Cultural factors in multinational enterprise location: the case of foreign direct investment in Thailand ; diploma thesis

In: Economy

Abstract

Abstract: Despite crises and uncertainty in international capital markets, foreign direct investment (FDI) by multinational enterprises (MNE) is booming. The buzzword is globalization. The business world is expected to be moving closer together through more or less recent developments in communication technologies and transportation facilities. The political ideal of democracy along with a liberalization of national economies seems to have finally gained the recognition it deserves as the system that in the end allows for the best utilization of wealth creating endowments. Besides differences in economic development, cultural differences remain as a single important means of distinguishing between people from several nations. The critical issue is that this situation is being recognized and mankind restrains from emphasizing distinctions, and instead focuses an working out compatibility between cultures. Culture has been given the attribute of being responsible for economic performance by several scholars over the past decade. The original aim has been at explaining the continuous growth of the economies of Asian NICs which, however, came to an abrupt and widely unexpected end an 2 July 1997. Still the importance of culture seems to have been underestimated, otherwise the crisis might have been foreseeable. If cultural factors are of significant importance for overall economic performance, i.e. an the macro-economic level, they must be of at least the same importance for the performance of companies that work within the particular culture, i.e. an the micro-economic level. In this case, not only local but international investors in particular are affected by their respective cultural environment as two - or even more - different cultures have to be brought to work together. Obviously, a consensus has to be found between influences from home and host country culture. This situation often is expected to be a threat to the economic performance of the MNE. However, no existing culture in the world today can be viewed as superior to others in all aspects. Moreover, each culture has positive as well as negative factors. A MNE then, if it is able to effectively bring together several cultures in order to achieve one common goal, should be able to make use of the positive sides of the cultures at its different locations. Dunning Bansal analyze the effects of culture an multinational enterprises applying John H. Dunning's "Eclectic Paradigm of International Production", which is seen as the most comprehensive approach to explaining MNE behavior. They mainly base their findings an identifying cultural influences an foreign investment in existing literature. The unequal distribution of comparative competitive advantages in different industrial sectors between countries is attributed to culture. MNEs from one country that have an advantage in one sector are found to be able to export this advantage to a foreign location at least to some extent. Home country culture is expectedly found to influence a company's perception about its ownership advantages, the necessity and its ability to internalize markets, and its perception about locational advantages in both the home and the host countries. This paper extends that point of view by taking into account not only the culture in the MNE's home country, but also cultural features in the post country. The perspective is changed in so far as the host country culture is given a greater role in influencing the MNE's perceptions about its ownership advantages and Internalization and locational opportunities. One may argue that each company has a unique business culture that is supported by the home country culture and will be taken everywhere the company goes. However, Berger found that it is not possible to export the basic cultural factors that are held responsible for economic performance. Therefore, it is desirable to integrate the MNE's business culture and the host country's culture. According to Smith, business culture is strongly dependent on national culture anyway. Therefore, in order to make this paper appiicable to all companies in one country and to make cultures comparable, it will make no difference between national culture and business culture. This implies that culture not only is a firm specific but also a location specific factor in MNE activity. Having talked about the significance of culture for MNEs, the question arises of what culture is and how exactly does it influence the. location selection of MNEs. Studies an culture have identified several categories which Dunning Bansal found to be differing only in certain minor details. In agreement with this statement, this paper focuses an the study an countries' value systems introduced by Hofstede, extended by Hofstede Bond, and restated and summarized in Hofstede. It is the most widely known and applied approach to explain international cultural differences. Moreover, it represents a strong means of analyzing the core dimensions of both home and host country culture. On the other hand, it has been shown, for example, by Aharoni and Davidson that certain country characteristics such as language and customs play a major role in MNE location. Therefore, an the basis of Terpstra David's anthropological approach, further factors from the international business environment, that are more obvious an the outer layer of a country's culture, are taken into consideration. Both the environmental factors and the underlying value system will be shown to influence and support the central prerequisite for the positive outcome of economic transactions: trust. Trust has been identified by Fukuyama and Berger as the single most important aspect influencing economic performance. The relevance of trust to economic theory, thereby, is derived from the fact that essentially economic life consists of multiple encounters between individuals. Indeed, economic transactions depend an individual decisions made within an interdependent system. If trust is lacking between the individuals the respective decisions will lead to a negative outcome of economic transactions due to rising transaction costs. Furthermore, trust can be seen as the single cultural component that is generated by interaction between people and, therefore, may be influenced by outsiders. lt is a characteristic that is shown to be of great importance to a foreign company aiming at internalizing markets in distant cultural settings. Casson analyzes the effects of trust and the efforts of the outsider, who takes the role of the group leader, an the level of transaction costs. By analyzing the significance Hofstede's value System and the two environmental factors of religion and language have for trust, this thesis will show how the perception an the achievability of intercultural trust between a foreign investor and the host country culture influences the location selection of MNE. In the part that is intended to show the relevance of culture in international business activities in the real world, this study will for several reasons consider operations of firms from only one source country - the United States of America - in only one host country - Thailand. Restrictions in financial resources, as weil as time and space, are self-explanatory causes for this limitation. More important, however, is the need to narrow down the research to a country by country scope due to the vast cultural differences that exist between each country. So why does it make sense to choose the very countries of the USA and Thailand? The United States of America as a country is in the lead position in the world, both from a political and economic standpoint. Moreover, the USA serves as a model for industrialized as well as for developing nations. The development of multinational enterprises initially was started by U.S. firms and FDI by U.S. companies still accounts for the largest part of world wide foreign investment. In 1995, U.S. companies controlled 21,318 foreign subsidiaries worldwide, worth $2,815 billion in foreign direct investment. Of these investments $614 Billion were located in the Pacific Asian region, including Southeast Asia. Thailand, as one of the NICs in Southeast Asia, is predestined for this study due to two major characteristics that make it unique in the world. First, it has never been colonized by Western countries and, therefore, could retain its distinct cultural identity much clearer than other nations. Secondly, before the start of the crisis in July 1997, the Thai GNP had grown for 30 consecutive years. Indeed, in 1988 the fastest annual growth rate ever recorded in the world's economic history was calculated in Thailand at 13.2 percent. Therefore, the country has been attributed the "fifth tiger" following Hong Kong, South Korea, Singapore, and Taiwan. Mainly supported by rising exports and continuing foreign investments, the annual growth from 1992 to 1996 continued at an estimated average of 8.2 percent. Until the mid-1980s U.S. companies were the largest foreign investors. It was only after 1987 that net inflows of investment from Japan and the four original "tigers" exceeded that of the United States. This paper is separated into three interactive parts. Part 1 deals with the theoretical background behind this study, and after these introductory notes, gives an overview of the theory of international production in order to show which factors influence MNEs and their activities. First, the basic terms are defined and then the most important theories are summarized. Chapter three starts with the definition of culture and goes an to show some basic elements of the environment international companies have to deal with, namely, religion and language. It then summarizes Hofstede's value system approach and Casson's findings an trust and leadership. Finally, the environmental factors and the value System are integrated into the theory of trust and leadership in order to show how they are able to reduce the cultural distance between investors and host countries. Part II of the paper is devoted to the interaction between the two cultures of Thailand as a host country and the USA as the investor's home country. First, both value systems and environmental factors are analyzed and compared. Then some findings from interviews with U.S.-American' investors an cultural factors that influenced their location selection will be summarized in order to provide some anecdotal evidence an how trust was generated in their decision to invest in Thailand. In Part III, the findings from the two previous parts will be synthesized into the theory of international production. Based an the assumption developed in the preceding parts that location decisions are made in pursuit of a fit between the investor's and the host country's cultures, the findings an the influences of inter-cultural trust and leadership an transaction costs will be integrated into the respective components of the Eclectic Paradigm of International Production. Finally, the findings are summarized and some conclusions are drawn. Einleitung: Trotz der Krisen auf Kapitalmärkten in Asien und anderswo boomen ausländische Direktinvestitionen weltweit. Die vorliegende Arbeit untersucht die These, dass Kultur eine wichtige Rolle bei der Standortwahl multinationaler Unternehmen (MNU) spielt. Kultur wird definiert als eine "kollektive Programmierung des Geistes, die das Verhalten in der Umwelt und die Auffassung darüber auf eine Art und Weise beeinflusst, die durch menschliches Zusammenleben erlernt wird". Vertrauen wird als wichtigster Kulturaspekt herausgestellt, da ein hohes Maß an Vertrauen zu einer Reduktion von Transaktionskosten führt. Vertrauen kann durch eine Führungspersönlichkeit erzeugt werden. Das Maß an interkulturellem Vertrauen, das zwischen der MNU und dem Gastland aufgebaut werden kann, variiert mit der Durchsetzungsfähigkeit der Führungskraft und der Offenheit der Untergebenen für Manipulation. Dabei hängen die angenommene Stärke der Führungskraft und die erwartete Offenheit des lokalen Personals für fremde Einflüsse ab von Unterschieden und Gemeinsamkeiten in den jeweiligen Wertesystemen und kulturellen Aspekten wie Religion und Sprache bzw. Sprachkenntnissen. Erfahrungsberichte U.S.-amerikanischer Investoren in Thailand werden analysiert, um zu zeigen, dass die Erwartung, dass eine hohes Maß an interkulturellem Vertrauen erzeugt werden kann, eine wichtige Rolle bei der Wahl Thailands als Standort für die Südostasien-Zentrale spielen kann. Ein umfassender Vergleich der U.S.-amerikanischen und thailändischen Kulturen wird angeführt, um die obigen Annahmen zu belegen. Die Ergebnisse werden in das "Eklektische Paradigma der Internationalen Produktion" (auch OLI-Paradigma) eingeflochten, um die Relevanz der eigentümer-, standort- und internalisierungsbezogenen Aspekte bei der Suche der MNU nach dem Standort aufzuzeigen, an dem das höchste Maß an Vertrauen erreicht werden kann.