Effects Of National Culture Essay

Since 1988, our world has changed in a myriad of ways. As dictatorships have risen and fallen and new democracies have formed, the political culture of our society is much different than in the years of the late Cold War. In addition to political changes, new technologies, including the world wide web and satellite communications have allowed people in different nations to communicate much more effectively. This research in this paper is very outdated, not taking into account the new market, trade laws, interest rates, or other economical factors of today’s international business world. The article, â€Å"The Effect of National Culture on the Choice of Entry Mode,† was written in 1988 by Bruce Kogut and Harbir Singh, of the Stockholm School of Economics and the University of Pennsylvania, respectively. The authors believed there were several means of entry into foreign markets, including joint ventures, wholly owned greenfield (start up) investments, and by acquisition. The authors examined these methods in depth and analyzed the means by which the businesses not only started up, but operated in foreign markets as well. The authors reviewed statistics, data, and literature, and formed hypothesis as to which methods were being used most, and in what industrial sector(s). The first means that some businesses entered and operated in a foreign country is through the acquisitions method. The acquisitions method entails purchasing a sufficient amount of stock to control the primary shares of a certain company. This method might be considered â€Å"buying out† a foreign company already in existence. However, as currency exchange rates and interest rates fluctuate on a daily basis, this would be trickier in today’s market. For example, 20 years ago, the dollar, the Japanese yen, the Canadian dollar, and the Indian Rupee were worth very different amounts. More importantly, the Euro was not in use, as many of the countries in Eastern Europe in particular, were under communist control. Today, as countries have become more aware of these fluctuating rates, it might be harder or riskier to enter a market through the acquisitions method. In addition, free trade laws and regulations also regulate who can buy what and how much in a foreign market. The second means is a joint venture method in which two or more firms share the assets and profits of a certain company. Again, the same problems might exist as in the acquisitions method, with fluctuating currency exchange rates affecting profit. For example, if a business operated in both China and the United States, as economies changed and foreign tax laws changed, the company could fall under financial strain. The influence of firm experience on entry choice has played a prominent role in several of the studies employing the Harvard Multinational Enterprise Data Base. In their pioneering study on the ownership structure of American multinational firms, Stopford and Wells [1972] found joint ventures, relative to wholly owned activities, were less likely to be chosen, the more central the product to the core business of the firm and more experience the firm had in the relevant country. Similarly, they found that marketing and advertising intensity, as well as research and development intensity, discouraged the use of joint ventures. (Kogut & Singh 1988) This mindset would make sense, as it is hard to run a successful business in one culture, let alone worry about marketing, advertising, and research costs. It also would make sense that two countries might not respond the exact same way to a business plan and marketing techniques. The third means of entry is a greenfield, or start-up, investment, completely new to the foreign market. While some of the challenges of tax laws, currency exchange, and interest rates would also affect this means, the biggest obstacle might be the cultural barriers. Although the world is getting smaller each day thanks to the internet and satellite communications, hundreds of languages and dialects are still spoken throughout the world. This might lead to a communications problem if a foreigner attempted a greenfield investment. Besides language barriers, marketing and advertising techniques would need to be researched in order to be effective in a new country. The authors argue that joint venture is almost a cross between the two other methods, greenfield, and acquisitions. Many studies, as discussed later, have treated greenfield and acquisition as representing alternative entry modes, with joint ventures being only a question of the degree of ownership. This approach implies that entry and ownership involve two sequential decisions, the first deciding whether to invest in new facilities or to acquire existing ones, the second one on how ownership should be shared. Whereas such an approach is clearly defensible on both theoretical and empirical grounds, we treat joint ventures as a choice made simultaneously with other alternative modes of entry. (Kogut & Singh 1988) For this reason, joint ventures can be described as a gray area in foreign business acquisitions. For example, if a company bought out another one, or merged with another company, while retaining some of the business practices and/or staff, it would probably be considered a joint venture. The authors theorize that Greenfield entry is the best way, or at least that was what they believed in 1988. Due to the difficulty of integrating an already existing foreign management, cultural differences are likely to be especially important in the case of an acquisition. Indeed, empirical studies on mostly domestic acquisitions have shown that post-acquisition costs are substantial and are influenced by what Jemison and Sitkin [1986] call the organizational fit of the two firms. They define organizational fit as â€Å"the match between administrative practices, cultural practices, and personal characteristics of the target and parent firms† (Jemison and Sitkin 1986, p. 1471. Sales and Mirvis [1984] document in detail the administrative conflicts following an acquisition when both firms differ strongly in their corporate cultures. In contrast to the integration costs of an acquisition, a joint venture serves frequently the purpose of assigning management tasks to local partners who are better able to manage the local labor force and relationships with suppliers, buyers, and governments [Franko 1971; Stopford and Wells 1972]. Thus, a joint venture resolves the foreign partner’s problems ensuing from cultural factors, though at the cost of sharing control and ownership. Unquestionably, a joint venture is affected by the cultural distance between the partners. But such conflict should not obscure the original motivation to choose a joint venture because the-initial alternative of integrating an acquisition appeared more disruptive than delegating management tasks to a local partner. Of course, a joint venture may be troubled not only by the cultural distance of the partners, but also due to concerns over sharing proprietary assets. A wholly owned greenfield investment avoids both the costs of integration and conflict over sharing proprietary assets by imposing the management style of the investing firm on the start-up while preserving full ownership. (Kogut & Singh 1988) In 2008, businesses would face some of the same challenges as in 1988, such as the cost of integration, conflict of sharing proprietary assets, and administrative and management differences. However, as more and more businesses have gone global, most countries would have contracts and lawyers defining clear parameters on such details. The authors came to this conclusion by testing two hypothesis. The first focused on cultural differences. Kogut & singh (1988) said that, â€Å"The greater the cultural distance when the country of the investing firm and the country of entry, the more likely a firm will choose a joint venture or wholly owned greenfield over an acquisition. † This hypothesis primarily focused on the costs of running and managing a business from a greater distance. The second hypothesis as stated by Kogut & Singh (1988) stated that, â€Å"The greater the culture of the investing firm is characterized by uncertainty avoidance regarding organizational practices, the more likely that firm will choose a joint venture or wholly owned greenfield over an acquisition. † As with all unknowns, a foreign company could not be expected to know the exact way a business and marketing plan would be executed and responded to in a foreign market. Basically, the data found that uncertainty was the main reason companies tended to shy away from acquisitions and enter the market through a greenfield or joint venture method. This reason would still hold true today as the world market fluctuates and recessions come and go. The studies also noted that the methods of entry into a particular market varied depending on the product, service, or industry. There is a clear difference in industry patterns among the modes of entry. Joint ventures are relatively more frequent in pharmaceuticals, chemicals and electric and nonelectric machinery. Acquisitions occur primarily in natural resources, financial services, and miscellaneous manufacturing industries. Chemical and electrical machinery are especially attractive industries for greenfield investments. At a higher level of aggregation, acquisitions tend to be relatively more common than other modes of entry in nonmanufacturing sectors of the economy. (Kogut & Singh 1988) The article, since it was written 20 years ago, analyzed data primarily from the industrial sectors of resource, paper, chemical, petroleum, metal, rubber, machinery, electrical, transportation, and instrumentation. It had some analysis of data in communications, wholesale, financial, and other services. Now, in 2008, the list would include a lot of new data for technology, automobile, computers, and pharmaceuticals, to name a few. The list would also be inclusive of customer service outsourcing, a practice common among many technology and computer companies. Furthermore, new sanctions have been imposed on some natural resources. It may not be possible, for example, for a foreign company to come in and control an oil field, a diamond mine, or a rainforest. Such companies might be required to work jointly with a company in the nation they wish to do business, thus keeping it a joint venture somewhat. In 2008, any analysis of entry into foreign markets would also mention the oil trade, and the complexities that accompany it. As the recent conflict in Iraq has shown us, cultural differences and political challenges may hamper easy trade and setting up business in a middle eastern country. In the next few years, as new automobiles are developed to hopefully not be as oil-dependent, the market will change yet again. Another difference in automobiles are the influx of foreign cars to the United States, and the continual race to develop the most fuel-efficient car amongst competitors throughout the world. The article analyzed data primarily from the United States, Western Europe, and Japan. It found differences based on these countries. Again, there are strong differences among the modes of entry. For Japan, 46 of its 114 entries are joint ventures. Whereas Japanese acquisitions are not common, Japanese firms have a high proportion of the wholly owned Greenfield investments. Scandinavia and, especially France, also lean towards joint ventures. United Kingdom represents the other extreme; 111 of its 141 entriesare acquisitions, with the remainder evenly divided between joint ventures and greenfield. (Kogut & Singh 1988) Twenty years ago, the European Union was not in existence and many Eastern European Countries were under communist rule, thus meaning they had very different laws, regulations, and business practices than they do today. The Euro was not yet a currency, so trading and doing business amongst European nations was also very different. Also, the article makes little mention of a very new powerful force in the global market: China. As China has made tremendous economic and technological gains in this decade, it has begun to not only dominate the world market, but also branch out and do business in foreign countries. This relationship is reciprocal as European and American businesses are also looking to enter the Chinese market at the same time. Another item the article looked at which is very different today than 20 years ago is the size of businesses. They sought to understand whether or not larger businesses entered a market usually one way, while smaller businesses did something else. Obviously, while larger firms may have had more resources to acquire, smaller firms may have had the flexibility to do so more frequently. It stands to reason that the larger the investing firm, the greater its ability to acquire. Despite the logic, the empirical evidence is mixed. Dubin [1975] found that smaller firms tended to acquire relatively more frequently than large firms, though he did not control for other factors. In his cross-sectional tests, Wilson (1980) confirmed Dubin’s findings. However, these studies drew upon entry data of the largest corporations of the United States and other European countries. Caves and Mehra [I9861 study did not restrict their attention to entries of the larger corporations. Their results showed that the size of the entering firm is positively and significantly related to entry by acquisition over greenfield. Because acquisitions require generally more financial and managerial resources than joint ventures, size of the foreign firm’s assets should be positively correlated with the tendency to acquire. Conversely, acquisitions are discouraged, the larger the assets of the American partner, target firm, or investment size. (Kogut & Singh 1988) In 2008, this may or not be the same, as firms in certain industries may have grown and merged, while others may have decreased in size and split up into more specific companies. Also, the lending practices and investment practices are different today than they were 20 years ago, so a company may have more ways through which to acquire start-up capital necessary for operating in a foreign market. The article also examined why certain companies may enter a foreign market. Twenty years ago, not all countries possessed the technology, skills, or resources needed for some businesses. This caused companies to enter foreign markets to get what they were lacking in their own country. The previous empirical studies have assumed, however, foreign entry was usually for the purpose of market access or low cost manufacturing. Clearly, foreign entry into the United States may be motivated in order to source technology or purchase brand labels. The more diverse motives of investing in the American economy make it more difficult to sign the structural variables. For example, firms from R&D-intensive industries might joint venture if they possess the requisite technologies but lack the marketing depth. Or they may tend to acquire if they are investing for technology sourcing. Similarly, firms from marketing-intensive industries might engage in a joint venture if they possess the brand label but lack other resources along the value-added chain. Or they may acquire if they are investing for market penetration and lack label recognition. Stopford and Wells [1972] found that American firms pursuing an advertising-intensive strategy tend to full ownership of their overseas subsidiaries. Their data is drawn, however, from a time when American firms were investing overseas with clear strategic advantages. For our study, it is equally likely that foreign firms are investing in the United States for technology and brand label acquisition as for the exploitation of their proprietary assets. No prediction is made, therefore, on the signs of the coefficients for R&D and Advertising. (Kogut & Singh 1988). In 2008, as natural resources have been discovered in other parts of the world and new technologies have emerged, countries that were formerly primarily importers are not exporters, and countries that primarily exported, now import more from elsewhere. As the playing field changes every year, it’s important to note that countries will be continuing to search for the next best place or resource to help grow their company. Also, thanks to the internet and a computer-savvy generation, it is possible that some countries will not need outside help advertising or marketing, or with brand-name recognition. If the article were to be re-written today, obviously new data would need to be collected reflecting the changes of the last 20 years, including new industrial sectors, new companies, and more countries. The researchers would need to also differentiate between a few things. First, they would need to look at a specific industry, because, as they stated, the means of entry vary greatly depending on the industry. For example, one might enter a foreign banking market very different than had they entered a foreign market strictly to utilize their natural resources or labour force. Also, the article did not look enough at the cultural aspect of the business world. It would be remiss not to notice that there are some cultures who object to foreigners doing business in their country and would not respond to foreign business plans. For example, the United States and European nations might successfully acquire or start a business in China or Japan, yet not be as successful in a Middle Eastern Country. In conclusion, considering the article is over 20 years old, and the data was even older, the authors did a great job of analyzing data and investigating business trends and foreign market entry modes. It provides a great insight into the past and the mindset of the times, before new trade laws, instant communication, and most importantly, new products and services used by people worldwide. As societies change every day, as third world countries become first world, and new drugs are developed to cure a myriad of conditions, the only certainty is that 20 years from now, we will be in a very different business world as a result of our actions today. REFERENCES Caves, Richard. E. 1982. Multinational enterprise and economic analysis Cambridge, U. K. : Cambridge University Press. Dubin, Michael. 1975. Foreign acquisitions and the spread of the multinational fi. D. B. A. thesis, Jemison, D. B. & S. B. Sitkin. 1986. Corporate acquisitons: A process perspective, Academy of Management. Kogut, Bruce, and Harbir Singh. 1988. The Effect of National Culture on the Choice of Entry Mode. The Journal of International Business Studies k S. Mehra. 1986. Entry of foreign multinationals into U. S. manufacturing industries. In M. Porter, ed. , Competition in global industries. Boston: Harvard Business School. Sales, A. L. & P. H. Mirvis. 1984. When cultures collide: hues in acquisition. In Managing organizational Stepford, J. & L. Wells. 1972. Managing the multinational enterprise: Organization of the firm and ownership. New York: Basic Books.