Growth market China: How European companies manage the delegation of power
©2014
Textbook
239 Pages
Summary
This research presents a wide spectrum of relevant information which is required for the market expansion of western based companies to China. China has developed from an ‘outsourced assembly line’ of foreign companies into an attractive sales market. The pure size of its population and the strong increase of its middle class offer good opportunities for western companies. The focus of this research is on the delegation of decision power from the head office towards the local subsidiary. This includes the aspects of the various market entry possibilities, leadership styles, organisational structures, cultural differences and the attractiveness of the employer. Additionally, also sensitive topics, such as corruption and intellectual property, are discussed.<br>In sum, this research identifies the contemporary issues managers of European companies in China are facing, and discuss them in respect of the existing literature of management. As a result, this research has become a handbook for foreign managers in China.
Excerpt
Table Of Contents
IV
2.3.6.
Corruption ... 27
2.4.
Management and leadership ... 28
2.4.1.
Skills required for management and leadership ... 28
2.4.2.
Decision making process description ... 32
2.4.3.
Strategic human resource management ... 33
3.
Research design ... 40
3.1.
Research objectives ... 40
3.2.
Research methodology ... 40
3.3.
Underlying philosophical assumption ... 42
3.4.
Data collection technique ... 43
3.5.
Development of questionnaire... 45
3.6.
Sample population ... 45
3.7.
Conducting ... 47
3.8.
Data analysis... 47
3.9.
Critical assessment and limitations ... 49
4.
Analysis and presentation of the data ... 51
4.1.
Interview statistics ... 51
4.2.
Market findings ... 54
4.2.1.
Market characteristics ... 54
4.2.2.
Education system ... 56
4.2.3.
Environmental factors... 59
4.2.4.
Plagiarism issues ... 60
4.2.5.
Corruption issues ... 62
4.2.6.
Conclusion ... 64
4.3.
Cultural aspects ... 66
4.3.1.
Comparison of Chinese and German culture ... 66
4.3.2.
Communication principles ... 71
4.3.3.
Cultural influences on company ... 74
V
4.3.4.
Gender treatment ... 76
4.3.5.
Open cultural questions ... 76
4.3.6.
Conclusion ... 77
4.4.
Company aspects ... 79
4.4.1.
Companies in China ... 79
4.4.2.
Company strategy for China ... 81
4.4.3.
Human resource management aspects ... 83
4.4.4.
Conclusion ... 91
4.5.
Decision making ... 92
4.5.1.
Organisational impact ... 93
4.5.2.
Share and distribution of positions and power ... 95
4.5.3.
Role of the manager ... 98
4.5.4.
Conclusion ... 105
5.
Conclusion and recommendations ... 106
5.1.
Summary ... 106
5.2.
Conclusion ... 109
5.3.
Outlook ... 113
Appendix ... 115
A.
Societal clusters and leader styles ... 115
B.
Comparison of culture models ... 116
C.
Questionnaire (blank) ... 117
D.
Interview 1 ... 123
E.
Interview 2 ... 131
F.
Interview 3 ... 137
G.
Interview 4 ... 143
H.
Interview 5 ... 149
I.
Interview 6 ... 155
J.
Interview 7 ... 161
VI
K.
Interview 8 ... 167
L.
Interview 9 ... 174
M.
Interview 10 ... 180
N.
Interview 11 ... 188
O.
Interview 12 ... 194
P.
Interview 13 ... 200
Q.
Interview 14 ... 206
Bibliography ... 212
VII
List of Abbreviations
BCG
Boston Consulting Group
CFO
Chief Financial Officer
CQ
Cultural Intelligence
CSR
Corporate Social Responsibility
EPRG
Ethnocentric, Polycentric, Regiocentric and Global
EQ
Emotional Quotient
GDP
Gross Domestic Product
GLOBE
Global Leadership and Organisational Behaviour Effectiveness Research
Program
HR
Human Resources
HRM
Human Resource Management
IBM
International Business Machines
IDV
Individualism versus Collectivism
IQ
Intelligence Quotient
IVR
Indulgence versus Restraint
JV
Joint Venture
LTO
Long-term versus Short-term Orientation
MAS
Masculinity versus Femininity
PDI
Power Distance
PRC
People's Republic of China
SHRM
Strategic Human Resource Management
SWOT
Strengths, Weaknesses, Opportunities and Threats
UAI
Uncertainty Avoidance Index
UK
United Kingdom
US
United States
WFOE
Wholly Foreign Owned Enterprise
WTO
World Trade Organisation
VIII
List of Figures
Figure 1: Structure of the research ... 3
Figure 2: Strategy hierarchy ... 6
Figure 3: Classification for internationalisation motives ... 7
Figure 4: Internationalisation model of Uppsala ... 8
Figure 5: Organisational forms ... 11
Figure 6: Three levels of uniqueness in human mental programming ... 13
Figure 7: The onion model of culture ... 14
Figure 8: The contextual continuum of differing cultures ... 21
Figure 9: GDP development from 1970 until 2011 ... 23
Figure 10: Confiscated counterfeit products by origin ... 27
Figure 11: Areas of leadership... 29
Figure 12: Situational leadership ... 31
Figure 13: A linear strategic HRM model ... 34
Figure 14: The human resource functions ... 35
Figure 15: Cultural adjustment life cycle ... 38
Figure 16: Distribution of German business locations in China ... 46
Figure 17: Three steps of grounded theory ... 48
Figure 18: Interview partners - gender, origin and age ... 51
Figure 19: Interview partners - hierarchical level and size of the company ... 52
Figure 20: Interview partners - industry, market entry and form ... 52
Figure 21: GDP of Chinas provinces 2011 ... 54
Figure 22: School forms in China ... 57
Figure 23: China corruption perception index ... 63
Figure 24: Hofstedes dimensions for China and Germany... 66
Figure 25: Pyramid of needs - compared Western countries to Asia ... 69
Figure 26: Iceberg model ... 72
Figure 27: Four sides of a message ... 74
Figure 28: Percentage of women in different positions in China ... 76
Figure 29: Market entry strategies ... 80
Figure 30: Role of the manager ... 98
IX
List of Tables
Table 1: Cultural standards in Germany and China ... 68
Table 2: Societal clusters and leader styles ... 115
Table 3: Comparison of culture models ... 116
1
1. Introduction
1.1. Background
For European companies the importance of the Chinese market has increased in recent
years. Due to market size and continuous growth, many European companies are ex-
panding their business to China or are increasing their existing operations.
In a recently published survey of the European Chamber of Commerce in China (2012,
p. 6) 97 per cent of the participants named China as the most important market in their
globalisation strategy. More than half of the companies disclosed that more than ten per
cent of their profit originates from that market. Furthermore, 60 per cent of the respons-
es foresee further investment in China.
Nevertheless, the expansion into the Middle Kingdom can be seen as a challenge for the
management of European international companies. Dealing with cultural misunder-
standings, plagiarism issues, and different market characteristics require higher compe-
tencies of the leader in international business. Additionally, uncertainty of customer
demands, a different supplier network and other market circumstances result in an in-
creasing complexity
Examples of western companies discontinuing their business in China
1
as well as failed
joint ventures in the past show that the environment is challenging. The disregard for
cultural aspects forces companies to stop their endeavour in the land of the dragon.
Therefore, qualified personnel who know the environment are essential. The question if
a leader from the home country can better deal with these issues or if a local person is
more appropriate will be further analysed below.
1.2. Problem
On the one hand, the Chinese market offers considerable potential to western compa-
nies. This is due to its size, its large numbers of consumers, as well as cost advantages
for production and personnel.
On the other hand, the big differences to the home country have to be overcome by in-
ternational western companies. Setting up and opening a foreign branch and its opera-
1
Berndes, a pan producer, relocated production back to Germany to be more flexible (Gärtner, 2012) and
Ravensburger, a toy producer, relocated the production because of quality issues (Giese et al., 2012).
2
tion entail several challenges. The head office is far away from the location of sales and
production. The subsidiary has to be integrated into the existing organisations and at the
same time appropriate personnel has to be found, cultural differences need to be consid-
ered and communication and language barriers need to be overcome.
Against this backdrop the question arises how a western company can deal the charac-
teristics of the country in order to be able to utilise them to accomplish the company
objectives best. Here in particular, the decision maker plays a deciding role in the com-
pany's ability to manage the increased complexity. The staffing of these key positions
influences significantly the success on the foreign market.
1.3. Objective
The objective of this research is to identify the contemporary issues facing mangers of
European companies in China via a primary research. Consequently, the different mo-
tives why a company goes abroad and enters into different markets are highlighted. In
addition, the different ways to enter the market shall be presented.
This research analyses the relevant circumstances of the Chinese market for the leader.
In particular, the opportunities and risks in regard to the delegation of responsibility
shall be further assessed and the ways in which a manager has to adjust his or her lead-
ership style and behaviour. In addition, the research shall assess how the responsibility
between the head office and the local unit is usually split, as well as how to incorporate
the local unit into the overall company organisation.
Besides this, the paper shows what a decision maker has to consider for a company's
market entry in China. This shall answer the questions about what cultural differences
and which further aspects are important in respect to the company. As the company has
to be operative in China, the decision maker also has to determine how to find suffi-
ciently qualified employees for the local unit. In this respect the different factors which
determine the attractiveness of the employer shall be identified.
As there are different cultures in these markets, the research shall also examine whether
the leadership style has to be adjusted to incorporate the concepts of motivation and
communication. It shall also answer the question whether culture has an impact on the
delegation of decision making power. As the role of the local decision maker has an
3
impact on the foreign unit, the details of the role will also be further assessed and the
key differences will be determined.
Since western companies are concerned about how to deal with intellectual property
rights as well as the perception of corruption, this research shall also assess these topics.
Beside the above mentioned characteristics, the scope of this research is limited to the
economical, competitive, societal and technological aspects. It excludes aspects of poli-
tics as well as a deeper assessment of the governmental structures and legislative pro-
cesses.
1.4. Methodology
To answer the objectives of this research this paper follows this approach: the introduc-
tion provides the background information on why this research is relevant, including the
problem definition and the objectives this research shall answer.
Figure 1: Structure of the research
Source: Compiled by the authors
In the second chapter, a secondary research is conducted on what the current literature
provides on this topic. It focuses on the areas of strategy, cultural aspects, and market
characteristics and concludes with the assessment of management and leadership.
In the third chapter, the research design is presented in which the details of the conduct-
ed primary research in Shanghai are described.
Research objective:
Transfer of decision power of western based companies to China
Literature review
Strategy, culture, market, leadership
Qualitative research
Survey in Shanghai
Analysis and presentation of the data
Findings of research discussed with the theory
Conclusion and recommendations
Summary, conclusion and further outlook
Answer of
research
question
Primary research
Secondary research
4
The fourth chapter analyses and presents the conducted information of the primary re-
search and compares it with the existing theory out of the secondary research in the fo-
cus areas of the market findings, cultural and company aspects. Finally, the role of deci-
sion making is further described.
At the end of this work, a summary, conclusion and outlook highlight the main findings.
Figure 1 summarises the approach.
5
2. Literature review
This chapter presents the relevant literature. It starts with the strategy process and is
followed by a presentation of the cultural aspects. The characteristics of the Chinese
market are shown as well as the details of the management and leadership role.
2.1. Strategy
The term strategy is explained in this chapter. Consequently, the reasons for a company
to expand into international markets are described. Organisational forms are also de-
tailed to later determine an appropriate form to fit the demands of a company expanding
its business to China.
2.1.1. Strategy definition
The term strategy in economics has its origin in military
2
and describes the way to
achieve an end. Strategy also includes thoughts, ideas and perceptions on how to reach
this goal. Chandler (1962, p. 9) describes, "Strategy can be defined as the determination
of the basic long-term goals and objectives of an enterprise, and the adoption of courses
of action and the allocation of resources necessary for carrying out these goals".
3
Many
more opinions exist about how to define strategy and what facets it includes.
4
Determining the strategy process is the task of the top management. Within the strategy
process, a strategy and its corresponding objectives are agreed upon. At the top of each
strategy there is a vision, meaning superordinate long-term objectives (Venzin et al.,
2003, p. 50). On the next level is the mission, which contains the area of activity, e.g.,
why the company was founded, what products and services it offers, and company val-
ues such as corporate culture and code of conduct (Venzin et al., 2003, p. 47). Figure 2
illustrates the hierarchy of the different part of the strategy.
The strategy process consists of three major parts
5
(Mintzberg et al., 2008, p. 7):
1) Strategy analysis: the goal of this step is to identify market characteristics of the tar-
get market. Strengths and weaknesses of the company are assessed. Tools commonly
2
In the military, strategy described the fundamental nature of warfare and was formed by General
Clausewitz in the 19
th
century.
3
Alfred Chandler can be seen as a pioneer of strategy in terms of economics.
4
Mintzberg et al. (2008, p. 5) summarises the most important schools of thought concerning strategy
5
Other authors call them differently and provide a different set of tools supporting each step.
6
used in this step are Porter's five forces (1980), SWOT-Analysis, BCG matrix or portfo-
lio techniques.
2) Strategy development: different strategic alternatives and options and their impact on
business are analysed in this step. Commonly this is done using tools to analyse the
stakeholders, the corporate culture or the break-even point. In addition, scoring models
are used for the strategy development.
3) Strategy implementation: it describes the concrete implementation of the strategy.
Usually this is accomplished through an organisational change. Therefore, well-
performing change management is important in this step. Objectives have to be specific,
measurable, attainable, realistic and tangible (Griffin, 2007, p. 65). Those objectives can
be integrated into a balance score card as a tool for the execution of the strategy (Kaplan
and Norton, 1996, p. 291).
Figure 2: Strategy hierarchy
Source: Adapted from Bamford and West, 2010, p. 64
One way to achieve the strategic goals might be to expand business to foreign markets
as described in the next chapter.
2.1.2. Internationalisation strategies
Internationalisation of a company often begins with a first relationship with a distributor
or customer abroad. It should be noted that internationalisation is separate from globali-
sation in that the term globalisation describes advantages in economies of scale. These
are gained when different national markets are grouped in almost homogenous regional
markets with only slightly country-specific product adaptations (Wiesner, 2004, p. 11).
An effect of increasing globalisation in the last decades has been an increase in the in-
ternationalisation of companies. Trade barriers have been reduced leading to a global
Objectives
Mission
Vision
Strategy plans
Action plans
7
interconnection of markets for services and products and a higher level of competition.
Companies no longer depend on a single economy and can further use scale effects.
Reasons for a company to internationalise can be divided into pull and push-factors
(Gutmann and Kabst, 2000, p. 184), depending on whether the market conditions
abroad attract (pull) a company to a market or whether the domestic market conditions
force (push) a company to start international activity.
Figure 3: Classification for internationalisation motives
Source: Adapted from Albaum and Duerr, 2008, p. 40
The main drivers can be grouped in three main categories: market expansion, securing
resources and cost reduction (Geyer and Uriep, 2012, pp. 1112):
Market expansion: can be driven by an individual manager's personal interests. Holi-
days and business trips abroad, study abroad and family ties all provide opportunity to
make contacts abroad that may later develop into business partnerships (Schmidt-
Buchholz, 2001, p. 211). Foreign customers with a demand for a company's reputable
know-how can also incite expansion. On the supply side, the expansion can add a mar-
ket to serve (Holtbrügge and Enßlinger, 2005, p. 370). Similarly a large customer's or-
der for goods and services not only for local units, but also for units abroad, creates op-
portunity. In this context it is also necessary to consider that the population in Europe is
shrinking while the population in Asia is increasing (United Nations, p. 22).This is also
complemented by advantages of economics of scale as a higher number of produced
products shrink the unit costs (Burgel and Murray, 1998, p. 36).
From the risk perspective, market diversification does lower the concentrated risk of
operating in one market only. Furthermore, market saturation in the home market may
make increased sales unattainable. Subsequently, market expansion is required to
achieve company growth.
External
Internal
Pull
Push
Managerial urge
Unique production / competence
Marketing advantages
Economies of scale
Risk diversification
Extended sales of seasonal
products
Foreign market opportunities
Small home market
8
Securing resources: the availability of resources is a further motivating factor for a
company in that existing cost advantages in international markets can be harnessed.
Raw materials can be bought from the most cost effective supplier independent of the
country. Furthermore, technology and other resources, such as specialised workers or
field experts, can be scarce in the home market (Geyer and Uriep, 2012, p. 12).
Cost reduction: cost can be seen as a push factor and as a pull factor. Lower production
costs abroad, including salaries and wages, can incite a company to internationalise.
Nevertheless, according to current surveys cost reduction is not the leading motive for a
company to expand internationally but rather the market opportunities (Geyer and
Uriep, 2012, p. 12).
To describe the steps of internationalisation of a company, the Uppsala model devel-
oped by Johanson and Vahlne (1977, p. 26) can be used. The model assumes that com-
panies prefer to internationalise in incremental steps rather than in one big step. Johan-
son and Vahlne describe common patterns of internationalisation which include the
establishment chain and psychic distance. The establishment chain depicts how inten-
sively the international activities are developed. The psychic distance chain explains the
need to gain experience in and knowledge of foreign markets. After empirical underpin-
ning of these patterns, Johanson and Vahlne built the model of internationalisation. The
model consists of static aspects and dynamic aspects.
Figure 4: Internationalisation model of Uppsala
Source: Adapted from Johanson and Vahlne, 1977, p. 26
Market commitment and market knowledge are static aspects. Market commitment de-
scribes that according to its position on the establishment chain, a company has certain
dependencies in foreign markets due to the activities abroad at a particular time.
Market knowledge
Experiental knowledge
Objective knowledge
Market commitment
Commitment decisions
Current activities
Internationalisation process
State aspects
Dynamic aspects
9
Market knowledge depends on two aspects: the psychic distance and the information
about a particular market the company has acquired.
Dynamic aspects are commitment decisions, meaning management decisions for further
internationalisation and ongoing activities abroad, described as current activities.
Dynamic and static elements influence each other. The lack of knowledge about foreign
markets leads to slow, stepwise progression. Each new decision is based on increased
international experience. Knowledge is seen as the key variable; it increases the basis
for decisions. The level of internationalisation advances and likewise the development
of the company increases.
The Uppsala model has been often cited and has been double checked by various au-
thors such as Cagusvil (1984), Bilkey and Tesar (1977), Malnight (1995). The criticism
is that the model has an insufficient proof of stability over time. Furthermore, specific
company aspects are not considered: company resources or branch specific influences.
Also the phenomenon of "born globals" is hard to describe with this model. This type of
company sells on international markets almost from its inception. Due to the criticism,
the model has been modified with a network approach. With contacts to partners
abroad, the company becomes involved in the network. This can further improve and
enhance the relationship to a country. Nevertheless, the power of explanation decreases
when branch and company are already in an advanced stage of internationalisation
(Meckl, 2006, p. 41).
A company's culture is formed by its flow of communication, how information is con-
trolled or shared within the organisation. The company derives its philosophy from this
basis. Philosophy, in turn, impacts the company's strategy, the type of organisation used
as well as the leadership style. The strategic profile of a company can be defined as eth-
nocentric, polycentric, regiocentric or global (EPRG model) (Perlmutter, 1969, pp. 9
18). These profiles are explained in the following section.
Within the ethnocentric model, the company headquarter has complete control and
makes all strategic decisions. In this form the culture of the home market is simply ap-
plied to all subsidiaries abroad. It can be compared to colonialism. In contrast within a
polycentric model, subsidiaries can also decide on operational tasks and specific strate-
gic decisions. The strategy, structure and the company principles are adapted to the lo-
cal habits. When different countries are grouped into regions, they are said to be regio-
10
centric. In this strategic profile, each region has its own headquarter. To ensure that not
every regional branch develops their own work approach, their subcultures are kept un-
der the umbrella of a common corporate culture. Within the geocentric model, the deci-
sion making power is distributed between the head office and its subsidiaries abroad. In
this form, values and principles from all branch offices are combined. The goal is to
create a new "symbiotic" company culture.
Based on its regional profiles, a company can derive its strategic options concerning
procurement, sales and efficiency. The strategic profile shows the direction of trust and
can be used as the basis for selecting the market entry form.
Although there are good reasons for internationalisation, there are also certain risks
connected to it. Therefore, good risk management is necessary. Kühlmann and Haas
(2009, p. 31) describe risks related to international activities.
6
Cultural risks such as
conflicts in multicultural teams or an expatriate's overemphasis of his or her own cul-
ture can occur (Kühlmann, 2009, p. 61).
In some cases quitting operations in a country can be the better choice for a company
(Schmid, 2007, p. 27).
2.1.3. Organisational management
In business, organisations are seen as management functions to ensure the fulfilment of
the company objectives (Laske et al., 2006, p. 13). The structural organisation is a sys-
tem of units, where each unit has different responsibilities to fulfil the company's objec-
tives. The structure is supported by rules. These define the hierarchy and the different
units (Weißenborn, 2012, p. 3). The organisation also has to support the internationali-
sation strategy of the company.
Meckl (2006, pp. 116123) presented several approaches to incorporate the foreign
market into the company's organisation:
One line reporting structure: the international market is integrated into the functional
(e.g., sales or purchasing) or object (e.g., product) reporting line. Advantages are either
the increased efficiencies as similar functions are grouped together or object efficiencies
as only coordination has to take place within the object. A disadvantage is the increased
6
Other risks are political, such as the risk of expropriation, or economic risks, such as counter party risk.
These will not be further assessed in this research.
11
coordination effort for the function across different objects or the lack of synergy in the
object oriented organisation.
Segregated international division: the foreign market's own international division is
established in addition to the existing organisation. The advantage is high resource effi-
ciency as it realises synergies across all objects and collects expert know-how from the
foreign market. The disadvantage is limited process efficiencies between the interna-
tional division and the product divisions due to the coordination effort.
Regional structure: as more and more markets come into perspective, the organisation
can be structured based on those. Several markets can be grouped into regions. Ad-
vantages are higher market and process efficiencies as only the coordination within the
market has to take place. Further, the responsibility for the profit can be delegated to the
different market divisions. The head office has the disadvantage of being responsible for
coordinating the different markets, with the risk of duplicating work and failing to share
knowledge and experience with different markets.
Matrix organisation: it has become the most popular organisational structure for Ger-
man companies doing international business. The structure is modified so that the object
and the markets represent two dimensions. The head of the object is responsible for the
product globally but has to coordinate with market head for respective regional adjust-
ments. The market head is responsible for the entire business in that market. Figure 5
shows the different organisational forms.
Figure 5: Organisational forms
Source: Adapted from Meckl, 2006, pp. 116
123
The advantage is that both dimensions are considered whereas in other forms one di-
mension is regularly neglected. Accordingly, people with the know-how of the market
and the object, e.g., the product, are available to harness all potentials of the market.
The disadvantage is the risk of conflicting interest between the different dimensions and
the need of more managers.
Region 1
Region 2
Region 3
Head office
Head office
services
Division 1
Division 2
Division 3
CEO
Table
Sofa
Foreign
market
Table
Sofa
CEO
Foreign
market
Table
Sofa
Home
market
Table
Sofa
Segregated international division
Regional structure
Division/region matrix
12
Whether the company follows a centralised or decentralised approach determines which
organisational structure selected. In the centralised approach the head office determines
the strategy execution. In the decentralised approach the foreign business units have
more freedom to make decisions locally for their respective business. The underlying
question is, if all markets should be treated equally to gain higher efficiency or if the
markets should be treated separately so the products can be more localised. Finally, it is
a question of standardisation vs. differentiation. This determines the allocation of deci-
sion making power within the company. This area of conflict needs to be considered in
the organisation for international companies (Meckl, 2006, p. 95).
Depending on the level of international activity and the importance of the different mar-
kets, an adequate organisational structure should be selected by the company to support
the internationalisation strategy.
2.2. Cultural aspects
International decision makers have to deal with humans cross culturally. This chapter
gives a definition of what culture is and shows how it can be described in a model. The
behavioural principles particular to a Western or German person are highlighted and
further explained. It concludes with the communication aspects that play an important
role.
2.2.1. Definition of culture
There is no unique definition of culture. One quite popular is provided by Geert Hof-
stede
7
(2010, p. 6) who describes culture as "the collective programming of the mind
that distinguishes the members of one group or category of people from others".
Hofstede describes that every person has their own "unique mental programming"
which contains universal, group specific and individual aspects that are either inherited
or learned. Figure 6 shows that culture is situated between human nature, things all hu-
man have in common like the ability to feel anger, love, or to be frightened and the in-
dividual personality, consisting of learned and inherited behaviour and personal experi-
ences. Hofstede explains that the border between culture and personality is hard to
draw. The culture level contains specific values, rituals, heroes and symbols. Like some
other authors, Hofstede et al. (2010, pp. 67) shares the opinion that culture contains
7
Geert Hofsteede is a Dutch scientist who researches in national cultures and cultural differences.
13
elements at the concepta (visible) and the percepta (non-visible) level. The elements can
be visualised in the "onion model" in figure 7.
Figure 6: Three levels of uniqueness in human mental programming
Source: Adapted from Hofstede
et al., 2010, p. 6
The three outer levels are described as visible practices that can be recognised by an
external person through observation. Values are found at the core of culture because
they remain unknown to a person foreign to the culture. Values can be observed in feel-
ings and tendencies like good vs. evil and permitted vs. forbidden. Learning and prac-
tices are influenced by the social environment and can differ according to age. Hofstede
describes that culture can be seen on different levels: on a geographic level, national or
regional; on an ethnic level, religious or linguistic; on gender, generation or social class;
on company, organisation or even department level. The levels are not isolated from
each other and can it can cause discord when one person belongs to more than one
group and is influenced by more than one level (Hofstede et al., 2010, pp. 4-9, 18).
Academics have created several theories to distinguish and measure national cultures.
The following section presents three models which are commonly cited in scientific
cultural analyses.
Hofstede's cultural dimensions
Hofstede did research on employees at International Business Machine Corporation
(IBM) to define common dimensions to determine culture. A dimension is an aspect of a
culture that can be measured relative to other cultures. Based on this premise, Hofstede
et al. (2010, pp. 2930) identified six different cultural dimensions
8
that can be applied
to all societies in the world. The dimensions and their meaning will be described in the
following paragraphs.
8
Initially there were only four dimensions. The dimension long-term vs. short-term orientation (LTO)
was added later in 1991, the last dimension indulgence vs. restraint (IVR) in 2008.
Human nature
Culture
Personality
Inherited
and learned
Learned
Inherited
Specific to
individual
Specific to
group or
category
Universal
14
Figure 7: The onion model of culture
Source: Adapted from Hofstede
et al., 2010, p. 8
Power distance (PDI) describes how people accept an unequal distribution of power in
society and how government deals with people who criticise the unequal distribution
(Hofstede et al., 2010, pp. 6061).
The individual vs. collective (IDV) dimension refers to society's collective characteris-
tics, where people are integrated into a certain group. Interests of the group take prece-
dence over those of a single person. In contrast, in an individualistic society, the inter-
ests of one person have a higher significance compared to those of the group (Hofstede
et al., 2010, pp. 9091).
Masculinity vs. femininity (MAS) refers to the pole a society tends toward. The mascu-
line pole represents earnings, recognition, achievement, success and challenge, whereas
the feminine pole represents caring for others, cooperation, work-life balance and em-
ployment security (Hofstede et al., 2010, pp. 138140).
The uncertainty avoidance
index (UAI) describes how people deal with the fact that the
future cannot be predicted. A culture tends to be either controlling or passive with the
relation to events (Hofstede et al., 2010, pp. 188190).
Confucianism or long-term vs. short-term orientation (LTO) factor relates to values
taken from Confucianism like persistence, thrift and having a sense of shame. In Confu-
cianism these are considered as virtue. In contrast personal steadiness, protecting face
and respect for tradition are seen as short term-oriented (Hofstede et al., 2010, pp. 236
238).
Rituals
Heroes
Symbols
Values
Practices
15
The dimension indulgence vs. restraint (IVR) measures the tendency of a group of peo-
ple to show happiness, have a self-determined life and see the importance of leisure
(indulgence). Or on the opposite end of the spectrum, there are norms and values that
restrain enjoyment of leisure activities or displaying feelings of happiness (Hofstede et
al., 2010, pp. 280281).
Hofstede's work is controversially discussed. There are certain points that are ques-
tioned, like a missing concept that the study is based on. Treating entire countries as
research objects is also criticised. Questionable is the usage of standardised question-
naires to measure cultures or the focus on IBM employees only, as it might be influ-
enced by the company culture (Reimer, 2005).
Trompenaars seven dilemmas
Fons Trompenaars
9
and Edward T. Hall developed their own theory for the analysis of
cultural differences linked to the ideas of Hofstede. It was based on 50,000 question-
naires
10
that they handed out to participants of management trainings (Kutschker and
Schmid, 2011, pp. 735736). Trompenaars (1997, p. 6) defines culture as the "way in
which a group of people solves problems and reconciles dilemmas" and distinguishes
between national, company and profession culture. Similar to Hofstede's illustration,
national culture is described in an onion model consisting of different layers with
known and unknown characteristics. They use seven different categories, called dilem-
mas, which are comparable to Hofstede's dimensions, but Trompenaars has taken some
other aspects into consideration and omitted others. Not all dilemmas will be detailed
within this work.
This model's advantage is that its formulation is considered more understandable than
Hofstede's. The work of Trompenaars is widely accepted in business context. It in-
cludes countries not mentioned by Hofstede.
11
The work also considers cultural differ-
ences within countries and de-links those from countries to cultural clusters across bor-
ders.
Hofstede, however, has criticised that the model is made for business and not for scien-
tific use. Other critics refer to the number of questionnaires: the theory is considered as
not scientifically sufficiently substantiated. The choice of participants has been criti-
9
Trompenaars is one of the leading experts in culture and intercultural management.
10
Due to the requirement of having at least 100 data records per country, the sample is reduced to 30,000
data records from 55 countries (Kutschker and Schmid, 2011, p. 736).
11
In contrast to Hofstede, Trompenaar also analysed the culture of middle and Eastern Europe.
16
cised due to fact that the population are participants of management trainings who may
have higher intercultural competences. Moreover, it cannot clearly be determined why
Trompenaars took these seven dimensions and if they cover everything or if further di-
mensions are needed (Kutschker and Schmid, 2011, pp. 740743).
GLOBE Model
The global leadership and organisational behaviour effectiveness research program
(GLOBE) model is a further approach to describe culture. The aim of GLOBE study is
to develop a reliable theory about the culture dependent differences in a society, organi-
sational culture and leadership.
12
In total 170 management and social scientists in 62
countries surveyed 17,300 participants contributed to the study. This large number
should ensure that the study is not negatively influenced by biased answers. Nine socie-
tal and cultural dimensions (as independent variables) and six leadership dimensions
(dependant variables) were determined and measured. The cultural dimensions are
(Rothlauf, 2009, p. 57):
1) Uncertainty avoidance: to which degree, uncertainties are avoided by rules, regula-
tions or rites. 2) Power distance: acceptance of unequal distribution of power. 3) Col-
lectivism I: the collective orientation of people for the whole society. 4) Collectivism II:
the loyalty of a social group such as family, relatives and department. 5) Gender egali-
tarianism: how engaged a society is in abandoning existing inequalities between gen-
ders. 6) Assertiveness: how assertive is a person in interpersonal relationships. 7) Future
orientation: to which degree a society thinks and behaves in future-oriented way. 8)
Performance orientation: the measurement of the level of willingness of a society to
reward performance. 9) Humane orientation: the dimension which shows the im-
portance of human factors such as fairness, mutual considerations or politeness within a
society (House, 2004, pp. 1213).
In contrast to Hofstede, the cultures were not assessed within national borders but with-
in regional clusters with sufficient commonalities. Therefore, Germany was grouped
together with Austria, the Netherlands and Switzerland into the cluster "Germanic".
China was grouped with Singapore, Hong Kong, Taiwan, South Korea and Japan into
the cluster "Confucian" (House, 2004, p. 1027). Out of the research a high number of
leadership characteristics were identified which in the end resulted in six different lead-
12
The study was initiated in 1991 by US professor Robert J. House. The original intention was to re-
search a general concept of charismatic leadership in 20 different cultures. Out of this study a world-
wide research program evolved.
17
ership styles (Hoppe, 2007, p. 3). An allocation of the different styles according to the
clusters can be found in appendix A.
To sum up, this model helps to describe the leadership expectations in the different cul-
ture clusters. Organisations with an appropriate corporate culture and leadership ap-
proach to the regional culture are more efficient.
Although the study is one of the largest cultural studies since Hofstede, it has been
questioned whether some results are representative enough to describe subcultures
which were not analysed, such as USA, India or China (Rothlauf, 2009, p. 60).
Summary:
Cultural differences exist among countries or cultural clusters. Dimensions to measure
these differences are difficult to define, with the result that no one theory is able to re-
flect the entire complexity of a culture using their measurements alone. From the com-
pany perspective, the local culture also needs to be considered when selecting the ap-
propriate leadership style. This may conflict with the preferred leadership style of the
manager. All theories have in common that they tend to stereotype culture and define
patterns of "normal" or "common practice". This bears the risk that individuality is ne-
glected because there are people who are not "typically German" or "typically Chi-
nese". It also does not consider that cultures are continuously changing and do not re-
main static. But all of the models provide leaders with hints how to treat people with
different cultural backgrounds better and to understand their behaviour (Kutschker and
Schmid, 2011, pp. 775780).
A detailed overview and differences of the presented models can be found in appendix
B.
2.2.2. Values and behaviour principles in China
Confucianism
Confucianism is a teaching by the philosopher Confucius, who lived around 500 BC.
The 2,500 year old teaching contains ethical principles without religious content.
13
It
provides guidelines for behaviour, the main aspect being the unequal relationship be-
tween humans in society. According to the teaching, the stability of society can only be
13
Some countries like South Korea classify Confucianism as a religion.
18
guaranteed through a strong hierarchy and a patriarchal system. Today it still has a ma-
jor impact on daily life in China (Liang and Kammhuber, 2007, pp. 172174).
The teaching describes the principle of "Wu lun" which defines the five human relation-
ships. These can be seen in the relationship between father and son, ruler and subordi-
nate, husband and wife, elder brother and younger brother and friend-to-friend. These
relationships are also called the five constants (wu ch'ang). Elders and people with a
higher rank are also given respect, out of respect for their wisdom and long life experi-
ence. Obedience is essentially the doctrine of final piety in the family. In families, the
oldest male possesses absolute authority, meaning that all others have to be absolutely
obedient and loyal (Chhokar et al., 2007, p. 879).
There are five virtues in Confucianism in regard to humanness: the virtue of benevo-
lence, charity, and humanity; of honesty and uprightness; of knowledge; faithfulness
and integrity; as well as correct behaviour, or propriety, good manners, politeness, cer-
emony, worship (Chhokar et al., 2007, p. 879).
The following principles also evolved out of Confucianism.
Social harmony and hierarchy
China experienced a 500-year period of war from 770 BC to 221 BC when Qin reunited
the country. After this period the teachings of Confucianism and the teachings of Meng-
zi developed. The solution to avoid war was to put the interests of oneself into back-
ground and to focus on the interests of the community (Liang and Kammhuber, 2007,
pp. 173174).
A clear hierarchy and collectivism are important concepts for harmony among people in
China. It means a stable social situation. Individuals are involved in the society accord-
ing to their specific social role, which is determined by family background, profession
or qualification. When strangers meet, the social hierarchy has to be determined first,
which dictates everything from the order of salutation to seating arrangements (Liang
and Kammhuber, 2007, pp. 174175).
Social harmony is the highest principle in the society. Only when a relationship is in
social balance can people be focused, work in a subject-oriented fashion and achieve a
common objective (Liang and Kammhuber, 2007, p. 173).
19
Mianzi (Face)
There are two concepts in the Chinese culture that represent the term face
14
: internalised
and externalised. Lian is internal "face" and includes moral values. Mian or mian zi is
externalised face and includes social image (Gao and Ting-Toomey, 1998, p. 55). This
is defined by Ho as "the recognition by others of one's social standing and position,
and thus must be seen as situationally defined rather than part of personality" (Lockett,
1994, p. 488). The importance in international business can be seen in the fact that mian
zi is, next to money and power, one of the three key motivators in China (Seligman,
1999, p. 37). In contrast to the German expression of face, the Chinese term distin-
guishes between the following situations:
Diu-mian-zi (lose face): Can be an affront to personal dignity that causes a loss of face
(Seligman, 1999, p. 37). Possible loss can occur, when either giving face or maintaining
of relations (renqing) has been neglected, for example when somebody refuses an invi-
tation. Or a moral loss of face can happen when there are conflicts with a person, espe-
cially, when the conflict was shown in public. Face related aspects are not only bound to
a person due to the collectivist orientation (see chapter 2.2.1). A possible loss of face
also affects the group the person belongs to, e.g., his family (Gao, 1996, pp. 9596).
Maintaining one's own face can be compared to making an investment; it creates an
opportunity demand things. Gao (1996) uses the term "Facework management" and
emphasises the essentialness linked to aspects of personal and interpersonal relationship
development (Gao, 1996, p. 96). The concept further ensures harmony and hierarchy in
the Chinese culture.
Gei-mian-zi (give face) refers to giving of face to others by showing respect. A person
with a higher social status can give face to someone by publicly praising their talents
and achievements. Adopting someone's ideas someone can be a sign of giving face.
Liu-mian-zi (to protect face): the Chinese spend a lot of time thinking about face and
put more relevance upon it. Things that make others look up to you or envy you confer
face on you (Seligman, 1999, p. 37).
Jiang-mian-zi (to emphasis face)
: According to G. Gao (1996, pp. 9596) , mian zi has
at least three significant implications for Chinese's everyday life. The fear of losing face
14
The first written descriptions for the face principle can be found in the work "Zuozhuan" from the sec-
ond century BC.
20
leads to self-regulation. Concern about face also prescribes the types of relationships in
which a person will decide whether to disclose certain information or not.
Guanxi and renqing
Guanxi plays an important role in Chinese society. It can be seen as a personal connec-
tion or relationship between persons. In business therefore, guanxi can be a significant
help in achieving goals that would otherwise be impossible. Davies et. al. (1995, pp.
209210) expands: "guanxi seems to be the lifeblood of the Chinese business communi-
ty, extending into politics and society. Without guanxi one simply cannot get anything
done. With guanxi anything seems possible". Therefore, belonging to a group and a so-
cial network is the basis for success. Relationships are often established based on a
common dialect, family background, work or a clan network (Miroslawski, 2008, p.
72).
An important aspect in guanxi is renqing. Renqing is relationship management in terms
of Chinese culture. It is divided into an inner circle of a relationship in which the people
know each other and an outer circle which is made up of strangers. Inside are relation-
ships based on social closeness, respect for family and helpfulness. Outside, a person
first has to fulfil several requirements to get helped by strangers. Renqing is a long-term
relationship which is coined by loyalty and trust between persons. It is based on a mutu-
al give and take principle. A lack of compensation would represent the loss of face and
needs to be avoided. Accordingly, Chinese are very careful when dealing with other
people (Liang and Kammhuber, 2007, p. 176). Guanxi can also be transferred, meaning
the compensation for a favour does not need to be paid back immediately and can be
done by a third person. This can lead to a complex relationship structure (Zwicker,
2004, p. 411).
2.2.3. Communication
Communication style can vary from country to country. Hall (1976, p. 101) distin-
guishes between high and low context cultures. He describes that in low-context cul-
tures most of the information that is transmitted is found in the message. There is not
much context in either the receiver or in the environment. The message has to be specif-
ic and the provided information has to be detailed to explain the context. High-context
cultures are characterised by the fact that most of the information is already in the re-
21
ceiver and in the setting. Only minimal information is transmitted in the course of the
actual communication process (Hall, 1976, p. 101).
Figure 8: The contextual continuum of differing cultures
Source: Adapted from Hollensen, 2001, p. 162
In Germany in particular, more direct communication is preferred. The meaning of the
words is taken solely from the words spoken. The context information, meaning which
words are chosen and how the words are expressed is not that important. In contrast to
this, in Arab countries as well as Japan and China the context is more important than the
pure spoken words. Figure 8 shows the variation between them (Hollensen, 2001, p.
162).
2.3. Chinese market characteristics
The following chapter summarises the different market characteristics of China com-
pared to Europe required for the analysis. First, an overview of China and its historical
development is given. Then the current situation in the labour market and consumer
market is described. Finally, an assessment of intellectual property and corruption issues
in China is made.
2.3.1. China terminology
When looking at China, different terminologies are widely used. Before further present-
ing the details, those terminologies have to be defined. Mainland China describes the
area administered by the People's Republic of China (PRC). It excludes the area of
Hong Kong, Macau and Taiwan. These were former colonies and became a dedicated
Chinese
Japanese
Arabs
Latin Americans
Italians/Spanish
English
North Americans
Scandinavians
Germans
Swiss
Messages
Context
Implicit
Explicit
Low
High
22
special administrative region of the PRC, Hong Kong in 1997 and Macau and Taiwan in
1999 (Central Intelligence Agency, 2012b and Central Intelligence Agency, 2012d).
When the communist party of China took full control of mainland China and founded
the PRC in 1949, the old the government of the Republic of China fled to Taiwan (Cen-
tral Intelligence Agency, 2012c). Greater China describes the area of mainland China,
Hong Kong, Macau and Taiwan.
The following chapters describe the situation in Mainland China. To simplify reading
only the term China will be used.
2.3.2. Development of China
For centuries China was a leading civilisation and was known for art and science. In the
19th and 20th centuries the country was beset by civil unrest, major hunger crises, mili-
tary defeats and foreign occupation. After World War II, the communists, under the
leadership of Mao Zedong, established an autocratic socialist system that, while ensur-
ing China's sovereignty, imposed strict controls over everyday life (Central Intelligence
Agency, 2012a).
China underwent several major political movements in the years between 1950 until
1976. This includes the socialist transformation (1953-1956), large-scale socialist con-
struction (1957-1966) and the Cultural Revolution (1966-1976) (Fu et al., 2007, p. 881).
The third plenum of the 11th central committee congress of the communist party of
China marked the beginning of the reform and opening up policy under the leadership
of Deng Xiaoping in 1978. The objective of these reforms was not the establishment of
western based free market economy, but rather a careful and experimental replacement
of poorly performing elements of the old system by new and better performing elements
(Oberender, 2004, p. 20).
The areas of reform started with the decollectivisation of the agriculture sector. Later
the introduction of a dual price system allowed state-owned industries to sell any pro-
duction exceeding the plan at a market price. The reforms also provided for the estab-
lishment of special economic zones, which were relatively free of bureaucratic regula-
tions and governmental interventions, thus attracting foreign investments (Brandt and
Rawski, 2008, pp. 918). The reform of state owned companies starting in 1987 has
further promoted a market oriented economy. This also included tax reforms, a dual
23
banking system and price liberalisation (Oberender, 2004, p. 21). In 2001 China joined
the World Trade Organisation (WTO) with the obligation to further open domestic mar-
ket to foreign competition (Kraus, 2004, p. 38).
One of the most recent major decisions of the national people's congress was the ap-
proval of the 12th five-year plan on 14 March 2011. It foresees five major goals
(KPMG Advisory (China) Limited, 2011, p. 2): 1) development of China's western re-
gions, 2) protecting the environment and improving energy efficiency, 3) continued
transitioning to an economy driven by domestic consumption instead of exports, 4) im-
proved quality of life for citizens and 5) development of seven
priority industries.
15
Figure 9: GDP development from 1970 until 2011
Source: Adapted from The World Bank, 2012b
The success of the above mentioned reforms can be seen in the development of the
gross domestic product (GDP) which is shown in figure 9. It has very significantly in-
creased since the start of the reform and opening up policy. In 2006 the total GDP of
China exceeded that of Germany.
2.3.3. Labour market
Economically speaking, labour should be utilised where it realises the highest return. In
other words, labour should go to where it is the most productive and where the best-
paying jobs are. However, China's household registration system, called hukou, and its
locally administered insurance and pension systems make mobility difficult (The World
Bank, 2012a, p. 32).
15
Industries are: energy savings, environmental protection, new energy and clean energy vehicles, bio-
technology, new materials, new IT and high-end manufacturing.
24
Since 1986 China has made an effort to set up a social system. The major pillars should
be health insurance, unemployment insurance and retirement provision. In former times,
these issues fell under the responsibility of state-owned companies creating a situation
where employees were bound to a particular state-owned company for their entire life.
This hindered or even made it impossible to transfer the acquired claims to a different
employer and lead to reduced mobility among employees (Kraus, 2004, p. 44). Similar-
ly, the current household registration system foresees no or only reduced access to so-
cial entitlements, including healthcare, education and household for rural migrants in
urban areas. Only urban residents receive these social entitlements. As a result, in the
year 2010 only 19.5 per cent of the population migrated across provincial boundaries as
per official records, compared with 45 per cent within the Republic of Korea (The
World Bank, 2012a, pp. 3233).
Unofficial migratory labour is another phenomenon. In 2007 it is estimated that approx-
imately 250 million workers migrated from a rural area to an urban area. However,
these workers are not registered. Beside other preconditions, a work contract has to be
presented. These are mostly non-existent although workers have a right to one. The ma-
jority of workers have long working hours and a low salary. As they are not registered
in the new location, as highlighted in the previous chapter, access to health services or
education services for their children is denied or only available at high prices that they
cannot afford. As a result the supply of health services is not sufficient and the children
usually remain with their relatives in their home town (Klüver, 2007).
In addition, a reduction of the labour force is expected in the next few years. This comes
as a result of the one-child policy as well as the declining participation rate among older
workers (The World Bank, 2012a, p. 32). The shrinking workforce and its poor mobility
lead to increased salaries. This development is further supported by the government's
decision to increase the minimum wage in line with the latest five-year plan's goal to
improve the lives of Chinese citizens. On average wages have increased by approxi-
mately 20 per cent in China as a whole. As a result, China's image and reputation as a
low-wage country is already changing as new trends begin to manifest themselves. La-
bour intensive industries such as the textile industry, rather invest in Vietnam or Bang-
ladesh than in China (Ricking, 2012).
25
2.3.4. Consumer market
The rising wages and salaries have a positive side effect on purchasing power of the
Chinese consumers so the former producer of goods becomes the purchaser of the same
(Ricking, 2012).
Not only is the current situation an improvement but the perspective has improved, too.
Young Chinese obtain higher levels of education including international exchange pro-
grams. It is expected that the next generation of adults will consists of many more
skilled, middle income workers (Kalish, 2009, p. 10). In addition, the increasing partici-
pation of women in the workforce translates into a higher level of discretionary spend-
ing by Chinese women (Kalish, 2009, p. 14). Domestic demand is likely to further in-
crease, as this is part of the next five-year plan.
Consumer spending did not rise as much as consumer income in the same time period.
The difference can be seen in an increase in household savings. Various reasons can be
attributed to this increase in savings. Traditionally state-owned enterprises have been
responsible for pensions and healthcare. As many of them have been privatised, this
safety net has been removed. A second reason is that since the beginning of the reform
and opening up policy starting in 1978, Chinese consumers have had virtually no sav-
ings. Accordingly, high savings are an effort to catch up. An additional factor is that
rural Chinese tend to save a higher share of their income than urban Chinese, due to the
fact that rural Chinese have almost no social safety net on which they can rely. A third
reason why Chinese save is to be able to accumulate the down payment to purchase a
home. A further reason seems to be the cultural bias in favour of saving. Chinese credit
card holders do not usually maintain a balance, but prefer to pay off their debts as soon
as they can (Kalish, 2009, pp. 1415).
In China, the importance placed on brand name goods corresponds to the type of prod-
uct and how visible it is. On the one hand, consumers are highly brand conscious when
it comes to luxury products or products where quality is perceived as very important.
Consequently, demand for well-known brands is higher for apparel, footwear, jewellery
or cosmetics. The same applies to home-related products such as kitchen and bathroom
fixtures, appliances, white goods and furniture. These products may all be seen by oth-
ers, thus brand recognition is important. On the other hand, brands hardly matter for
commodities or products which are rarely seen by friends and neighbours. Whether a
26
brand is Chinese or foreign can also be of significance. In the early days of the reform
and opening up policy, foreign brands were generally preferred due to their higher
quality compared to state-produced products. Yet as state-owned companies were pri-
vatised and the domestic product quality improved, pride in the nation's accomplish-
ments compelled some consumers to favour local brands (Kalish, 2009, p. 17).
2.3.5. Intellectual property
Within western countries, such as Germany, certain prejudices exist about the Chinese
attitude toward intellectual property. Those prejudices are primarily sourced out of news
or television reports about counterfeit Chinese copies of European products. There have
been reports that entire Apple Stores have been copied (Blattberg, 2011) and that a local
clone of the Austrian UNESCO world heritage-listed village Hallstatt was built (Spiegel
Online, 2011). In addition, customs officials carry out regular operations to confiscate
counterfeit products (Sächsische Zeitung, 2012). Since 1977, a German organisation has
annually issued a negative award for the most obvious counterfeit products. In 2012
seven out of ten awards went to Chinese companies (Aktion Plagiarius e.V., 2012a).
With its WTO accession in 2001, China committed to comply with the requirements of
WTO trade related aspects of intellectual property rights agreement (Okun et al., 2010,
p. xiii). Since then, in addition to other law changes, the government has reviewed laws
protecting intellectual rights and sought to further improve rights of foreign companies
and individuals. In the meantime, an entire legal framework to protect intellectual prop-
erty rights as well as their execution rules has been established. China has realised the
protection of those rights also in their own interest (Shi, 2009, p. 13). The policies are in
line with increasing their level of scientific and technological innovation that is origi-
nated within the country, as well as increasing the domestic share of the value embodied
in goods made by Chinese. To summarise, China would like to shift from "made in
China" to "created in China" (Okun et al., 2010, pp. 12).
27
Figure 10: Confiscated counterfeit products by origin
Source: Adapted from Federal Head Office of Finance, 2011, p. 11
As the law itself is considered compliant with international standards, it is the enforce-
ment of the law which is considered most problematic. Enforcement methods in China
fall into four categories: administrative enforcement, criminal prosecution, civil litiga-
tion and customs enforcement. Significant structural and institutional impediments
hamper the enforcement capacity. These impediments include a "lack of coordination
among national agencies and between subnational authorities and the central govern-
ment, inadequate training and resources for enforcement and corruption and local pro-
tectionism" (Okun et al., 2010, pp. 18).
In a confidence survey of the German Chamber of Commerce in 2012, the issues with
intellectual property rights ranked 13 out of a list of 19 business problems. In earlier
studies this issue regularly ranked first of all challenges for foreign companies. Other
challenges exist and the lack of skilled workers is at the forefront in the current survey
(Koehn and Schmidt, 2012, p. 7).
2.3.6. Corruption
Historically speaking, corruption is not a new phenomenon in China or in any other
country (Rennstich, 1990, p. 137). Next to other definitions, corruption is primarily de-
fined by the misuse of public offices for private benefits (Senturia, 1931, p. 449).
Since the transformation process in China started, the perception of government has
changed. The government was perceived as non-corrupt in 1970 (Heberer and
Wegmann, 1991, p. 14). In 2012 China scored with only 39 points out of 100 (100
0%
20%
40%
60%
80%
100%
2006
2007
2008
2009
2010
2011
Confiscated counterfeit products by origin
Others
North and
south America
Europe
Other Asian
countries
China
28
equals no corruption) of the corruption perception index issued by Transparency Inter-
national (TRANSPARENCY INTERNATIONAL, 2012).
China is mitigating this behaviour with high penalties, so in the time frame from 1998
until 2003 more than 80.000 functionaries have been convicted (Engl, 2004, p. 393).
But at high administrative levels, accusations of corruption are used to remove political
opponents (Engl, 2004, p. 399).
In addition, corruption can be categorised as "spot-market-corruption", in which only a
one-off benefit is granted, and "relationship corruption", which is dominant in the Asian
area. The last one is a long standing transactional relationship between involved parties,
which at execution positively influences the political decision making process
(Schramm and Taube, 2001, p. 4).
The form of corruption does not necessarily correspond to its criminal prosecution, but
to the tradition that it is based on within social relationships (Heberer and Wegmann,
1991, p. 11). This phenomenon is also known as guanxi, explained in chapter 2.2.2.
This routine small-scale corruption especially pervades all areas of society and deter-
mines entrepreneurial behaviour (Zwicker, 2004, p. 415).
Although individuals from all societal levels engage in corrupt behaviour, the majority
of the population objects to corrupt practices and is aware of the problem (Zwicker,
2004, pp. 413, 415).
2.4. Management and leadership
This chapter shows the influence of decision makers on the company performance. The
distinction between management and leadership is described in detail as well as the
skills required for good leadership. Analysis of the decision making process follows and
finally, the chapter describes the role of strategic human resource management
(SHRM). In this part, the cultural differences and challenges that leaders and managers
are confronted with are also explained.
2.4.1. Skills required for management and leadership
A work psychology experiment in the 1920s showed that human relations had a positive
influence on employee work performance. In response to these findings, the former
Tayloristic work approach was questioned. Companies that insisted on treating workers
29
like efficient machines recognised a disadvantage and began to search for ways to at-
tract and retain talented employees (Bloisi, 2007, p. 8). A real change in mindset can be
observed in the early 1990s due to the market transformation from a buyers-market to a
consumer-market (Kotler et al., 2009, p. 78).
Leadership plays an important role. A leader has the potential to influence many people
and is responsible for employee motivation and performance and finally for achieving
the organisational goals to gain a competitive advantage. There is a distinction between
the tasks of management and leadership. Armstrong (2008, p. 6) explains that manage-
ment's goal is to achieve a certain result by effectively utilising all required resources
i.e., people, financials, facilities or material. Leadership focuses on people and deals
with the question how to develop and motivate them. According to Armstrong, leader-
ship is a necessary skill for managers, whereas leaders do not necessarily have to be
managers (Armstrong, 2008, p. 7).
Figure 11: Areas of leadership
Source: Adapted from Stock-Homburg and Wolff, 2011, p. 296
A leader has to tend to the different areas of leadership as shown in figure 11. In addi-
tion to having knowledge about a particular field, a leader also needs the ability to in-
spire other employees (Blake and Mouton, 1986, p. 23). Theory distinguishes mainly
between the following three approaches: personal perspective, behavioural perspective
and situational perspective.
Personal perspective
A concept that can be applied to leadership is Goleman's concept of emotional intelli-
gence (Soundview Executive Book Summaries, 2002, p. 3). It describes the application
of emotions in business life. The emotional quotient (EQ) is, according to Goleman,
more important than the intelligence quotient (IQ) as the IQ accounts for only 20 per
Areas of
leadership
Employee
motivation
Image creation
Employee
retention
Employee
development
Satisfaction
Efficency/
effectivity
30
cent of success. The rest is driven by the EQ. It includes factors such as the ability to
recognise one's own emotions and harness them to achieve goals. Goleman describes
four dimensions with attitudes that create an advantage in being a good leader:
Self-awareness: be aware of one's own emotions and use them for one's own perfor-
mance. Know-how to handle situations by saying what they feel. Know own strengths
and weaknesses. A sense of humour, self-confidence and a willingness to learn are also
important.
Self-management: control negative emotions and lead them in a positive direction. Stay
calm in crisis and under pressure. Be authentic and admit faults. Show initiative and
adapt to changing situations and be optimistic to achieve difficult objectives.
Social awareness: show empathy by listening and paying attention to others and under-
stand them. Get along with people from different backgrounds. Show awareness for the
forces within the organisation and the strengths and weaknesses of each player. Create a
climate of satisfaction.
Relationship management: inspire others to share the common vision and mission.
Build networks by influencing, pursuing and engaging people. Develop others and show
serious interest in the concerns of others. Be a good coach or mentor. See where chang-
es are necessary and negotiate between employees to find compromises. Build and en-
hance teamwork and collaboration.
Behavioural perspective
Besides the personal attitudes a leader should have, there are certain theories about the
behaviour of the leader, mainly the leadership style. A quite common distinction can be
seen in the Ohio-State-Leadership approach which distinguishes between authoritative,
cooperative, bureaucratic and relationship focus. Goleman divides them into six styles
(Soundview Executive Book Summaries, 2002, p. 4):
31
x Visionary: create a shared vision. People who share a vision work together.
x Coaching: connect individual and organisational goals.
x Affiliative: bring people together and solve problems in teams.
x Democratic: encourage participation, get employees to support initiatives.
The last two styles are negative examples of leadership style, which are:
x Pacesetting: set high standards, build pressure. Strategy likely to fail, lose peo-
ple of team.
x Commanding: accept no disagreement.
Goleman states that nobody wants to work under this style of leadership and it can harm
the organisation.
Figure 12: Situational leadership
Source: Adapted from Hersey
et al., 2008, p. 313
Situational perspective
The situational perspective deals with the fact that there is no one-size-fits-all style for
leadership. The model shown in figure 12 developed by Hersey and Blanchard (2008, p.
313) describes the involvement of the leader depending on the maturity level of the
subordinate. At first it is very task oriented; as the employee's maturity level increases
the leader should reduce task behaviour and increase relationship behaviour. Beyond a
certain point of maturity, the relationship behaviour should also be reduced.
Task behaviour
Low
High
S
upport
ive behaviour
High
Low
Low relation-
ship and high task
High relationship
and high task
High relationship and
low task
Low relation-
ship and low task
S
el
lin
g
P
er
su
ad
ing
E
x
p
la
in
in
g
Par
tic
ip
at
in
g
P
rob
lem
s
o
lv
in
g
En
co
ura
tin
g
Te
lli
ng
Di
re
ct
in
g
D
e
le
ga
tin
g
M
on
ito
rin
g
O
bs
erv
ing
Directive behaviour
Relat
ions
hip behaviour
Gu
id
in
g
R2
R3
R1
R4
Low
High
Moderate
Leader directed
Self directed
32
2.4.2. Decision making process description
The delegation of decision making power is an essential instrument of the design of the
organisation. Delegation is empowerment of a lower position by a higher position. The
competency has been handed over vertically from the top down (Schwarz, 2005, p. 90).
The basic idea of the delegation is that decisions are made at the lowest level of hierar-
chy that has the necessary overview and the required skills to do so. The purpose of
delegation is to release the higher level from routine activity. The freed time should be
spent on tasks that require their responsibility and competence. At the same time dele-
gation allows the lower level to develop skills and increases their motivation owing to
their increased engagement and involvement (Staudinger and Reindl, 2010, p. 18). It
needs to be considered that functional organisations have the tendency to centralise de-
cisions as lower levels usually don't have the required overview to assess the impact of
the decision, resulting in overload at higher levels (Weuster, 2008, pp. 113114).
In chapter 2.1.2 the EPRG-model was described. According to the level of centralisation
there are also different demands for the involvement of the decision maker (Meckl,
2006, pp. 9698):
x Ethnocentric: the foreign office or subsidiary is managed by staff from the head
office country because it is perceived that they are more qualified than local per-
sonnel. The manager is involved in the decision making of the head office and ap-
plies the strategy abroad. The influence of locals is quite limited.
x Polycentric: the management is recruited in the foreign subsidiary directly. The
power of decision is in the specific subsidiary. The subsidiary receives less instruc-
tion from the home country. There is also less monitoring by the company head-
quarter. Customising products allows markets to be served that usually could not.
The lack of oversight or coordination of the part of the company headquarters
makes knowledge management and more difficult.
x Regiocentric: national markets with fewer market entry barriers are combined into
one region. The regional offices are staffed with personnel from the specific region.
Nationalities of the leaders do not play an important role. More important is the
homogeneity of the region.
x Geocentric: the world is seen as one global market. Therefore, a global leadership
style is applied. The company is seen as a network of equally treated national and
33
regional organisations. There is high effort exercised on communication and nego-
tiation.
The definition of the optimum centralisation level is a trade-off between the cost of co-
ordination and the costs of self-governance. The cost of coordination represents the cost
for additional reporting systems and the structures to convey and enforce orders from
the head office. It also considers the possible costs for the risk that the head office takes
suboptimal decisions due to the long distance to the market and resulting missed market
opportunities. The costs of self governance are potential costs which could be avoided,
related to duplication of tasks, missing learning curve experience and missing utilisation
of economics of scale. The optimum combination is when the sum of both costs is min-
imal. It needs to be considered that this is only a theoretical model, the practical applica-
tion it is only limited (Meckl, 2006, p. 115).
2.4.3. Strategic human resource management
In contrast to the administrative tasks of a company's human resource (HR) department,
such as hiring, creating job descriptions, creating payrolls, rewarding and developing
employees, SHRM has the aim to implement HR activities with a long-term focus on
management discipline and alignment with management's strategic goals. Accordingly,
HR becomes management's strategic partner. The core assumption of this concept is
seen in the fact that employees are recognised as a key variable of the company (Arm-
strong, 1987, p. 32).
Literature rarely distinguishes human resource management (HRM) from SHRM
(Beardwell et al., 2004, p. 32). To describe the differences, first the characteristics of
the term HRM are further explained. In theory, there are two approaches described as
hard and soft HRM. Hard HRM sees employees as necessary resources to fulfil the
goals of the organisation and is described by the Michigan matching model. It assigns
tasks to HRM: selection, appraisal, reward and development. The other approach is soft
HRM, influenced by the Harvard model. The model highlights the importance of a
manager's attitude toward staff and his or her ability to incorporate employees in the
policy creation process within the framework of the organisation goals (Armstrong,
2006, p. 5).
Nevertheless, there are common aims of both HRM approaches. Both approaches have
the intention to increase the effectiveness of the organisation. To achieve this goal, both
34
use instruments such as knowledge management and reward management. Learning and
motivation aspects are promoted by the individual treatment of the employees.
There is also a discussion about the difference between personnel management and
HRM. Armstrong (2006, p. 17) says that HRM can be seen as a perspective on person-
nel management. He does not describe it as a new concept. The main difference in the
virtue of HMR is that people are treated as a key resource.
Figure 13: A linear strategic HRM model
Source: Adapted from Armstrong, 2006, p. 36
Apart from this, SHRM is seen as a process dealing with long-term goals and is consid-
ered part of the strategic process. The assumption is that HR strategies contribute to the
strategic goals of management. Accordingly, SHRM provides a competitive advantage
for a company, by securing skilled, committed and motivated employees in the organi-
sation (Armstrong, 2006, p. 31). In contrast to this, HRM focuses more on managing
people rather than gaining a competitive advantage out of them. Figure 13 describes the
core processes derived from the business strategy and of SHRM.
In figure 14 the goals of HRM are redefined as an individual strategy with long term
goals. To best profit from market opportunities and to manage the related risks (external
factors) the company has to utilise its capabilities, especially its human resources and
their skills (internal factor) to gain a competitive advantage. This is also known as stra-
tegic fit. It is also criticised due to the fact that it oversimplifies reality. Usually influ-
ences are not as linear as shown in the model (Armstrong, 2006, p. 35).
The HRM department has to handle all issues related to personnel. This includes com-
pany specific issues such as recruiting, developing and retaining employees, as well as
external environment issues such as changes concerning competition, education or leg-
islation.
Business
strategy
Internal
environment
External
environment
Overall HR
strategy
Resourcing
strategy
Human resource
development
strategy
Reward
strategy
Employee
relations strategy
