THE CULTURAL CHALLENGES OF MNCS INVESTING IN CHINA
IN THE TWENTY-FIRST CENTURY
Universal approaches of management believe that "few major differences exist among managers from different social and cultural backgrounds and that management theories and practices can be easily transferred from one culture to another" (Chen, 2004, p1). This approach suggests that the corporate culture and management systems that secure financial success in a company's home country will guarantee success in other countries. This assumption is often erroneous. Due to the difference in history, geography, culture, infrastructure and the relevant political environment, management systems and best prac-tises in the home countries of successful MNCs often conflict with those in a host country. To help MNCs develop an efficient management system for the countries or region they operate in, management should instead use the 'cultural cluster' approach 'which puts emphasis on how attitudinal and behavioural differences among cultures determine man-agement tasks' (Chen, 2004, p2).
In examining the challenges that are confronted by western MNCs in investing in China, this essay will firstly consider the meaning of cul-ture. Specifically, Hofstede's expanded concept of culture is defined, then applied to il-lustrate the sharp contrast in culture and business environments that MNCs face in China (Hill, 2003). At this point, the danger in stereotyping about Chinese culture is emphasised. Guanxi, the unique element of Chinese culture, is discussed. The critical role that guanxi plays is illustrated through examples (Chen, 2004). Furthermore, the importance of de-signing culturally relevant employee incentive schemes in China is canvassed, as well as the Chinese method of conflict resolution. Then, the essay will define and historically explain the four different types of enterprise, each with their differing corporate cultures. The challenges that different types of enterprise confront in China are considered. Finally, the essay seeks to explain why some MNCs fail in their investment in China. The man-agement systems of China and western countries will be shown to differ greatly, suggest-ing MNCs need to modify their business practice in order to survive in China.
WHAT IS CULTURE?
Culture is 'the acquired knowledge that people use to interpret experience and generate social behaviour' (Hill 2003, p 108). Hofstede develops this notion by articulating the four dimensions of culture. These dimensions will enlighten our analysis of Chinese cul-ture. Broadly, these four dimensions are: power distance, uncertainty avoidance, indi-vidualism and collectivism (Hill 2003).
1. Power distance is "the extent to which less powerful members of institutions and or-ganisations accept that power is distributed unequally" (Hill 2003, p 116). Chinese culture is largely influenced by Confucianism. Three branches of loyalty bind indi-viduals within Chinese society: "loyalty to the ruler, filial obedience and fidelity of wife to husband" (Child & Warner, 2003, p 28). The predominance of Confucian thinking in Chinese culture has survived, despite Mao's attempts to weaken its influ-ence. Both State Owned Enterprises ('SOE') and private firms delegate little authority to the employees (Child & Warner, 2003). This suggests that they have embraced a large power distance, and that China is high in power distance.
2. Uncertainty avoidance "is the extent to which people feel threatened by ambiguous situations and have created beliefs and institutions that try to avoid those" (Hill 2003, p 117). Throughout Mao's Cultural Revolution and the 'Hundred Flowers' program, Mao created an atmosphere where the educated classes felt free to express their views. But those who criticised the regime were reprimanded by the administration, and committed to a program of 're-education'. Since then, the Chinese political environ-ment has created high uncertainty avoidance in Chinese people (Peng et al, 1998).
3. Individualism is "the tendency of people to look after themselves and their immedi-ate family only" (Hill 2003, p 117). In contrast, collectivism is "the tendency of peo-ple to belong to groups or collectives and to look after each other in exchange for loy-alty" (Hill 2003, p 117). This is consistent with the Confucian teaching, which em-phasises the important of the group, and the sacrifice of personal interest for the greater benefit of the group. This is further reinforced by the State Owned Enterprises, which emphasise strong group orientation (Child & Warner, 2003).
4. Masculinity is a "culture in which the dominant values in society are success, money, and material goods" (Hill 2003, p 117). Generally, Chinese people living in coastal cities like Shanghai and Beijing, as well as the younger generation, tend to be more sympathetic to masculine culture (Child & Warner, 2003). Conversely, femininity is a culture in which the dominant values in society are caring for others, and the quality of life for everyone (Hill 2003, p 118). Typically, people living in rural areas conform to the feminine culture (Child & Warner, 2003).
The cultural gulf that separates China from western corporations is illustrated by the con-trast between the four dimensions of culture in Sweden, the home of highly successful MNC IKEA, the outcomes of which are the opposite to those in China. Sweden can be characterised as a highly individualistic society with a small power distance (Hill, 2003). Swedes feature weak uncertainty avoidance and their culture is highly feminine. There-fore, a possible expansion of Ikea into China may lead to a transformation in its corporate culture. For example, instead of promoting a small power distance, IKEA should consider avoiding the delegation of power into the hands of employees.
However, our analysis must recognise the dangers in stereotyping Chinese culture. Chi-nese society is rapidly changing, fuelled by the wave of reform instigated by Deng Xiao Ping throughout the last twenty years. Past assumptions about Chinese culture may not hold true today (Boos et al, 2003). For example, the influence of the west has created a younger generation of Chinese who tend to be more individualistic than preceding gen-erations. Generally, the younger culture is more masculine than in the past. The trouble with making assumptions about Chinese culture can be illustrated by the expectation of some MNCs that China has a high uncertainty avoidance. However, a survey taken by two American academics suggest that Chinese university students are more comfortable with high risk projects compared to their America counter parts (Anonymous1, 2004)
GUANXI: AN ESSENTIAL INGREDIENT FOR BUSINESS SUCCESS IN CHINA
Central to Chinese culture is the notion of guanxi, which is defined as "the connection that binds people through the exchange of favours rather than through expressions of sympathy and friendship" (Chen, 2004, p 45). Because the legal system is still in its in-fancy, any form enterprise, either State owned, private, WOS or JV, will not succeed without guanxi. MNCs should modify their business practice to accommodate and prac-tise guanxi, rather than rely on the strict western legal notions of contract law. Further-more, American managers should work on building their network of relationships. Liang Su-ming classifies Chinese society 'as neither individual-based nor society-based, but rather relation-based' (Chen, 2004, p49). Therefore, if American managers are to run their Chinese operations successfully, it is essential that they comprehend the operation of the Guanxi network. If managers of MNCs don't have adequate connections, they can begin by employing social expressions such as the offering of congratulations or condo-lences and the giving of gifts on appropriate occasions (Chen, 2004, p 46). The experi-ence of Hong Kong businessman Vincent Lo exemplifies a successful approach to build-ing a network of relationships. In 1984 he built a hotel with Shanghai's Communist Youth League. At the time the League could not repay its construction loan, so Lo de-cided decide to help out. One of the Youth League secretaries at that time, Han Zheng, is now the Mayor of Shanghai. Zheng helped Lo secure the rights to develop a project worth US$170m (Anonymous2, 2004). This example illustrates that relationships in China are long lasting, and parties to an agreement share a relationship beyond the com-pletion of their agreement.
For MNCs negotiating business projects in China, it is critical to remember that the busi-ness does not end when a contract is signed. If a Chinese party to an agreement offers fa-vourable terms, a lower cost or access to a big project, the MNC should not let that kind-ness go unnoticed. MNCs should observe the reciprocal rules and seek to return that fa-vour in the future. The reputation of those who fail to do so will suffer, making it harder for the future prospects of their business.
THE IMPORTANCE OF CULTURALLY RELEVANT EMPLOYEE INCENTIVES
Business success is based on the performance of employees. MNCs need to motivate their employees. This motivation should be culturally relevant. The skilled workforce in China is highly mobile, with employees often moving between different jobs and em-ployers (Boos et al, 2003). Wage competition is fierce because of the shortage of skilled labour in China, with employers fighting over employees by offering two or three times the normal wage. MNCs should modify their incentive systems to complement Chinese culture. For example, if an MNC employs a predominantly young workforce, which is more likely to be ambitious, it should offer incentives based on performance. This con-centrates on the performance of the individual. However, if a MNC is engaged in a JV with a SOE, the local employees are more likely to be older. Consequently, an incentive system should reflect the profile of the workforce, and be more collective based.
Guanxi can also play a role in the effectiveness of employee incentive schemes. For ex-ample, if an employer offers the provision of private loans to employees at low or no in-terest, the employee recipient may appear ungrateful if they leave their employer to pur-sue different employment. The culturally specific design of employee incentive schemes should also consider the strong sense of collectivism in Chinese culture. For example, subsidised housing appeals to the sense of collectivism shared by employees, who may be reluctant to change work and break the strong bond that had formed in the work and liv-ing space (Boos et al, 2003).
CONFLICT RESOLUTION -- THE CHINESE WAY
Child observed that Chinese managers attempted to maintain harmony in potentially heated situations in the workplace. Importantly, they always responded to situations of actual or potential conflict, but not in a confrontational manner. Rather, Chinese manag-ers tend to act 'behind the scenes' in a conciliatory attempt to resolve the conflict, rather than directly dealing with a foreign colleague. In sharp contrast, western managers are more likely to resolve conflict in the boardroom or through a formal meeting. They are more reluctant to personally approach employees, particularly in the case of senior man-agers. Obviously this can jeopardise workplace harmony, particularly when contrasted to the alternative taken by most Chinese managers. Rather than directly addressing conten-tious issues in the boardroom and publicly embarrassing other parties, managers of MNCs should choose a private setting and address the matter politely (Child & Warner, 2003).
THE FOUR DIFFERENT TYPES OF ENTERPRISE IN CHINA
Whilst Confucianism lies at the philosophical core of China, China is not a homogenous place. Due to the raft of changes introduced by the Communist Party during the first half of the twentieth century, and the recent reform of the past two decades which has driven the emergence of new types of enterprise, many subcultures exist. The Dengist reforms have transformed management practise in China. The pace of reform has prompted some commentators to ask, 'to which China are we referring? Which sector? Which region? Which generation?' (Child & Warner, 2003 p42-43). Therefore, China does not necessar-ily fit into only one point on the Hofstede's culture dimensions index (Hill 2003). Before 1979, State enterprise was the dominant enterprise in China due to the approach taken by the Communist Party. During this period (pre-1979), the Government determined quality and quantity of supply, and the bureaucratic management implemented resources accord-ingly. In this form of enterprise, there was a culture where people were reluctant to accept personal responsibility. Because of state involvement, there was a trend to bureaucratic behaviour. During this period, managers were constrained with very little autonomy. They could neither hire nor fire their workers. Performance was not linked to effort, and motivation was low (Forrester & Porter, 1999).
But over the last 20 years, China has experienced the beginning of an economic revolu-tion. The stranglehold that State enterprise enjoyed over the economy has gradually de-clined, whilst the private sector has begun to expand. In a private Chinese firm, efficiency is greater because the owner maintains their authoritative position through controlling information. They have a different way of doing business to the other three types of en-terprise. There is a greater emphasis on the owner's personal control on all aspects of the enterprise. Because private enterprise is motivated by self interest, it tends to be more profitable and have greater efficiency because of its superior flexibility to SOE. Further-more, private enterprise is not overburdened by the bureaucracy, and can therefore make quicker decisions. The rise of the private sector has also had significant implications for State enterprise. Managerial mindsets were radically transformed. Chinese managers be-came responsible for financial performance, which meant they were handsomely re-warded for success. Private enterprise has also been strengthened through China's acces-sion to the World Trade Organisation, but it also has suffered the pitfalls of a resurging rule of law. The Chinese Government was successfully sued by a private firm in a Chi-nese court. It remains to be seen what regulation will emerge in China, and how this will affect the business environment (Child & Warner, 2003).
THE CHALLENGES FACED BY WOSS AND JVS
For us to understand the corporate management culture in China, it is important to exam-ine the types of enterprise that exist there. Enterprise in China can be characterised by four main types: state, Joint Ventures ('JV'), Wholly Owned Subsidiaries ('WOS') and private Chinese firms. In dealing with enterprise, a modified approach should be applied according to the enterprise's type. A Joint Venture is a partnership between a foreign and a local Chinese business. Such an arrangement is contributing to the rapid change in mindset of Chinese managers. A Wholly Owned Subsidiary allows a foreign MNC to open in China and have complete control of that business. Wholly Owned Subsidiaries tend to implement parent corporate culture in the foreign subsidiary. If MNCs wish to operate in China, they can either operate as a WOS or engage in a JV agreement. Both of these alternatives pose important challenges that particular MNCs need to be aware of. If an MNC seeks to maintain a strong corporate culture in its operations in China, it is ad-visable that they invest in a WOS. This is because of the pace of rapid reform that has swept through China in the past two decades. Consequently, employees generally support a paternalistic corporate culture (Child & Warner, 2003). While this arrangement allows MNCs to have tight control over their Chinese operations, problems can arise because particular industries are sheltered by restrictive market access laws. Furthermore, expatri-ate managers of MNCs in China can confront difficulty in dealing with a burdensome, complicated bureaucracy.
Alternatively, MNCs can establish a JV which can help overcome some of the limitations that a WOS is likely to encounter. A JV can help deal with the complicated bureaucracy. However, before an MNC enters such an arrangement, the company needs to be aware of some of the potential conflicts that can arise between JV partners. Cultural conflict can arise from particular ethical issues specific to customary practices. For example, potential ethical issues include corruption, deception and a tendency of local partners hiring em-ployees based on their personal relationship with that worker, but not because the worker is required Managers from Anglo cultures that are deeply embedded in the rule of law and the importance of government may find it difficult to cope with such business prac-tices in China. For a JV to be successful in China, it is advisable that managers avoid making judgments informed by their western conception of morality (Boos et al, 2003, p75). Instead, they should try to understand their local colleagues. For example, corrup-tion can occur because Chinese government officials are paid poorly. Provincial leaders in China can be paid approximately USD$300 per month (Anonymous3, 2003). In light of this, lying during negotiation between competitors has become more acceptable in parts of Chinese business culture.
Some of the key ideas of leading Chinese strategist, Sun Zun, have been subconsciously incorporated into business practice. One particular fundamental (translated) teaching is that an 'enterprise should also hide its own strength so that its competitors do not know its real situation and direction of development' (Chen, 2004 p40). In line with this think-ing, MNCs should be careful in their selection of managers. Whilst technical skills are important, intercultural skills and the flexibility to adapt to foreign regulatory and cultural environments are also invaluable. MNCs should select managers who can adapt their management system to conform better to the Chinese regulatory environment and culture (Boos et al, 2003).
EXPLAINING WHY MNCS FAIL IN CHINA
A common reason for the failure of JVs in China is that MNCs often fail to consider the interests of other parties to the agreement. For example, a Chinese JV partner may seek to employ as many of his staff as possible, to ensure that skills are transferred to his work-force. The Chinese Government seeks to keep unemployment low (Boos et al, 2003). Therefore, local JV companies and the Chinese Government are more likely to support MNCs if they can help local Chinese companies and the Government achieve their par-ticular interest. Clearly, managers of MNCs should consider the interests of other parties in pursuing business in China, and determine a common ground that respects the interests of all the parties to the venture.
Many MNCs believe that intercultural training is futile(Boos et al, 2003). They insist that the management model that works in one place will work in another. Questioning the le-gitimacy of the universalist approach, this essay has demonstrated that this attitude is of-ten wrong, and is unlikely to lead to financial success in China. Endorsing the 'cultural cluster' approach, this essay has emphasised the importance of culture, as defined in the four dimensions according to Hofstede. Significant elements of Chinese culture have been explained, and their centrality to the conduct of business in China has been high-lighted. The universalist position has been undermined through the consideration of cul-turally relevant employee incentive schemes, particularly in the context of the competi-tive skilled labour market in China. That approach has also been weakened through the example of conflict resolution in China, the methods of which differ starkly to practises employed in MNCs. By outlining the historical demise of State enterprise, and the corre-sponding rise of private enterprise, the essay has demonstrated the relative infancy of the capitalist mentality in China. The four type of enterprise in China were explained. Then, the essay examined the difficulties that MNCs confront when they begin WOS or JVs in China. These challenges illustrate the inherently different business climate in China. As a new economic era dawns in China, the MNCs that most successfully adopt their domestic management models to the new cultural climate in China will reap the greatest rewards.