The view that cultural diversity can have a positive impact on global firms

The effects of cultural diversity are very powerful and complex. But what is Cultural diversity? Firstly, according to Hofstede, (1980), culture is: ‘the collective programming of the mind which distinguishes the members of one human group from another.’ This implies that ‘culture’ is a learned group system, such as language, daily living habits, social interaction, religious observance, law and justice etc, (Burke, E. 2001). It is these learned behaviours which distinguish one community from another and constitute the shared basis of social action, transmitted and reinforced by members of that group (Burke, 2001; Hall 1976; Hofstede, 1980, Adler, 2002).

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Secondly, ‘cultural diversity’ Cox (1993) defines this as the ‘representation, in one social system, of people with distinctly different group affiliations of cultural significance.’ To identify and measure the effects of diversity it is necessary to examine the organisations culture (Blank & Slipp, 1994.).

Research on intercultural effectiveness has been undertaken from a variety of perspectives and methodologies. More recent work has adapted empirical approaches to examining cross-cultural effectiveness (see reviews by Black and Mendenhall, 1990; Hammer, 1989, 1984; Imahori and Lanigan, 1989; Benson 1978, Hammer, Gudykunst and Wiseman, 1978; as cited in Clarke & Hammer, April 1995).

Increasing international trade makes it imperative for firms to develop a good understanding of the culture of other countries. Failure to do so would be a disadvantage measured in lost revenue. For instance Americans could lose Japanese clients if they fail to understand that the Japanese use a period of ritualised politeness to signal their intentions, the Europeans could be offended by the Americans with their informality such as standing with their hands in their pockets. To avoid such problems the necessary preparations by becoming aware of cultural and language differences, (Slate, 1993).

Comparative advantage is about the global management of national differences by MNC’s. Such national differences may include differences between countries in anything from skills, wage levels, products, climate, infrastructure, language or culture. The potential list is endless. MNCs seek to benefit by organising their international operations to take advantage of the availability of comparative advantage from the existence of national differences. They seek to turn comparative advantage into competitive advantage (Segal-Horn, 2002).

E.g.: the UK benefits from the fact that English is the dominant language for business worldwide, attracting many European businesses to the UK. Similarly Asian airlines tend to focus their advertising on their very high service cultures, derived from wider social and cultural attributes that provide a source of comparative advantage (Segal-Horn, 2002).

An excellent, and well-known example is HSBC plc. To truly understand a country and its culture, you have to be a part of it. That’s why at HSBC; they have local banks in more countries than anyone else. And local people staff all their offices around the world. It’s their insight that allows HSBC to recognise financial opportunities invisible to outsiders. But those opportunities don’t just benefit local customers. Innovations and ideas are shared throughout the HSBC network, so that everyone who banks with them can benefit. Think of it as local knowledge that just happens to span the globe (


The increase in cultural diversity has been fuelled by many different motivations such as new markets, exploitation of competences, a chance to gain lower costs and higher quality, the opportunity to gain economies of scale (Shaked 1986), and gain advantages from strategic markets and spreads across international markets reducing risk (Caves 1982; Rugman 1979).

Competition and employment problems are all factors that increase the complexity of the general environment and lead firms to question their traditional methods and brings about such things as the transformation of Eastern Europe and the multiplication and diversity of international exchanges, and exploit home monopoly advantage (e.g., such as technology and brand name recognition) by increasing their international presence (Palich 1994), e.g. Levi Strauss, Benetton, Marlboro to name but a few. Some companies may enter a new market with a totally new product to what they produce locally, this is known as diversification (Hermel, 1999; Cheng, 1995; Mitchell et al, 1995; Rhinesmith, 1995; Kogut, 1985).

International diversification may yield cost advantages by allowing the firm to expand in its domain of distinctive competence and boost production economies without resorting to product diversification (Buhner 1987; Hirsch 1976; Agmon and Lessard 1977; Lessard 1979; Vernon 1979; Palepu 1985).

With globalisation, not only are businesses exporting their goods worldwide, they are also producing them worldwide, often through complex production chains across several countries. Indeed, trade among different parts of global enterprises, such as components of a final product being manufactured by affiliates in several countries, has increased significantly since the late 1980s. Such global companies or industries can be found in a range of sectors, like designer fashion, automotive components, computers and mobile phones (Turner & Richardson, 2002).

General overview.

According to Baroness Symons (2002), International trade creates closer links with the rest of the world. It helps create personal as well as business relationships – and in doing so assists international relations. It broadens skill base along with education and cultural diversity. Advocates of the value in diversity hypothesis suggest that work team heterogeneity promotes creativity and innovation (Johnston, 1990).

An expected consequence of increased cultural diversity is the presence of different perspectives for problem solving, decision-making and creative tasks (Cox, et al 1991; Johnston, 1990) and understanding of the customers (Raatikkainen, 2002; Moorhead & Griffin, 2001). Diversity also can increase a company’s access to new markets and help in understanding the needs of these markets (Kuczynski, 1999; Senge, 1999). Raatikkainen, (2000), views cultural diversity as an asset meeting; people with different views, skills and learning styles.

“Diversity is a competitive advantage. Different people approach similar problems in different ways.” (Colvin 1999).

Kao (1996) states that if creativity springs from divergence then a great source of ideas is in the multicultural world. The interconnected world gives opportunities to link cultures. With regards to coke he says ‘we have a lot of accents now.’


‘Whether organizations produce in multiple countries or only export to them, whether employees work as expatriates or only travel abroad, whether legal ownership involves joint ventures, wholly owned subsidiaries, or strategic alliances, global firms must manage despite the added complexity of working in countries simultaneously.’ Adler, 2002.

When entering a culturally diverse market place management is the key to success. ‘Competitive success in the global economy will be increasingly dependent on the contribution of a new breed of manager- the global manager’ (Schermerhorn et al 1995). Managers must be culturally sensitive, and have the ability to take a strategic approach to the human dynamics of working across cultures: to build trust, minimise misunderstandings and create synergy in international business relationships (TCO Profile). This is seen as a powerful resource to benefit from the process of change and to tap into levels of creativity and potential produced by such radical departures from past certainties (Bruce, 2002).

With more and more organisations operating across linguistic and cultural borders, cross-cultural management skills can make the difference between personal success and failure (TCO Profile). With this increase so does the frequency of business negotiations between people from different countries and cultures. Perlmutter (1983) estimates that over 50% of an international manager’s time is spent negotiating.

Managing diversity enhances organisational flexibility (Cox, et al 1991: identifies steps to how this may be accomplished).

Companies that have successful diversity programs seem to have higher returns. Referring to how a company’s stock performance could relate to its diversity level. It is believed that using social criteria to evaluate a company paints “a picture of the corporate culture and a picture of the quality of management.” (Kuczynski, 1999).

Hofstede (1980) noted that the reasons why culture is an important aspect for those who wish to do business outside their own market place and country. Firstly, nationality is important as it has historical implications, which have formed the political backbone of nations and countries. The sociological aspect of culture defines who we are, and experiences and educations received mould the psychological being, culture is collective mental programming.

Hofstede (1980), set out four dimensions of national culture:

o Individualism versus collectivisim: this involves the relationship people have with each other, where individualists are loosely integrated and collectivists are tightly. The degree of each depends on the countries wealth, with collectivists being in poorer regions and vice versa.

o Power distance: this is how people deal with unequality. (This unequality may become inequality). The authority centralisation and autocratic leadership measure power distance. Mental programming leaves those dependants on power remaining so. It is seen that those showing large power distance are collectivist- poor countries, but hose of low power distance are not always individualist- wealthy western countries.

o Uncertainty avoidance: this is based on the fact that he future is uncertain and that some take each day as it comes and take risks, not work as hard, and be tolerant of others with differing beliefs and opinions- weak uncertainty avoidance, this opposite can be said of those with strong uncertainty avoidance. These people protect themselves from risk using technology, laws and rules, and the use of religion that makes all uncertainty tolerable.

o Masculinity versus femininity: this is the division of the role of sexes in society. Masculine societies achieve and show off, ‘big is beautiful’, making money etc. but femine societies are geared towards relationships over money, looking after the environment, quality of life etc.

Using Hofstede (1980): leadership and power distance are the dimensions firms should be aware of when entering a country or market as these will determine the strategy or structure they attempt to implement.

For an organisation power distance and uncertainty avoidance are important, as they serve power and avoid uncertainty. The theories of motivation and practices of motivating people are both related to individualism and collectivism. High individualists are highly motivated to fulfil their own obligations incorporating ‘self respect’ and ‘self actualisation’. Masculinity- femininity and uncertainty avoidance are significant in motivation theories, the need to achieve and assert oneself e.g. US, on the other hand Japan is motivated by security and low uncertainty avoidance.

One area of cultural differences researched extensively is the contrast between individualism and collectivism. Compared to individualistic cultures, collectivist cultures emphasis the need of the group. The research indicates that individualism-collectivism is an important dimension of cultural differences in nations. (Triandis, McCusker, ; Hui, 1990). The extent of people’s cultural beliefs of individualism or collectivism has been used to predict the effectiveness of many management practices. As Hofstede (1980) stated: “What this can also lead to is a better ability to manage… essential for the common survival of us all.”


If companies are to be successful in an ever-changing environment they must view diversity as a business strategy that will distinguish them from the competition (Crockett, 1999).

Global strategies for operating within global industries require that the building and management of such complex sets of resources have to be structured internationally and globally (Segal-Horn, 2002).

It is also a matter of making sure that there is a level playing field, making certain that there are rules and regulations for international trade that benefits all (Baroness Symons, 2002). The implications of global synergies with respect to competitive advantage have become increasingly clear; they produce a positive impact on corporate profitability (e.g., Hamel and Prahalad (1985); Ghoshal (1987); Kim, Hwang and Burgers (1989)). This is typically actualised through enhanced innovative capability or some form of cost reduction. For example, Honda’ s engine technology once developed for producing motorcycles was virtually costlessly available for the production of engines in the different capacities in which Honda exploited it across the globe.

When MNCs enter foreign markets, especially their global contenders’ home markets, they may have strategic motivations that go beyond the narrow calculus of choosing the most efficient entry mode; that is, they may have global strategic motivations (Hout, Porter and Rudden 1982; Hamel and Prahalad 1985; Kim and Mauborgne 1988). Hence, global strategic motivation can be defined as motivation to fulfill strategic aims set at the corporate level for the purpose of overall corporate efficiency maximization (Hwang, al 1992).

A number of corporations have reaped the benefits of high profits from having Japanese strategies formulated by expatriates whose skills straddle the cultural and linguistic boundaries. A Japanese client may feel unimportant if they have a meeting and the visitor who cannot speak Japanese. However the recognition that business is fast becoming global has made it easier for US firms to send employees abroad (Lam, 1998).

Europeans see differences in language and culture as a business advantage for example ‘Wella’, the German shampoo, cultivated its European origins when entering an already saturated market place. Two Japanese-speaking executives, who recognised that the final decision lay with the wholesaler and not the customer, enticed them, for want of a better word, by using concerts, to incentive tours of German castles.

It was also the cultural insights of Luder Paysen, the Japanese-speaking CEO of BMW Japan which allowed the German auto trader to set up his own distribution network at the time when the US negotiators were insisting that the Japanese mark be closed to foreign entry. Using his knowledge of the culture he found out what the customers actually wanted, in one instance 80% of the Japanese BMW drivers wanted the steering wheel put on the wrong side of the car so their neighbours could see they could afford a foreign car! Europeans take the learning of foreign languages very seriously they hold the European Union Training Program, a one-year intense course of Japanese (Lam, 1998).

As markets globalise, increasing numbers of mergers and acquisitions are crossing linguistic and cultural borders. Within the EU alone, the ease of financing brought by the single currency has prompted a noticeable rise in the number of cross-border mergers (TCO Profile).

The increased number of mergers and acquisitions that have taken place over the past decade imply that there is something to be benefited from cultural diversity, which shall now be reviewed.

Deregulation has a positive impact on globalisation as it reduces time, costs, and complexity involved in trading across national boundaries. The creation of the European Union in 1992 and NAFTA (North American Free Trade Association) in America in 1989 allows for the free movement of goods and services and finances between members of the EU and Canada, respectively (Segal-Horn, 2002).