Foreign direct investment (FDI) is the investment that a firm or an individual makes in another country’s business operations. These firms, multinational enterprises (MNE), need to consider the cultural factors that are likely to arise when making foreign direct investments. Let us assume my American company, Xaeto, is interested in investing in East Asia. Some of the cultural factors that might arise before the investment begins and after my company becomes operational include Confucianism, social structure, religion, and language.
Confucianism in East Asia is an ethical system that is based on high ethical and moral conduct and loyalty to others. Practicing and adopting Confucianism ideologies in Xaeto will allow it to spend less on enhancing the cooperation between employees and management and reducing conflicts between them (Hill & Hult, 2018). These ideologies oblige Xaeto to reciprocate their employees’ loyalty through rewards such as blessings (Hill & Hult, 2018). Additionally, the social structure of the U.S. is significantly different from that in East Asia. The U.S. mostly focuses on individual aspects compared to the East Asia countries, which focus on the group. The U.S. community is known to have a low degree of social stratification and high mobility between strata compare with East Asia countries with vice versa (Hill & Hult, 2018). East Asian countries such as Japan consider themselves as middle class. Therefore, a high degree of mobility will have limits the significant impact of class background on the business operations of Xaeto.
There are different religions in East Asia, with the majority being Buddhist. Buddhism, compared to Christianity, which is a major religion in the United States, does not emphasize wealth creation (Hill & Hult, 2018). An ideal society adhering to Buddhism teachings can adversely affect Xaeto during its operation in East Asian countries, resulting in less profit margin than the United States. Additionally, the inability to recognize society’s spoken and unspoken language in East Asia might result in communication misunderstanding that might cause Xaeto a significant loss in the market share and vice versa. If Xaeto understands and recognizes the language cultures of East Asia citizens, it can create a better rapport with them and its employees.
The functions of the firm that are significantly affected by culture are research and innovation, communication and decision-making, marketing, and accounting and finance management. Culture can have an advantageous and disadvantageous effect on these functions depending on the firm’s approach to the cultural aspects of their community. Suppose Xaeto recognizes the East Asia cultural factors likely to affect its operations before and after FDI. In that case, it is expected to succeed in this market and develop a significantly positive rapport with its employees and customers.
Dimensions of Culture
Cross-cultural differences between the entrepreneur and society influence their decision to participate in foreign direct investment in a particular country. There are various dimensions of culture that are useful to managers in analyzing cross-cultural differences. Some of my top five dimensions of culture, starting from the priority to the least important importance to the multinational enterprises (MNEs) management, are power distance, uncertainty avoidance, performance orientation, institutional collectivism, and assertiveness.
Power distance is the degree to which societies accept the differences in power and authority in the community. High power distance arises when a country allows the growth of inequalities of power and wealth (Hill & Hult, 2018). In these countries, people respect the elderly, social positions of individuals, adhere to rules, and tolerate concentrated powers. Low power distance happens when society plays down the inequalities to significantly low proportions (Hill & Hult, 2018). On the other hand, uncertainty avoidance is the extent to which community members feel threatened by risks, change, and unpredictable situations (Hill & Hult, 2018). Institutions of high uncertainty avoidance regard career patterns and retirement benefits as significantly important. Individuals in these settings respect and adhere to the set rules and regulations. However, lower uncertainty avoidance cultures are based on increased readiness to tackle risks, and individuals are less resistant to emotional change.
Performances orientation is how innovation, outstanding qualities, and significant merit are supported and renumerated. Societies with a high-performance orientation are highly concerned with materialism and competition (Hill & Hult, 2018). They increase their investments in employee training to enhance their performances. Additionally, institutional collectivism is defined as the extent to which various institutions emphasize societal integration into groups and institutions (Hill & Hult, 2018). A high institutional collectivism culture encourages communal resource distribution and joint actions and unconditional loyalty to groups. Moreover, assertiveness is the extent to which community members are confident and self-assured and stand by their convictions (Hill & Hult, 2018). High assertiveness culture emphasizes direct, unambiguous communication, individualism, and competitive relationships.
Reference
Hill C. W.L. & Hult G. T. M. (2018). International business: Competing in the global marketplace, 13th edition. McGraw-Hill Education.