Report On The Power Distance Accounting Essay


As can be seen in the table both, the Arabic countries and the United States differ in each one of Hofstede's cultural dimensions. This leads to differences in behavior and activities performed by people of these cultures.

The first cultural dimension is Power Distance. Power Distance shows how excepted the unequal distribution of power is within a society. A country with a high power distance excepts power that is distributed unequal, meaning that some people are more powerful than others. Since Arabic countries are countries with a high power distance it is perfectly okay for them that some people are more powerful than others. On the other hand the USA are lower on this dimension, meaning that they expect power to be distributed fairly equal meaning that almost everybody has a say in the running of, for example, a company and so results in more harmony and cooperation. (Deresky, 2003, p. 95)

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The second dimension is Collectivism respectfully Individualism. Whereas Collectivism means that people feel for each other and are more in favor of harmony, Individualism on the other hand means that people are mainly looking for themselves and their immediate family only and not so much for the society as a whole. As can be seen in the table Arabic countries are very collectivistic and the USA are very individualistic. That means that Arabs are valorizing group decisions, harmony and the concept of saving face whereas the USA are valuing personal achievement, democracy and tend to perform less when working in a group. What also is important to mention is that countries which are more Individualistic (like the USA) have a higher gross national product and a freer political system than countries which are more collectivistic (like Arabic countries). (Deresky, 2003, pp. 95-96)

The third dimension is Femininity versus Masculinity. These dimensions refer to how countries value masculine or feminine values. A country that scores high on Femininity has a high concern for others, for relationships and for the quality of life whereas a country that scores high on Masculinity is very assertive, materialistic and has a lack of concern for others. Within these dimensions both countries score fairly high on Masculinity and so both are materialistic and do not favor a high quality of life.

Question 1) - continued

Since Arabic countries are less masculine than the United States these countries are a little bit more feminine and so when facing decisions also take into consideration how their decisions will impact the quality of life and their relationships to others. (Deresky, 2003, p. 96)

The last dimension is Uncertainty Avoidance. This dimension refers to how much people in a society are in favor of stability or how much they are in favor of ambiguous situations. Countries with high Uncertainty Avoidance (like Arabic countries) are valuing stable situations and tend to have stricter laws and procedures and lean to nationalism. On the other hand countries like the U.S., which are low on Uncertainty Avoidance are favoring less structured and less formal more risky situations and decisions and have a high labor mobility and more democracy. (Deresky, 2003, p. 95)

All these values have a major impact on a society and the development of institutions. And so they also have a major influence on the accounting system of each country. It can be seen that countries with different scores in the above mentioned cultural dimensions will also result in different accounting systems. So an accounting system for Arabic countries will differ from that used in the United States. (Chanchani/ Willet, 2004, pp. 126-127)

To show the basic differences between both accounting systems we could use the accounting values and hypotheses made by Gray. Gray basically constructed four different accounting values and linked them with the cultural dimensions constructed by Hofstede. The first accounting value is Professionalism. Professionalism is the preference for individual professional judgment and the maintenance of professional self-regulation. The next value is Uniformity, which is the preference for enforcement of uniform accounting practices between companies and the use of practices over time without changing them. The third value is Conservatism, which is results in a more cautions approach to measurement. The last value is Secrecy and is the preference for confidentiality and the disclosure of information only to people closely involved in the business. (Salter/ Niswander, 1994, p. 382)

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From there he linked these values with Hofstede's cultural dimensions and built four hypotheses. The first one is that a country ranking high on individualism and low on uncertainty avoidance and power

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distance will rank high on professionalism. The second hypotheses is that a country ranking high in terms of uncertainty avoidance and power distance and low on individualism will rank high in terms of uniformity. The third hypotheses says that if a country ranks high in terms of uncertainty avoidance and low on individualism and masculinity then it will rank higher in terms of conservatism. The last hypotheses says that the higher a country ranks in terms of uncertainty avoidance and power distance and the lower it ranks in terms of individualism and masculinity the more likely it ranks high in terms of secrecy (Salter/ Niswander, 1994, pp. 382-383).

Since Arabic countries rank high in terms of power distance, uncertainty avoidance and masculinity but lower in terms of individualism a Muslim accounting system would feature a statutory control and would be very uniform, conservative and would be in favor of high secrecy. On the other hand the U.S. accounting system would feature personal judgment, a flexible system which adapts to changing environments, would be very optimistic and would be in favor of transparency for all of its stakeholder.

Question 2)

We have seen above that accounting systems are influenced by the culture of a country. The question now is how to deal with this. Since every country has a different culture it also basically needs a different type of accounting system. But how can any institution construct an accounting system that works for the country and its people. One concept that could help in this respect is radical transactiveness. Radical transactiveness basically focuses on gaining access to stakeholders and ideas which previously had been left out. This should facilitate a change and should create a new kind of imagination going beyond current accounting systems. The other part of radical transactiveness is that it seeks to engage other stakeholders into a dialogue so that stakeholders can influence systems and on the other hand also are influenced by the system. But what does that mean for accounting systems. Basically a modern accounting system needs to be build for a country. That means it needs to be specialized and custom fit to the culture involved. So it needs to be influenced by the culture of the country it is build for but on the other hand also has to have an influence on the country and its culture. (Hart, 2007, p. 177)

With respect to the Islamic world this means that an accounting system needs to be build for the Islamic world as a whole or even better for each country of the Islamic world. This accounting system needs to be tailored to the cultural and economic situations of the involved countries and should not just be a version of IFRS with little changes. It also needs to be constructed not only by accounting professionals or managers but also with the help of religious professionals since in the Arabic world economics, politics, social affairs and so also accounting fall under the jurisdiction of the divine law of Islam, the shari'a (Lewis, 2001, p. 103). But the accounting system should not only be influenced by economic and religious leaders and the culture of the Islamic world. It also needs to have a major impact on the economy, religion and culture of these countries. This seems very unrealistic at first but is an absolute necessity for the Islamic world to overcome terror and poorness and to become prosperous and future orientated countries which can compete in the global economy. Examples like Saudi Arabia and Qatar show how countries can change over time and become major players in today's globalised world and not just because they have huge amounts of oil.

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However since it would be to complex to find out every aspect of a countries culture accounting institutions need a certain guideline which they can use to find out the differences and specifics of a culture. Therefore they could use the cultural dimensions of Hofstede combined with Gray's accounting values and hypotheses to get a first impression of how a country and its culture differs from that of other countries. Afterwards this could be linked with radical transactiveness so that major stakeholders like economic experts, politicians, managers, religious leaders and cultural experts could work together with the accounting institutions to come up with the best possible and custom fit accounting system for the country.

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One problem should be kept mind. Since Hofstede's findings are based only on its analysis of 116,000 employees at only one company (IBM) it is very narrow and could be highly influenced by IBM's corporate culture (Deresky, 2003, p. 94). Besides that Chanchani found out that today accounting systems in this increasingly globalized world are not only determined by cultural values. Sometimes also capital markets, tax laws and other economic and political characteristics of a country are factors that reinforce or obscure the impact of cultural values on accounting systems. (Chanchani/ Willet, 2004, p. 149)

So what features does an Islamic accounting system need. First of all toHo

TTTTTThe most important difference between Islamic accounting and almost all other accounting systems in the world is the fact that Arabic countries do not have a division of government and the church. This means that in the Arabic world economics, politics, social affairs and also accounting fall under the jurisdiction of the divine law of Islam, the shari'a. The basis of an Arabic accounting system should therefore not be the accountability to its shareholders (like in the U.S.) but the accountability to god and the community. Since everybody is accountable to god an Islamic accounting system would feature honesty and fair dealing in the valuation of assets and debt (Napier, 2009, p. 123). Another factor is that in Islam certain values should be avoided. These are tyranny, miserliness, greed, the hoarding of wealth and extravagance. So an Islamic accounting system needs to show that these values are been followed. Another important feature is the fact that the future cannot be overlooked and so it would not be possible to account for future earnings and losses. Important is also that profits need to be made through the transformation of resources and therefore an

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accounting system needs to show exactly how, when and for what purpose resources are being transformed. Accrual accounting of revenues and expenses is also not capable for Islamic companies so that they use a cash basis. Another difference lies within contracts. In Islamic law a contract also includes dispositions which are gratuitous as well as endowments and trust. As well Islam requires the removal of doubt and uncertainty from inter-personal engagements. Therefore both should become accountable under an Islamic accounting system. The different types of partnerships in Islamic laws also need to get special attention by an Islamic accounting system. An Islamic accounting system also needs to follow the basis of full disclosure of all facts and therefore would be more detailed then western accounting systems. This is due to the basic concept of Islam that a primary responsibility is the collection of knowledge (Kamla, 2009, p. 5). Another major problem lies within the differences in periodicity. Whereas the western calendar follows Common Era dating, the Muslim calendar follows the lunar system and has therefore on average 10 days less. Another difference to western accounting standards is that in Islam interest is forbidden (Kamla, 2009, pp. 6-7). This results in depositors of banks being more of non-voting shareholders and therefore are entitled to a certain share in the profits of the bank (Kamla, 2009, pp. 6-7). Another important factor of Islamic accounting is that people and companies are required to pay a certain amount for social purposes and is therefore similar to a tax and thus needs special accounting treatment (Napier, 2009, p. 127). (Lewis, 2001, pp. 103, 107-117, 121-123)

So generally Islam has five features that accounting has to follow. These are the 1) prohibition of interest, 2) God owns all wealth and property should be used for the benefit of society, 3) banks need a special supervisory board which controls if Islamic law is adhered, 4) speculation and any form of gambling and 5) insurances are forbidden since they involve unknown risks. (Lewis, 2001, pp. 116-119)

Question 3)

One trend which came up in previous years is offshoring. Offshoring is the geographical relocation of specific business activities to foreign countries for the purpose of lower costs and or increased quality and or productivity (Daley, 2008, p. 2; Daugherty/ Dickins, 2009, p. 60). The question is how companies can decide whether to offshore business activities like accounting systems. A particular useful concept for this question is the transaction cost economics framework. Basically this framework argues that companies will choose the alternative that yields the lowest total cost of running their operations and says that companies will not offshore outsource areas with a high potential risk of supplier opportunism (Ellram/ Tate/ Billington, 2008, p. 149). The last part of this framework does not need to be taken into account since the question is whether to offshore accounting services (stays within the company but is located in another country) and not whether to offshore outsource (to another country and performed by another company) it.

The transaction cost economics framework consists of different elements. The first one is the transaction frequency. The framework argues that as transaction rises offshoring becomes cost prohibitive. Surely modern information system has shifted these costs. Today fixed set-up costs outweigh the variable costs and that means that it is only reasonable for companies to offshore high volume services. (Ellram/ Tate/ Billington, 2008, p. 150)

The next element is the level of asset specific investments. This element argues that the more specific assets are required to support the service the less likely it is that the company will offshore the service. (Ellram/ Tate/ Billington, 2008, p. 150)

The third element is the uncertainty in the external environment. The basic assumption of this element is that companies will not offshore a service if the country to which the service will be offshored is highly uncertain. May that be due to political, regulatory or economic uncertainties. (Ellram/ Tate/ Billington, 2008, p. 151)

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The fourth element is the internal uncertainty in requirements. If a firm does not know what it wants from the process and outsources and or offshores this service it will limit its flexibility and will risk that the service lacks quality. This is mainly a problem if companies will outsource a service since then they lose a lot of the control over the process but also when a service will only be offshored a country loses control and flexibility to a certain degree. So basically the more uncertain the requirements are the less likely will the company offshore the service. (Ellram/ Tate/ Billington, 2008, p. 151)

The last element is the uncertainty regarding performance of the contract performed by a supplier or another service department in a different country. This element faces arising quality problems due to the offshoring and or outsourcing of services. The basic notion is that the more difficult it becomes to verify the contractual performance, the less likely it is that the service will be offshored by the company. (Ellram/ Tate/ Billington, 2008, p. 151)

To check how useful the transaction economics framework is, one can link it with Ricardo's ideas regarding competitive advantage. Ricardo's theory of competitive advantage says, that every country or company has limited resources and produces the goods it is most efficiently in (Roberts, 2007, pp. 9-11, 33-34). This would mean that a company should find the country in which it could perform the accounting service with the highest quality and the lowest cost possible. Besides this Ricardo also mentions that a particular reason for the outsourcing and or offshoring of jobs is that some countries (like the USA) have too few highly qualified people to do everything on their own (Roberts, 2007, pp. 102-103, 109-110; Daugherty/ Dickins, 2009, p. 61; Robertson et al, 2005, p. 55). For the offshoring of accounting services this means that if a company cannot find enough qualified people in its country of origin it has to look for them in another country, like India with its huge amount of highly skilled workers. Also Ricardo would argue that if countries will compete for the right to perform the accounting service this could result in a higher quality and lower costs (Roberts, 2007, pp. 107-108).

So it can be seen that Ricardo would support the transaction cost economics framework since it would help companies raise their competitive advantage and also help them handle the scarcity of highly

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skilled labor but with the security that the quality of the service would not diminish and that costs will go down not up.

Question 4)

Like mentioned in Question 1) the USA score very high in Hofstede's cultural dimension of individualism. Again that means that people have the tendency to look for themselves and that they are in favor of democracy and individual initiative and achievement. On the other side of the individualism score is for example a country like Korea which is therefore more in favor of group decisions and valorizes harmony and saving face. (Deresky, 2003, p. 96)

At first it seems that countries with a lower score in terms of Individualism are superior to the USA when it comes to management teams and their power to make effective decisions. For example, is it common in the USA that people are performing less when they work within a group. (Deresky, 2003, p. 96)

However this is just the first impression and the problem of social loafing can be found all around the world. Maybe it is more common in the USA but it would be foolish to believe that this would only happen in an individualistic culture. If one looks closer at the findings of Hofstede a few things catch someone's eyes. The first thing is that individualistic cultures value democracy (Deresky, 2003, p. 96). Democracy is a form of government where many people have a vote (a say) in how to do certain things. This means that democracy is similar to group decisions and so individualistic cultures somehow also value group decisions. Another very important aspect is the fact that in individualistic countries people are promoted and hired based on their achievements and personal capabilities whereas in collectivistic countries people are often promoted or hired based on paternalism (Deresky, 2003, p. 96). This could result in less capable employees becoming managers compared with an individualistic country. So if one compares two companies it could happen that the Korean company has a good team spirit but less qualified people in the group and the U.S. team on the other hand has more qualified people but has a few problems regarding team work. Which one is better? Another major aspect is that collectivistic cultures value the concept of saving face (Deresky, 2003, p. 96). This means that they exert control over the individual members of a group through social pressure and the fear of humiliation (Deresky, 2003, p. 96). This could result in people being unable to make realistic assumptions about a certain project or who even lie about the status

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of a project just to save their face and not being humiliated. Clearly one can see that this would not be an ideal situation and surely not the optimum for a company.

As you can see it is not possible to give an exact and easy answer to the question of who is able to make the better decisions, an individualistic or a collectivistic company. Maybe countries like Spain or Germany can make better decisions because they are between individualism and collectivism and therefore combine the advantages of both cultures (Deresky, 2003, p. 96). However one needs to be careful about this idea because they not only share the advantages they also share the disadvantages. There is maybe an even more important factor regarding the effectiveness of groups then their score in terms of individualism. Because people and therefore also groups are not only affected by the culture of the country, they are also manly affected by the culture of the company. The culture of a company could differ tremendously from that of the country it is incorporated in. If for example a U.S. company has a history and culture of deciding in groups and a management team that acts in exactly this manor then this company could be more affective than its Korean counterpart whose culture values group decisions but who's managers decide everything on their own without checking back with other managers of the company.

The last factor that needs to be mentioned is again the fact that Hofstede only interviewed people at IBM. Certainly one can see that the culture of IBM in general and especially of the managers in charge regarding how decisions are made (individualistic or as a group) has a huge influence on the answers the employees gave to Hofstede about how they value group decisions (Deresky, 2003, p. 94).

Therefore it is the combination of the countries culture, the companies culture, the spirit of its employees and the actions of its management that determine which company makes the better decisions.

Question 5)

Since a holistic approach means that people always look on the big picture and not just on the project alone it becomes clear that an individualistic country like the U.S. follows a different way. The question is how does this affect the negotiation process, especially between a country like the USA and a more holistic orientated country like for example China (Deresky, 2003, p. 176).

It is a normality that in negotiations people have different perceptions about what they want to get from the other party and what they want to give. Clearly every negotiation carries certain problems with it. However it gets very difficult if the perception about what the aims of the negations are differ and what the final outcome should result in. For example for managers of an American company the primary objective of a negotiation is to get the project done. So if for example a U.S. company wants to build a factory in China with the help of a Chinese partner. Since both countries differ in terms of their holistic approach, there will be different perceptions about what the outcome should be. The American managers expect the factory to produce goods to earn money and that with the lowest cost and with the best quality possible. On the other hand the Chinese maybe have a somehow different aim. They also want to build the factory to produce goods and to earn a profit but they maybe also have a different set of aims. Maybe they want the Americans not only to invest into the factory but also in infrastructure, Kindergartens for the children of the employees or maybe even schools for these children. This clearly would result in difficulties in the negotiation process because the American managers will not expect that and would probably have problems excepting the requests of the Chinese. Therefore managers need to realize what both parties want from each other and have to be willing to make concessions (Deresky, 2003, pp. 160-163, 171).

Another major influence on a negotiation process is time and the perceptions of the parties about what time is and how time is spend. Basically there are two time systems. The first one is a monochronic time system. This means that time is experienced in a linear way with a past, present and future and therefore time is spend, saved, made up or wasted. Countries which experience a monochronic time are for example Germany and the USA. The second time system is the polychronic time system. A polychronic time system tolerates many things occurring at the same time and emphasizes the involvement of people.

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People from countries with a polychronic time system (like Latin American countries) are highly distractible and often change plans. Also people from this kind of time system will more likely hold open meetings, move around and conduct transactions between the parties. On the other hand people from the USA will most likely compartmentalize meeting topics and want to have a strict time frame. (Deresky, 2003, pp. 135-136)

Of course this will result in tremendous problems for any negotiation. At least at first because over time both parties can and should arrange a certain kind of time system both can work with and feel comfortable with. So both parties need to make adjustments about how they sense time. But until this happens the experience of time for both parties could result in not matched time frames and a lot of frustration for both sides. And if both parties are not able to adjust to the different experience of time the negotiation could ultimately fail because the Americans would see the Latin Americans (for example) as to lax and probably will not trust them to meet time frames and milestones and the Latin Americans will view the Americans as to focused and not able to see the big picture about how work can be done in Latin America.

One can see that both the perception about what the goals of a process are and about what time means have a tremendous influence on negotiations and their outcome. Therefore all parties should be aware of what the culture of the other parties is and what their expectations are. A good preparation on both sides can prevent a lot of frustration and can secure a good outcome for all the parties involved.

Question 6)

One can say that sometimes or even often joint ventures are very similar to a marriage. Why is that? First of all what is a joint venture. In a joint venture two ore more companies create an independent company with the aim to bunch knowledge, to lift economies of scale and or to become active in a new market (Deresky, 2003, p. 261). So obviously there are similarities between a joint venture (JV) and a marriage. Because at both two individuals (in some JVs and in some cultures also more) want to join into an agreement. Be it to share their love for each other or to improve their competitive position. But there are other similarities too. Like in a marriage companies who want to create a JV both need to find each other. That is (like with people) not always easy. Theoretically everything needs to fit, be it the culture of both companies, their structure, their way of dealing with problems or their aims for the future. And like in a marriage both parties need to trust each other and need to be loyal. Basically the more issues are settled before, the less likely the JV (marriage) will fail (Deresky, 2003, p. 274). However like in a real marriage too often failures are made and or expectations were falls. This could then result in a divorce, so the closure or the acquisition of the JV company by one of the partners (Deresky, 2003, p. 281).

There are two other concepts which can be linked to marriages and JVs. The first one in guanxi. Guanxi is the Chinese word for connection. This connection is been built between Chinese companies through friendship and affection. It is based on the exchange of gifts and favors to provide an obligation between the parties involved. At the end all companies within these relationship are bound by an unwritten code and this provides the ideal basis for business between the connected companies because what otherwise would take long negotiations and the creation of trust has already been built so that work can start immediately. The second concept is advancement of guanxi. This concept is called guanxihu. Guanxihu refers to a bond between specially connected companies which secures a special treatment for members of this guanxihu network. Thus guanxihu refers to the outcome of the process of guanxi. (Deresky, 2003, pp. 116, 278)

Obviously both concepts can be linked to a marriage and to JVs. The guanxi process is the process of flirting with the preferred partner before the negotiations. Between people this I done through

Question 6) - continued

gifts and pleasantries. Between companies this is done through preferred care, inviting the management of the other company to nice dinners (in marriages too) or to nice places around the world. Also within the negotiation process the concept of guanxi plays an important role. Because both parties need to work together and show the needed respect and make compromises so that both parties are pleased and a deal can be reached. Then, ideally, at the end of the 'flirt', the marriage takes place or the creation of the JV respectfully. After the marriage (the creation of the JV) the concept of guanxihu kicks in because then both parties are bound in a very special relationship which (should) be based on trust and makes dealing between each other (through the JV) easier then without this special relationship.

One particular JV were exactly this procedure of relationship building and building of trust resulted in one of the most successful JVs of today is the creation of the joint venture between Nissan and Renault.

Question 7)

Like mentioned earlier one major global trend is offshore outsourcing. Again offshoring is the geographical relocation of specific business activities to foreign countries (Daley, 2008, p. 2) and outsourcing is the practice of contracting specific organizational activities and functions to external firms (Daley, 2008, p. 2). Currently the common perception is that only low skilled work is outsourced but this is not the truth (Daley, 2008, p. 3). In fact also highly skilled, very technical work is been not only offshored but also outsourced to other companies and even offshore outsourced to suppliers in foreign countries (Daley, 2008, p. 3; Cervantes, n.y., pp. 102-103). Be that to save money or to find the skilled labor necessary to perform this kind of work (Roberts, 2007, pp. 102-103, 109-110). So since almost everything can be outsourced the question is how people (and especially students) can find a way to save their jobs from being outsourced.

This is one particular reason why Pink wrote his book 'A whole new mind'. In this book and the movie to the book Pink gives some ideas how one can prevent his position from being outsourced.

Pink basically believes in one thing. That in the long run outsourcing is understated and that in the near future every routine work will be outsourced. For Pink the only way to secure ones job from being outsourced is to become unique. The question is how one can become unique. Therefore first of all one needs to realize that according to Pink only the left side of the brain can be outsourced or replaced by a machine. This side basically provides analytical and routine work. What cannot not be outsourced is the right side of the brain, the side which performs creative activities. So to secure a position from being outsourced a person must ensure that his work mainly is performed by the creative (right) side of the brain. But how can one manage this. According to Pink there are seven important things one need to understand. He describes it on the basis of a product but his ideas can also be used for a person. The first thing a product must have is design. A product should never look like another one. It has to have a special design which makes it unique. For a student that means that he needs to realize that the work he performs needs to be unique. It cannot be the same work someone else can perform because then this could be easily outsourced. The second factor which a product needs to have is a story. A story also makes a product unique

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and can hardly be imitated. So a student needs a certain story. That means his or her resume needs to have certain features which make it unique and this features will be abilities which he or she could use to secure that his or her job will not be outsourced. The third factor a product needs is symphony. That means that people need to see the big picture, they need to find out what others are looking for. This will give them a supply that others need and will secure them from being outsourced. The fourth important feature a product needs is empathy. Students need to identify what a company needs and then should do everything they can to become a good employee for the company. That means they need imagination, ideas and should adapt new ways of thinking to find new ways the company can do business. The fifth important aspect is play. A sense of humor makes a product unique and helps creating a unique image. But this also works for people. It is often easier for people who have a certain sense of humor to come into contact with other people and they also find it easier to create some kind of band between them and others. This also will enable them to become unique. The sixth factor which helps becoming unique is meaning. The concept is simple but effective. If a person has a 'big hairy audacious goal (BHAG)' he or she has something to work for or better to fight for. A personal goal is stronger then any assignment one can get and if one has found his or her BHAG it will be unique and therefore will help one to become unique. The last important factor is that one should never just focus on profit. This is not only important for companies but also for people. Employees who only work for their own profit are not unique and will never build the same strength and capabilities which a person has who not just only works for his or her personal enrichment but for the earlier mentioned bigger goal or the wellbeing of its family. This will make him or her unique and therefore will secure his or her position from being outsourced.

So in the modern globalized world an employee needs to be creative, has to have a BHAG and needs to have abilities that barley anyone else has to secure his position from being offshored and or outsourced. All this can be combined under Pink's idea of uniqueness. A unique person cannot be offshore outsourced and can bring a company to a whole new level.