Effect of national culture on the design of management control systems of multinational enterprises

Abstract

This study examines the effect of national culture on the design of management control systems (MCS) of multinational enterprises operating in Egypt. Data for testing hypothesis are collected from 167 Egyptian managers working in German, French, Japanese and Italian owned firms compared to a pure Egyptian firm, all operating in car industry. Overall, the results of the tests performed do not provide a conclusive evidence to support the hypothesis of the study. It was found that there are many cases where the national culture of Egypt was not able to affect the design and use of some controls of the multinational companies while they operate in Egypt. Although globalisation and borderless economies tend to promote similarities and convergence in managerial behaviours, the separate cultural traditions tend to encourage diversity (Hodgetts and Luthans, 1997). This means that the impact of diverse cultures must be recognised and related to specific international management situations. In the last 20 years, there was a lot of research that has been directed at understanding the relationship between national culture and the design of management control systems in different countries (Chow,Shields and Chan, 1991; Chow, Kato and Shields 1994;Chow,Katoa and Merchant 1996;Chow,Shields and WU, 1999, Harrison (1992, 1993) ; O’Connor, 1995; Merchant, Chow and Wu, 1995). This kind of research has gained increasing prominence, as it is important to the business community. Simply, with increasing globalisation, the companies, which may have operated, previously in only their home country have had the opportunity and found the necessity to establish international operations, to become a multinational enterprise (MNE). Companies increasingly need to know whether management control systems or tools that are effective in one national setting will have alternate levels of effectiveness if used in a different national setting. This means that the question of whether these multinational enterprises can transport their domestic management control systems (MCS) overseas, or whether they need to redesign their management control systems (MCS) according to the cultural imperatives of the overseas nations, is of a considerable practical significance. The main problem of the study is “Do multinational enterprises need to modify their domestic management control systems or tools to suit the national culture dictates of a foreign or host country?” The purpose of this research is to understand how national culture affect the design of and preference for management control systems using Hofstede’s theory of national culture. More specifically, how national culture affects the design of and preference for management control systems of the multinational firms (German, French, Japanese and Italian) operating in a less developed country like Egypt in this study. There are no cross-cultural studies that tried to examine the effect of national culture on the design of management control systems in any of the western companies or Asian companies compared to the Egyptian companies when they operate in less developed country like Egypt. This is what the researcher is doing in this research, the researcher examines whether or not the multinational enterprises (German, French, Japanese, Italian) need to modify their domestic management control systems or tools, when they operate in Egypt, to suit the national culture dictates of a foreign host country –Egypt-. Egypt was chosen for this study, because it has been identified by Hofstede’s national culture taxonomy that has been used in this study as almost opposite to the position of the countries chosen for the study in three out of the four cultural dimensions of Hofstede framework (power distance, individualism, uncertainty avoidance). This means that the effect of national culture -if any- should be detected because of the big differences in national culture dimensions scores of these countries compared to Egypt.