressures to make ethical decisions, a classic dilemma in management. Possible Discussion Questions 1. What cross-cultural differences may be at play in this situation? Cross-Cultural Differences at Play The situation Chong faces involves navigating potential cross-cultural differences between Jextra's corporate culture, based in Hong Kong, and Malaysian business practices: • Business Practices and Expectations: In Malaysia, like in some other countries in Southeast Asia, informal agreements and the expectation of reciprocal favors are sometimes part of how business deals are made. The mayor's request for contributions (for the primary school and flyover) may be seen as a way to enhance local infrastructure, but it could also raise concerns about transparency and fairness, as these practices may be viewed as part of a "you scratch my back, I'll scratch yours" culture. • Gift-Giving Norms: In Asian cultures, giving and receiving gifts in a business context is more common than in Western cultures. This could explain the rumors about the category manager receiving gifts. What might be considered ethical or normal gift-giving in one context may appear suspicious or inappropriate in another. • Indirect Communication: Asian cultures, including Malaysia’s, often value indirect communication to avoid confrontation. The mayor’s request may not be framed as a direct demand for a bribe, but rather as a suggestion or an implied expectation. 2. Does Chong understand exactly what the Mayor has asked of him? Is he correct to assume that this may be a request for a bribe? Chong may be correct in interpreting the mayor’s request as a potential bribe, but the situation is unclear: • Uncertainty and Interpretation: The mayor’s request for contributions to a school and flyover could be seen as an informal "facilitation" payment in exchange for rezoning approval, which borders on bribery. • Clarification Needed: It is possible that Chong is misinterpreting the mayor’s request. Chong should avoid jumping to conclusions about corruption without first seeking clarity. The mayor could be making a legitimate request for corporate social responsibility (CSR) investment, which would align with community development goals. Action: Chong should clarify with the mayor what exactly he is asking for and, importantly, determine if this is common or legal in Malaysia’s regulatory environment. 3. What are Chong’s options as to how to proceed in the case? Should he ask the Mayor more directly what he meant? Should he confer with his supervisor for guidance? Should he try to determine whether such a contribution would be legal under Malaysian law? Chong has several options: • Clarify with the Mayor: He could politely ask the mayor to explain the request in more detail to understand if it’s a legal contribution or an under-the-table deal. This allows Chong to make an informed decision while maintaining a good relationship with the local government. • Seek Legal Advice: He should consult legal advisors or experts on Malaysian law to determine if such contributions are legal or if they constitute bribery. This is critical because Jextra needs to avoid any activities that could tarnish its reputation. • Consult His Supervisor: Chong could approach his supervisor for advice on how to proceed. Large multinationals like Jextra often have policies for navigating ethical dilemmas, and Chong might need guidance to balance ethical behavior with the company’s business interests. 4. Regarding Chong’s suspicions regarding Alam, what should he do? Should he investigate in some way, and if so, how? Or should he, as the English expression goes, “let sleeping dogs lie?” Regarding his suspicions about Alam, Chong must act carefully and fairly: • Investigate or Let It Be? While there is no concrete evidence of wrongdoing, the rumors suggest possible unethical behavior. Ignoring the issue could lead to larger problems if Alam is indeed involved in corruption. Action Options: • Internal Investigation: Chong could initiate an internal investigation by discreetly examining Alam’s interactions with suppliers, reviewing contracts, and monitoring his financial behavior for unusual patterns. This could help determine whether there is any truth to the rumors. • Confrontation: Chong could have a private conversation with Alam to discuss the rumors, making it clear that Jextra expects transparency and adherence to the company’s code of conduct. This would give Alam an opportunity to respond directly. However, Chong should avoid making accusations without proof, as this could harm morale and lead to unintended consequences. 5. What guidance does Jextra’s Business Code of Conduct provide for each of Chong’s ethical dilemmas? Jextra’s Business Code of Conduct likely provides guidance on two key areas: • Bribery and Corruption: It would likely state that employees are prohibited from offering or accepting bribes, directly or indirectly, in any form. If the mayor’s request constitutes a bribe, the code should clearly prevent Chong from complying. • Gift-Giving: The code should outline the company’s policy on accepting gifts, particularly from suppliers. If accepting money or gifts from suppliers violates the code, then Alam’s actions should be investigated. Chong should refer to Jextra’s code to ensure that his decisions regarding the mayor’s request and Alam’s behavior align with the company’s ethical standards. 6. What are the pressures Chong faces to perform well, and what are the pressures he faces to perform ethically? Chong faces two conflicting sets of pressures: • Performance Pressures: • Business Expansion: Chong needs to get the store rezoning approved to expand Jextra’s presence in Malaysia, which may pressure him to comply with the mayor’s request, even if it seems unethical. • Financial Targets: As a country manager, Chong is likely under pressure to meet financial performance targets, which could push him to take risks that compromise ethical standards. • Ethical Pressures: • Reputation of Jextra: Chong must ensure that his decisions maintain Jextra’s reputation for integrity. Engaging in corrupt practices could damage the company’s global standing and harm its relationship with other markets. • Legal Risks: Bribery or other unethical behavior could expose Jextra to legal penalties or government scrutiny, both in Malaysia and internationally. Balancing Act: Chong must balance the need to grow Jextra’s business in Malaysia with the need to maintain ethical integrity and avoid engaging in illegal or corrupt practices. His decision should prioritize long-term sustainability and ethical business practices over short-term gains. Analysis 1. What cross- cultural differences may be at play in this situation? Cross-cultural management research assumes that countries differ based on culture. Although there are wide cultural differences between countries, significant differences exist even between those countries that share the same cultural values. It is possible that Malaysian culture treats this situation differently than does Hong Kong culture, where Chong is a native. One recent study found that there were significant cultural differences between Hong Kong, Taiwanese and Chinese cultures. Malaysia scores high on Humane orientation, which means that people are expected to be fair, altruistic, caring and generous. Using the 7d Model of culture, as to the Neutral vs. Affective dimension, Hong Kong scores 92, while Malaysia scores 25. On the Specific vs. Diffuse dimension, Hong Kong scores 87, while Malaysia scores 43. These are significant differences in the ways of thinking about and doing things, and they may have affected this exchange. 2. Does Chong understand exactly what the Mayor has asked of him? Is he correct to assume that this may be a request for a bribe? The exchange is subject to interpretation. The Mayor appealed to the value of culture when he said, “We have a unique community in Klang, and want to protect our cultural heritage.” Of course, the appeal may more easily be viewed as a veiled request for a bribe if one recalls the next statement he made: “We scrutinize all proposed real estate developments very carefully. With your store, perhaps we can help each other.” The phrase “perhaps we can help each other” is often used in such bribery requests. Chong wonders whether this is “normal practice” in Malaysia. Even if it is a request for a bribe, Chong does not understand clearly what the Mayor has asked of him, as Chong is not even certain if the contribution requested would one that would fund the new school in its entirety, or only contribute to it. As to whether this may be a request for a bribe, there is no way to be certain, but it seems so. 3. What are Chong’s options as to how to proceed in the case? Chong has many options, though it may not seem like it to him. On the one hand, he could pay the money requested for both the school and the flyover, and hope for the best. On the other hand, he could refuse to make any payments, and again, hope for the best. These are the options at the extremes, and neither seems particularly appealing. Between those two extremes, Chong may: • Confer with his supervisor for guidance; the Jextra Business Conduct Code expects that this is what Chong will do if he does not know how to proceed. • Consult with a Malaysian lawyer officially, to determine whether the requested payments would constitute bribes under Malaysian law. The problem is that the payments, even if legal under Malaysian law, might still violate Jextra’s Business Conduct Code. • Tell the mayor about the Jextra Social Fund, and promise to make a case to Jextra officials for a contribution from the social fund, hoping that this will satisfy his request. • Confer with other managers in his position at Jextra, to see whether they have experienced situations like this one. Chong may wish to take all of these steps, and gather as much information as he can before making a decision on how to proceed. Whatever he decides now will be with him for the remainder of his career – and his life. 4. Regarding Chong’s suspicions regarding Alam, what should he do? Should he investigate in some way, and if so, how? Or should he, as the English expression goes, “let sleeping dogs lie?” Consider both taking action and not taking action, and make a case for each. Chong is in a situation re Alam where does not have all of the information. His best chance to learn more before making a decision regarding whether or not to proceed with an investigation is to learn as much as he can through other channels, informally. He could, for example, congratulate Alam on his successes, and propose that he accompany Alam on his visits to his suppliers, in order to “thank them for their efforts, and to see if there is anything they need.” Such a proposal should raise little or no suspicion in Alam, and would give Chong the opportunity to assess the suppliers for himself in a non-adversarial setting. It would also give him the opportunity to assess Alam, particularly in the company of his suppliers. Chong may think of other ways to learn what he needs to know before proceeding. 5. Make a case for Chong going forward with a contribution to the school. Make a case for Chong refusing to contribute. Among the arguments for Chong’s going forward with a contribution to the school are: • Chong interprets Jextra’s Business Code to prohibit payments to individuals, but this payment would be to a primary school which would benefit the community, not individuals. • Chong learned from a Malaysian lawyer friend that Malaysian law was unclear in the area of business payments for social purposes made specifically for regulatory approval. • Also, although not widespread in Malaysia, the practice of businesses contributing to city projects is common in Klang and other areas around Kuala Lumpur. • Chong’s Malaysian lawyer friend said that some local lawyers would probably advise him to make the payments, but to keep the school and the flyover payments independent, which would blur the line as to whether the behavior was indeed illegal. • If the school payment speeded up the development process, it could be legal. Among the arguments against Chong’s contributing to the school are: • The payment to individuals prohibited by the Jextra Business Code may be a difference without a distinction. Payments of the kind contemplated may well be forbidden by the Jextra Business Code. • Local Malaysian lawyers likely would advise that if the payment was necessary solely as a prerequisite to obtaining the permit, it could be considered a bribe, and thus illegal under Malaysian law. The difficulty would be in proving the purpose of the payment, and if Jextra were charged with misconduct, even though not convicted, the damage would be done • The fact that local business practice may include such payments does not mean they are legal, ethical or correct. Such an excuse would not absolve the company or Chong from liability. • Also, the fact that Chong’s Malaysian lawyer friend told him to keep the payments independent so as to avoid suspicion is a red flag, indicating probable illegal conduct. • Several scandals involving alleged bribes and corporate contributions had contributed to recent “retirements” of various elected officials in Malaysia, which makes it make sense to be wary. Both state and federal politicians are using “clean government” as part of their political platforms. • Neither the loss of Chong’s reputation, nor Jextra’s, is reason enough to engage in the payments. 6. What are the pressures Chong faces to perform well, and what are the pressures he faces to perform ethically? The pressures Chong faces to perform well include: • Jextra wishes to expand in Malaysia, first at Klang. • Jextra also wants to enter the convenience store market in Malaysia. • The number of new stores opened is an important element in Chong’s overall valuation, and a factor in determining his future career prospects. • Failure to open new stores (including Klang) would be viewed negatively at corporate headquarters. • The number of new stores opened will also be a factor in determining his discretionary bonus. • If Chong is unable to get zoning to open the new store in Klang, one of his competitors might take that opportunity. The pressures Chong faces to perform ethically include: • This is the first time Chong has been responsible for real operational issues and profit and loss responsibilities. It seems he has not confronted such a situation before, but he is clearly troubled by it, and wants to make the right decision. • Jextra’s Business Conduct Code prohibits offering benefits to third parties to obtain or retain business; the Code contains several other prohibitions. • Several of the issues raised above should give Chong pause; the risk is far greater than the “reward” to be received if the payments are given. • Once either Chong or Jextra is charged with bribery, the damage would be irreversible. Lessons • Understanding that even countries with similar cultural values may nevertheless have significant cultural differences • Learning from the experience of a young, first-time Multinational manager • Understanding the need to address both business productivity and ethical conduct. • Learning whether to confront a subordinate suspected of unethical conduct Instructor Manual for Multinational Management: A Strategic Approach John B. Cullen, Praveen K. Parboteeah 9781285094946
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