The Institutional Context of Multinational Management Learning Objectives Alter roading this chapter you should be able to: ‘Understand the national context and how it affects the business environment, * Understand the influence of the institutional context of countries on individuals and organizations. « Define social institutions and understand their basic forms. * Explain how social institutions influence both people and organizetions. * Describe the basic econoinie systems and their influence on multinational operations. * Understand the basic stagos of industrialzation and their implications for multinationals. * Discuss the world's basic religions and how they shape the lacat business environment. « Develop an understanding of education and its effects on ‘multinational operations. * Define social inequality and ts implications for multinationals. * Understand the importance of the national context end its connection with other international management areas. Entrepreneurship in the United States and Europe As of 2009, the United States stil leads the world in the creation of new businesses, Between 1996 and 2004, itis reported that about 550,000 new businesses were created every month. In contrast, the number of new businesses created in Europe and Japan remains much smaller Why is the United States creating new businesses al such a high rate? Experts agree that the United States enjoys a number of important char- acteristics that facilitate entrepreneurship. For instance, the country has very flexible labor market that allows companies to freely hire and fire workers. Also, its educational system has long promoted close cooperation between higher education and industry. Universities such as Stanford and Harvard place a strong emphasis on entrepreneurship. Finally, the United States presents companies with a fairy flexible immigration system The European environment, in contrast, is not seen as conducive to entrepreneurship. For instance, the tax system is seen as much higher and thus less likely to promote new businesses. The legal and patent requirements are very complex and daunting, Small businesses find it very expensive and time-consuming to navigate such barriers success- {ully. Furthermore, in contrast to the United States, where entrepreneurs such as Bill Gates are celebrated, not all Europeans view entrepreneurs in such a positive light, Many universities view industry with skepticism and have been reluctant to establish partnerships. In general, busi- nesses tend to be viewed more suspiciously. Will things change? Experts note that Europeans are increasingly adopting the US, model. Further, many European universilies are establishing stronger links with industry. The success of Skype is a good example of European entrepreneurial effort. So the future is likely to more and more new businesses coming from Europe. Source: Based on Economist. 2009. “The United States of Entrepreneurs. Special Report on Enireprenersip.” March 14, pp. 913,Se Te Multinational Companies a a ili! ne Part 1 Foundations of Multinational Management 'n Chapter 2, we discussed some of the ways societies can be compared in terms of their national cultures. However, as the Preview Case in Point shows, other elements of a society besides national culture, such as education and the legal system, can affect important business-related dif- ferences among societies. In that case, you saw how such factors as the legal, education, and tax systems were all important in explaining differences in entrepreneurial output between the United States and Europe. These factors are critical in how businesses are conducted in societies, and some of them may even encourage individuals to adopt values that are not consistent with their national cultures. It is therefore important to understand the dominant institutional context of any society and to appreciate its influence on both individuals and organizations. Specifically, understanding the institutional context is extremely critical to effective multinational management. At a basic level, a manager cannot com- pletely understand any society without examining the national culture and the institutional context.’ Both are key elements of societies, and both have im- portant influences on issues related to strategic multinational management. Exhibit 3.1 shows a model of how the national context (i.e., institutional con- text, national culture, and business culture) leads to national differences that have implications for the business environment of a country. Institutions Economic Industrialization Education Business Environment: National explanations forthe i existence of the firm Capital markets Labor markers ‘Top management characteristics eae ‘Comparative advantages National differences in strategy Local adaptation i content and implementation pressures for i 1 multinational t Platform opportunities for companies roultinational compas ee fanagement, pp. 79-99. eel teeter epee te ete eters erate ‘55-78; Rosenstein, Josep, and Abra Reshed. 1993, “Nenad compris in sr tog.” Advances in ocretioalChapter 3 — The Institutional Context of Multinational Management ‘The national context is made up of the respective national cultures and social institutions of a society. As we saw in Chapter 2, the national culture of a society shapes its important norms, values, and beliefs. These cultural components exert important influences on the business culture and on acceptable and correct ways of doing business. However, closely intertwined with national cul tural forces are social institutions such as the economic system, religion, and ‘education. As we will see later in this chapter and in other chapters, they also representa significant influence on people’s norms, values, and beliefs and have implications for the business culture. ‘This chapter thus provides a basic understanding of the institutional context of societies. In the next section, we discuss briefly the main elements of a country’s institutional environments: social institutions and how they influence society. In subsequent sections, we discuss each of these social institutions in depth and their implications for multinational strategic management. We conclude this chapter by looking at some of the ways social institutions are connected to later chapters. Social Institutions and Their Influence on Society A social institution can be defined as “a complex of positions, roles, norms, and values lodged in particular types of social structures and organizing relatively stable patterns of human resources with respect to fundamental problems in ... sustaining viable societal structures within a given environment.”* In addition to national culture, social institutions have profound effects on people's life con- ditions and provide the context for psychological differences among people. Similar to national culture, social institutions provide boundaries and norms that prescribe how people will behave; that is, they provide people with beha- vioral guides when facing different social situations. We consider three key social institutions that are the most likely to influence the business environment: the economic system (e.g., capitalism or socialism), the level of industrialization, and the types of religion. We also briefly consider the educational system and the level of social inequality because both have been linked to a lesser degree with the business environment. Economic Systems ‘The economic system is the “interrelated network or system of beliefs (con- cerning work, property, constructs, and wealth), activities (extraction, produc- tion, and distribution), organizations (business firms, labor unions, consumer associations, regulatory agencies), and relationships (ownership, management, employment, sales) that provide the goods and services consumed by the members of a society."* Economic systems are usually reflected in their gov- emments’ influence, specifically in terms of whether productive activities are state owned or privately owned. ‘Economic systems can be typified by the extremes of capitalism and socialism, with mixtures of elements of both in the mixed economy. The capitalist or market economy refers to an economic system where production activities are “decentralized to private-propertyrights holders (or their agents) who carry out these activities for the purpose of making profits in a competitive market.”* In contrast, the socialist or command economy is one where production resources National context ‘Notional culture ‘and social institu tions that influence how managers make decisions re- garding the strate- gies of their organizations. Social institution ‘A complex of posi- tions, roles, norms, and values organiz- ing relatively stable patterns of human resources with re- ‘System of beliefs, (concerning work, property, and ‘wealth, activities extraction, produc: tion, and distribu: tion), organizations {business firms, labor unions), and relationships (own- ‘ership, manage- ‘ment) that provide the goods end ser views consumed by the members of @ society. Capitalist or market economy. ‘System where pro- duction is decen- tralized to private ‘owners who carry ut these activities to make profits. Socialist or command economy Production re- sources are owned by the stete and production deci sions are centrally coordinated.Part 1 Foundations of Multinational Management CASE Venezuela is an example of a socialist economy. The ~ government, led by Hugo Chavez, has strived to inter- vene in many industries to take hold of production in the interests of the poor. This approach worked well when the price of oil was relatively high because oil represents about 90 percent of Venezuela's exports. ‘The significant inflow of cash allowed Chavez to fund many social programs to keep the population content However, the fallin il prices in 2008 weakeried gov- emment finances, making it harder to maintain’ Such programs. TN POINT Socialism and Venezuela taking” over’ private comparies. For instance, the government seized a rice plant belonging to Cargil, as Well as plants owned by Venezuela's most powerful conglomerates. Rice is an important staple for Venezuelans, and isruption in its supply could trigger unrest. When Veriezuela experienced a significant rice shortage, the ‘ice ‘companies argued that they were operating at loss because of price controls. The Veriezuelan gov- ernment then took control of the rice plants to enforce price-controlled production. To minimize economic worries=and remain con- Source: Based on Econornst. 2009. “Soil in Venezuela, Feeding sistent wilh socialist principlesthe government started fry,” March 14, p. 40. are owned by the state and production decisions are centrally coordinated.° The ideal socialist economies pursue collective goals such as social equality and solidarity. Consider the above Case in Point. Finally, the mixed economy combines aspects of the capitalist and socialist Mixed economy Combines aspects of economic systems. In such economies, certain sectors of the economy are left to capitalist and socialist private ownership while the state runs others, such as health care and education. economies. ‘The state determines that private interests cannot run some sectors of the economy and thus takes control of such sectors, making resource allocation and production decisions. Countries such as Sweden, France, Denmark, Italy, and India are examples of mixed economies. Although it is impossible to cover all their possible business implications, economic systems have two major implications for strategic multinational management: 1, Dominant market type. 2. Market transitions. Dominant Market Type Ata basic level, decisions to operate in a country can be made based on the dominant economic type. For instance, to operate relatively freely from governmental interference, a multinational may want to set up operations in a capitalist society like the United States or Britain, However, if multinationals expect to do business in mixed economies like France and Italy, they should expect to subordinate their economic goals and respect social objectives. Emerging markets also present peculiar challenges for investors. Consider the next Focus on Emerging Markets ‘The Focus on Emerging Markets clearly shows the impact of governmental interference on a multinational’s operations. As a rough guide, multinational managers may want to consider a country’s index of economic freedom to de- termine the extent of its governmental intervention. Since 1995, the Heritage Foundation, a U.S-based research foundation, has been constructing the index. Index of economic freedom Determines the extent ‘of governmental inter- ‘vention in @ county.Chapter 8 The Institutional Context of Multinational Management Governmental Interference in China Research by Luo shows how companies deal with difficulties when forming joint ventures in China. Specifically, the intemational joint venture contract, which governs how many joint ventures are operated, incorporates three important components: (1) term specificity (the degree to which contractual terms are clearly specified), (2) contingency adaptability (the degree to which companies can adapt to changing situations), and (3) contractual “obligatoriness" (the degree to which companies are bound by the contract). Using surveys from 110 executives involved in international jint ventures, Luo showed that the more the respondents experienced governmental interference, the more highly they rated the need for contingency adaptability in the contract. In other words, the more governmental interference, the more the contract needs to leave room for adaptation to new situations. Luo also found that govern- ‘mental interference had a negative impact on contract specificity because the more the government intervened, the less possible it was to specify the contract clearly Such research provides some important guidelines regarding how companies need to structure their contracts to counteract Chinese local and central. governmental interventions, Other events point to the role played by the Chinese government in other cases. For instance, Coca-Cola attempted to buy China Huiyan, China's largest juice company, offering $2.4 billion, an amount that represented about three times the value of the ‘company. For the privately run company, the offer was very appealing, but the Chinese government rejected the offer. Many experts see the move as an effort to prevent foreign companies from dominating the Chinese market. Although Coca-Cola controls half of the market for soft drinks, the juice market is highly fragmented. The successful ‘acquisition of China Huiyan would have given Coca-Cola control of 20 percent of the market. Other industries, such as aviation, banking, and automaking, are seeing significant governmental control through nationalization, Sources: Based on Econo. 2009. “Business in China. So much fo cept,” Marc 7, p. 72; Economist 2008. "Coca-Cola and China. Hardt swllow," March 21, pp. 68-69; uo, Yadorg 2005. “Transco char- ‘certs, nttaonalenironment and jint venture contra" Journal ofIneemational Business Sees, 36, ‘Pp. 208-230. It defines the index as “the absence of government coercion or constraint on the production, distribution, or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty itself.” The index inchudes ten indicators, ranging from trade freedom (i.e., the degree to which the government hinders free trade through tariffs), taxation policies, and the evel of governmental intervention in the economy, to property rights (freedom to accumulate private property) and business freedom (i.c., ease of obtaining a business license). The foundation assigns scores of 0 through 100, with 100 being the perfect degree of economic freedom. Exhibit 3.2 shows selected top and bottom ten countries on the 2009 assessment. ‘The indices shown in Exhibit 3.2 are not surprising. Capitalist societies such as Canada, Australia, the United Kingdom, Singapore, and Hong Kong figure prominently in the list of top ten countries. Communist societies such as Guba and North Korea are in the bottom ten, Additionally, countries with repressive governments such as Zimbabwe and Libya are also in the bottom ten. n2 Part1 Foundations of Multinational Management Index of Economic Freedom (5 = lowest economic freedom, 1 = highest EXHIBIT economic freedom) Australia UK. Turkmenistan Burma Urbekisean Serbia-Montenegro Belarus Libya Laos Zimbabwe Cuba North Korea 2 3 [index of economic freedom] Source: Adopt rom Here Fanti 2009. hp ening Market Transitions Market transitions ‘The second economic system implication involves market transitions, which are Changes that societies the changes that many societies go through as they move from socialism toward 90 through as they a markerbased system. The post-1980s saw a large number of countries in move from socialism Russia, Eastern Europe, and Asia (i.e., China and Vietnam) undergo marked ote ee attempts by the governments to infuse heavy doses of capitalism. For most multinationals, such open market policies have presented incredible opportu- nities because they represent new markets and access to skilled but relatively cheaper labor. An important aspect of this transition for many multinationals has been an increase in international strategic alliances with local companies, as described in Chapter 9. For most multinationals, an important component of market transitions has been to understand socialism and its effects on both people and organizations in order to better understand the workers’ reactions to market mechanisins, Under socialism, most enterprises were mere factories, with no need for cost control.® Often these enterprises did not have any strategic planning, account ing, or marketing departments. Furthermore, central planners guaranteed the survival of these firms—despite their inefficiencies—by setting up prices that ‘were not accurate reflections of costs. Instead, prices were sometimes kept low to encourage the heavy consumption of goods manufactured on the orders of the central planners. Banks also were managed according to the needs of centralChapter 3. The Institutional Context of Multinational Management planners. Loans were often made on the basis of connections and personal relationships rather than creditworthiness. It is not difficult to understand, then, what multinationals experience in facilitating the transition to a market economy. Drastic measures have to be taken to turn inefficient companies into firms that can perform essential busi- ness functions. Additionally, managers’ thinking has to be changed completely so that they understand management functions and the necessity t0 be cost effective. Finally, the financial system, the firms, and prices have to be left unregulated to more accurately reflect the needs of the market rather than to satisfy the needs of central planner Multinationals also have to be aware of the effects of socialism on workers. Pearce provides a good understanding of what workers go through in socialist societies.” In socialist societies the government is considered as nonfacilitative because it does not provide the structure to ensure that people can depend on interpersonal trust, Government officials are actually more likely to have the power to distribute rewards and to make important salary decisions. For Human Resource Management Challenges in China ‘As companies stive to learn how to do business in China, they have to contend with governmental interference, but employees also pose a challenge. The 1950s Iron Rice Bow! policy was based on the notion that workers had the right to lifetime employment and a wide range of social programs, such as housing, schools, and medical care. ‘Thereafter, the long isolation under communism resulted in the complete elimination of the human resource management function. China now is transitioning to a market economy, and companies are finding that they are facing major challenges as they try ‘0 adapt market-based approaches to this function. In face-to-face interviews with ten individuals closely linked to private firms in China, a number of significant challenges were described. For instance, because the ‘old system emphasized personal networks and ties, private firms found that Chinese managers tend to hire relatives and friends and to overstaff. Additionally, Chinese workers in these firms were not accustomed to do more than what was specified in their job description, and they were often risk averse. Finally, job appraisals and rewards were very difficult to manage, especially when good relations with workers ‘and government officials had to be maintained, In addition to these challenges, research suggests that the Chinese contextual ‘environment has resulted in other problems. For instance, the planned economy and the Cultural Revolution emphasized loyalty at the expense of initiative among workers. Furthermore, the lack of business education in the past means that China is currently suffering from a severe shortage of qualified professionals. As a result, the workforce is very mobile, and employees do not hesitate to change jobs frequently to take advantage of high demand for qualified individuals. Mullinationals also find it risky to bring Chinese employees to train in Europe because such training makes the em- ployees more attractive to other firms when they return to China. ‘Sources: Based on Orton, Garry D., David A. Ahistro, and Eunice S. Chan. 2000. “Fore fms in Chin: Facing ‘nan resources callers in a transitional econony.” SAM Advanced Management Journal, Autumn, p. 4-36, Jus, Jacques, and Xieming Lin 2006. “La GRE des personae lect dans es entarprisserangres en (Chine: Une approche explortor.” Revue de Gestion des Ressources Humaine, 59, p. 60-71; Economist. 2009. “Business in China So much or capitan,” March 7, p72. Ea74 Industrialization Cuttural and economic changes that occur be- cause of how produc tion is organized and distributed in society Preindustrial society Characterized by agr cultural dominance and shaping of the econom- ‘c environment. Industrial society Characterized by the dominance of the sec: ‘ondary or manufactur- ing sectors. Part 1 Foundations of Multinational Management instance, Walder,* in a study of Chinese companies, discusses how supervisors were responsible for writing character reports on workers, which were then relayed to the central party. Such information was then used in responding to workers’ requests for housing and other scarce consumer items. Workers could not rely on meritocracy but instead had to rely on the personal relationships with their supervisors and party officials. Consequently, they tended to develop a severe distrust of each other because they were all competing for the same lim- ited rewards. Additionally, they focused their energies on refining their personal networks rather than on performance because networks were more likely to help with success ‘Multinationals have incredible challenges as they hire employees in former socialist societies. At a basic level, they need to train these workers to trust each other. As multinationals start up team-based approaches to designing work, they are finding that workers are reluctant to cooperate and work with each other. Furthermore, multinationals also need to change the mentality that personal relationships are key components of success. As they introduce more open systems based on meritocracy, they sometimes face significant opposition from these employees. Consider the Comparative Management Brief on the previous page, showing the various challenges private firms have faced with regard to human resource policies in China and their response to these challenges. Clearly, economic systems have important implications for the strategic management of multinationals, impacting relationships among companies and how these companies are structured. Specifically, the transition of many former socialist countries to a market-based approach presents significant challenges for multinationals. However, economic systems also affect individuals, specifi- cally how workers view work and even how they justify ethical behaviors, as we will see in subsequent chapters. In the next section, we consider another critical social institution: the levels of economic development through different degrees of industrialization. Industrialization The application of the steam engine to the gathering and production processes is largely used to explain the Industrial Revolution in Europe. The machine climinated the excessive reliance on animal power and allowed the building and use of new machines and equipment that were very effective in resource use. This new ability to gather and transform resources led to the rapid development in many Western societies of large factories with large numbers of workers as- sembled around networks of machines. Such changes dramatically influenced all aspects of society. Industrialization refers to the cultural and economic changes that are brought about by fundamental changes in how production is organized and distributed in society. Industrialization can be categorized in several ways. Ina preindustrial society, agriculture dominates and shapes the economic environ- ‘ment. Religious norms and tradition are emphasized, and social mobility is dis- couraged." Occupational placement tends to be based on ascription (family background), and social status is largely determined through inheritance. An industrial society tends to be characterized by the dominance of the manu- facturing or secondary sector. Such societies reflect the prevalence of techno- logical development that makes rapid economic growth possible. Industrial societies tend to require wider ranges of skills in their workforce relative to preindustrial societies. Occupational placement is based on universalistChapter 3 The Institutional Context of Multinational Management criteria, such as achievement. Finally, the postindustrial society emphasizes the service sector. The dominance of employment by the service sector leads to a drastic expansion of the role of formal education due to the need for highly trained workers with specialized skills. Exhibit 3.3 shows selected countries and the distribution of employment by primary, secondary, and tertiary sectors. ‘The level of industrialization has important implications for strategic multi- national management. Consider the next Case in Point. What does the Case in Point mean in terms of international management? There is a direct correspondence between the level of economic development and industialization, so preindustrial societies tend to be the least economically developed. Multinational companies can use such indicators to determine the feasibility of doing business in preindustrial societies. Given that the long-term prospect of a business in any country depends on market size and income, pre- industrial societies tend to provide fewer opportunities. However, preindustrial societies also provide relatively cheap labor compared to industrialized societies, so, not surprisingly, many companies tend to locate their plants in preindustrial counties, Also, preindustrial societies tend to have poor infrastructure and business support. Operating in such countries may be more costly because the multinational company may have to provide its own infrastructure and support services. Many African countries unfortunately fall into this preindustrial cate- gory, and multinationals have generally shunned most of them because of poli- tical instability, However, as the Case in Point, “What Does the Future Hold for Africa,” shows, the future for some African countries is bright, and multinationals haye to be aware of the role they can play in such developments. As technological development makes it possible to shift production to the manufacturing sector, important changes in a society's economic environment EXHIBIT] Distribution of Production Activities by Sector United States: ‘South Korea Canada | Australia. (50% Ae re ° Sauce: Adept fom World DenlopmentIndtors Debt. 2009. hi pbesonswoddbenkog/ ccommercprcuts Postindustrial society Characterized by emphasis on the service sectors. cy76 Part 1 Foundations of Multinational Management India is currently experiencing tremendous changes because of industralization. Even though a significant percentage of the population remains in poverty, India has nevertheless seen a growing middle class with the tise of service companies, such as infosys, Such ex- periences are bringing major changes that will likely affect the future work environment in that country. One of the many changes has been a new cele bration of entrepreneurial success. Many Indians. are now wiling to leave or turn their backs on jobs at well- known companies to start their own businesses, Such efforts are also spurred by new entrepreneurship CAS 6.01 “OINT Industrialization and India ‘Cofipatitions, such as the National Entrepreneurship Network's competition to find India's hottest start-ups. ‘One company shorlisted for the competition is ‘Sammean Cdignity), Irfan Alam came up with the idea when he was siting in a rickshaw on a hot summer day. He asked the rickshaw puller for a drink of water and realized that rickshaws cover over six miles a day. He realized that the rickshaw pullers could supplement their meager income by selling water and even advertising on their rickshaws. He thus sells ads through the rickshaws. Source: Economist. 2008, “StarsUps in Inia. A suitable business,” December 20, pp. 171112. affect strategic management. Instead of emphasizing tradition and communal obligations that are heavily influenced by the religious norms typical of preindustrial societies, industrial societies tend to favor innovation and in dividualism. Economic achievement becomes the top priority for industrial societies, and discipline and achievementoriented norms predominate.'' Industrial societies tend to present significant opportunities for multinational ‘companies. Multinational companies have access to an environment that is very favorable to businesses and a labor force that is often educated and motivated. ‘Additionally, industrialized societies tend to have governments that are usually favorable to businesses. Multinational companies can generally expect that their business endeavors will be facilitated. Furthermore, industrial nations tend to present lower nonmarket risks, such as government appropt With the exception of nations like Botswana and Mauritius, few African economies have been able fo sustain growth in real per-capita gross domestic product, one indicator of industrialization. The reality is that African nations have been growing much more slowly than other developing nations. Why have most African countries been left behind in terms of industrialization? itis often argued that, after many African nations experienced independence from the three major colonizers (France, Belgium, and Great Britain), their respective elites established one-party rule ‘promising stability and economic development in return for a monopoly ‘on. politcal EIN POINT What Does the Future Hold for Africa? power” However, these countries did not have _pre- vious experience in governing and in capital accu- mulation, Furthermore, any outward-oriented growth potential was viewed with suspicion because it was ‘seen as foreign interference from the previous colo- nizers. Consequently, most governments, because of intemal pressures, engaged in more state-led and inward-looking industriaization efforts. Coupled with’ internal strife and governments’ response to interest groups, African nations have not achieved much economic progress. Multinational companies nevertheless have sig nificant roles to play in Africa's future development eeChapter 3 ‘The Institutional Context of Multinational Management resources, and it represents significant market op- portunities, As the continent wrestles with the fallings of most autocratic regimes, many of these countries are. gradually moving toward multiparty regimes ‘with an emphasis on political stability. As more and and growth: Africa has ‘sizable physical and human ‘accumulation and growth. Eventually, multinational ‘companies will have a significant role to play as investors, As a rough guide for investment decisions, ‘multinational companies may want to consider liberal _ democracy indices, that is, the extent to which a po litical system enables political liberties and demo- more of them gain political freedom, the economic environment will become more conducive to capital ccratic rule: The following exhibit shows the political democracy indices for selected African countries, Liberal Democracy Indices for Selected African Countries (100 = absolute liberal democracy, 0 = absolute dictatorship) Nigeria Mauntius ‘Ghana ‘Source: Adapted fom Sole, Kenneth. 1993. “Liberal democracy: Validity and method factors in cross-national measures” American Journal of Political Science, 37, pp. 1207-1230 Exhibit 3.4 shows the materialist scores of selected countries. These scores indicate how much societies value such goals as economic growth and main- taining discipline, both indicators of the degree of industrialization. As the exhibit shows, many countries that are currently undergoing industrialization (eg. China, Hungary, India, and Brazil) have high rankings on the materialist index, suggesting that individuals in such societies are achievement oriented and favor material gains. The emphasis on economic achievement implies that multinational companies are well advised to motivate employees with monetary rewards. In addition to shaping norms for individuals, industrialization also has im- plications for how industries are shaped. Industrialization can therefore take many forms and have various effects based on the conditions in the society. In some cases, industrialization efforts can be inward oriented, where local in- dustries are promoted to satisfy the domestic market and preserve foreign7B Part 1 Foundations of Multinational Management Materialist Values for Selected Countries Sweden, Denmark United States UK Turkey Bulgaria Spain Belarus Russia India Hungary South Korea China Sources: Adepted from the World Values Survey. 2009. hit fwnw.worldeluesurny.org “World vats sure and European vlues sur. 1981— 1984 and 1990-1993 and 1995-1997" (computer fil). An Arbor, Ml: Intsr University Consortium for Potical and Socal Research exchange.’? In contrast, some countries also have more outwarc-oriented in- dustrialization strategies where foreign investment is encouraged and exporting is heavily promoted. ‘A postindustrial society is characterized by the domination of the service sectors in production activities.'* In such a society, productivity and growth tend to come from the generation of knowledge as applied to all economic sectors through information processing. Countries transitioning from an industrial to a postindustrial society experience an almost complete demise of the agricultural sector, along with a significant decline in the manufacturing sector. Because services delivery becomes prevalent, there is a significant rise of information-rich ‘occupations, such as managerial, professional, and technical jobs. As socicties ‘become more postindustrial, more jobs require increased skills and advanced educational achievements. Postindustrialization is leading to a postmodern shift in many societies. Inglehart ct al.'* argue that the disciplined and achievementoriented norms and values typical of industrialized societies have reached a peak. In post- industrial societies, the “emphasis on economic achievement as the top priority is now giving way to an increasing emphasis on the quality of life.”'° As a result, people are more likely to espouse individual expression values and a movement toward a more humane society. Exhibit 3.5 shows selected countries and their scores on the postmaterialist scale. AS the exhibit shows, many of the most developed societies have high postmaterialist scores. Multinational companies operating in such countries have to be aware of the changing needs of workers in these countries. Specifi- cally, people are likely to value jobs over which they have the most control, Such workers also are more likely to prefer noneconomic incentives rather than monetary rewards. Companies should strive to find ways to satisfy such needs.Chapter 3 The Institutional Context of Multinational Management Postmaterialist Values for Selected Countries 9 TH Pestmateritit values] ‘Sources: Adapted from the Wer Velues Sure. 2008. htp:/ww.worlvauessurvey org; World wales sure and European vals sures. 1981-1984 and 1990-1993 and 1995-1997" (computer fk). Ann Arbor, Ml: Intr University Consortium for Poel and Socal Reseach In this section, we described some of the possible effects of indusurialization Specifically, we looked at industrialization levels and how they viduals as well as organizations. In the next section, we consider another critical social institution: religion. Religion A religion can be defined as a shared set of beliefs, activities, and institutions based on in supernatural forces. Religions continue to be an important aspect of most societies. The recmergence of Christianity in the United States, the rise of Islamic fundamentalism in the Middle East, the rapid growth of Protestantism in Latin America, and the religious devotion in the former Soviet Union and Eastern Europe all signal that religions continue to be pervasive and important.'® Religion, work, and their interrelationships form the very foundations of human society.'” In fact, the link between religion and how societal systems are structured for economic purposes forms the basis of Max Weber's famous for- mulation of the Protestant work cthic.'* Weber, a famous German sociologist, proposed that the domination of Protestant religions led to the emergence of modern capitalism in Western Europe. He argued that Protestant beliefs em- phasize hard work, the creation of wealth, and frugality. This combination of values allowed individuals to work hard to accumulate wealth. However, because Protestant beliefs encouraged believers to reinvest the wealth rather than spend it, they formed the basis of the Western European capitalist expansion. Religion ‘Shared set of be liefs, activities, and institutions besed fn faith in super- natural forces.80 Part 1 Foundations of Multinational Management CASE Understanding how religion affects work has attracted significant atention, but only recently have the important effects of religion on work been demonstrated. A study by Parboteeah, Hoeg], and Cullen examined the effects of religion on work obligations, that is, the degree to which individuals believe they have a societal: duty to work. The researchers argued that al religions view work as an important obligation and, more important, as having religious dimensions. Analysis of a large-scale set of data from 45 countries showed that the belief in God and the betiavioral aspects of religion, such as church attendance, have positive effects on work ob- ligations, Multinationals: may therefore want to weigh religion in determining how their employees view work. In another study, Parboteeah and colleagues looked at how four specific religions. (Buddhism, IN POINT Religion and Work Christianity, Hinduism, and tslam) influence work values. Employees typically have preferences for what they want from their work. Some prefer extrinsic work values, such as income and job security, while others prefer intrinsic work values, such as autonomy and the Use of initiative at work. Analysis of another lerge- scale-dala'set from-40 countries showed that all four religions: have posite influences on intrinsic work ‘values. Furthermore, the results show that three of the four religions (Christianity excluded) have positive effects on exttinsic work values. “Sources: Based an Parbcteah, K.P, Y: Pils andJ. 8. Cullen. 2009, "Rebus grape and work wales.” Incernational Journal of Cross CCaleural Management, 9(1), p. $1~67; Parboeedh, K.P, M. Hor, and) B. Cale, 2009 "Rebus dimension and work ablations Acountty insiusional profile approach.” Human Relations, 62(1). pp. 119-148. Religions have important influences on society, providing its members with a way of dealing with issues that reflect individual wishes and activities." However, religions also affect business and other organizational procedures. Consider that Islam, as discussed later in this chapter, has productivity implications during the Ramadan months or that Christianity has obvious consumer behavior implica- tions during Christmastime.” As we will see, for instance, in Chapter on ethics, religions have important influences on how people do business in different parts of the world, as the above Case in Point demonstrates. As the Case in Point shows, clearly religion has profound influences on work. ‘As multinationals conduct operations in foreign locales, they need to be sensi- tive to religion. We therefore consider various aspects of religion in this section. Despite a great variety of religions around the world, only four are practiced by a large percentage of the world’s population. In the next few sections, we look at Christianity, Islam, Hinduism, and Buddhism, along with their implica- tions for multinational strategic management. Exhibit 3.6 shows the distribution of religions around the world, both in percentage of the world population and in number of followers. As the exhibit shows, Christianity, Hinduism, Islam, and Buddhism are followed by almost 71 percent of the world’s population: of the remaining 29 percent, approximately 20 percent are considered nonreligious. Christianity “Christianity is a faith based on the life, teachings, death, and resurrection of Religion based on the | Jesus" and is clearly the most practiced religion around the world. Christianity life and teachings of started with the birth of Jesus Christ approximately 2,000 years ago and has Jesus. evolved considerably into different forms because of many internal feuds and divisions. A major separation occurred in 1054 when the Roman Catholic Church split from the Eastern Orthodox Church. The majority of Orthodox Christians today live in Russia, Serbia, Bulgaria, Romania, Albania, Poland, and the Czech Republic, and most Roman Catholics live in Western Europe and the Americas, In 1517, yet another major division occurred in Christian history. Disillusioned with the Roman Catholic Ghurch’s authority and practices, MartinChapter 3 The Institutional Context of Multinational Management Religion by Percentage of World Population and Number of Followers A Fey in ha as Nga sa an " a Sel et ie Hi ae er cee a i , ary P. 20 in Hall ana i I nN Luther, a German monk and priest, initiated different interpretations of the Bible that led to the Protestant branch of Christianity. Despite the many divisions among Christianity, Christians all share the belief that Jesus is the incarnation of God who was sent to cleanse the sinfulness of ‘humanity, Jesus is often associated with love and allows humans to connect with God through penance, confessions of their sins, self-discipline, and purification. ‘The impact of Protestantism on the development of capitalism is seen as major evidence of the link between religion and economic structuring of societies. Because Protestantism emphasized wealth and hard work for the glory of God, it allowed the focus on goals related to economic development and wealth accumulation, In contrast, Catholics were more likely to question the pursuit and accumulation of wealth. This difference explains the sustained de- velopment of capitalism in Western Protestant societies, In general, Christians agree “on the value and dignity of human life, labor, and happiness.” There is a general support for the freedom to accumulate ‘wealth and possessions. However, human greed and selfishness are nevertheless viewed with contempt, and attempts are made to ensure equality of opportunity and faimess for the less fortunate. Additionally, Christianity, through the Ten Commandments, provides the basis for what are considered ethical behaviors. Although not all individuals follow these commandments, they are nevertheless seen as norms guiding behaviors with respect to such things as theft (“You shall not steal”), murder (“You shall not kill”), and protection of private property You shall not covet your neighbor's house or anything that is his”), Multi- national companies therefore have access to environments that are conducive to conducting business. ‘The essence of Islam, as described in the Qur‘an, is the submission to the will of Allah (God). Islam can be traced back to Muhammad, a prophet born in 570 CE. However, unlike the Christian view that the founder Jesus was divine, Muslims do not ascribe divinity to Muhammad, Rather, he is scen as the mes- senger of Allah’s revelations and the last in a line of prophets starting with Adam, through Moses, Jesus, and Abraham.”* Islam is currently the second Islam Religion based on ‘the submission of ‘the wil to Allah (Goa). BLPart 1 Foundations of Multinational Management largest of the world’s religions and has adherents in Africa, the Middle Fast, China, Malaysia, and the Far East. It continues to grow rapidly in many coun- tries, especially in Europe. ‘Muslim society is heavily influenced by Islamic standards and norms. Islam provides encompassing guidance in all spheres of life, both social and eco- nomic. Those who serve Allah and accept the reality and oneness of Allah go to paradise in the afterlife.** Muslims also believe that Allah wants them to live according to the Shari'ah (Law). The Shari'ah requires Muslims to follow five pillars: Confession, Prayer, Alms Giving, Fasting, and Pilgrimage to Mecca.?° These pillars have important implications for multinational strategic man- agement. First, a multinational company operating in a Mustim country has to accommodate the Muslim’s need to pray five times a day. Muslims need to pray in the early morning, noon, midafternoon, sunset, and evening.*® Furthermore, during the Ramadan, a month of fasting, multinational companies face some decline in productivity. During that month, Muslims are not allowed to eat, drink, smoke, and even take medicines from dawn till dusk. As such, multi- national managers are advised to take steps to ensure that business activities are not disrupted. The month is also considered very spiritual, and multinational companies should expect their workers to be more concerned with sacred matters and a heightened spiritual atmosphere. ‘The alms-giving pillar also has critical implications for multinational strategic management and how Islam views business. In general, the Quran is supportive of entrepreneurship and the earning of profits through legitimate business activities. The Qur’an also allows the accumulation and protection of private property. However, Muslims are naturally concerned with issues of social justice and fairness, and they are likely to condemn the pursuit of profits through the exploitation of others. Multinational companies thus have to ensure that their business activities are conducted in a socially just manner and that some form of alms giving is practiced. Muslims (and organizations) are required to share their accumulated wealth by charitable giving to the poor. This practice is seen as necessary to decrease social inequalities and personal greed. Multinational ‘companies may be well-served by participating in such donations. ‘An important consequence of Islam’s condemnation of the exploitation of others is that Muslims may not pay or reccive interest. Islam regards the payment or acceptance of interest as a serious sin. Such beliefs are not just ideals but are actually put into practice in many countuies, induding Pakistan. In such coun- tries, governments have instituted financial laws declaring interest illegal. For 2 multinational company operating in a Muslim country, the prohibition of in- terest presents a serious challenge. However, many Muslim societies have been working in profitsharing plans to avoid the payment or receipt of interest. For instance, if a multinational company borrows money from a bank in a Muslim country, it should expect to be asked to share the profits from the investment as an alternative to paying interest. Multinational companies should thus be pre~ pared to formulate creative but acceptable ways to manage their finances, Multinational firms are likely to be presented with significant opportunities in the Muslim countries in years to come. For instance, it has been estimated, that the Middle East alone has approximately 300 infrastructure projects representing $45-$60 billion of possible private investment ”” and itis likely that multinational companies will have to provide significant financing for these projects. The challenges of financial exchanges, therefore, will become more urgent and will have to be dealt with. Consider the next Comparative Manage- ment Brief on the challenges of Islamic laws.Chapter 3. The Institutional Context of Multinational Management Islamic and Financial Operations In an effort to revitalize its economy after the Gulf War, the Kuwaiti government ‘embarked on a strategy of attracting foreign investment to make up for the deficits incurred in reconstruction. However, Kuwait is an Islamic society and has to respect the Sharfah, or religious law, which prohibits receiving or paying interest. In addition to this well-known financial requirement of Islam, the Shari'ah also prohibits uncertainty and gambling, and it stresses honesty in business and monetary transactions. As a consequence, all contracts have to be specified in great detail, Additionally, because futures and options have speculative natures, they are regarded as gambling and are ilegal. Such prohibitions represent significant challenges for international capital providers. The EQUATE (Ethylene Products from Kuwail) project was a joint venture be- tween Petrochemical Industries Company, a subsidiary of the Kuwaiti national oil company, and Union Carbide Corporation. The joint venture, formed to finance the construction and operation of a $2 billion petrochemical plant, faced a number of nt financing challenges. For instance, the venture participants wanted part of the financing to come from Islamic banks in an effort to involve Kuwaiti citizens and investors. However, the Islamic banks could not loan the money directly; they had to be involved directly in the venture so that they could share in the profits instead of eaming interest. Eventually, the Islamic banks purchased assets and leased them to the joint venture. Compared to a regular loan, these financial arrangements present significant challenges. With the ownership of assets in a company comes ownership risk. For instance, how much should the Islamic banks be liable for if the plant causes serious environmental damage? This problem was addressed by placing the assels in a special-purpose vehicle with limited liability. Another challenge pertained to the leasing aspect of the financial arrangement: the Islamic banks owned the assets while the venture was the actual user. As with any lease agreement, the Islamic banks are responsible for maintaining the assets of the plant and for insuring against losses that may occur should the assets break down. A major expectation for the venture was therefore to ensure that the Islamic banks took such insurance and maintenance precautions. Another challenge dealt with the application of the law in the event of default: Should Islamic or other law apply to the contract? Additionally, the Istamic investors were at a great disadvantage if payments were late because of their inability 40 collect penalty interest, which would have to be donated to charities. Finally, in the event of a bankruptcy, the Islamic bank still owned the assets and would be able to claim them from the venture. However, such actions would destroy the ongoing value of the project and reduce any chance of recovery. Seurces: Based on AL-Kasif, A, M. 2009. "Shar'ah’s normative rameork as to financial crime and abuse.” Journal of Financial Crime, 161), pp. 85-98; Es, Benjamin C 2000, “The EQUATE projec: An introduction 10 amic project finance Journal of Project Finance, 8, pp. 7-20. A final multinational strategic management implication of Islam pertains to the role of women in Muslim countries. Although the Quran puts men and women on an equal footing as individuals, the guidelines for the roles of men and women differ. While the man’s role is to work and support the family, the woman’s roleHinduism Acceptance of the an. cient traditions of India ‘that are based on the Vedic scriptures Part 1 Foundations of Multinational Management is to provide care and stability to the family in the home. Not surprisingly. many ‘Muslim societies are strictly divided by gender. Multinational companies have to be aware of the effects of their business actions based on gender roles. For instance, given the dominance of the male sector, it is not advisable for multinational Companies to post women in executive positions in Muslim countries. Ad- ditionally, human resource management practices need to take into consideration the limited role of women in such societies. Although there has been much pro- gress in many Muslim societies regarding gender roles, respecting such roles is clearly important for any multinational firm operating in a Muslim country. ‘Hinduism is a broad and inclusive religion encompassing individuals who respect and accept the ancient traditions of India, “especially the Vedic scrip- mmres and the social class structure with its special respect for Brahmans (the priestly class).”*? Unlike Christianity and Islam, Hinduism has no specific founder, and Hindus place no special significance on historical events or on the sequence of events. Rather, Hinduism, through the Vedic scriptures, is seen as timeless and eternal. Currently about 760 million Hindus reside in India, Malaysia, Nepal, Suriname, and Sri Lanka. Many of the Hindus outside of India typically share ancestors from India. ‘The quest for Braman is the ultimate goal for most Hindus. Brahman refers to the ultimate reality and truth, the “sacred power that pervades and maintains all things.”"° However, to discover the Brahman, one needs to look into one's ‘ima, ot soul. Hinduism generally believes in the reincarnation of the alma based on one’s karma, or the effects of one’s past actions. Whoever tries hard to live life according to the principles of diarma, or principles of righteousness and moral order, will be reincarnated in successively more favorable atmas until one reaches Brahman. ‘One aspect of Hinduism that is most likely to have implications for multi- national companies in India is the caste system, which is the ordering of Indian society into four occupational groups. The highest caste includes the priests, followed by the kings and warriors, and then merchants and farmers. The fourth ‘caste includes the manual laborers and artisans. Although the caste system seems unfair and is illegal in India, its original purpose was to create a higher Jaw that would subordinate individual interests to the collective good. The system remains a dominant feature of life in India today, and multinational companies operating in India have to be aware of it. For instance, having a lower caste member supervise higher caste individuals can be problematic. ‘Additionally, members of lower castes may face promotion ceilings in organi- zations because of their caste membership. Finally, at meetings, it is important to consider how the various castes interact. Consider the experience of FoodWorld supermarket chains in India.”! While opening new retail supermarkets in India, the firm had to hire and train mane ‘agers. However, being a retail manager is not seen as having a high social status in India, and only members of the lower caste were willing to take the jobs. Given the pervasiveness of the caste system in India, these workers felt that they had significantly lower status. Training programs therefore had to be designed to emphasize confidence in the workers in order to get them to perform their duties adequately. Another major challenge was to find ways to alleviate the concems of traditional Indian customers who may not want to make contact with someone from a lower caste. Some, however, argue that the caste system is slowly dying. The next Case in Point provides evidence of fundamental changes in Tndian society and how it views the caste system.Chapter 3 ‘The Institutional Context of Multinational Management _CASE The villagers of Seetanagaram were tired of their water pumps breaking down frequently. Despite their complaints to local officials, the pumps were seldom repaired. The women would then have to walk two hours to get water from the Sarada River, and the water would often make them sick. Things changed when Mr. Rao, a 23-year-old resident, was sent to attend the pump repair training program offered by a British charity, Water Aid. After he attended the train- ing, his services were much in demand. However, Mr Rao is a member of the Dalit caste, or untouchable, a fifth class below the other four castes. Furthermore, ‘Seetanagaram is a very segregated village, where the Upper castes live in a separate colony and exclude the Dalits even from participation in marriages and festivals, At first, the upper-caste members were reluctant to interact with the Dalits. However, faced with the possibily of nonfunctioning pumps, the upper castes gradually accepted the idea of a Dalit helping them fix the pumps. Such programs, lke Water Aid's efforts to train 490 lower-caste villagers, are slowly eroding the caste-based prejudice systems. ‘The political environment also shows some evi- dence that the caste system is slowly dying. At the TN POUN T Is the Caste System Dying? time of writing, Kumari Mayawait, a 53-year-old for~ mer school teacher and member of the Dalit caste, was running for primé ‘minister, and some experts believed she had a charice to win. Furthermore, India was considering extending quotas in-various occu- pations fo ensure that the lower castes get a fair representation. Indian companies were also im- plementing voluntary plans to increase the numbers of lower castes in the workforce. Some companies were thinking about offering better educational and ‘raining opportunities, while others were investigating coaching classes to encourage lower castes to achieve higher education, The Indian government was at the same time considering tax breaks for compa- nies offering employment to lower-casie people in oor areas. ‘Sours: Bosed on Economist. 2008. “Ada: Caste and cash,” Api 29, . 67; Harding Lake. 2002. “Indonvilogars gen «taste ofequaiy ‘Lower caste Dalits ersined to fx Purp im dean water and modicum of respect.” Guardian, December 7, p20: Waldman, Ary. 2003. “Mayawati embeds outcast political rie; She India’s ist Dalit chief minster.” Seale Times, May 4, p. A26; Westhead, R 2009. “Can ‘untouchable’ be India’s PM? Born ino lower caste, Kumari Majowet is trying ta mak history as chess contovery.” Toronto Star, Marth 26, PAIS. Hinduism’s teachings and philosophies have other implications for multi national strategic management, The religion provides clear guidelines on ethi- cal behaviors, among which performing one’s duty and respect for one’s parents are prominent. In connection with the caste system, most people have clearly defined paths that they should be engaged in. Multinational companies would be well-advised to take such guidelines into consideration, The Hindu’s respect, for parents also has business implications. Multinationals will often find that families run Indian businesses and that the elder males in the business typically make the major decisions. As such, multinational companies should be ready to accept parental influence even when dealing with younger family members. Finally, Hindus believe that they should aim for four goals in life: spiritual achievement, material prosperity, pleasure, and liberation, although the aims vary depending on the stage of life.*? Nevertheless, multinational firms should be aware that Hinduism does not condemn the pursuit of material possessions; they can generally expect an environment that is conducive to business and wealth accumulation. Buddhism is the broad and multifaceted religious tradition that focuses pri- marily on the reality of worldly suffering and on the ways one can be freed from it. Gautama Buddha, the founder of Buddhism, was born as a prince in the sixth century BCE in India. Buddhist accounts of his life suggest that his father tried to protect him from seeing suffering to prepare him as a king. Buddha was, Buddhism Religious tradition ‘that focuses pri- ‘marily on the reality of world suffering ‘and the ways one can be freed from sufferingEducation Organized networks of socialization experi ences that prepare in- dividuals to act in society. Part 1 Foundations of Multinational Management however, dissatisfied with the impermanence of life, and, when he turned 29, he abandoned all riches to become “a wandering ascetic, searching for trath."** ‘Today, Buddhism is very popular in Europe and the United States, although most of its followers are found in countries such as Cambodia, China, Japan, Korea, Laos, Sri Lanka, and Thailand. ‘The essence of Buddhism is that craving and desires inevitably produce suf fering, It is, however, possible to reach a state where there is no longer any suffering, Buddha proposed that, to remove suffering, one had to follow the Eightfold Path of right understanding, right intention, right speech, right ac- tion, right livelihood, right effort, right mindfulness, and right concentration. Buddhists also believe that the way to end suffering is to meditate in order to train and soothe the mind and ultimately reach enlightenment, or Nirvana. Nanayakkara’s interpretations of Buddha's teachings suggest that he saw poverty as the major reason for the decline of ethical behavior in society.™* Buddhism therefore prescribed a work ethic that encouraged workers to engage in their best efforts and that promoted qualities such as taking initiative, per sistence, and hard work. Laziness is seen as a very negative quality and is heavily discouraged. Buddhist workers may be expected to have a generally positive view of work, but multinational managers must be aware that Buddhism proposes a work ethic that emphasizes teamwork and ethical means to achieve success. ‘Multinational companies would be welladvised to provide environments that take advantage of such values. Given Buddhism's strong emphasis on compassion and love, some have sug- gested that Western profitoriented companies should adopt Buddhist prince ples. In that context, Gould proposes that employees (and multinational man- agers) engage in a number of exercises to enhance their ethical orientation to busincss.”® For instance, if everyone is considered as a mother, father, brother, or sister, one is more careful about the consequences of one’s actions on others. Furthermore, the compassion and love inherent in considering others as close relatives may be helpful in dealing with the employee diversity of multinational companies. Another Buddhist principle is the acknowledgment that the positive action of others makes life possible. Hence, if multinational managers recognize the efforts of their workers through ethical treatment, they are likely to enjoy longterm benefits. Finally, although work is a key component of life, other areas need to be balanced. Multinational companies can respect a balanced work design for their workers. ‘These descriptions of the four major world religions show that they all have implications for how the economic environment is shaped. Tm this section, we looked at four of the world’s main religions and examined the implications for multinational strategic management. In the next section, we Jook at two final social institutions: education and social inequality. Both are key in most societies, even though their effects on multinational strategic manage- ‘ment may not be as great as that of the other three social institutions. Education Education consists of the “organized networks of socializing experiences which prepare individuals to act in society” and “isalso a central element in the table of organization of society, constructing competencies and helping create profes- sions and professionals.”** Education is seen as a critical path to economic de- velopment and progress. Most countries want to achieve universal educational enrollment” because education enables society to instill the skills, attitudes,Chapter 3 The Institutional Context of Multinational Management behaviors, and knowledge that allow people to demand more and give more to society. Such exchanges enhance the societal expansion and modemization. Education has obvious implications for multinational strategic management. For one thing, educational levels indicate the skill and productivity of workers* The more educated workers ate, the more skills they possess, and the more likely they are to contribute to a country’s production, both in products and services. As you will sce in Chapters 11 and 12, educational systems have implications for how labor force issues are approached and how policies are implemented. Edu- cational systems determine the nature of the workforce, and having an abundant supply of well-educated individuals allows countries to facilitate the absorption of technology from developed countries. Multinational companies can thus gauge the educational levels of various countries to determine what to expect from workers. Specifically, multinational companies can look at the mean years of education or educational attainment scores to get an idea of the human capital potential in a society. To estimate the availability of serviceoriented multi- nationals, multinational companies can look at the percentage of population enrolled in tertiary education. Exhibit 3.7 shows, for a selected number of countries, the percentages of individuals within the relevant age groups enrolled in tertiary education. The scores reported in Exhibit 3.7 give a very rough estimate of educational potential. ‘Nevertheless, the focus of education varies widely. As you will sce in Chapter 11, some societal educational systems value only academic education, while others, like Germany, have a balance between the academic and vocational components of the workforce. Multinational companies may therefore be in- terested in the skills and experience to be gained from a country’s educational system by considering the test scores of students on internationally comparable tests. For instance, the test scores on mathematics and science, as conducted by the International Evaluation of Educational Achievement and International Assessment of Educational Progress, provide a good idea of the quality of a workforce and the educational system's preference for specific areas. Further- more, if multinational company is engaged in high-level R&D, it may find that Tertiary Enrollment as Percentage of Relevant Age Group (%) | Nonway’ United States ‘Sweden Finland Bal 7 zai ig Boel as Sore: Basel on Economist, 2008. Pockes Word Figures 2008 Eton endo: The Ena88 Part 1 eExuieit United States Iceland Japan Finland Sweden Israel ol fos al 15 ‘Source: Based on Economist 2008, Pocket World in Figutes. 2008 Ealtion. London: The Economist. Total Expenditures on R&D as Percentage of GDP (%) 2 Foundations of Multinational Management 2511) (ihr WSeSiqu ae ast els locating in countries with high research and development may be necessary. Exhibit 3.8 shows the percentage of GDP that goes to research and development in selected countries. GASE China is currently struggling with efforts to redesign its educational system. For decades, its system was based on rote leaming; both parents and teachers would encourage students to memorize brutal ‘amounts of information and cram for extremely com- petitive examinations. However, current critics argue that the system stifles creativity and is producing a very unhappy student force. A survey conducted jn 2002 found that about 50 percent of senior sec- ‘ondary students and first-year university students had actually considered commiting suicide as a way to cope with the difficulties associated with being @ student. ‘The nature of the changes has been to reformulate textbooks to make them more interesting, integrating practical situations to theoretical explanalions. Instead of merely memorizing facts, students are encouraged to see how facts relate to solutions to practical problems. Students are also encouraged to be TN POUNT Research and Development in Asia imaginative and to view texts as the foundation for leaming rather than as sacred books. These reforms, however, cost money, and many ‘schools are having difficulties implementing them. ‘Some also argue that, as long as students have to take nearly impossible entrance examinations to secondary ‘and tertiary schools based on memorization, parents will continue to pressure their children in the old way. Despite these difficulties, the future looks bright for Asian nations. Observations show that research and de- velopment in countries like China and South Korea has increased substantially. For example, Samsung spent more on R&D in 2007 than IBM. Corporate spending on R&D in China grew 23-percent between 2001 and ‘2008, while it arew only 1=2 percent in Europe and the United States. Other statistics show that Taiwan has more high-tech researchers than the United Kingdom “Sources: Raed on Economist. 2008. “sng inthe Eas" Jamar 3, 1-47; Eccmomist 2003 “Roll over, Confit,” lnuery 25, 9p. 40-41,Chapter 3 The Institutional Context of Multinational Management 89 As Exhibit 3.8 shows, an important issue is the extent to which educational systems actually encourage students to be innovative and creative. In that con- text, many Asian societies have been grappling with the redesign of educational systems that are extremely competitive at the secondary level but that rely heavily on rote learning, Nevertheless, some of these societies have been extremely successful in research and development. Consider the Case in Point on the previous page, which shows that, in many Asian societies, students may go through extreme hardship to succeed. Multinational companies have to be aware that their workers have gone through schooling experiences based sometimes on rote memorization. However, the evidence also suggests that Asia will play a key role in the future with regard to innovation. This section has explained that education has important effects on how so- cieties are structured economically, In the next and final section, we look at social inequality. Social Inequality Social inequality is the degree to which people have privileged access to re- Social inequality sources and positions within societies.” In high-social-inequality societies, a [ew Degree to which individuals have the ability to control and use important resources as sources of people have privileged access to resources and positions within societies. control. This access to resources also enables the select few to use this power to gain access to even more power and to use it, in turn, to perpetuate inequality. Additionally, the level of inequality is typically taken for granted by people as the various socialization agents, such as schools and parents, tend to teach their children to justify such social stratification. CASE Multinational companies, involved in trading bananas have been under intense pressure to improve the labor conditions of both their workers arid their suppliers” workers. Chiquita, for example, has developed @ com- prehensive corporate social responsibility policy. A major ‘component of this policy Is @ voluntary code of conduct, | which both Chiquita and its independent producers must implement. However, a survey of Nicaraguan women banana workers revealed that the code of con- duct has not made much difference in their lives. Why has the code been less effective for Nicaraguan women and women in other countries? Prieto-Caron argues that, among other factors, structural gender In- equalities have mitigated. the effectiveness of such codes. The banana industy employs approximately 482,000 wornen in countries such as Guatemala, Hon- duras, Nicaragua, Colombia, and Ecuador, However, most of these women are involved in vary low-paying, high-hour packing jobs. They face significant inequalities compared to their male counterparts. Additionally, they are employed in a very seasonal industry, and mary more TN POUNT Gender Inequality and Chiquita Bananas ‘women workers are usually available to perform these Jobs. Coupled with a social context where domestic vio- lence and the negative perception of women are com- mon, women workers have faced much harder working conditions than mien because of such inequalities. What can Chiquita do to reduce gender inequal ities? Most experts agree that improving the conditions ‘OF women is a challenging task, However, local gov- ‘ernments and companies can work to provide equal pay for equal work. Furthermore, gender awareness training may be useful to encourage male workers to change their perception of female counterparts. Additionally, more female supervisors can be hired to reduce cases of sexual harassment, and systems can be implemented s0 that women can safely report in- cidents and violators can be sanctioned. Finally, com= panies can be proactive and work to provide a better ‘environment for maternity rights, Sour: Based om Pit Caran, Marina. 2008: “Corporate soil “rsponstliy in Latin America" Journal of Corporate Crizership, 21, pp. 85-94.90 Part 1 Foundations of Multinational Management Social inequality has important implications for multinational management. ‘As you will see in the next chapter on international ethics, multinational ‘companies are subject to significant criticism for their operations in countries with high social inequalities. Many firms endure negative publicity for paying low wages or using child labor, and the high levels of social inequality only magnify the publicity. As a result, many multinational companies are realizing that it is sometimes in their interest to be socially active to mitigate social in- equalities. Consider the previous Case in Point, which considers social inequality from a gender perspective. ‘As the Case in Point implies, social inequality can have important implica- tions for location decisions. Many multinational companies now actively avoid countries with high inequalities to prevent potential negative publicity. As we will see in Chapter 4, many key ethical issues arise in countries with high forms of social inequalities. For that reason, multinational companies can consider the GINI index as an indicator of the degree of social inequality. The GINT index measures the degree to which people's income deviates from a perfectly equal income distribution. Exhibit 3.9 shows the GINT indices for selected countries. Few cross-cultural studies have examined the effect of social inequality on work-related variables. However, in an innovative study of 30,270 individuals from 26 nations, Parboteeah and Cullen showed that social inequality negatively impacts the degree to which pcople are attached to work.”° Social inequality provides job opportunities only to some highly placed individuals. Furthermore, high levels of social inequality may result in more demoralized workers who are suspicious of their “exploiters.” It is therefore less likely that people in highsocial-inequality societies see work as more important in their lives. In fact, high levels of social inequality Tikely result in a less favorable work environment. This study clearly shows the importance of social inequality and its potential impact on multinational companies. GINI Index for Selected Countries (0 = perfect equalit) Inequality) 00 = perfect Vietnam United States UK South Africa Spain Poland Mesico South Korea Japan i Honduras Denmark Czech Republic China Colombia Belgium Austria “Soure: Adapted from World Development Indicators Database, 2009. htp:/publictions worldbank:ry/ecommere/producs.Chapter 8 The Institutional Context of Multinational Management OL [Sanenary aad Conclusions TN To get a full understanding of any society, it is essential to understand both national culture and the institutional context We first looked at a model fo examine how both national culture and social institution combine to form the national context that influences the business culture. of a sociely. The chapter then complemented Chapter 2 by providing more specific background information on four important social institutions and their implications both for companies and for the people they employ. First, the chapter defined social institutions and pro- vided an explanation of how social institutions affect in- dividuals and organizations. The chapter then described ‘economic systems, especially their extreme types. It was shown that in societies arranged along socialist systems, the government owns the systems of production, whereas in capitalist systems private individuals make production decisions, Lodged between these two extremes is the mixed economy. Two major implications of economic systems for multinational strategic management were then discussed: the extent of govemmmental intervention in the business arena and the transition from a socialist economy to a free-market economy. The institutional context includes industralzation. in that context, the chapter discussed preindustial, industrial, and postindustrial societies and their implications for muttinational strategic management. Preindustrial so- cieties are typically less developed and thus present significant challenges for multinational companies. In contrast, industrial societies tend to be more economic- ally advanced, with the manufacturing sector dominating the economic environment. Finally in the postindustrial society, services become the dominant sector, and peo- ple start shifting trom achievement values to more quality-of-life values. Religion is also an important social institution in most societies. We discussed four of the major religions ‘around the world: Christianity, Islam, Hinduism, and Buddhism. The chapter also outlined the important business implications for each. Educational systems have important implications regarding the available skills and experiences of the workforce in a society. However, other aspects of edu- cational systems, such as the emphasis on sciences and mathematics, were also discussed. Finally, we saw that social inequality can have Portant implications for multinational companies. The chapter concludes with the theme that social institu- tional differences are important now and will continue to, be important in the future. We concluded by arguing that successful multinational managers are the ones who can properly assess the institutional context of the society in which they operate and who can design work environ- ‘ments that fit the institutional context. 11. What are the three major types of economic sys- tems? What are the effects of economic systems ‘on how organizations are structured in societies? What are same implications of the market transition that many formerly communist societies are ex- periencing? What are some major challenges companies are facing in such societies as they try to motivate workers? 3. Why has Africa lagged behind other countries in economic development? What can multinational companies do to encourage economic progress on that continent? What are the major philosophies of each of the ‘world's four major religions? Pick two religions, and discuss how they affect the business environment. 5. Discuss specific Buddhist principles and how they can be applied to help multinational managers become more ethical 6. How does the educational system influence the business environment in a country? ‘7. What is social inequality? What important areas of business can social inequality impact? A Briefing Paper You have just been informed that your company has agreed to a joint venture with a company in the Czech Republic. You not only will provide new technology to ‘manufacture lightbulbs but also will have to provide your managerial expertise to manage and motivate workers. Your understanding is that you will take over the92 Part 1 managerial aspects of the joint venture at the beginning and gradually train Czechs in management positions, Using the World Wide Web and the library, research general issues such as Czech culture, Czech workers! attitudes toward work, the appropriateness for Czech partners of Western-based motivational practices typi- cally used in your company, and the managerial potential Foundations of Multinational Management of Czech workers. Identify key challenges you will face as you make the merger work, Discuss some potential so- lutions to these challenges. Discuss some of the training methods you may want to use as you train Czechs to become managers. What are some challenges you may face when you try to train Czechs to become managers? Present your findings to the class. * Schooler, C1996, “Calla and socio-cultural explanations of czoss-naional pycholgical ferences Annual Review of ‘Sociology 22, pp: 323-319. 2 Tamer dH. 1997. 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