2 pages Article Notes

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Cross-Cultural Management

The Cosmopolitan Corporation by Pankaj Ghemawat

From the Magazine (May 2011)

Summary.   Reprint: R1105F Never mind what you’ve heard about the world being

flat. Today’s global landscape is marked by unbalanced growth, protectionism, and

ethnic, religious, and linguistic divides. Differences still do matter. The ideal of a

truly global, stateless...

Listen to an interview with Pankaj Ghemawat.

Unbalanced growth, pockmarked by financial distress. The threat

of protectionism brought on by persistently high unemployment,

particularly in developed countries. Tensions, in wealthy nations

as well as poor ones, around ethnic, religious, and linguistic

divides, and talk of a new age of secession or tribalism. These are

some of the developments that contradict the story we had just

gotten used to—the one about how markets were becoming

perfectly integrated across borders, technology was obliterating

distance, and national governments were now irrelevant. The

aftermath of the financial crisis of 2008 reminds us of the many

ways in which differences still matter.

more

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It also calls for a reassessment of what it means to be a global

manager or corporation. Much of the management writing on

globalism adopts the Enlightenment-era ideal, proposed by the

18th-century philosopher Immanuel Kant, of abandoning all

“allegiances to nation, race, and ethnos” in favor of world

citizenship. Take the strategy guru Kenichi Ohmae. In 2000 he

published his famous book, The Invisible Continent, depicting a

world in which businesses largely ignore geographic boundaries

when serving markets and building supply chains. This kind of

thinking isn’t confined to management experts with an avant-

garde view to promote: Forty-eight percent of the respondents to

an online survey that HBR conducted for me in 2007 agreed with

the proposition “The truly global company has no home base.”

And among people with more than 10 years of international

experience, 63% agreed.

Unfortunately, enticing though they may be, such beliefs don’t

bear up upon closer examination. Of course, they never did.

The Reality of Roots

The vast majority of firms are deeply rooted in their home

countries. In 2004 less than 1% of all U.S. companies had foreign

operations, and of those, the largest fraction operated in just one

foreign country. The median operated in two foreign countries,

and 95% in fewer than two dozen. Among the U.S. companies that

were in one foreign country, that country was Canada 60% of the

time and the United Kingdom 10% of the time.

Even the icons of globalization are less global than the rhetoric

suggests. Remember ABB? Back in 1990, when BusinessWeek ran

the cover story “The Stateless Corporation,” that company, with

its global nomad of a CEO, Percy Barnevik, was the lead example.

The boundaries between ABB’s Swedish predecessor ASEA and

Swiss predecessor Brown, Boveri had ostensibly been broken

down by putting the merged company’s headquarters in

Switzerland to balance the Swedish nationality of the controlling

investors, the Wallenberg family, as well as of some key managers,

particularly Barnevik. But the years after the merger were marked

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by what one insider characterized as internal warfare between the

Swedes and the Swiss. Although things seem to have calmed

down since then, it’s more accurate to think of ABB as a company

with a global presence but with particularly strong roots in

Northern Europe and runners or prop roots in other geographies

in which it has significant operations. Not as a company without

any particular roots. That much is evident from looking at ABB’s

directors and top management (although a U.S. CEO was brought

in from GE not long ago) and at its geographic distribution of

assets and shareholdings.

Or, for an example in Asia, consider Rupert Murdoch and News

Corporation’s satellite TV network, Star TV. Murdoch and News

Corporation had some elements of statelessness. They were major

players from Australia to the United Kingdom to the United

States, and Australian-born Murdoch had already become a U.S.

citizen so that he could buy a set of American TV stations. But his

experience across English-speaking countries didn’t stop him

from making some tremendous blunders in Asia.

Murdoch’s original strategy for Star was to leverage News

Corporation’s English-language programming library across Asia,

because many Asians of the target demographic spoke English.

The company paid no attention to evidence from continental

Europe that audiences strongly prefer local-language content,

even if they understand foreign languages. Star TV’s travails with

language and culture paled in comparison with its political

missteps. Shortly after acquiring Star, Murdoch pronounced

satellite TV “an unambiguous threat to totalitarian regimes

everywhere.” The Chinese government reacted by banning

satellite TV dishes. Much of Murdoch’s China strategy has since

involved digging out of this hole. The bottom line: Though News

Corporation had transcended its Australian origins, it was still

deeply rooted in a particular set of Anglo democracies that bore

little resemblance to Star TV’s target markets along some

important dimensions.

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If you’re skeptical about the relevance of a corporation’s

nationality or the locations of its owners, ask yourself: Why are

large export deals involving private firms often announced at

meetings between the heads of national governments? Why do

employees of foreign-owned companies often fear their career

opportunities will be limited relative to their counterparts from

the firm’s home country? Which governments do firms call to

represent them in World Trade Organization disputes (and to lead

their bailouts in a crisis)? Why do foreign-ownership restrictions

persist in industries like media (as well as various others, like

airlines)?

It’s not just firms that are deeply

rooted in their home countries; it’s

their employees and customers.

It’s not just firms and their business operations that remain

deeply rooted. More important, it’s the people who are their

customers, employees, investors, and suppliers. Ninety percent of

the world’s people, it is estimated, will never leave the country

where they were born. Two percent of all telephone calling

minutes are international. People get 95% of their news from

domestic sources, and those sources focus most of their coverage

on domestic news. Only 21% of U.S. news coverage is

international, and of that, half deals with U.S. foreign affairs. In

European countries about 38% of news is international, but

almost half relates to stories involving other countries in Europe.

Only 5% to 10% of private charitable giving crosses national

borders, and rich countries’ governmental aid to the foreign poor,

per person, has been calculated to be one thirty-thousandth the

size of aid to the domestic poor. As another 18th-century

philosopher, David Hume, pointed out, “Sympathy…[is] much

fainter than our concern for ourselves, and sympathy with

persons remote from us much fainter than that with persons near

and contiguous.”

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90% of the world’s people will never

leave the country where they were

born. 2% of all telephone calling

minutes are international. 95% the

news people get is from domestic

sources.

This is the reality of what I call World 3.0, a world that is neither a

set of distinct nation-states (World 1.0) nor the stateless ideal

(World 2.0) that seems implicit in the strategies of so many

companies. Home matters in such a world, but so do countries

abroad. And instead of everything being equally near or far, as

German philosopher Martin Heidegger proposed in 1950, the law

of distance continues to apply to many activities. As distances—

geographic, cultural, administrative/political, and economic—

increase, cross-border interactions tend to decrease. It’s certainly

possible to have a global strategy and a global organization in

such a world. But they must be based not on the elimination of

differences and distances among people, cultures, and places, but

on an understanding of them. The mind-set, strategy,

organization, and employees of these firms will not be oriented

toward the global citizenship model implicit in corporate rhetoric.

Instead, they’ll start with a strong grasp of one’s roots and what’s

distinctive about them, recognize relative similarities and

differences, and flag the differences particularly worth watching

out for. Because denying the existence of differences doesn’t

make them any easier to deal with.

Building a Cosmopolitan Understanding

Most executives’ opportunity assessments rank markets by size,

growth rate, and other indicators of long-term potential, such as

demographics. In this approach, distance from a firm’s home base

or current markets is always a challenge to be overcome.

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One way to break out of this trap is to use what I call a rooted map

to ground your analysis. A rooted map resembles world maps that

size countries according to measures such as population and GDP,

but it focuses on measures that reflect a particular country’s

perspective. An Indian IT services company, for example, might

use rooted maps like those in the exhibit “How Important Is

Distance?” The first map takes a general Indian perspective by

sizing countries according to their share of India’s international

trade. The second takes an industry view, with each country

drawn according to the size of its IT services market. The third

map combines the two perspectives, sizing countries on the basis

of their purchases of Indian IT services.

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How Important Is Distance?

The rooted maps below size countries according to their

share of trade with India, their share of global IT

spending, ...

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To gain insights, you need to make comparisons across maps and

think about what kinds of distance influence the patterns they

reveal. In this case, the first map shows how India’s general trade

pattern is sensitive to geographic distance, natural-resource

availability, and historical connections. Nearby countries in Asia

and along the resource-rich Persian Gulf are among its major

trading partners, and we also see the legacy of India’s historic ties

to the former British Empire. The second map shows,

unsurprisingly, that the largest IT services markets are the most

advanced economies, whose per capita incomes make them

distant economically from India.

The first two maps suggest that without a more careful analysis,

an Indian IT firm might follow India’s general trade ties to the

nearest major market—continental Europe. Indeed, one of the

first large software projects offshored to India was for a Swiss

clearinghouse. But the third map reveals that in IT services,

linguistic distance matters more than geographic distance.

Upwards of 85% of India’s IT exports go to English-speaking

countries. Though that makes continental Europe an obvious area

for potential growth, operations there are usually less profitable

than those in the major English-speaking geographies.

This example should make clear the importance of considering

multiple types of distance and conducting analyses at the

industry level. Your sensitivity to 1,000 miles of geographic

distance is obviously much greater if you manufacture heavy

goods than if you offer an online service. On the other hand it’s

less important to share a common language if you export cars

than if you provide online training.

Rooted mapping is not just a global exercise. You need to analyze

differences across regions and within countries as well. Indeed,

the bulk of economic activity still takes place within national

borders, and large gains can be achieved by carefully managing

differences between provinces, ethnic groups, or language

communities. For example, though nationalism and separatism

are prominent in Spain’s Basque Country, that region’s trade with

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the rest of Spain is still 50% greater than its trade with the rest of

the world. If tensions between the Basque Country and the central

government in Madrid were reduced, Basque trade with the rest

of Spain would presumably rise.

Companies and individuals vary in their ability to manage the

same external distances. Businesses and executives from small

home countries, for instance, are often more accustomed to

dealing with cross-border differences than those from large home

countries. Since Finnish norms aren’t common in most of the

markets Nokia sells to, its managers have had to learn how

customers in other countries think. Americans, by contrast, are

more likely to project their values or feel that other people need to

do the changing.

Executives also need to think about how rooted maps are

evolving. Which kinds of distances are expanding and which are

contracting? What factors are driving those changes? In the

current environment of protectionist rumblings and more-

assertive governments, administrative and political distances

seem to be increasing. And the shift in the locus of growth to large

emerging markets—especially to the smaller interior cities within

them—also adds distance along several dimensions for a typical

U.S. or European multinational, which must learn how to bridge

cultural and political differences and vast economic and

geographic divides. On the other hand, trade agreements and new

communications and transportation technologies can contract

distance (though the impact of new technologies is often

overblown). In each case, the insights you glean from a careful

analysis will inform your strategic and organizational choices.

Crafting the Cosmopolitan Strategy

In my 2007 book, Redefining Global Strategy, I described three

fundamental ways that companies can create value across

borders: the “AAA strategies” of adaptation, aggregation, and

arbitrage. Adaptation strategies try to adjust to differences

between countries and respond to local needs. Aggregation

strategies attempt to overcome differences to achieve economies

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of scale and scope across national borders. Arbitrage strategies

seek to exploit differences—by, say, buying low in one country

and selling high in another. I advised managers to tailor a

combination of these strategies to their company’s industry,

position, capabilities, and intent.

Though the AAA strategies remain the relevant consideration set

for cosmopolitan corporations, in the medium term it may make

sense for many companies to emphasize adaptation more than

aggregation or arbitrage, given the public’s current sentiment

toward globalization. Such medium-term adjustments, however,

must be checked against longer-term plans and expectations

about how a firm’s industry might evolve, because it can take

years for companies to execute meaningful shifts among the AAA

strategies.

The rationale for strengthening adaptation is threefold. First, if

companies become more respectful of differences, people may be

less inclined to demand protectionism. Second, when companies

acquire foreign assets with little apparent rhyme or reason, as

many did before the crash, they come across to the public as

voracious and greedy. Showing regard for the sovereignty,

uniqueness, and internal diversity of foreign markets can go a

long way toward improving companies’ reputations and, more

broadly, the environment in which business as a whole has to

operate. The rooted cosmopolitan corporation will be an active

foreign investor across many locations but will pay careful

attention to the cultural, political, and economic impact of its

investment decisions. (For an influential conception of rooted

cosmopolitanism at the individual level, see Kwame Anthony

Appiah’s book The Ethics of Identity.)

Finally, and perhaps most important, adaptation strategies are

better suited to the opportunities opened by the shift in the locus

of global growth. With growth slow in Western markets, Western

companies must compete in big emerging markets like China and

India. But they can’t force their way in. They also cannot prosper

by continuing the old practice of targeting elite customers in big

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cities, who tend to be more like customers back home. Western

firms will need to take local competitors seriously and consider

extending their presence to second- and third-tier cities, where

more adaptation will be required.

But it is unfeasible to invest in every market in the world in an

adaptive way. You need to zero in on the places where you’re best

positioned to add real value. That requires really understanding

selected markets and demonstrating deep commitments there to

customers, suppliers, governments, and the public at large—a far

cry from the imperialist approach of pushing globally

standardized products and pressing others to conform to your

way of doing business.

Designing the Cosmopolitan Organization

When making choices about supply chains, organizational

structure, foreign investment, and cross-border innovation, a

cosmopolitan firm thinks about how to alter internal,

organizational distances in response to changes in external

differences. Take supply chain decisions. The trend toward

significant offshoring will most likely continue. But many

companies are becoming concerned that widely dispersed, low-

cost supply chains make them vulnerable to protectionist

governments, rising transportation costs, and quality problems.

Some are taking steps to make their supply chains shorter,

simpler, and stronger, in effect reducing internal distance within

their production networks to better manage their exposure.

Companies are realizing that widely

dispersed, low-cost supply chains

make them vulnerable to

protectionism, rising transportation

costs, and quality issues.

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When it comes to innovation, many firms are similarly

readjusting internal distances to reduce their sensitivity to

external distances. In some cases this leads to an increase in

internal distances. Innovation for emerging markets, for example,

often requires different business models, not just whiz-bang

technology. Corporate R&D labs located close to home in

advanced markets may excel at creating technology, but firms

seeking to develop products and business systems for markets

abroad will increasingly need the informed creativity that only

boots on the ground in those markets can provide. This suggests

that Western multinationals may keep research mainly in the

West but push development out to the large emerging markets.

The street isn’t one-way, of course; there’s a lot of discussion now

about transferring innovations from the emerging markets back

to developed countries and adapting them for wealthier

customers.

As the mix of a company’s activities across countries changes, it’s

often wise to reexamine reporting relationships. Do they create

unnecessary internal distance by routing too much through

headquarters? Which decisions should be made at the country

level? The regional level? The global level? More adaptation in a

strategy might mean giving more authority to country managers.

Should some functions be shifted from headquarters into regions

where more of the related work actually gets done?

Perhaps the critical organizational ingredient in a world that

demands adaptation is the composition of the management team.

Most corporations are far from cosmopolitan. Even though GE

deploys roughly half its assets in and generates half its revenues

from markets outside the United States—and is justly famed for

the breadth and depth of its top management—I reckon that

about 80% of its top 200 managers are Americans. And among the

vast majority of firms from emerging economies, management

teams are much less international. This is true even for the very

largest firms.

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The most critical ingredient in a world

that demands adaptation is a diverse

management team.

But simply adding foreigners to the management ranks won’t

make a firm cosmopolitan. First, their numbers must reach a

critical threshold; a few token foreigners will probably have little

impact. And second, when you put people of various nationalities

together in a single corporation, you have to manage that

diversity very carefully. Research suggests that unmanaged

diversity is more likely to have negative than positive effects on

group performance. People are more inclined to trust their fellow

nationals, which often exacerbates tensions between

headquarters and managers in far-flung foreign operations. And

other research indicates that people’s inclination to show

sympathy is even more sensitive to cultural similarities.

People whose backgrounds are rooted in multiple cultures—so-

called biculturals or triculturals—can play useful bridging roles in

organizations. Studies also show that nationalism and suspicion

of outsiders both decrease as a person’s education level rises; one

study found this to be true across the board in 10 countries with

quite different educational systems. But large corporations can’t

rely on filling their management teams with individuals

possessing bicultural or tricultural backgrounds and advanced

scholarly degrees. They will have to develop rooted

cosmopolitanism in people who have an average upbringing and

education.

Cultivating the Cosmopolitan Leader

My own perspective is greatly influenced by my participation over

the past two years in the Globalization of Management Education

Task Force of the Association to Advance Collegiate Schools of

Business. I wrote the portion of that group’s report that focused on

what business schools should teach their students about

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globalization and how—advice that could also help companies

develop more-cosmopolitan managers. (See “Responses to Forces

of Change: A Focus on Curricular Content,” The Report of the

AACSB International Globalization of Management Education

Task Force, February 2011.) Four of the levers I identified seem

particularly well suited to a corporate context.

Fostering the Right Mind-set

Companies can help their employees develop

cosmopolitan attitudes by pulling on four key levers: ...

Conceptual frameworks.

It’s overwhelming to try to develop an understanding of diverse

places by studying them one by one—not to mention, to develop

general knowledge of a variety of places all at once. But a survey

of academic thought leaders points to the usefulness of

conceptual frameworks that emphasize the multiple dimensions

of differences among countries. My own CAGE framework, which

categorizes distance along the dimensions of culture,

administration/politics, geography, and economics, is a fairly

widely used one. Such frameworks bring order to masses of facts

and fine-tune one’s perceptions of foreign countries.

Incorporating them into executive training can be very helpful.

When businesspeople can make only short trips into a particular

country, the ability to draw on frameworks can amplify what they

learn on their visits—and help reduce the chances that they’ll

make costly missteps.

Longer and deeper immersion.

Research shows that living abroad expands your mental horizons

and increases your creativity. However, merely traveling abroad

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doesn’t produce this benefit. Executives report that it takes at

least three months to become immersed in a place and appreciate

how the culture, politics, and history of a region affect business

there. A number of leading MBA programs therefore incorporate

long visits to sister or secondary campuses abroad rather than

short visits that are often privately acknowledged to be little more

than business tourism. So, though an anti-expatriation bias exists

in many companies, it’s important for executives to recognize that

short-term stays have a limited impact. My advice to companies is

to reconsider expatriation, especially for their high-potential

managers. Of course, the high potentials may resist leaving their

home countries for family reasons—or because it still seems to

take longer to get promoted at many multinationals if your career

path has taken you far from home base. Senior executives will

need to create the right incentives for emerging leaders to invest

in a cosmopolitan education.

Projects and networks.

Participation in intercultural activities and networks (which

corporations can easily facilitate through international projects)

tends to soften ethnocentrism. Here, businesses have certain

advantages over business schools. They can provide stronger

incentives promoting particular behaviors that cultivate

cosmopolitanism, have the opportunity to work with key

executives over a longer time horizon, and can bind together

diverse groups by promoting shared values, culture, and

processes. They also have more scope to leverage online

collaboration, translation, and social-networking tools, which

very few companies (or business schools) fully exploit. But they

must be mindful of cross-cultural differences in the use of such

technologies; you can’t just make a platform available and expect

it to be readily embraced worldwide.

Assessment tools.

Scholars have created a variety of assessment tools to reinforce

programs aimed at improving international skills. In the AACSB

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report, I propose that every MBA graduate—and presumably,

every global manager—have a minimum body of globalization-

related knowledge, including:

A handle on levels of and changes in cross-border integration of

markets of various types.

An understanding of how differences between countries can

influence cross-border interactions—and how to look at them at

the industry level.

Awareness of the benefits of additional cross-border

integration, and some perspective on the problems it’s alleged

to produce.

Other assessment tools focus on mind-sets rather than

knowledge. One that will allow readers to compare their mental

openness to the world with that of a highly international group of

MBA students at a top school is the Global Attitude Protocol that I

developed, which can be found at www.ghemawat.com.

In addition to pulling on these four levers, companies need to

beware of behavioral and cognitive traps. For example, when

managers do look at differences, they often focus on the most

obvious ones while ignoring smaller ones. Yet smaller differences

may be more important. For a Portuguese firm thinking of selling

abroad, at least some of the differences and the challenges of the

Chinese market will be obvious. But those of the Spanish market

may attract less attention, even though Spain is the first foreign

target for many Portuguese firms, and many stumble there.

We should have been skeptical about the false ideal of

statelessness from the start. “The Stateless Corporation” came out

only three months after BusinessWeek had run another cover

story, with the subtitle “Does the U.S. Need a High-Tech Industrial

Policy to Battle Japan Inc.?” It’s no different today. For every

article or book you read about the world being flat, you’ll read

another that highlights the rise of state capitalism and the

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economic rivalries between China, India, and the United States.

It’s worth reemphasizing that the world is neither a collection of

autonomous nations (World 1.0) nor perfectly flat (World 2.0), but

semiglobalized, with some places being much closer to home than

others. In such a world, rooted cosmopolitanism is a more

realistic and, ultimately, more useful objective than statelessness.

A version of this article appeared in the May 2011 issue of Harvard Business Review.

Pankaj Ghemawat is Global Professor of Management and Strategy at the NYU Stern School of Business, Director of NYU Stern’s Center for the Globalization of Education & Management, and Professor of Strategic Management at IESE Business School. He is the author of The New Global Road Map (Harvard Business Review Press, 2018).