Chapter 3 Learning Objectives

After studying this chapter, you should be able to:

1. Define what culture is and articulate its two main manifestations: language and religion

2. Discuss how cultures systematically differ from each other

3. Understand the importance of ethics and ways to combat corruption

4. Identify norms associated with strategic responses when firms deal with ethical challenges

5. Participate in three leading debates on cultures, ethics, and norms

6. Draw implications for action

WHERE DO INFORMAL INSTITUTIONS COME FROM?

informal institutions - cultures, ethics, and norms

socially transmitted information and are part of the heritage that we call cultures, ethics, and norms

ethnocentrism - self-centered mentality within a society; people tend to perceive their own culture, ethics, and norms as “natural, rational, and morally right”

ETHICS

ethics - principles, standards, and norms of conduct governing individual and firm behaviorcode of conduct - set of guidelines for making ethical decisionsethical relativism -“When in Rome, do as the Romans do”

ethical imperialism - absolute belief that “there is only one set of Ethics (with a capital E), and we have it”corruption - abuse of public power for private benefits usually in the form of briberyForeign Corrupt Practices Act (FCPA) - US law enacted in 1977 that bans bribery to foreign officialsnorms - prevailing practices of relevant players that affect the focal individuals and firms

Economic Development: Western Valuesvs. Eastern Values

Belief in the superiority of Western values has recently been challenged by two sets of Eastern values: Islam and Asian (Confucian).Islamic fundamentalism, which, rightly or wrongly, argues that Western dominance causes the lackluster economic performance of Muslim countries. Marketing of Western products in these countries is seen as a cultural invasion. Islamic fundamentalists prefer to go “back to the roots” by moving away from Western influence.Asian (Confucian) values are widely viewed as the engine behind the “Asian economic miracle.” Not only do Asians proudly proclaim the validity of “Asian values,” but leading Western scholars also increasingly endorse such a view.

Cultural Change: Convergencevs. Divergence

In this age of globalization, one side of the debate argues that there is a great deal of convergence, especially toward more “modern” Western values such as individualism and consumerism.Another side suggests that Westernization in consumption does not necessarily mean Westernization in values. In a most extreme example, on the night of September 10, 2001, 9/11 terrorists enjoyed some American soft drinks, pizzas, and movies and then went on to kill thousands of Americans the next day.A middle-of-the-road group makes two points. First, with the end of the Cold War, the rise of the Internet, and the ascendance of English, there is no doubt some convergence—at least on the surface and among the youth.

Opportunism versus Individualism/Collectivism

Opportunism is a major source of uncertainty that adds to transaction costs, and institutions emerge to combat opportunism. However, critics argue that emphasizing opportunism as “human nature” may backfire in practice by causing distrust that could lead to opportunistic behaviors.Transaction cost theorists acknowledge that opportunists are a minority in any population. However, theorists contend that because of the difficulty in identifying a minority of opportunists before they cause any damage, it is imperative to place safeguards that, unfortunately, treat everybody as a potential opportunist.United States, the leading individualist country, is among societies with a higher level of spontaneous trust, whereas there is greater interpersonal and interfirm distrust in the large society in China.