National Culture as a Moderator of the Relationship between Management Practices and Firm Performance

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UNIVERSITY OF GRONINGEN

National Culture as a Moderator of the

Relationship between Management

Practices and Firm Performance

Master Thesis for International Business and Management

by

Xiaoying Jin

Supervisor: Dr. André van Hoorn Dr. Sathyajit Gubbi

Student Number: s2157799 E-mail: smileking2008@yahoo.com.cn

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ABSTRACT

Despite the wealth of research on the relationship between national cultures and management practices, it remains unclear to what extent the national cultures influence the performance and behavior of MNEs. This study examines the national culture that could impact on management practices and lead to a better understanding of its effects on performance. In an empirical examination of 16 countries’ MNEs, the results suggest that the effects of national culture were not significant on the relationship between management and performance. Except for power distance negatively moderate the relationship between monitoring management practices and profitability. It implies that theoretical analysis does not work with empirical data in this case. The implications for future research are discussed in this paper.

Keywords: national culture; management practices; firm performance; contingency

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Chapter1 Introduction

Global business tends to an ever-increasing globalization and internationalization. Globalization offers huge advantages, since it contributes to maximize the economic efficiencies. MNEs receive benefits in a globalized market, including efficient allocation and utilization of resources, such as natural resources, labor and capital on a global scale (Dhungana, 2003). Accordingly, large numbers of companies from developed and developing countries go abroad to contribute to their own efficiencies and profits. In spite of these benefits that multinational companies can profit by, many firms fail when they go abroad. For instance, Wal-Mart has gone to countries like Brazil, Korea, and Germany and failed. When Wal-Mart went into Germany in 1997, managers asked staffs to treat Germans with the same courtesy as they did in America, to greet customers by smiling and to help pack their shopping. Afterwards, Wal-Mart found that this was a mistake. In German culture, consumers regard shop-assistants who help them with suspicion and avoid buying anything from these assistants. Apparently, the identical management practice lead to a different performance in a different country.

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of Wal-Mart in global market case.

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CHAPTER 2 BACKGROUND AND THEORY

2.1 Background

Economic performance is influenced by institutions (North, 1994), including formal (e.g., rules, laws, constitutions) and informal (e.g., norms of behavior, conventions, socio-culture) institutions. Institutional theory (Scott, 1995) states that “institutional fit” for the organizational design can lead to superior performance. Organization can receive benefits of legitimacy and external support by fitting the organization to the requirements of its institutional environment. In addition, structural contingency theory (Donaldson, 1987, 1999) identifies that an organizational structure needs to fit particular contingency factors. It states that contingency factors, like strategy, size, task uncertainty and technology, must be taken into account for each particular aspect of organizational structure in order to make the structure fit. Hence, the fit or misfit between each contingency factor and organizational structure could impact on the firm performance. Moreover, Donaldson (1987) developed structural adaption to regain fit theory (SARFIT) to explain the structural contingency theory in-depth. The theory states that misfit creates low performance, which lead to pressure for change to restore the match between structure and contingencies. Generally, the concept of “fit” in contingency theory is that the organizational performance is a consequence of fit between two or more factors, which are the fit between organization environment, strategy, structure, systems, style, and culture (Drazin and Van, 1985). Prior research has focused more on the fit between organizational context and structure to account for performance. The general consensus that fits on the level of various contingency factors has a significant impact on firm performance, but the cultural contingency factors from the national context, reflect informal institution, are overlooked in this contingency analysis.

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manager in the U.S. will also be a good manager in other countries (Newman and Nollen, 1996). In other words, it means that effective American management practices will still be effective in other countries. But, lots of U.S. multinational companies, which failed in foreign countries, run counter to this theory. Since management practices could reveal various performances in different countries, this can be attributed to several factors. Phua (2012) mentioned that the widely accepted US HRM model ignores the impact of cultural contexts on HRM practices across countries. Culture is defined as the collective mental programming of the people in an environment, and it can distinguish one group or category of people from another (Hofstede, 1980). Research by Katou et al. (2010) reported that aspects of national culture have influence on the aspects of national institutions ethical beliefs of employees in external and internal environment of operational framework. These factors interact together to impact on the preference for HRM practices. Thus, according to the “fit” theory, there will be superior performance when the HRM practices fit their cultural context. The theory of culture-fit models (Aycan et al, 2000; Offodile, 2001) explained the relationship between cultural contingency and HRM practices specifically. The model makes it clear that cultural variables explain the effectiveness of different HRM practices in different cultures. Nevertheless, in the research on the contingency fit between national culture and management practice, it remains unclear to what extent cultural differences among countries influence the performance and behavior of MNEs. There is a scarcity of literature on how national cultures shape the relationship between management practices and a firm performance in internationalization and globalization of business. With this purpose in mind, the concept of management practices needs to elaborate here.

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on the whole.

The next part, hypotheses will be developed in distinct management sections to test the extent that cultural dimensions have influence on the management practices of firm performance. In other words, it tests if the cultural-fit model really does affect the firm performance across cultural-based context.

2.2 Theory development

2.2.1 Monitoring management practices

Monitoring management monitors the processes which are going on inside of the firm, and this information is then used for continuous improvement. Performance appraisal could be the critical part of monitoring section, since that the process contains observing and evaluating employees’ performance with the pre-set standards in workplace (Rusli and Nur Azman, 2004, Abu-Doleh and Weir, 2007). To illustrate, performance appraisal process notes negative critical behaviors to be stored for future use, this is to monitor performance in hopes of relaying useful information to improve future performance (Jacobs et al., 1980). There are several practices in the performance appraisal system (Jacobs et al, 1980, Abu-Doleh and Weir, 2007). Firstly, disciplinary action that is to identify whether employees’ performance is less than expectation subsequently, and with this information to perform a disciplinary action. Secondly, facilitating supervisory feedback could be beneficial for employees and organizations. For instance, 360-degree appraisal feedback system (Antionioni, 1996) is the most famous process in this area. The system requires that individuals evaluate themselves and receive feedback from their immediate supervisor, peers, and subordinates (Antionioni, 1996, Brutus et al., 2006). Thirdly, provide a platform for organizational diagnosis and development after the effective performance review and valuable feedback. The fourth is that organization can establish a training program and other human resource management (Jacobs et al., 1980).

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distribution of power, and managers in this cultural society are unwilling to seek feedback from their subordinates. It is considered that seeking feedback can undermine supervisors’ authority (Gregersen et al., 1996, Aycan, 2005), and challenging authority (Fletcher and Perry, 2001, Aycan, 2005) in high power distance culture. On the contrary, in low power distance culture, where exist harmony between the powerful and powerless in the society (Hofstede, 2001; 97), both of the managers and employees would prefer to seek feedback on individual performance. Moreover, under the equally power distributed environment, managers and employees could communicate more comfortably than in high power distance. Therefore, power distance has negative effect of monitoring management on firm performance.

Hypothesis 1: Power distance has a negative moderating effect on the relationship between monitoring management practices and firm performance.

Furthermore, individualism and collectivism describe the relationship between the individuality and the collectivity that prevails in a given society (Hofstede, 2001; 209). There is a tight social framework in collectivism culture, so that direct appraisal of performance is a threat to harmony (Hofstede, 2001: 245). For example, constant monitoring on one colleague’s behavior or performance feedback may disturb the group harmony (Aycan, 2005) in collectivistic countries. The positive feedback may induce jealousy and resentment among those who do not receive such feedback. The negative feedback will also lower the harmony among the individuals. Conversely, in high individual culture, employees perform best as individuals and they operate in direct appraisal of performance which improves productivity (Hofstede, 2001: 244,245). So positive feedback could enhance future performance, and negative feedback can serve to increase training and further education (Jacobs et al., 1980). .

Hypothesis 2: Individualism has a positive moderating effect on the relationship between monitoring management practices and firm performance.

2.2.2 Targets management practices

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right outcomes, and then taking appropriate actions to narrow the gap between targets and outcomes. Goal-setting theory states that individuals with more specific and detailed targets can have a better understanding of expected behavior and results, which provide greater motivation and effort (Locke and Latham, 1990; Dekker et al., 2012). Hence, firms benefit from defining more detailed future planning information that is adjusted for varying situations in the past, or in benchmarking information both in stable and dynamic environment (Dekker et al., 2012). For instance, assigned goals have a positive effect on salespeople’s self-efficacy and self-set goals, and self-efficacy positively influences selling effort of salesman (Fu et al., 2009). Furthermore, appropriate targets means the expected performance that is required for each of the measures needs to be identified clearly (Ittner and Larcker, 2001). It is essential that managers correctly asses his/her employees’ needs and skills, and then place them in goals in which the employees can fulfill those goals and use their skills to fullest extent (Oldham, 1976).

In cultural context, uncertainty avoidance indicates the extent to which a society feels threatened by uncertain and ambiguous situations and tries to avoid these situations (Hofstede, 1980). High uncertainty avoidance societies seek clarity, structure, and purity to avoid these uncertainties and ambitions. Theoretically, the companies in the high uncertainty avoidance societies need greater and clearer rules and regulations in their management part. Wong and Birnbuam-More (1994) mentioned that employees’ actions are defined more clearly in high uncertainty avoidance cultures. Aycan (2005) stated that there is higher preference of fixed and long-lasting job requirements, rather than dynamic work assignments in high uncertainty avoidance culture. Hence, uncertainty avoidance culture positively influence on the targets management to lead to high performance.

Hypothesis 3: Uncertainty avoidance has a positive moderating effect on the relationship between targets management practices and firm performance.

2.2.3 Incentives management practices

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part, which can prioritize hiring and keeping best employees. In day to day management practices, individuals should be rewarded in proportion to their contributions (Campbell et al., 1998; Mulvaney et al., 2012). Henderson (1980) developed merit pay plans, which relate adjustments in an employee’s base pay directly to that person’s job performance. Briefly, it presents a link between pay expenditures and individual productivity. In particular, the pay-for-performance systems have been considered as one of the most effective incentive practices to motivate and increase employee performance (Levy and Williams, 2004; Mulvaney et al., 2012). In addition, there are personally rewarding and personally punishing practices on individual performance in Oldham’s (1976) study. He argued that only when rewards are given for outstanding work performance and punishments distributed for poor work performance, an employee’s motivation and performance could be increased.

Reward and punishment are judged by performance, they can also be judged by managers and superiors. From this perspective, power distance dealt with the superiors’ power and subordinates’ fear of power. In high power distance cultures, managers or superiors represent authority, so wage and salary determination is evaluated by managers, rather than the job itself (Aycan, 2005). The performance-reward system is more preferable in low power distance countries (Aycan et al., 2000). Moreover, low power distance cultures stress on reward, legitimate and expert power, while high power distance cultures stress on coercive and referent power (Hofstede, 2001; 97). Several researchers found that reward allocation is based on criteria other than performance in high power distance culture (Smith and Bond, 1993, Aycan et al., 2000).

Hypothesis 4: Power distance has a negative moderating effect on the relationship between incentives management practices and firm performance.

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avoidance to offer certainty, while the performance-based compensation system was popular in low uncertain avoidance countries (Schuler and Rogovsky, 1998).

Hypothesis 5: Uncertainty avoidance has a negative moderating effect on the relationship between incentives management practices and firm performance.

Hofstede in his second edition of Culture’s Consequences mentioned that employees supposed to act as “economic men” and preferred reward allocation based on equity-principle in high individualism culture. Pay-for-performance system is equity for all staff. Therefore, performance-based and individual-based compensation practices are prevalent in countries with higher level of individualism (Schuler and Rogovsky, 1998).

Hypothesis 6: Individualism has a positive moderating effect on the relationship between incentives management practices and firm performance.

The fourth cultural dimension, masculinity and femininity, could also be associated with incentives management. Masculinity dimension is labeled by assertiveness, acquisition of money and material goods, quality of life, or people, and not caring for others. From both a traditional and modern perspective, men are more concerned with economic and other achievements and women are more concerned with taking care of people. In high masculinity, there is higher stress on work, as that men take care of performance, and people preference for higher pay (Hofstede, 2001; 298, 299). Moreover, in distributing the rewards of work, masculine cultures favor to pay according to merit and performance (Hofstede, 2001; 313). Hence, employees in high masculinity culture could prefer pay-for-performance, while femininity culture focuses more on the relationship to keep the harmony in group working. Thus, pay-for-performance system may inspire employees’ motivation to yield higher effective performance in masculine culture.

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CHAPTER 3 DATA AND METHOD

The manufacturing industry sector was focued to test the hypotheses, because the firm performance is easier to measure than other nonmanufacturing sector. In order to test the hypothesis, data was required on management practices, firm performance, and cultural dimensions. The database of Bloom and Van Reen (2010) will be used in this analysis. Their study focused on the relationship between management practices and firm performance, and the reasons for varying management qualities across countries and firms. Thus, their database should also be serviceable in this study to test the hypothesis.

3.1 Sample

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3.2 Measures

3.2.1 Dependent variable

Firm performance

Several dimensions of manufacturing performance have been indentified in previous research (Vickery, Cornelia, & Markland, 1997; Ward, McCreery, Ritzman, & Sharma, 1998). In the research of Bloom and Van Reenen (2010), firm performance was measured by productivity, profitability, growth rates, survival rates, and market value. Productivity was measured by sales per employee; profitability was measured by return on capital employed (defined as profits over equity plus debt capital); growth rates were measured by five-year sales growth rate; survival rates were measured by post-survey survival rates; and market value was measured as Tobin’s q, which is calculated as the stock market value of the firm divided by the book value of the firm. In this study, firm performance will be measured by profitability as dependent variable. The function of the profitability is:

Profitability = (operating / total assets – current liabilities)*100 (1)

Table 1 shows descriptive statistics (mean and standard deviation) of the variables and the results of the correlation analysis.

3.2.2 Independent variables

3.2.2.1 Management practices

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Table 1. Summary statistics and correlation matrix

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not know that their interviews are being scored. For example, on the monitoring dimension, they asked the open question “tell me how you monitor your production process,” rather than closed questions such as “do you monitor you production daily [yes/no].” To run this “blind” scoring, the combined responses to one of the management practices are scored. For example, the first question on that incentives dimension is “to what extent does failure to achieve agreed objectives carry consequences, which can include retraining or reassignment to other jobs?” The best practice which is scored 5 is defined as “Failure to achieve agreed targets drives retraining or moving individuals around,” to the worst practice which is scored 1 is defined as “Failure to achieve agreed targets does not carry any consequences.” Thus, this interview-based tool enabled scoring to be based on the interviewer’s evaluation of the firm’s actual practices, rather than the manger’s perceptions or the interviewer’s impressions. Secondly, interviewers are not told anything about the firm’s performance in advance, just only the company name, telephone number and industry. Since that interviewers’ preconception might be a problem to affect the accuracy of conducting interview and score the management practices.

For the hypotheses, each management section is measured by the average score of its management dimensions. Table 2 lists the three categories relating to monitoring, targets, and incentives with country-level scores.

3.2.2.2 National culture

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of cultural dimensions for 16 countries.

3.2.2.3 Control variable Firm size

The quality of management practices may also be influenced by the size of the firm. Since larger firms are more likely to have the resources and expertise to improve their management quality. Hence, firm size was controlled in this model. It was measured by the logarithm of the number of employees.

Education level of managers or of workers

Managers with an MBA or college education are more likely to realize the importance of modern management practices. Additionally, knowledgeable employees are easier to implement these practices. The education level was controlled in this model, and was measured by the logarithm of total percent employees with a degree.

Tangible fixed assets

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Table 2. Management Practice Scores and cultural dimension index by Country

Source: Bloom, N., and Reenen, J.V. 2010, Why do management practices differ across firms and countries

http://geert-hofstede.com/countries.htm

Country Management Practice Scores Cultural Dimension

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3.3 Method

To analyze the cultural dimensions positively moderate or negatively moderate the effect of management practices on the firm performance, a moderate regression model is developed to analyze the hypotheses. The empirical model in this study is defined as:

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CHAPTER 4 EMPRICAL RESULTS

The dependent variable captured the profitability that is measured by return on capital employed. The independent variable captured the interaction terms between management practices and national cultural dimensions. Hence, a positive slope coefficient means that an interaction variable increase the profitability of company. This chapter shows the results of the moderate liner regression analysis for the hypotheses. The estimation results are presented in Tables 3 to 6.

4.1 Baseline results

4.1.1 Results for Monitoring

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Table 3. Regression results for profitability – Monitoring section

Profitability

Variables Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8

Constant 10.325** (0.850) 10.701** (1.286) 12.773** (1.134) 12.796** (1.134) 14.865** (1.513) 8.317** (0.931) 8.220** (0.938) 8.404** (1.359) Monitoring management 0.077** (0.254) 0.086** (0.262) 0.069** (0.258) 0.070** (0.258) 0.075** (0.265) 0.065** (0.258) 0.065** (0.258) 0.072** (0.266) Power distance -0.041** (1.169) -0.043** (1.174) -0.066** (1.184) Individualism 0.066** (0.818) 0.068** (0.835) 0.072** (0.843) mc-Monitoring*Power distance -0.023+ (1.1576) -0.001 (1.577) mc-Monitoring*Individualism 0.010 (1.107) -0.009 (1.110) Log of employees 0.181** (0.241) 0.194** (0.245) 0.189** (0.242) Log of total % employees with

a degree -0.003 (0.143) 0.004 (0.144) 0.010 (0.146) Log value of tangible fixed

assets -0.175** (0.165) -0.191** (0.169) -0.183** (0.167) N 6520 6520 6520 6520 6520 6520 6520 6520 Adjusted R2 _0.006 _0.024 _0.007 _0.008 _0.028 _0.010 _0.010 _0.029

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4.1.2 Results for Targets

Table 4 shows the results of the relationship between profitability and interaction terms between targeting management and uncertainty avoidance. As can be seen in Models 9 and 10, the relationship between targeting management and profitability is positive and significant (p<0.01). Model 11 shows that uncertainty avoidance is negatively and significantly (p<0.01) associated with profitability. In Model 12 and 13, the results depict that the interaction of uncertainty avoidance and Targets management practices have no significant coefficient association with profitability. Hence, Hypothesis 3 is not supported.

Table 4. Regression results for profitability – Targets section

Profitability

Variables Model 9 Model 10 Model 11 Model 12 Model 13

Constant 9.652** (0.812) 11.081** (1.229) 12.959** (0.919) 12.966** (0.922) 13.762** (1.326) Targets management 0.088** (0.263) 0.099** (0.273) 0.083** (0.262) 0.083** (0.264) 0.096** (0.275) Uncertainty avoidance -0.091** (0.628) -0.091** (0.631) -0.067** (0.646) mc-Targets*Uncertainty avoidance 0.001 (0.855) -0.335 (0.850) Log of employees 0.169** (0.233) 0.149** (0.239) Log of total % employees with a degree -0.009

(0.140)

-0.002 (0.140) Log value of tangible fixed assets -0.175**

(0.160)

-0.161** (0.162)

N 6842 6842 6842 6842 6842

Adjusted R2 0.008 0.025 0.016 0.016 0.029

Note: Values are standardized coefficients. Standard errors are in parentheses. +p<0.1; *p<0.05; **p<0.01.

Two-sided tests.

4.1.3 Results for Incentives

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5 argued that power distance and uncertainty avoidance interact respectively with incentives management having a negative effect on dependent variable. Table 5 contains the results. Model 14 and 15 depict that incentives management positively and significantly (p<0.01) coefficient with profitability. Hypothesis 4 is not supported in Models 17 and 18, which show that the relationship is not significant. Furthermore, Hypotheses 5 is also not supported in Models 20 and 21. Although the power distance and uncertainty avoidance are associated significantly (p<0.01) with profitability respectively, the interaction terms are not.

Table 5. Regression results for profitability – Incentives section (1)

Profitability

Variables Model 14 Model 15 Model 16 Model 17 Model 18 Model 19 Model 20 Model 21

Constant 8.630** (0.905) 10.322** (1.293) 10.690** (1.169) 15.487** (0.192) 17.646** (1.197) 12.093** (1.030) 12.170** (1.033) 13.092** (1.404) Incentive management 0.095** (0.307) 0.096** (0.318) 0.086** (0.312) 0.088** (0.312) 0.086** (0.322) 0.085** (0.308) 0.084** (0.310) 0.088** (0.320) Power distance -0.034** (1.155) -0.035** (1.158) -0.059** (1.174) Uncertainty avoidance -0.085** (0.639) -0.083** (0.643) -0.060** (0.658) mc-Incentives*Power distance -0.009 (2.033) 0.005 (2.027) mc-Incentives*Uncertainty avoidance 0.014 (1.020) 0.013 (1.014) Log of employees 0.162** (0.238) 0.176** (0.241) 0.145** (0.242) Log of total % employees

with a degree -0.010 (0.142) -0.004 (0.143) -0.004 (0.142) Log value of tangible fixed

assets -0.165** (0.161) -0.183** (0.165) -0.153** (0.162) N 6712 6712 6712 6712 6712 6712 6712 6712 Adjusted R2 _0.009 _0.025 _0.010 _0.010 _0.028 _0.016 _0.016 _0.028 Note: Values are standardized coefficients. Standard errors are in parentheses.

+p<0.1; *p<0.05; **p<0.01. Two-sided tests.

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individualism culture interacted with incentives management to have a positive effect on firm performance. The results showed that Hypothesis 6 was not supported in Models 23 and 24. Moreover, Hypothesis 7, which argued that the interaction term of masculinity and incentives management would be positively related to firm performance, was not supported in Models 26 and 27.

Table 6. Regression results for profitability – Incentives section (2)

Profitability

Variables Model 22 Model 23 Model 24 Model 25 Model 26 Model 27

Constant 6.723** (0.970) 6.681** (0.973) 8.145** (1.344) 10.902** (1.003) 10.843** (1.005) 12.776** (1.347) Incentive management 0.082** (0.312) 0.082** (0.312) 0.081** (0.324) 0.099** (0.308) 0.100** (0.308) 0.101** (0.318) Individualism 0.067** (0.804) 0.067** (0.811) 0.074** (0.822) Masculinity -0.063** (0.923) -0.062** (0.925) -0.077** (0.923) mc-Incentives*Individualism 0.007 (1.333) -0.003 (1.331) mc-Incentives*Masculinity -0.013 (1.583) -0.011 (1.570) Log of employees 0.170** (0.238) 0.175** (0.239) Log of total % employees

with a degree

0.347 (0.145)

-0.689 (0.142) Log value of tangible fixed

assets -0.173** (0.161) -0.173** (0.161) N 6712 6712 6712 6712 6712 6712 Adjusted R2 0.013 0.013 0.030 0.013 0.013 0.030

Two-sided tests.

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4.2 Robustness check

Besides profitability, there are other measurements for a firm’s performance, such as productivity, growth rates, survival rates, and market value. To test the robustness of dependent variable measurement, productivity was tested for an alternative measurement in this empirical model. Hence, the regression analysis was replicated, replacing profitability by productivity and sale growth rates for 5 years respectively. Table 7 shows the results from regression for productivity. As can be seen in the table, each hypothesis was not supported. Although some of the relationship were significant, the results showed the opposite what were hypothesized. Moreover, replacing the profitability by growth rates did not lead to different conclusions. Thus, results from the both productivity and growth rates analysis were similar to those reported in tables 3 to 6. The conclusions from the analyses did not change when replacing the measurement of firm performance.

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Table 7. Regression results for productivity

Productivity

Variables Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7

Constant 4.944** (0.067) 3.319** (0.058) 3.926** (0.059) 5.440** (0.072) 4.040** (0.067) 3.657** (0.062) 4.660** (0.065) Monitoring management 0.253** (0.015) 0.262** (0.016) Targets management 0.268** (0.017) Incentives management 0.147** (0.019) 0.210** (0.020) 0.143** (0.020) 0.213** (0.020) Power distance -0.277** (0.070) -0.306** (0.071) Uncertainty avoidance 0.057** (0.041) 0.070** (0.042) Individualism 0.249** (0.051) 0.289** (0.051) Masculinity -0.179** (0.059) mc-monitoring*Power distance 0.151** (0.093) mc-monitoring*Individualism -0.138** (0.066) mc-Targets*Uncertainty avoidance -0.040** (0.055) mc-Incentives*Power distance 0.079** (0.125) mc-Incentives*Uncertainty avoidance -0.012 (0.066) mc-Incentives*Individualism -0.082** (0.083) mc-Incentives*Masculinity 0.019 (0.101) Log of total % employees with a

degree 0.095** (0.008) 0.108** (0.009) 0.067** (0.009) 0.102** (0.009) 0.072** (0.009) 0.128** (0.009) 0.080** (0.009) N 6520 6520 6842 6712 6712 6712 6712 Adjusted R2 0.208 0.196 0.081 0.149 0.054 0.141 0.081

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CHPATER 5 DISCUSSION AND CONCLUSION

5.1 Discussion

A key motivation for this study was to examine the cultural contingency theory was valid in real world. Although conventional studies draw on the management practices of fit or misfit structural and cultural contingencies, little research has addressed to what happens after applying these theories in real world. Previous study focused more on the cultural values influence on the preference of HRM practices and policies, and the cultural and structural values affect on firm performance directly. In this paper, the relationship between management practices and firm performance was examined within a cultural-based context. In other words, national culture was regarded as a moderator to influence on the relationship between management and performance.

Nevertheless, the results suggest that cultural dimensions failed to exhibit their hypothesized association with the relationship between management practices and firm performance, besides that the power distance had negative effect of monitoring management on the profitability. It depicts that firms with one point higher average monitoring management score have about 2.3 % point higher firm profitability in low power distance society, like the Republic of Ireland (power distance index: 28). In contrast, firms from countries like China which power distance index is 80, one point higher average monitoring management score could not lead to any increase in their profitability. As monitoring management practices fit the equally power distributed environment, these practices misfit with high power distance culture. The subordinates consider their superiors as powerful and privileged entities in high power distance. Hence, the misfit could result few increase in their profitability.

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performance was better when management practices were congruent with national culture. There is no obvious explanation for why this might be, but an intriguing possibility is that the real word is more complex than academic theory.

In this paper, the sample firms are from 16 different countries, some are MNEs’ subsidiary, and some are domestic firms. Newman and Nollen (1996) sampled 176 work units from one of the large U.S.-based Corporation, which is located in eighteen European and Asian countries. The different features of sample could generate different results. Moreover, the measurement of profitability was different. In this study it was measured by return on capital employed, while Newman and Nollen measured the profitability by return on assets and return on sales. There is no evidence to prove which the most appropriate measurement of profitability is. Hence, the profitability is difficult to measure in empirical research. In addition, firm performance was measured broadly, these are increase of sales or revenues, cash flow from operations, return on investment, return on equity, market share, new product development, market development, the quality of products and services, personnel development, employee job satisfaction, employee productivity, and employee commitment or loyalty to the firm (Teeratansirikool et al. 2012). Although the 5 years growth rates and productivity as dependent variable were tested in robustness check, the results showed that national culture still do not work in the relationship between management and performance. However, there remains other ways of measurement for firm performance need to check. Hence, in real business world, it is difficult and complicated to measure firm performance appropriately.

5.2 Conclusion

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organizations fit their structural contingency factors result in superior performance. However, cultural contingency factors do not work in this paper. It has two implications. Firstly, national cultures do not play a pivotal role in the relationship between management practices and firm performance, unlike the organizations structural factors. Secondly, the effects of national cultures in this relationship might be affected by other invisible factors. These unknown factors might weaken the national cultures’ effect. It illustrates that there are many factors that affect the results of theory building which are overlooked.

Although the results indicate that firm performance did not enhance too much, when they fit their management to the cultural environment, it still has several implications for business practices. Specifically, establishing foreign affiliates in unfamiliar cultural environment, it is necessary for managers of MNEs to address the issue of how they can improve their performance given the institutional constraints of the chosen host country. This study suggests that the contingency misfit in their culture could weaken the employees’ satisfaction. The dissatisfaction could cut down the employees’ motivation in their work, and then reduce the organizational effectiveness. Therefore, managers of MNEs should recognize complexity of global market and requirements of capabilities to manage the employees in different environment.

5.3 Limitations

This study has three limitations that suggest some further research for theoretical and empirical refinement. Firstly, studies employing 16 countries and manufacturing industry only face the validity problem for results. The results could not represent the whole business world exactly. They may contain sampling and rating biases. Despite the day-to-day operation being most effective in manufacturing industry, other industries, like service, hospital, could also be used. This issue provides an opportunity for future researchers to extending the study to large number of countries and other industries to examine whether the finding of this paper is convictive.

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Hofstede’s cultural measurement to develop cultural dimensions. Although the Hofstede scales were widely used, it has been heavily criticized in terms of the validity and limitations. Hence, Aycan (2005) mentioned other dimensions of cultural value beyond the four national culture dimensions, and future researchers are therefore urged to develop more comprehensive measures of cultural value.

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APPENDIX I: Management Practice Dimensions

Categories Score from 1-5 based on: 1) Introduction of modern

manufacturing techniques

What aspects of manufacturing have been formally introduced, including just-in-time delivery from suppliers, autorotation, flexible manpower, support systems, attitudes, and behavior?

2) Rationale for introduction of modern manufacturing techniques

Were modern manufacturing techniques adopted just because others were using them, or are they linked to meeting business objectives like reducing costs and improving quality?

3) Process problem documentation

Are process improvements made only when problems arise, or are they actively sought out for continuous improvement as part of a normal business process?

4) Performance tracking Is tracking ad hoc and incomplete, or is performance continually tracked and communicated to all staff?

5) Performance review Is performance reviewed infrequently and only on a success/failure scale, or is performance reviewed continually with an expectation of continuous improvement?

6) Performance dialogue In review/performance conversations, to what extent is the purpose, data, agenda, and follow-up steps (like coaching) clear to all parties?

7) Consequence management To what extent does failure to achieve agreed objectives carry consequences, which can include retraining or reassignment to other jobs?

8) Target balance Are the goals exclusively financial, or is there a balance of financial and nonfinancial targets?

9) Target interconnection Are goals based on accounting value, or are they based on shareholder value in a way that works through business units and ultimately is connected to individual performance expectations?

10) Target time horizon Does top management focus mainly on the short term, or does it visualize short-term targets as a “staircase” toward the main focus on long-term goals?

11) Targets are stretching Are goals too easy to achieve, especially for some “sacred cows” areas of the firm, or are goals demanding but attainable for all parts of the firm?

12) Performance clarity Are performance measures ill-defined, poorly understood, and private, or are they well-defined, clearly communicated, and made public?

13) Managing human capital To what extent are senior managers evaluated and held accountable for attracting, retaining, and developing talent throughout the organization? 14) Rewarding high performance To what extent are people in the firm rewarded equally irrespective of

performance level, or are rewards related to performance and effort?

15) Removing poor performance Are poor performers rarely removed, or are they retrained and/or moved into different roles or out of the company as soon as the weakness is identified? 16) Promoting high performance Are people promoted mainly on the basis of tenure, or does the firm actively

identify, develop, and promote its top performers?

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18) Retaining human capital Does the firm do relatively little to retain top talent or do whatever it takes to retain top talent when they look likely to leave?

National Culture as a Moderator of the Relationship between Management Practices and Firm Performance