THE CULTURAL DIFFERENCES OF CHINA
A COMPARATIVE STUDY ON THE CHINESE REGIONAL CULTURAL DISTANCES FOR MULTINATIONAL ENTERPRISESMaster Thesis
Master of Science in Business Studies Program International Management
University of Amsterdam Faculty of Economics and Business
Department Business Studies
FINAL VERSION
Submitted on October 18, 2013 by R.Vis (6212972)
Supervisor: Erik Dirksen MSc. Second Supervisor:
thinking. One of the most widely studied fields of international business is cross-national cultural distance. The literature and theories of cross-cross-national distance propose a good starting point in understanding how to enter a largely dispersed country like China. However most of the literature has been written about the dyadic cultural
distance between countries, but little has been written about the within-country regional cultural differences. Metrics in traditional theories such as Hofstede, Kogut and Singh, Schwartz and GLOBE all focus on the effects of national culture on the choice of entry mode, while the business need for deeper knowledge on cultures is still increasing.
The purpose of this paper is to find evidence on cultural disparity between the regions of China, and what the disparity holds for the strategic choices of
multinationals. For multinationals with the ambition to enter China through an equity investment like a joint venture or wholly owned subsidiary, the findings demonstrated that the Chinese market is culturally heterogeneous and should therefore be approached accordingly. The findings of this research also indicate a rich regional cultural diversity within China and should therefore be taken into consideration when multinationals make strategic decisions for entering, moving or expanding their business in China.
very enthusiastic that, during my second master business study international management at the University of Amsterdam, the influence of cultural distance in managing an international business was discussed extensively. Cultural differences matter when people go abroad, whether it is in travel or in business. To fit in people from other cultures have to follow the country’s rules, regulations, norms and values and as foreigners adapt their behavior to it. When they don´t it will be very hard to connect, communicate and survive in a foreign area.
First of all I would like to thank Erik Dirksen for his efforts and support in getting me through this thesis for my second master, and his guidance and help to get this thesis finished on time. Also a big thank you to my girlfriend Astrid who has been supporting me throughout the whole process, and to whom I had to promise I would not pickup any study in the near future, while working full-time. And a special thank you to the ten Chinese master students who have been helping me in getting the Chinese respondents. Thank you all, without your help I could never have made it.
Further I would like to thank the University of Amsterdam and my fellow master students. As a full-time student and being almost twice as old as the average student, it was because all of you I had a wonderful life and learning experience. Thank you.
ABSTRACT ... 2
PREFACE ... 3
TABLE OF CONTENTS ... 4
ABBREVIATIONS ... 6
1. INTRODUCTION ... 7
1.1. Problem indication and statement ... 8
1.2. Research Questions ... 9
1.3. Relevance and Scope... 10
1.4. Research method ... 10
1.5. Structure of the thesis. ... 11
2. LITERATURE REVIEW ... 13
2.1. International business ... 13
2.1.1. Institutional framework ... 15
2.1.2. Transaction cost theory ... 17
2.1.3. Internalization theory ... 18
2.1.4. OLI Framework ... 19
2.2. Cultural Distance ... 20
2.2.1. Hofstede ... 20
2.2.2. GLOBE ... 22
2.2.3. Kogut & Singh ... 23
2.3. Conclusion ... 25
3. DATA, METHOD AND ANALYSIS ... 26
3.1. Data collection ... 26
3.2. Analysis of the collected data ... 27
4. RESULTS ... 30
5.2. Do significant cultural differences between the Chinese regions exist, and
what are these cultural differences. ... 34
5.3. What influence does the Chinese regional cultural distance have on the strategic entry decisions of MNEs?... 42
6. CONCLUSION ... 45
6.1. Research limitations ... 46
6.2. Future research ... 46
7. REFERENCES ... 47
CD Cultural Distance
CSA Country specific advantages FDI Foreign Direct Investment GAs Global Alliances
IJV International Joint Venture IND Individualism
IVR Indulgence versus restraint
JV Joint Venture
LOF Liability of Foreignness LTO Long term orientation MAS Masculinity
MNC Multinational corporation MNE Multinational Enterprise MON Monumentalism
PDI Power distance
TCE Transaction Cost Economics UAI Uncertainty avoidance WOS Wholly Owned Subsidiary
1. INTRODUCTION
In the last three decades the People’s Republic of China transformed itself from a poor and undereducated nation into one of the key players on the world market. In 1978 China started fundamental reforms from a planned economy to a market-economy. Due to these
increasingly liberalized government regulations the reforms led to dramatic growth. From 1978 gross domestic product has been growing with approximately 10 percent a year and national income per capita has eight folded. In the second quarter of 2010 China surpassed Japan, the second largest economy of the world and is expected to surpass the biggest economy of the world, the United States in the near future.
The transition from a command to a market-based economy not only brought growth to China but also a growing inequality between the eastern coastal and western inland regions. The reason behind this inequality was mainly the result of a faster economical growth of the eastern coastal regions in comparison with the western inland regions. The lack of adequate infrastructure slowed down the economical progress in the western ‘inland’ regions, whereas the eastern coastal regions profited from the export of labor intensive products and
production.
To boost the economic development in the western regions of China, the ‘Western Development Program’ was launched in 1999 (Fan and Sun, 2008) by the Chinese
government to support the western regions to catch-up with the eastern regions. This happened during China’s ninth five year plan (1996-2000). Since 1953, quinquennially the Chinese government developed a social and economic development initiative.
As a result of the rising costs of wages and land prices in the eastern coastal regions, labor intensive industries lose their competitiveness and are forced to relocate to the other, cheaper regions of China in pursuance of keeping their competitiveness in the market. Not only the domestic Chinese firms, but also foreign firms that have established themselves in the eastern regions need to relocate their production to the western and central regions of China, searching for less expensive land and workers to maintain the firms competitiveness.
For foreign companies China is a very attractive market with 1.3 billion inhabitants, cheap labor and low land prices. However in a country as large as China, different cultures among regions could potentially exist. China has various high contrasts between the old traditional culture and religion, Buddhism, Confucianism, and Taoism. And the new, capitalism, high-tech industries and the cosmopolitans. Should in this case China still be approached as a homogeneous market, and its inhabitants as one culture?
1.1. Problem indication and statement
International business initiatives bring new challenges, require awareness and strategic thinking. One of the most widely studied fields of international business is cross-national cultural distance. Literature and theories on cross-national cultural distance try to quantify the complex, subtle and intangible nuances of dyadic cultural differences between countries, and propose a good starting point in understanding how to enter a large country like China. However most literature has been written about the dyadic cultural distance between countries, little has been written about the within-country regional cultural differences. Metrics in traditional theories such as Hofstede (2001), Kogut and Singh (1988), Schwartz (1994), and GLOBE (House et al., 2004), all focus on the dyadic cultural distance of national cultures, while the business need for deeper knowledge of cultural differences is still
increasing (Terlutter, Diehl and Mueller, 2005).
To what extent can the dyadic national cultural distance still be helpful in the strategic decision making process for entering a rich and diverse, 1.3 billion inhabitant country like China? Should in this case a more regional focus on with-in country cultural differences be more applicable, instead of only relying on the traditional national cultural distance?
The answer to these questions could be very beneficial for companies wanting to enter and establish their business in China, as for company’s moving or expanding within China. The Chinese business environment is highly dynamic and changing rapidly (Luo, 2007). The complexity and uncertainty involved in cross border activities could be minimized by not only relying on the dyadic cultural distance between countries, but also by taken the regional cultural distance into account.
1.2. Research Questions
The purpose of this paper is to find evidence on cultural disparity between the regions of China, and what the disparity holds for the strategic choices of multinationals. The main research question of this paper is formulated as ‘To what extent does cultural disparity exist between the regions of China, and what does this disparity hold for the strategic entry choices of multinationals?’. To be able to answer the main research question three sub-questions have been formulated, leading to jointly answer the main research question.
For foreign companies, China looks like one big attractive market with 1.3 billion inhabitants, cheap labor and low land prices. However in a country as large as China, different cultures among regions could potentially exist. China has various high contrasts between the old traditional culture and religion, Buddhism, Confucianism, and Taoism, and the new, capitalism, high-tech industries and their cosmopolitans. As most literature on cultural distance is written about the dyadic cultural distance between countries and compared
countries as being culturally homogeneous, does this also count for a large country as China? Can China be approached as a homogeneous market, and its inhabitants as one culture? Based on these questions the first research sub-question is formulated as:
Is the Chinese market a culturally homogeneous or heterogeneous market, and why?
China, the world's third largest country, has a total area of 9,598,094 square km with great differences in climate, landscape, and people. Therefore it is not unusual that regions that are separated by large distances will be noticeably different. The question however is what these differences are and if these differences are significant. Thus the second sub-question is formulated as:
Do significant cultural differences between the Chinese regions exist, and what are these cultural differences?
High cultural distance between the home and foreign market raises the cost of
internationalization (Hennart, 2000) and prevents multinationals from applying their rules and routines from the parent company. Leading to larger differences in organizational practices (Kogut & Singh, 1988), corporate cultures, management practices (Larimo, 2003), and a
higher level of equity ownership in entry mode, to minimize the transactions costs (Hennart and Reddy, 1997). Therefore the third sub-question has been formulated as:
What influence does the Chinese regional cultural distance have on the strategic entry decisions of MNEs?
The remaining sections of this chapter present the method, relevance, scope and structure of this research.
1.3. Relevance and Scope
The business study international management is all about awareness and strategic thinking to manage the complexities and uncertainties an international business encounters when
engaging in international economic activities. Cross border activities bring new challenges, therefore establishing in a foreign country or entering a new market without careful
consideration or ameliorating knowledge on the ‘rules of the game’, could end up being very inauspicious for the firm.
The purpose of this paper is to find evidence on cultural disparity between the regions of China, and what effect the regional cultural distance has on the strategic entry decisions of MNEs,. The main focus of this paper lies primarily in cultural distance and does not aim to provide a complete overview of all the entry theories and possibilities. The aim is to show whether or not the cultural differences between the Chinese regions exist for the benefit of MNEs entering, moving or expanding their operations in China.
1.4. Research method
For the research secondary literature has been reviewed to identify what theories would best fit the method for ultimately answering the sub-research questions. Although the study at first would be primarily qualitative, for validation purposes descriptive statistics have been added. Therefore this research is both descriptive as explanatory, as it clearly describes the data collection of the research objects, and establishes the relationships between the objects and the variables (Saunders et al., 2011). As a strategy the survey has been chosen as the deductive approach, as also being the most widely used strategy amongst business researchers.
For the purpose of this research a representation of the Chinese population is needed from six different regions to be able to make a valid comparison of the cultural distances between
the regions. To overcome the physical distance between China and the Netherlands, ten Chinese students helped in reaching the hard to get survey respondents from China by applying the snowball technique. All the respondents of the survey received a link in an e-mail from one of the ten Chinese students, asking their participation in a study on regional cultural distances.
The survey is setup in Qualtrics and consisted in a total of 51 questions divided in three parts. The first part of 28 questions, consists of the same 5 point Likert scale questions used by Hofstede et al. (2008) in his VSM08 questionnaire on cultural distance. The second part of questions, consists of the same 18 questions of the questionnaire used by the GLOBE project (House et al., 2004), to measure the dyadic cultural distance between countries. The last part of the survey consists of five questions, asking the respondents about their demographics like gender, age, occupation, the region they were born and the region they currently live. The outcomes of the survey will be computed in accordance with the Hofstede and GLOBE method of calculating the dimensions of cultural distance.
Figure 1. Six traditional regions of China
1.5. Structure of the thesis.
In this chapter the topic of the research has been introduced, with an overview of the thesis methods, data collection, problem statement, and research (sub) questions. In the second chapter, the literature review, an introduction will be made into the field of international business and the theories that support the strategic decision making of firms investing in foreign countries. The last part of the literature review is devoted to the studies on cultural
distance and its interaction with the field of international business. The third chapter, the data, method and analysis, will describe how the data was retrieved and what analysis has been used to calculate the cultural distances. The fourth chapter presents the results from the survey and the computations from the data analysis, as described in the third chapter. In the fifth chapter the results and the findings will be discussed, leading to answering the sub questions of the research. The sixth and last chapter will present the conclusions, including the
2. LITERATURE REVIEW
In this chapter first a brief introduction of the field of international business and theories supporting strategic decision making of firms investing in foreign countries will be presented. These theories underline the importance of researching cultural differences in the field of international business and their interlink. The second and last part of the literature review is devoted to theories concerning the primary part of this research, the cultural distance.
2.1. International business
Firms with the ambition to expand internationally face some difficult strategic decisions. In advance of investing in a foreign country, a firm has to decide why it wants to invest
(strategy), where it wants to establish (location) and how it wants to establish (entry). Hymer (1976) and Kindelberger (1969) argue that the reason firms expand internationally is to vitiate the competition and exploit the firm’s competitive advantages. Firms must have firm specific assets that are easily transferable across borders to compensate for their cost of foreignness (Hymer, 1976). As all firms have goals and their main goal is to make profit, firms invest to increase returns, look for stability and increase their market share. For firms that want to invest in a foreign country there are two investment options. The non-equity mode, like export and contract agreements including leasing, licensing and franchising (Erramilli et al, 2002). Or the equity mode, investing in a cooperative venture or wholly owned subsidiary (Hill, Hwang and Kim, 1989).
When a firm invests in a foreign country through equity investments two different types of investments can be chosen, direct and indirect investment (Hymer, 1970). Hymer defines an indirect investment as an invest in which the investor has no control over the foreign firm, known as a foreign portfolio investment (FPI). FPI is an indirect investment with an equity stake of maximum 10% on stock and bonds in a foreign company. With this low percentage of equity stake, it is hard to perform managerial control rights. Companies investing in foreign countries with the need to manage the operations themselves, need a much higher equity stake to perform managerial control rights. Having direct control in a foreign firm when investing is called a foreign direct investment (FDI). FDI is a direct investment and occurs when a firm invests directly in facilities to produce and/or market a product in a foreign country. Once a firm undertakes FDI it automatically becomes a multinational enterprise. As Rugman and Collinson (2009) define it, a multinational enterprise (MNE) is a company with its headquarters in the ‘home’ country but with
operations in one or more countries. FDI is basically all about investing, controlling and managing value added activities in another country. The control of these foreign assets involve the whole or partially ownership of a subsidiary in a foreign country.
Prior to expanding internationally, firms have to identify the entry and establishment mode of their subsidiary in a foreign country (Brouthers & Hennart, 2007; Chen, 2008; Chen & Hennart, 2002). For the mode of establishment (Padmanabhan & Cho, 1995) there are two types of investments, Greenfield, whereas the firm is going to build it, or merger and
acquisitions, in which the firm is going to buy it to transfer the existing assets from the local to the foreign firm. Subsequent to the establishment mode the firm has to decide on the entry mode. Is the firm going to do itself by setting up a wholly owned subsidiary (WOS), or the firm is going to join efforts with a local partner, with whom the firm will share the ownership, by setting up an International Joint venture (IJV) (Dikova and Witteloostuijn, 2004).
Whatever the preference of a firm is, or strategic decisions it is based upon, the decisions made on the entry and establishment mode, hold different advantages and disadvantages for the firm.
Firms prefer setting up their own subsidiary (WOS) when the firm has specific assets, which are either tangible (goods) or intangible (knowledge), that could potentially generate revenue. These assets need protection against opportunistic behaviour (Gomez-Mejia & Balkin, 1992). The costs for protecting these assets by owning and having full control of the foreign subsidiary (WOS) are higher, compared to when efforts are joined in a JV with a local partner, but also give higher returns (Agarwal & Ramaswami, 1992). Firms therefore prefer a WOS to reduce the risks involved in working together with a partner, that could potentially use the firm’s assets to pursue its own interests in the foreign country. MNEs that have decided for a WOS have full control over the day-to-day operations, better protection against opportunistic behaviour and own all the revenues generated from their assets. However a WOS also reduces flexibility, requires a high commitment of resources, and all the costs involved in opening the subsidiary and handling the foreign market are incurred by the firm.
The level of control when working together with a foreign partner or partners in a IJV, depends on the equity stake of the ownership, how many partners are involved, and the resource sharing between the partners (Hill et al.,1990). The firm is dependent on the knowledge spill-over from the partner(s) to overcome its liability of foreignness (Zaheer, 1995), as local knowledge is usually very hard to obtain due to the high transaction costs, involved in obtaining the knowledge. Firms in a IJVs may have far less managerial control,
but also lower investment costs compared to a WOS. IJV’s are faster to setup, have lower threats of losing market access and more access to local knowledge then a WOS.
Whenever a foreign (host) country is risky or uncertain because of political or
economical instability, firms prefer to wait with setting up wholly owned subsidiary and have the preference to work together with a local partner in a IJV, even knowing the disadvantages of working with a local partner in a IJV, considering it is easier and less costly to discontinue an IJV than having to close down a WOS in a foreign country.
To become an emerging market, the Chinese government changed their trade policy in 1979 from confrontational to accommodating. This ‘open door’ policy constituted the equal treatment of domestic and foreign companies, enhancing the success rate of foreign firms, and made it easier for foreign firms to establish. Thus giving rise to incoming FDI and the
economic growth of China.
From the policy reforms in 1979 until 1996 joint ventures (IJVs) have been the most popular mode of entry in China (Deng, 2001). When the investment restrictions were loosened in 1996, multinationals started preferring WOS over IJV. The reason behind this preference is the high amount of failing joint ventures and growing partner frustrations in IJVs (Teng, 2004). As multinationals gain more and more experience in China, the preference of having more control through a WOS increased. Considering it is easier to start a business from scratch, or acquire an existing business, instead of trying to find a local partner, with whom the firm has to negotiate, establish, control and manage the joint venture (Taylor et al., 1998). According to Deng (2001) this is why the WOS has become and still remains the most popular entry mode of MNEs entering China. Although the (transaction) costs of a WOS are very high, Chen (2007) finds that for the entry choice of Taiwanese food companies going to China, the ‘institutional factors are more important than transaction cost considerations’.
One of the institutional influences on the selection of entry mode is national culture (Kogut & Singh, 1988). When the differences between cultures are high it influences the understanding of the local partners, and limiting the prediction of their behaviors. A crucial part of this liability of foreignness is that cultural misunderstanding are largely cognitive and part of the cost of doing business internationally (Hymer, 1976).
2.1.1. Institutional framework
One of the leading perspectives in global business is the institutional framework. The
institutional framework embodies both formal and informal institutions regulating individual and firm behaviour, which North (1990) defines as ‘the rules of the game in a society or, more
formally, are the humanly devised constraints that shape human interaction’. These
institutions or ‘rules of the game’, define and limit the choices and serve as a framework for human interaction (North, 1990), by providing incentives for compliance and sanctions for violations.
Scott (1995) defines these institutions as ‘cognitive, normative, and regulative structures and activities that provide stability and meaning to social behaviour’. The three structures and activities defined by Scott are the pillars that support the formal and informal institutions. The regulatory pillar, a countries primary supportive pillar, is the formal, vigilant and ‘rule setting’ regulatory aspect of the institutions, represented by laws, rules and
regulations. Both the normative pillar and cognitive pillars are informal institutions,
embodying norms, values, ethics and cultures. Whereas the normative pillar is related to peer pressure, social expectation of how things should be done, and accentuates the role of values and norms in creating obligations and expectations.The cognitive pillar, of the three pillars, is most closely associated to culture (Jepperson, 1991), and represents the subconsciously accepted customs, rules and assumptions that are often hard to explain.
Formal and informal institutions differ per country, therefore establishing in a foreign country or entering a new market without careful consideration or ameliorating knowledge on the ‘rules of the game’, could end up being very inauspicious for the firm. The overall
disadvantage firms experience in foreign country are primarily due to the cultural-, administrative-, geographic-, and economic distance (Ghemawat, 2001). This so called liability of foreignness is inherent to the non native status of the firm. To reduce the liability of foreignness and being able to compete against the local firms, foreign firms bring their own firm specific resources and capabilities, submerging the local competitors with something they do not share.
According to Williamson (2000) understanding institutions is very complex because most of them are poorly defined and understood. The key role of institutions is to reduce uncertainty, opportunism, and to constrain the range of what is acceptable and what is not. However when the incentive structures are weak, arbitrary or ambiguous, the uncertainty will be higher, resulting in higher transactions costs and more opportunistic behaviour. As a consequence the uncertainty and unpredictability could lead to political, legal, and economic risks and losses. Instead of the formal constraints the uncertainty will then be reduced through the relational informal constraints.
2.1.2. Transaction cost theory
The market price of a product consist of the production costs, coordination costs and the profit margin. In the market price the coordination costs represent the transaction costs that cover all the costs involved in providing a good or service through the market rather than having it provided from within the firm (Coase, 1937). Included in these costs are the searching, information retrieving, negotiating, monitoring, organisational, and physical asset moving costs, that occur every time a product or service is being transferred from the seller to the buyers.
Williamson (1975, 1981) argues that as a result of asymmetric information all transactions are effected by ‘self interest with guile’, the behaviour of agents serving their own interest better by lying , cheating, misleading and confusing their exchange partner. Even when the risks of potential and actual opportunism are low, the safeguarding through
monitoring and enforcing of contracts still increase the transaction costs. However Hill (1990) finds that by neglecting the significance of the invisible hand, the hands-off approach in a market economy by governments known as laissez faire, which is keeping the risk of
opportunism low, ‘the transaction cost rationale for internalization has been overstated’ (Hill, 1990). He further found that the geographical distance, language problems and other distance factors, make the measurable output of contracts and agreements difficult to enforce and monitor.
In his research on the emerge of firms, Coase (1937) found that firms are able to coordinate lower costs in transactions, instead of having to close a new deal or contract every time a transaction occurs. These finding’s resulted in Coase’s (1937) transaction cost theory which has been complemented and extended by Oliver Williamson (1975) in his transactions costs economics (TCE) theory, explaining why companies exist, expand and outsource their activities. Williamsons (1975, 1981, 1985) transaction costs economics theory currently is a widely used theory important for firms to analyze various strategic and organisational issues, and to determine the choice of entry mode.
However there has also been a lot of critique on the TCE theory of Williamson (1975, 1985, 1993). One of the critiques came from Ghoshal and Moran (1996). According to these authors Williamsons’ version is ‘bad for practice’ because an ‘attempt to create a model of organisations based on the logic of markets is dangerous, because the logic that creates the first set of behaviours destroys the context that is necessary for the second set’. Ferraro, Pfeffer and Sutton (2005) support these arguments and add to the argument that regardless of
their empirical validity, ‘theories become dominant when their language is widely and mindlessly used and their assumptions become accepted and normatively valued‘. Ferraro, Pfeffer and Sutton (2005) and Ghoshal & Moran (1996) find the evidence of the TCE theory inconsistent and ‘bad for practice’ since the theory produces self-fulfilling beliefs that once trapped in is almost impossible to change. Despite all the critiques on Williamson’s theory of transaction cost economics, researchers still adopt it widely as a major theoretical and
empirical field of study. 2.1.3. Internalization theory
Another theory based on transaction cost theory is Buckley and Casson’s (1976) internalization theory. With their internalization theory Buckley and Casson explain the existence and functioning of Multinational Enterprises (MNEs) and the associated transaction costs when managing an internal market across borders; by internalizing across national borders a firm becomes multinational. According to Buckley and Casson (1976) firms choose low cost locations for their activities, and grow by internalizing markets until the benefits of further expansion are outweighed by the costs. The internalization theory looks at the firm as an alternative institution to markets when the transaction costs on a market are higher than the internal costs, still 'markets will tend to be relatively more efficient than firms in handling transactions between a large number of buyers and sellers’ (Buckley and Casson, 1976).
Everything that interferes trade or transactions can be defined as a market imperfection (DeGennaro, 2005). Market imperfections are an inherent part of the markets (Buckley and Casson, 1976) and the multinationals are the institutions to avoid these imperfections. Due to these market imperfections multinationals create their own internal market to generate profits, avoid certain costs, and to transfer their knowledge across borders while still maintaining the knowledge within the company.
A firm with a high level of firm specific knowledge prefers a WOS over an JV to have greater control and reduce the threats of opportunism by protecting its core resources and competencies (Hill, 1990; Hymer, 1960, 1976; Kindleberge, 1969). The downside of this high need of control is that it increments the transaction costs, although firms normally would choose the entry mode that minimizes the transaction costs (Chen, 2008). When the
transaction costs for finding, negotiating and monitoring a potential joint venture partner is very high firms also tend to prefer the WOS over a JV (Taylor et al., 1998).
2.1.4. OLI Framework
In 1976, John H. Dunning introduced a new model based on the theory of internalization and named it the eclectic paradigm, also known as the OLI framework. Since the original 1977 paper on the eclectic paradigm, Dunning (1988, 1993) continued refining his theory, bringing new insights and richness into the theories of strategy and international business. Dunnings (1977) eclectic framework has been widely used by scholars in the research of the economics of international direct investments, the multinational enterprise (MNE) and the selection of the MNEs international entry modes. Among many scholars, Brouthers, Brouthers and Werner (1996) find that Dunnings eclectic paradigm approach exceed the transaction cost / internalization theory as it integrates the factors of the transaction cost theory with the ownership and locations specific advantages.
The eclectic theory of Dunning (1977) explains how companies internationalize their activities towards foreign direct investment. Firms will avoid transactions in a free market when the internal transaction costs are lower. Firms engage in FDI when it is beneficial or the gains outweigh the costs, the source of these gains are the ownership advantages, location advantages and internalization advantages (Dunning, 2000; 2001), also known as the OLI framework (FDI = O + L + I). To be able to compete with local competitors in a foreign country a firm must have ownership (O) advantages like competitive assets or firm specific advantages (FSA) when seeking to engage in foreign direct investment. The higher the competitive or firm specific advantages, the more likely the firm engages in foreign production. These ownership advantages are key in explaining why MNEs exist, as firms have a collection of internal assets that can be used anywhere else without losing their effectiveness, like management structures, multinational experience, skills to develop and produce differentiated products.
To utilize and replicate the ownership advantages of the firm to a foreign market, firms explore the location (L) specific advantages. These country specific advantages (CSAs) must derive a greater benefit and revenue through a foreign operation otherwise it could be more beneficial to stay in the home country. The advantages of internalization (I), like the reduction of transaction costs by integrating the assets and skills within the firm, is among one of the main reasons why firms want to exploit foreign opportunities themselves, rather than through a partnership.
Firms invest in foreign markets for several reasons, Dunning borrowed the four primary reasons for foreign investments, developed by Jere Behrman (1972) to explain the
different objectives of FDI. The first reason for FDI is resource seeking, the seeking and securing of natural resources like raw materials, minerals or lower labour costs in a foreign country. The second reason for FDI is market seeking, identifying and exploiting new markets for the final products and finding new buyers. The third reason for FDI is efficiency seeking, the restructuring of a firms existing investments to achieve a more efficient allocation of the firms international economic activities, like manufacturing in China because of cheap labor, land costs. The fourth and final reason of FDI is strategic asset / capabilities seeking, the investment in other firms or assets, for building and protecting the ownership advantages, to advance or sustain the firm’s global competitive position.
2.2. Cultural Distance
The past three decades the most widely studied field of international business for foreign investment expansion, and the entry and establishment mode of multinational enterprises, is cross-national cultural distance. The studies on cultural distance are of great importance for companies in understanding the varieties in norms, values, and culture in organizational structures, leadership styles, and management practices between the parent company’s country and the host country in which the subsidiary company is located (Kogut & Singh, 1988; Mulok & Ainuddin, 2010; Tihanyi et al., 2005).
2.2.1. Hofstede
One of the most influential and cited theory used in explaining the variations in social behaviours across countries is developed by Geert Hofstede (1980). In his book ‘Culture’s consequences: International differences in work related values’, Hofstede defines culture as ‘the collective programming of the mind which distinguishes the members of one human group from another’, and introduces his cultural dimension paradigm for the first time.
The basis of his book and theory lies in the Hermes (IBM) attitude surveys, conducted during the period of 1966 until 1973. The conducted surveys consisted of two paper and pencil surveys to study the social action and thinking within IBM, to make an international comparison of work related values. To locate the variations in the cultural dimensions the survey was translated into 20 languages and spread among 116,000 IBM employees working in 72 countries and regions worldwide. After analyzing the survey data, Hofstede (1980) identified four dimensions explaining the organizational structures, leadership styles, and management practices. Hofstede named the four identified dimensions the power distance (PDI), individualism (IDV), uncertainty avoidance (UAI) and masculinity (MAS).
Hofstede’s (1984) first dimension, the power distance (PDI) refers to the acceptance of unequal distribution of power by the less powerful individuals. In cultures where the power distance is high individuals embrace the hierarchical structure and the need for clear roles and responsibilities. They will never challenge authority and avoid any criticism towards it. On the opposite, in cultures with a low PDI, it is normal to challenge authority and individuals prefer to have a flexible organizational structure in place.
The second dimension of Hofstede, individualism versus collectivism (IDV), reflects to degree of how individuals are integrated into groups. In individualistic cultures, individuals primarily are self reliant and more focused on themselves, and their direct surrounding like their family. In collectivistic cultures the focus is on the interest of the group and the well-being of the group above those of the individual.
Hofstede’s third dimension, masculinity versus feminity, refers to the degree of differences in roles between genders. In cultures with high masculinity individuals are dominant, aggressive and do not trust each other. The focus is on achievements, and working together is seen as less important, whereas cultures that are highly feminine are more warm-hearted, caring and humble.
The fourth and last dimension that Hofstede (1984) described is uncertainty avoidance (UAI), referring to the extent to which individuals tolerate uncertainty and vagueness. In cultures with high uncertainty avoidance individuals feel threatened, tensed, uncertain and anxious when something occurs that is unstructured, unknown, unclear or unpredictable. Cultures with low uncertainty avoidance rely more on the informal rules, feel comfortable when a situations are changing, are willing to relinquish control and take risks.
Based on the research conducted among Chinese students on Confucian dynamism by Michael Harris Bond (1987), Hofstede and Bond started working together and conducted a subsequent study (Hofstede and Bond 1988) which resulted in the fifth dimension, long term orientation (LTO). Long-term orientation versus short term orientation in cultures refer to thrift and perseverance. Long-term orientation is higher in cultures where individuals hold on to traditions and values, like older people and men have more authority than younger people and females. Also education and training are highly valued in long term oriented cultures. In short term oriented cultures individualism and creativity prevail, there is a desire for self actualization, and equality is promoted.
In 2008 Hofstede added a sixth dimension, indulgence versus restraint (IVR), which is based on Minkov's (2007) analysis of the World Values Survey data for 93 countries. IVR
refers to degree of how freely individuals can satisfy their basic need and desires, and still respect the social norms. Cultures with indulgence allow individuals to have the freedom to enjoy of life and having fun. Whereas cultures with restraint, suppress pleasure and the luxury of doing things freely through control and regulation.
The seventh dimension of the VSM model, monumentalism versus self-effacement, is identified by Minkov (2011), while working under the supervision of Hofstede.
Monumentalism refers to the pride of an individual, and believing that religion is important. Self-effacement in a culture refers to being humble and a flexible attitude towards the truth.
Despite the fact that Hofstede’s model of cultural distance is the most influential and cited theory in the field of international business, his model has also been subject to broad criticism by scholars. Schwartz (1994) for instance criticized that Hofstede’s model does not reflect nor identifies the full spectrum of countries and the dimensions of national cultures, considering IBM employees can never be a representation of the general population. 2.2.2. GLOBE
The GLOBE (Global Leadership and Organizational Behavior Effectiveness) research project is a long-term study of eleven years, involving 170 researchers from different countries, and is founded by Robert J. House in 1993. The research project examines the differences in
national cultures, resulting in a model of cross cultural interaction. The GLOBE project (House et al., 2004) study is conducted in the mid 1990s among 17,000 managers of 951 organisations functioning in 62 nations. The GLOBE research group (House et al., 2004) identified nine cultural dimensions as independent variables. These cultural dimensions are Power Distance, In-group collectivism, Institutional collectivism, Uncertainty avoidance, Future orientation, Gender egalitarianism, Assertiveness, Humane orientation and
Performance orientation.
As shown in table 1. the GLOBE project group derived the first five cultural
dimensions of Hofstede’s model (2008) and expanded it to nine. The GLOBE project group kept the names of the five dimensions of Hofstede et al. (2008), but divided masculinity into gender egalitarianism and assertiveness, and collectivism into Institutional collectivism and in-group collectivism.
Table 1: The nine dimensions of the GLOBE model
Power Distance Degree to which a culture’s people are (should be) separated by power, authority, and
prestige.
In-Group Collectivism
Degree to which a culture’s people (should) take pride in and (should) feel loyalty toward their families, organizations, and employers.
Institutional Collectivism
Degree to which individuals are (should be) encouraged by institutions to be integrated into broader entities with harmony and cooperation as paramount principles at the expense of autonomy and individual freedom.
Uncertainty Avoidance
Degree to which a culture’s people (should) seek orderliness, consistency, and structure.
Future Orientation
Degree to which a culture’s people are (should be) willing to defer immediate gratification for future benefits.
Gender Egalitarianism
Degree to which a culture’s people (should) support gender equality.
Assertiveness Degree to which a culture’s people are (should be) assertive, confrontational, and
aggressive.
Humane Orientation
Degree to which a culture’s people are (should be) fair, altruistic, generous, caring, and kind toward others.
Performance Orientation
Degree to which a culture’s people (should) encourage and reward people for performance.
(the descriptions of the nine cultural dimensions of GLOBE are derived from House et al.,2004)
As Hofstede’s (2008) cultural dimension, value survey module (VSM08) is currently still one of the most popular models to measure cultural distance, Shi and Wang (2010) argue that the GLOBE dimension scores are also a good choice for conducting research on China. In their study Shi and Wang (2010) focused on the comparison of cultural distance between China and the United States, and used both the Hofstede and GLOBE model for their research.
2.2.3. Kogut & Singh
As an alternative to the Euclidean distance measurement for measuring the distance between two points, Kogut and Singh (1988) developed an index formula. Kogut and Singh used Hofstede’s cultural dimensions framework, to calculate the statistical distance between countries. This formula is algebraically:
Whereas the CDj represent the cultural distance between the country i and the country j. The Iij is the country j’s score on the ith cultural dimension, and Iiu is the score of home country i on the dimension, and Vi is the variance of the score of the dimension. At the end of the index formula the outcome is divided by four, representing the four dimensions of Hofstede (1984), suggesting that each dimension is equally important and not correlated.
Many scholars adopted the index formula of Kogut and Singh (1988), and widely used the measurement for their studies (see Barkema et al., 1996; Benito and Gripsrud, 1992; Gomez-Mejia and Palich, 1997; Morosini et al., 1998; Padmanabhan and Cho, 1996). However there are also scholars who have been very critical about Kogut and Singh’s index formula. Shenkar (2001) for instance found several weaknesses and criticised the index formula on seven different points (see table 2.)
Table 2: Shenkar’s (2001) seven points of critique.
The illusion of symmetry The measured CD between country A and country B is assumed to be the same
CD between country B and country A.
The illusion of stability Measured at a single point of time, CD is assumed to be constant. Cultures
change over time, however.
Illusion of linearity The assumption that cultural distance evolves in a linear form.
Illusion of causality The assumption that distance is the only determinant with relevance to FDI.
Illusion of discordance The assumption that all dimensions of culture equally matter.
The assumption of corporate homogeneity
The assumption that corporate culture is in line with the national culture.
The assumption of spatial homogeneity
Assuming uniformity in one country, while regions within a country could also have differences in culture, norms and values
(descriptions derived from Shenkar, 2001)
Next to the seven points of criticism raised by Shenkar (2001), Kirkman, Lowe and Gibson (2006) took their critique even a step further by stating ‘we strongly encourage researchers to avoid further use of the overall cultural distance index’.
As with every widely used model, also Kogut & Singh’s (1988) cultural distance index formula has been subject to criticism by scholars. However since no progression has been made in finding valid alternatives for replacing the models of Hofstede, GLOBE and Kogut
2.3. Conclusion
In this chapter the leading perspectives in international business and their effect on cultural distance have been reviewed. First the institutional framework has been discussed, embodying both formal and informal institutions regulating individual and firm behaviour, defined by North (1990) as ‘rules of the game’, and serving as a framework for human interaction (North, 1990). Secondly the transaction cost theory described that transactions in social, political and legal institutional environments, necessary for searching buyers and sellers through negotiating, writing and inspecting terms and contracts (Coase, 1937), are not cost free. Transactions costs are generally assumed to be higher when the cultural distance is high.
The internalization theory explained the existence and functioning of Multinational Enterprises (MNEs), and the associated transaction costs when managing an internal market across borders. According to Buckley and Casson (1976) firms invest in low cost locations for their activities, and grow by internalizing markets until the benefits of further expansion are outweighed by the costs. The source of these gains are explained in the ownership, location and internalization advantages (OLI) of Dunning’s (1977) eclectic paradigm. This theory illustrates how companies internationalize their activities toward foreign direct investment, and why cultural distance is a central determinant of entry mode choice in location specific approaches (Dunning, 1977).
The purpose of this paper is to find evidence on cultural disparity between the regions of China, and what effect the regional cultural distance has on the strategic entry decisions of MNEs. The in this chapter reviewed international business theories function as merely as an introduction for understanding, and underlining, the importance of cultural distance and its impact on the entry mode decision of a MNE (Hill et al.,1990; Kim & Hwang, 1990; Kogut & Singh, 1988).
The last part of the theoretical section in this chapter, cultural distance, is dedicated for reviewing the theories used in this paper to answer the research question.
3. DATA, METHOD AND ANALYSIS
3.1. Data collectionChina has, with over 1.3 billion inhabitants spread over six traditional regions, the largest population of the world. For the purpose of this research a representation of the Chinese population from the six regions will be required for making a valid comparison of the cultural distance between the regions. The downside of executing this kind of research is that the physical distance between China and the Netherlands is too big and it is very hard, even via the internet, to reach Chinese respondents for conducting a survey. Another obstacle to
overcome is the language barrier. Mandarin Chinese is the main language of China and not all Chinese can properly read or write the English language.
To overcome these obstacles I have taken the advantage of asking my fellow
international management master students from China, to help me in reaching these hard to get survey respondents from China. Ten Chinese students agreed to help me out and will each ask at least 20 Chinese respondents (N=200) from as many different Chinese regions as they possibly can. The ten Chinese students were asked to personally approach their family members, friends and acquaintances from different regions in China, and ask if they would like to participate and fill in the internet survey of the research. This so called non-probability sampling technique is called snowballing, which is ‘gathering research subjects through the identification of an initial subject who is used to provide the names of other actors’ (Atkinson & Flint, 2001). One of the advantages of the snowball technique is that a sample can be produced quickly and cost-effectively by using an internet survey platform, like Qualtrics. Another advantage of this technique is that with the help of the ten Chinese students these hard to reach people can be surveyed. After all without the help of the Chinese students the sample members needed to obtain the data from for the survey, would otherwise never have been reached. Also by applying the snowball technique, a sample has been build from many different resources, minimizing biases in the survey (Faugier & Sargeant, 1997).
To apply the snowball technique, the ten Chinese students received an e-mail
including some background information about the survey, some instructions and a link to the survey on the Qualtrics site of the UvA. In the e-mail the instructions clearly stated the minimum requirements for participating in the survey, being that all participants must have been born and still live in China, and have the age of at least 18. All the respondents of the
survey received a link in an e-mail from one of the ten Chinese students, asking them for to help in conducting an online survey for a study on cultural distances.
The survey has been setup in Qualtrics, which is a web-based tool for building surveys. The survey consists of 51 questions in total (see appendix), divided in three parts. The first part of 28 questions, consists of the same 5 point Likert scale questions used by Hofstede et al. (2008) in his VSM08 questionnaire on cultural distance. The second part of questions, consists of the same 18 questions of the questionnaire used by the GLOBE project (House et al., 2004), to measure the dyadic cultural distance between countries. And the last part of the survey consists of five questions, asking the respondents about their demographics like gender, age, occupation, the region they were born and the region they currently live.
The expected response rate on the survey is set at 60%, N=120 valid responses dispersed over the six traditional regions of China.
3.2. Analysis of the collected data
The response rate of the survey is lower than expected. According to the students each have at least asked 20 persons to fill in the survey, and some have even asked more than 25
individuals to participate in the survey. Still only 56 respondents participated in the cultural distance survey. When analysing the survey results it seemed that only 48 surveys were completed, whereas one respondent did answer all the questions but did not answer the demographical questions, making the answers unusable for the analysis.
When comparing the results of the respondents, it showed that only one respondent from the region North-East China participated in the survey. The results from the respondent also turned out to be outliers of at least two standard deviations from the mean scores of the other respondents. A reason for this occurrence could be that the respondent did not take the survey too seriously, as even after recalculating with other constants, the results still would not fit the 0-100 scale, as assigned by Hofstede et al. (2008). Therefore the choice has been made to discard the results of the only respondent from the region North-East China in this research.
In line with the critique of Shenkar (2001) two different theories for measuring
cultural distance have been used in this study. The first theory is from Geert Hofstede (1980), who developed the most influential and cited theory to explain the dyadic cultural distance. The second theory is the GLOBE model (House et al., 2004). Instead of only using Hofstede’s VSM08 model, the GLOBE model is a well-founded choice when doing research about China
(Shi & Wang, 2011). Additionally among many other scholars Shi and Wang (2011) argue that Hofstede derived China’s cultural distance score from Taiwan and Hong Kong (Ronen & Shenkar, 1987; Shi & Wang,2011). Hofstede (2001) estimated the cultural distance score of China due to the absence of data and based it on ‘observation and extensive literature’ (see Hofstede, 2001: 52). Thus strengthening the choice to use two theories in this research and to find out if the results, by applying the calculations of the two theories, are comparable.
For analysing purposes and to calculate the scores the survey results are exported from the Qualtrics website to excel. The scores of the twenty-eight Hofstede questions exists of four questions per dimension, so the following index formulas of Hofstede can be used to compute the seven cultural dimensions.
PDI = 35 (m07-m02)+25(m23-m26)+C(pd) IND= 35 (m04-m01)+35(m09-m06)+C(ic) MAS= 35 (m05-m03)+35(m08-m10)+C(mf) UAI = 40 (m20-m16)+25(m24-m27)+C(ua) LTO = 40 (m18-m15) + 25(m28-m25) + C(ls) IVR = 35 (m12-m11) + 40(m19-m17) + C(ir) MON = 35(m14-m13) + 25(m22-m21) + C(mo)
In the index formulas the m01 is the mean score for question 1. The C(..) is a negative or positive constant assigned by the researcher to maintain the outcome range of 0-100 points. This has no effect on the comparison between the regions.
To compute the GLOBE scores of the nine dimensions, the eighteen responses of each respondent must be used to calculate the mean distance score as used by GLOBE (House et al., 2004). Every dimension of GLOBE contains two questions. To calculate the scores of the GLOBE questions, the sum of the two responses on each dimension must be divided by two (amount of responses) to get the mean score of the corresponding dimension. The outcome is the dimension result of the cultural dimensions score of GLOBE.
To retrieve the cultural distance per region, the Euclidean distance variant of Kogut & Singh (1988) has been employed. This method is widely used in the diverse literature (see Drogendijk and Slangen, 2006; Aggarwal et al., 2012). In this study both the Hofstede and the GLOBE results are calculated with the Kogut & Singh index formula to get the cultural distance scores per region.
Algebraically the formula is:
CDj represent the regional distance between region i and region j. The Iij is the region j’s score on the ith dimension, Iic is the score of home region c, on the ith dimension, and Vi is the variance of the score of the dimension. The outcome of the formula is divided by R dimensions, representing the seven dimensions of Hofstede et al. (2008), or the nine
dimensions of GLOBE (House et al., 2004). Both are used to calculate the cultural distance index.
The basis of this research was actually qualitative with some calculations to retrieve the cultural distance scores. However when analysing the descriptive statistics, it seemed that extending the results with some statistics like an one-way ANOVA – an analysis of variance to test the equality of three or more means at one time by using variance – would make the results more grounded and valid. Therefore all the results are imported in SPSS and recoded accordingly for a more thorough analysis, which essentially leads to better grounded answers.
First the regional results from the Kogut and Singh calculations are compared
statistically with the Pearson correlation, to find if there is a correlation between results from the Hofstede and the GLOBE model. Secondly every dimension is separately computed using the one-way ANOVA. The results of both the descriptive and the one-way ANOVA are presented in the next chapter.
4. RESULTS
In this chapter the computed results emerged from using the Hofstede, GLOBE and Kogut & Singh framework will be presented. As described in the chapter data method & analysis, the North-East region of China has been removed from the results, resulting in the comparison of five regions in this research.
4.1. Descriptive statistics
The computations of the regional scores of Hofstede and GLOBE framework are presented in table 3 and 4. In the second column of the table 3 and 4, the Kogut & Singh (K&S CD) results are presented, followed by the scores on the Hofstede and GLOBE dimensions. In table 3 and 4 are also the mean, variance, and standard deviation included, to present the differences. For both the Hofstede and the GLOBE results, the North-West region of China has been
appointed as the home region for the computations of the Kogut & Singh index.
Table 3. Hofstede
Region K&S CD PDI IDV MAS UAI LTO IVR MON
North-West China 0,00 21,67 46,67 13,33 35,00 51,67 11,67 5,00 South-West China 1,71 26,25 26,25 68,75 7,50 50,00 38,75 26,25 North China 2,82 59,38 30,63 70,94 41,25 42,19 80,00 21,88 Central-South China 4,15 72,73 9,55 69,55 65,91 29,09 49,09 7,27 East China 2,39 51,15 24,23 62,69 52,69 45,00 33,85 44,62 Mean 2,22 46,23 27,46 57,05 40,47 43,59 42,67 21,00 Variance 2,33 475,42 177,93 607,22 478,52 80,12 622,30 257,61 Standard deviation 1,52 21,80 13,34 24,64 21,88 8,95 24,95 16,05
Table 4. GLOBE Region K&S CD UAI PDI IC IG GE AS FO PO HO North-West China 0,00 3,17 4,17 3,83 3,50 3,00 3,50 3,67 3,67 4,00 South-West China 1,34 3,13 3,88 3,88 3,63 3,38 3,63 3,75 5,75 3,38 North China 1,87 3,81 4,38 4,88 5,34 2,91 3,91 3,50 4,84 3,50 Central-South China 2,79 4,32 4,27 4,59 5,50 4,14 4,18 3,77 5,00 4,36 East China 2,50 3,62 4,00 4,65 4,85 2,62 4,15 4,65 5,19 3,31 Mean 1,70 3,61 4,14 4,37 4,56 3,21 3,87 3,87 4,89 3,71 Variance 1,22 0,24 0,04 0,23 0,89 0,34 0,09 0,20 0,59 0,21 Standard deviation 1,10 0,49 0,20 0,48 0,95 0,59 0,31 0,45 0,77 0,46
A Pearson correlation coefficient was computed to assess the relationship between the Kogut and Singh index with the results from the Hofstede dimensions, and the Kogut and Singh index with the results from the GLOBE dimension. There was a statistically significant correlation between the two variables, r = 0.978, n = 5, p = 0.04. Overall there was a positive correlation between the Kogut and Singh index with the results from the Hofstede
dimensions, and the Kogut and Singh index with the results from the GLOBE dimensions. The results are presented graphically in figures 2 and 3.
Figure 2. Kogut & Singh index, based on Hofstede results
0,00 1,00 2,00 3,00 4,00 5,00 Regional distance K&S CD
Figure 3. Kogut & Singh index, based on GLOBE results
In figure 3 and 4 the results of the dimensions are presented in a bar graph. The two tables visually present different outcomes on the cultural dimensions. The visual difference could be increased due to the difference in the scales of the graph. It could also be due to the fact that the framework of Hofstede and GLOBE are not as similar as the results from the Pearson correlation coefficient suggest.
Figure 4. Cultural distance results from Hofstede model
Figure 5. Cultural distance results from GLOBE model 0,00 0,50 1,00 1,50 2,00 2,50 3,00 Regional distance K&S CD 0,00 20,00 40,00 60,00 80,00 100,00 North-West China South-West China
North China Central-South China East China PDI IDV MAS UAI LTO IVR MON 0,00 1,00 2,00 3,00 4,00 5,00 6,00 7,00 North-West China South-West China
North China Central-South China East China UAI PDI IC IG GE AS FO
Table 5. One-way ANOVA
Sum of Squares df Mean Square F Sig.
PDI Between Groups 10594,959 4 2648,740 1,316 ,280 Within Groups 84555,041 42 2013,215 Total 95150,000 46 IDV Between Groups 4547,288 4 1136,822 ,397 ,809 Within Groups 120194,202 42 2861,767 Total 124741,489 46 MAS Between Groups 8911,851 4 2227,963 ,849 ,502 Within Groups 110199,851 42 2623,806 Total 119111,702 46 UAI Between Groups 11555,981 4 2888,995 ,657 ,625 Within Groups 184671,678 42 4396,945 Total 196227,660 46 LTO Between Groups 2454,625 4 613,656 ,173 ,951 Within Groups 149006,013 42 3547,762 Total 151460,638 46 IVR Between Groups 22503,216 4 5625,804 2,165 ,090 Within Groups 109134,018 42 2598,429 Total 131637,234 46 MON Between Groups 9778,156 4 2444,539 ,921 ,461 Within Groups 111453,759 42 2653,661 Total 121231,915 46
For all dimensions of the Hofstede framework an one-way analysis of variance (ANOVA) is calculated on five regions. The results of the analysis of cultural dimensions are not
significant, at the p<.05 level for the five regions. Statistically the results are: PDI [F(4, 42) = 1.316, p = .280], IND [F(4, 42) = .397, p = .809], MAS [F(4, 42) = .849, p = .502], UAI [F(4, 42) = .657, p = .625], LTO [F(4, 42) = .173, p = .951], IVR [F(4, 42) = 2.165, p = .090], and MON [F(4, 42) = .921, p = .461].
5. DISCUSSION
Prior to going into discussing the presented results and answering the research questions, it is essential to state that the low amount of survey responses could have influenced the results in this study. Secondly, as time is limited for conducting this research, the choice has been made to continue with only one instead of two models to compare the regional cultural distances in China.
The decision is based on the results of the Hofa Pearson correlation coefficient, being computed to assess whether or not a relationship between the Kogut & Singh’s calculated CD derived from Hofstede results, and Kogut & Singh’s calculated CD derived from the GLOBE dimension, exists. The results from the Pearson correlation coefficient, show a statistically significant correlation between the two calculations, r = 0.978, n = 5, p = 0.04, suggesting comparable outcomes of the two calculations, when calculating the cultural distance with Kogut & Singh’s index. Since GLOBE has been largely influenced by Hofstede’s work (Shi & Wang, 2011), and Hofstede’s theory is the most influential and cited theory used to explain the dyadic cultural distance, the decision is made to continue with only Hofstede’s cultural dimensions after answering the first sub question of this research.
5.1. Is the Chinese market culturally homogeneous or heterogeneous, and why? The calculated results from the Kogut and Singh index of both the Hofstede and GLOBE results, as shown graphically in figure 1 and 2, indicate large disparity between the regions. The disparity indicates that the Chinese market is not a homogeneous but a heterogeneous market. The finding is strengthened with the results from the Hofstede dimensions (figure 3), showing large regional disparity per region. Also the one-way analysis of variance (ANOVA) that was computed (table 5.), show no significance on the cultural dimensions, at the p<.05 level for the five regions. Therefore International businesses like MNEs should not scrutinize China as a culturally homogeneous market, but as a culturally heterogeneous market.
Together all these findings indicate that the Chinese market is culturally dispersed and therefore culturally heterogeneous, thus answering the first sub question of this paper.
5.2. Do significant cultural differences between the Chinese regions exist, and what are these cultural differences?
In advance of discussing what cultural differences exist between the regions of China, and what effects these differences can have on the strategic entry decisions of multinationals, some coding needs to be clarified first. The standard deviation, or ‘average from the mean’
establishes the extent of the variation from the mean. To weigh the results (see table 2) the following has been set: when the region result of a dimension is higher or lower than 1 standard deviation (SD) from the mean (M) it will correspondingly be coded as high or low. When the region result of a dimension is higher or lower than .5 standard deviation (SD) from the mean (M) it will correspondingly be coded as medium high or medium low. Whereas one standard deviation counts for a big difference, and a .5 standard deviation for medium
differences.
For answering the second sub-question, the results are represented graphically and subsequently discussed per cultural dimension. As stated earlier, the results of the region North-East China has been left out of the comparison, therefore North-East China will be graphically presented as dashed in the figures 6 to 12.
Figure 6. Power distance
The results on Power distance (PDI), graphically represented in figure 6, indicate that Hofstede’s (2008) PDI is low in North-West China (M = 21.67), and high in Central-South China (M = 72,73). Whereas South-West (M = 26.25) is medium low, and North China (M = 59.38) is medium high compared to the mean of the regions of China (M = 46.23, SD =
21.8), indicating a large difference between Central-South China and North-West China on the PDI dimension. In cultures with low PDI like the North-West region of China, it is normal to challenge authority and individuals prefer to have a flexible organizational structure in place where authority and decision-making responsibilities are decentralized (Hofstede et al., 2008). In regions with a high PDI like Central-South, individuals embrace the hierarchical structure with a centralized authority and control.
Figure 7. Individualism
The results on Hoftstede’s (2008) Individualism (IND), graphically represented in figure 7, indicate that IND is high in North-West China (M = 46.67) whereas Central-South China (M = 9.55) is low compared to the regions of China (M = 27.46, SD = 13.34).
Indicating a large difference in IND between the North-West and Central-South of China. These findings are not in line with the findings of Hofstede (2001) among others, stating that regions with high economic exchange also have a higher individualism score. The expectation was that Eastern regions should have a higher score on individualism, and the western regions a low score as being more collectivistic. The opposite seems to be the case. Next to these results no clear evidence was found in literature indicating a direct influence of IND on the
entry modes of firms. Although it could be debated that high IND is somewhat related to high PDI, the results show the opposite.
Figure 8. Masculinity
The results on Masculinity (MAS), graphically represented in figure 8, indicate that Hofstede’s (2008) MAS in the North-West of China (M = 13.33) is low compared to the average MAS of China (M = 57.05, SD = 24.64), and the medium high MAS of the North (M = 70.94) and Central-South (M = 69.55) regions of China. These findings indicate that there are lower levels of differentiation and discrimination (Hofstede et al., 2008) between males and females in the North-West of China compared to the other regions. Individuals in low masculine, more feminine regions are more relationship orientated and find the quality of life and people important.
Figure 9. Uncertainty avoidance
The results on Hofstede’s (2008) Uncertainty avoidance (UAI), graphically
represented in figure 9, indicate that UAI is low in the South-West of China (M = 7.50) and high in the Central-South of China (M = 65.91) compared to the other regions of China (M = 40.47, SD = 21.88). The region East China (M = 52.69) has a medium high UAI. These findings indicate that in the South-West region individuals accept uncertainty and are more willing to take risks (Hofstede 1991, 1994). Whereas the Central-South is characterized by people with higher levels of anxiety, and avoid uncertainties (Hofstede 1991, 1994).
Figure 10. Long Term Orientation
The results on Hofstede’s (2008) Long Term Orientation (LTO), graphically
represented in figure 10, indicate that LTO in the North-West (M = 51.67) and South-West (M = 50.00) regions of China is medium high compared to the average LTO measured in the other regions of China (M = 43.59, SD = 8.95). Central-South (M = 29.09) is low, indicating that individuals are short term orientated. Short term oriented individuals emphasize on quick results but also find stability important (Hofstede, 2001), as these can be found in western cultures (Bond, 1988). On the opposite medium high regions tend to emphasize more on persistence than on quick results, and find the relationship and market position important (Hofstede, 2001), as identified in the Eastern (Asian) cultures (Bond, 1988).
