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Effect of Culture on a Foreign Company's Business Conduct

Executive summary

In the environment of business today, a popular study area is cross-cultural study. This is due to the negotiating parties' different modes of conducting business, legal and ethical considerations, dress, preferences and language. One of the aspects of succeeding in international business is the understanding of the cultural variables of the host country. This thesis investigates how cultural aspects affect business transactions between locals and foreigners. It illustrates the impact of the host country's culture on the choice of a market of foreign firms. That local country's cultural variables like avoidance of uncertainty and trust influence the location of firms. Foreign firms like to invest in nations with very low risks of uncertainty but with high levels of trust. Using an example of the Sweden U.S business relationship, it narrows down to show entry, strategy, structure, marketing, production, finance, government - business relations and management style.


In today's business world, stakeholders are no longer from the host country as it was in the past. Due to stiff local market competition, companies have started going global by investing in other countries. They end up facing competition both locally and globally. It is even tougher taking the intercultural differences into consideration. Managers have to be more considerate on cultural issues to succeed in the foreign market arena. Francesco and Gold, (1998) define culture as a complex whole that encompasses knowledge, beliefs, art, morals, laws, customs and other capabilities and habits acquired by man as a member of society. According to Czinkota & Ronkainen (1998), culture consists of interdependent elements including language, customs, morals and values among others. Foreign Companies should always consider cultural differences that may be of a problem between the business partners, (Johan & Svedjeholm, 2006).

Cross cultural encounters are today more frequent with increased trade, migration, media coverage and travel hence the need to accommodate intercultural and ethnic diversity (Osman-gani & Joo-Senq, 2002). Due to this, communication and technology have greatly improved with time and countries are no longer independent but interdependent (Francesco & Gold, 1998) meaning that companies must operate in the globalization era. The most challenging element in the market place is culture (Czinkota & Ronkainen, 1998). Harris and Moran (1996) argue that socialization for business people must be in their culture, business culture and corporate culture. Involvement of a firm in foreign culture is what shows the firm's degree of adaptability on foreign cultural elements (Czinkota & Ronkainen, 1998). Cultural diversity still remains to be an important factor in the modern world market liberalization and mergers across the border. According to Adler (2002), globalization is a reality and intercultural communication is more of a norm than an exception.

The foreign direct investment funds that a country gets are directly related to the culture of the host country. According to UNCTAD (1998), foreign direct investment (FDI) entails long term commitment to a business endeavor by foreign firms in a host country (Bhardwaj, 2007). Firms always like investing in countries with favorable economic, institutional and regulatory conditions. Certain host country's cultural attributes either attracts or repel foreign investors. The host country's culture influences the entry, strategy, structure, marketing, production as well as finance and management style for the foreign company. As Gulbro and Herbig (1996) point out; there are three things that are necessary for a company to succeed in a foreign market:

• Identifying, understanding, accepting, and respecting the other sides' culture and a preparation to communicate and operate on two separate cultural wavelengths.

• Culturally neutrality.

• Sensitivity to other people's culture.

Host country culture and the entry mode of foreign firms

There are a number of factors affecting the entry mode of foreign firms into a country but this paper will dwell mainly on the social cultural factors. According to Wagner (2009), the greater the disparity between the host country and the firm, the harder it is for the firm to enter. Taking an example of a company like AIG which wants to capture a new market in East Africa, it will have to trade off the cultural factors from the west with those present in east Africa. Its managers will also have to consider the opportunities and risks involved in each entry mode. According to Charles et al. (1990), if the cultural disparities are high, it will mean that the risks and uncertainty is also high. With such high uncertainty, the firm will not want to commit much of its resources. Therefore it will choose an entry mode that binds less of its resources. The firm chooses the modes of entry basing on:

a) The cultural distance: The higher the cultural distance the higher the uncertainty and risk of venturing into a market / country. Therefore a firm will choose a safer mode by investing less in that market.

b) Cultural competitive advantage: Some cultures give their firms advantages over others thus the cultural competitive advantage.

c) Ownership preferences due to culture

There are various entry modes that a firm may choose depending on the cultural differences:

Exporter: AIG firm may choose to enter as an intermediary exporter. Due to large cultural differences, there is lack of knowledge concerning intercultural problems and foreign market. Thus the firm doesn't want to commit much of its resources (Wagner, 2009).

Licensing: According to Hollensen (2007), this is an entry mode in which the firm can establish local production in a foreign country without capital investment. This mode is more common with firms that have relatively high cultural distance.

Franchising: Is a type of entry where a firm is give the right to franchise without payment. The right includes use of business concept/system including the use of trademarks (Hollensen, 2007).

Joint ventures: International joint venture is a partnership of firms having different countries of origin. Hollensen (2007) says that cultural distance complicate management of such partnership.

Subsidiaries: Firms may choose to enter as subsidiaries due to low cultural distance. The levels of uncertainty are low increasing the chances of investing more direct investment. Decision makers always shy away from investing high fund with high levels of uncertainty (high cultural diversity) (Charles et al., 1990).

Therefore, the culture of a country is very vital in determining the entry mode, whether a foreign company will invest in a country or not. A country with a complex culture will be hard to capture since there will be high chances of risks and uncertainty. Most foreign firms are concerned with the certainty of the future. Firms like investing in economies with high certainty rates than those with uncertainties this will depend mainly on the cultural diversity of the society. With the volatility of the east African market, the managers of AIG will have to trade cautiously because of the risky nature of business transactions.

If the economy is rising from a recession, or a slump, the future of business looks bright and therefore many foreign firms will seek to enter into that market regardless of the cultural differences.

Culture and firm marketing strategies

Culture influences the marketing strategy of a firm to a great deal. This is because the firm always wants to maximize profits and for it to manage, it must tap into the market as much as possible. For it to do so, it must meet the needs of the residents. But the needs are based on culture. AIG being an insurance firm, it must find the difference between the market in East Africa and the west. It must therefore adapt to all the elements of the culture that make up the market in east Africa. It must look for locals to do the advertising using the local language, religion among other cultural elements. According to Umoren (1996), every culture is indentified by language and symbols among other elements and therefore, the marketing strategy of the firm must include learning and use of the local language(s) and the symbols that go by them. Umoren (1996) defined religion as a “cultural system and culture as a system of symbols and meaning.” Religions affect the spending power of the consumers since they affect their consumption behavior. For example in some places, Islam doesn't allow beer parlors and abusing of alcohol unlike in others. Some religion cultures do not allow eating of certain types of meat. If AIG wants to capture the market it must the religious cultural and even the traditional African society values in its marketing strategy (Umoren, 1996).

Marketing strategy determines the productive capacity of the firm since it affects the demand for the firm's goods. Poor marketing strategy will mean low demand for the firm's product hence reduced output. A good marketing strategy on the other hand will mean expanded demand for the firm's products which will translate into high output (increased revenue). Therefore, for a firm to meet its objective (profit maximization), its marketing strategy and product must suit its market area of operation (Ekerete, 2001). Also the marketing strategy must be cost effective. The marketing managers will try to evaluate the marketing strategy to use to penetrate the market. According to Busch and Houston (1985), individual behavior, which also affects individual consumption hence firm marketing, is also influenced by social cultural values.

When the cultural values of a society change the motives with which the individual buys products also change and the firm is required to see this and venture into the market with a new product or make changes on existing products to meet changes (Ekerete, 2001). According to Pride and Ferrell (1985), marketing strategy entails selecting and analysis of a target market and creation and maintenance of appropriate market mix that satisfies the market residents. While McCarthy and Perreault (1984) see “marketing strategy as a big picture of what a firm will do in some market” (McCarthy & Perreault, 1984, p. 34), Pride and Ferrell (1985) see it as “the core of a successful marketing plan” (Pride & Ferrell, 1985, p. 54).

Culture and the management structure

The management decides the management structure to use when it goes multinational. For example, AIG will have to look at the market and then determine whether it has to establish a base in east Africa or not. Culture determines how easy or hard the market is to penetrate. The management after observing the cultural differences, they will know whether to make the independent of the parent firm or to remain as a subsidiary. This depends depend on internal and external variables including; marketing and economic information, social and cultural factors, tariff and non-tariff barriers, legal restrictions among others (Nwokoye, 1981). All these factors are governed by culture. The management style chosen must be in line with the cultural elements hence const effective.

Culture and production of a firm

Cultural values highly affect the production of a firm. A firm must produce in line with the local culture of the people. Motives of purchasing goods always change with the changing cultural values and therefore the firm's production must look ahead for new opportunities. Production of a firm is directly related to the culture of its market. The better it adapts to the market's cultural values, the higher the production and vice versa (Ekerete, 2001). A good marketing strategy that matches the needs to the products manufactured will capture the market, increase demand hence a rise in the firm's output. When the society's values changes, the firm must come up with a new product to suit the now changed market, or improve the current product, otherwise production will decline drastically. For instance, if AIG captures the market in East Africa using a good marketing strategy, then demand for its products will increase swelling the firm's output (Ekerete, 2001).

Culture and finance

To choose a successful market, the management always evaluates possible markets. The evaluation is always in terms of the anticipated success, possible entry points and the firm's expected costs, sales and profits. Through such an analysis, the management will see rate of return on their investment on the market. They analyze every detail including the size of the firm, the number of competitors, expected resources and the available resources for investment (Ekerete, 2001). The determinant factor to the above evaluation is the cultural background of the market in East Africa. A good evaluation should consider all the cultural elements (language, African traditions, customs, religion etc). The resulting outcome should reveal the certainty of the market and the risks involved. The certainty or uncertainty of the market in East Africa will determine how much AIG will invest in East Africa and which entry mode the firm is to use in penetrating the market (Wagner, 2009).

Culture and government business relations

The business cultures of different countries differ according to their cultures. For example, the Chinese business culture is “scratch my back and I'll scratch yours,” and it differs from that of the west. In some parts the business culture is based on money while on others it extends to the relationship between the contracting parties. Apart from money, the business relation ship may also depend on decency and trustworthiness while being reliable and dependable strengthens the relationship. Frequent contact with each other also shapes the business relationship. The business relationship of most governments and organizations, even though it is sometimes political, it depends on the cultural mentality of the society that you are dealing with (Lo, 2010).

Business relationship of the government with firm will differ from place to place. For example, the way a government in the west deals with firms is different from the way the one in the East Africa does. This is as a result if cultural differences which encompass religious practices. Certain cultures are hostile to foreign investors. Such a market will be hard to penetrate because even the governments are forced to be harsh to foreign investors due to the peoples' culture. Such government's preferences may be monopolistic conflicting with the profit-maximizing policy of the firm. AIG's penetration in East Africa will quite easy because of the easy going nature of the governments in east Africa (culture of hospitality). Certain Governments' cultures and way of doing business may undermine a company since its officials may undermine it by maximizing on employment for their own people. This is due to a culture of corruption or nepotism and it can bring losses to the investors (Julan, 2005).

Culture and management style of a firm

Cultural differences in trust do influence business costs and the preference for direct foreign investment in different countries. Being a profit maximizing organization, AIG will decide whether to decentralize its management or to centralize it. A volatile market with higher social-cultural differences and risks will be quite difficult to capture since the level of uncertainty and risk is high (Wagner, 2009). Therefore, the organization will not fully enter and will invest little resources in it because it doesn't want to risk. This will mean that the organization will less likely decentralize its management. Contrary, a market with less socio-cultural diversity will mean that the market is easy to capture and the company will not incur much expenses in penetrating it. The company will therefore decentralize its management for it to fully capture and compete in that market.


Culture has several elements that are vital focal points for any marketing manager who would like to venture into a new market abroad. This is because culture has a great significance on the success of that company abroad. The marketing manager must study all the aspects of the foreign culture, analyze them and see the possibility of adapting to them hence work out the possible return on investment that they are yet to make.

Such a good analysis will enable the management certainty and the riskiness of the new market. This will ion turn make them know the entry point to the market; a more diverse culture with a complicated culture means high uncertainty rates and more risks hence the company will not invest much in it. In such markets firms prefer entering through as an intermediary exporter, licensing firm or a franchise firm. On the contrary, a less risky or more certain market firms enter as joint ventures or subsidiaries.

Culture also plays a major role in marketing strategies. The more certain the market the easier the market strategy and the vice versa is true. The marketing strategy of the firm will determine the firm's output and the eventual size of the firm. An organization will maximize its profits with a good marketing strategy; which means a good understanding of the cultural elements.

Culture influences the financing of a firm's activities abroad. This is usually achieved through a good marketing strategy which puts into consideration the cultural aspects. High certainty areas will mean higher funding while lower certainty area will mean lower funding.

Culture determines the type of management structure that an organization will have. In high certainty areas, the management can be decentralized unlike in the uncertain market areas, decentralization is unlikely.

Depending on the people's culture, the governments in different region have different ways of dealing with business issues. It can either be hostile or hospitable affecting the business of the firm both positively or negatively.

In summary, culture is the pivot with which an organization bases all of its decisions. Whether to produce or not and by how much, expansion, entry or exit of the market, etc. the better the understanding of a market's culture is very important for the going concern of a company.


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