Is International Management Different from Management? 

Herbert A. Simon 

Business organizations have certain fundamental characteristics that condition strongly their structure and operation. The most basic of these is that they operate in the context of markets and that they must rest on their own bottoms - they can only consume the resources that they acquire through sale of their products to customers and sale of ownership rights to investors. These are severe constraints, especially in the context of competitive markets, and might appear to force business firms into a single mold, with few differences between them. This is not necessarily so: self-sufficiency under competition can push firms toward diversity as well as identity. In what direction does the internationalization of business move the balance? 
The economic textbooks have accustomed us to thinking of companies as competing in offering almost identifical products with those of other companies in their industry. Of course the reality is quite different. Companies compete principally by trying to differentiate in the eyes of their customers the goods and services they have to offer from what other companies have to offer. Their goal is to find or develop a niche that gives them some measure of protection against the competitive incursions of others, and to broaden and enlarge that niche to the greatest possible extent. They do this by acquiring and learning to apply a vast body of know-how: for example, about products, manufacturing methods, ways of becoming visible to customers and binding their loyalties, techniques of organizing and managing, methods of funding new activities and expansion, and so on. 
Multinational Companies 
Companies that operate in the international scene are no different from other companies in these respects. What differentiates them from companies operating more locally is, first, that they must be able to transport their know-how and niche advantage in an adaptive way into a broader range of cultural and political settings; and second, that they must be able to accommodate within the corporate family people drawn from a wide range of national cultures. 
International operation today presupposes the modern communication technology that, except for time differences, makes location almost irrelevant in the contemporary world of business. What problems of communication remain (e.g., face-to-face versus less personal communication and time-zone differences) will continue to fade as technology continues to advance. 
For that reason, I am not going to have anything to say about communication technology, but will simply take it for granted. The problems it poses for international management are no different 
1I want to thank Jeff Williams for valuable comments and discussions on the topic of this paper, and for access to his manuscript, "What is Distinctive about International Management?". While he and I have independently reached quite similar conclusions, obviously, he cannot be held responsible for my interpretations here. 
This paper was the basis of a presentation to the Institute's Stuttgart Conference, "The Challenge of Multinational Competition", May 12 - 14, 1993. Conference papers have been revised by the authors and the complete set is available as Working Papers 94-1 to 94-7. 
from those it poses for corporations that operate in a single large nation state - the United States, Italy, or Argentina. People communicate electronically as well as through face-to-face meetings, and they are prepared to spend substantial amounts of their time in travel. Spatial separation is not without significance for management, but it is by no means the most important variable in managing organizations of international scope. 
Operating with a management team that reflects cultural diversity is a different matter; and extending operations into diverse cultures is yet another matter These are the questions to which I will direct my attention. 
The Multinational Management Team 
We hardly need to be reminded that human beings are strongly driven by economic motives; for the possession of adequate economic resources is an essential condition for meeting almost all human needs and wants (though not always a sufficient condition). But events of recent years around the world have brought to our attention another set of motives of equal importance: the loyalties that attach people to specific social groups, ranging from the family and business organizations to nation states and ethnic groups. People evaluate the choices before them and make their decisions, not only in terms of their own economic gain and advantage, but also (perhaps even more) in terms of what they perceive to be the advantage, economic, social, or other, for the groups with which they identify.  
Individual Advantage and Group Loyalty 
Even when economic motives are foremost, we often estimate our economic advantage by equating it with the economic advantage of groups to which we belong: we work toward policies, for example, that we think will be to the economic advantage of California, or Germany, or Atlanta because we are Californians, or Germans, or Atlantans, and somehow assume that what is good for our group is good for us. 
Sometimes what is good for the group is good for us, but we do not often make careful distinctions, when we are making decisions, between group advantage and personal advantage. It is not uncommon for the voters in an American city to approve taxes or a bond issue to retain a sports team in the city. The argument is given that "it brings business to the city," but no one inquires very deeply about who gets that business and who profits from it. If it is "good for our city" it must be good for us. We could generate a host of other examples of how natural it seems to us to judge the pros and cons of proposed policies of actions by their expected effects upon the survival and growth of the groups to which we belong. 
Often, we have to choose between competing group loyalties. Will we give the job to a member of our family (or our ethnic group) even when it might be more advantagious to our company to appoint someone else? Whether we are in China, the United States, Italy, or India, a large part of the activities that are labeled "corrupt" are simply the product of conflict of loyalty between family and business firm, or political party and government agency, where the choices that are made are regarded by the society (at least legally) as morally inappropriate. Which of our countries (and which of our companies) has been free from scandals originating from such conflicts of loyalty. Sometimes corruption is a product of individual greed; more often it derives from conflict of loyalty, where the interests of the "impersonal" group (the company or the state) is sacrificed to the interests of the group to which the individual has strong personal and even emotional ties. 
Company Loyalty as Motive 
That is the dark side of loyalty; there is also a bright side. Does anyone (other than the author of an economics textbook) imagine that a company can be managed successfully simply by providing every employee, from CEO to blue-collar worker, with an economic reward just equal to his or her marginal contribution to the company profit? First of all, and especially for people with managerial responsibility, we have no way of measuring that marginal contribution, even within an order of magnitude's accuracy. In the second place, no amount of supervision can secure effort and initiative from employees who are determined to shirk or to take "free rides," or to pursue their selfish interests at the expense of the company. 
Companies work well, when they do, by securing the loyalties of their employees - not in the absence of economic rewards, but in addition to them - so that employees identify with the company's survival, growth and profit, making it the "we" of their decision-making processes. Companies succeed when they harness to their goals the human capacity for forming strong group loyalties and identifications. 
Multinational companies face a special challenge in creating the conditions under which their employees, and especially those who have professional and managerial responsibilities, can feel a strong loyalty to the organization's goals, even when these goals conflict, or appear to conflict, with the claims of nation or ethnic group. The events of the past decade in the former USSR, the former Yugoslavia, Ireland, the former Czechoslovakia, Belgium, Shri Lanka, India - an endless list - have educated all of us, if we were not already educated, about the power of ethnic loyalties in molding human behavior. 
In the United States, in spite of its reputation as a "melting pot," it is no secret that ethnic loyalties have played (hopefully more in the past than the present) a major role in shaping managements. There were, and are, Protestant managements, Catholic managements, and Jewish managements, to say nothing of companies with managements dominated by Whites (usually) or Blacks (sometimes) or men (overwhelmingly) or women (rarely). My concern in this talk is not with the rights or wrongs of such ethnic sorting, but with the fact of it and its causes. 
The root cause, of course, is the sense of ethnic "we-ness" felt by almost everyone. This reflects itself in informal as well as formal social relations: most of us have far more to do with members of our own ethnic group than with members of other groups. Since informal communication has always played a key role in recruiting employees, searching for jobs and giving job recommendations, formal decisions to lower ethnic boundaries do not, to put it mildly, translate themselves into effective action automatically. 
It is requisite to international management, as seems increasingly to be the case, to accommodate ethnic diversity throughout the firm, and especially at the higher levels of management, we have much to learn about how to bring this about. It is not simply a question of whether managements recruited from a variety of ethnic groups can work effectively together - there are many positive demonstrations that they can - but also a question of how such groups are assembled in the first place and maintained in equilibrium without a heavy burden of bureaucratic regulation. 
Language Diversity 
Every multinational corporation faces the question of what language or languages it will use in it activities, at what times and places. That is perhaps a solvable problem (or seems so to an Anglophone in a world where English has become the new Latin). It is not too much to ask virtually everyone to be effectively bilingual. 
Agreeing upon a common corporate language does not end the language problem. Members of the organization for whom that common language is a second language may feel themselves (and may be) disadvantaged in dealing with native speakers. Even a brief visit to India will make one aware of the sensitivities of people to the connection between language skills and career opportunities. The reason that English remains an official language in India - especially in the southern, non-Hindi-speaking part of the peninsula - is precisely that it is no one's first language; all are equally disadvantaged in using it! India is not an exceptional case: Canada and Belgium illustrate the strength of human feelings about language. 
But language is simply the tip of the hidden iceberg of ethnic and national loyalties that must be dealt with. With language goes particular ways of handling social and interpersonal situations. A few familiar examples from a vast pool of cultural difference: When do we use first names or familiar forms of speech? What is the appropriate way to correct a subordinate's error, or to change his or her style of management? What role should age play in promotion? 
I wish I had a recipe for solving the problem - for creating the company environments we need in order to operate with ethnic diversity. History undoubtedly has some lessons to teach us, both positive and negative. We might look at the historical international trading companies, but these probably provide a misleading example, for they were ethnically homogeneous, establishing bridgeheads in port cities for trading with their foreign partners. 
In ancient times, the Phoenicians began exporting from their own cities on the Eastern Mediterranean seaboard. Gradually, they developed a great trading network through the Mediterranean and beyond, based on both manufacturing industries in their homeland and in the new seaport cities they colonized, and on the products they acquired by trading with the non-Phoenician hinterlands of these ports. 
The prime medieval example was the Hanseatic League which enabled German traders to dominate the Baltic and surrounding regions, pushing into Slavic, Dutch, English and French territories, but confining the trading privileges to their own people. Other ethnic groups have developed similar networks and played similar roles: Jewish international banking and trading networks, the Armenians in the Middle East, the Chinese in more recent times, over a large part of the Orient and even much of the rest of the globe - and many others. 
In all of these instances, the loyalties on which they relied were primarily the loyalties that bound their own ethnic communities. Where more than one such trading group operated in the same port city (as, for example in ancient Alexandria or pre-revolutionary China), each had its own working and living zone, with a considerable measure of autonomy and extraterritoriality. 
Ethnicity and The Modern Multinational Company 
Clearly, these ancient and medieval trading organizations provide more negative than positive lessons for contemporary multinational corporations, for they were squarely based on the very ethnicity that we are now trying to dispense with. They do have for us at least one very important message: that if the modern multinational corporation is to succeed, it must find an effective replacement for the powerful motivating forces that ethnic homogeneity can provide. 
Nation States and International Business 
In more recent times, nation states created a quite different kind of international operation. Especially in Europe, for several centuries they were successful in binding together diverse ethnic collectivities into powerful organizations, nations that maintained the peace (at least internally) and provided extensive public services over wide areas. We can ask how they did that, and also why so many of them seem to be faltering in the present era. 
We might at first blush think of Spain, Italy, France, Great Britain or Germany as "natural entities," bound by a common language and (in the case of the first two) a common religion, but this is not historically correct. The diversity of groups in all of these states with respect to language and customs was at least as great, prior to their unification, as was the diversity within Yugoslavia just before it dissolved. And we have the even more remarkable examples of century-long stability in "conglomerates" like the Austro-Hungarian and Ottoman Empires. It is not at all obvious, a priori, with what "we's" people will identify, and under what conditions. 
Multinational private corporations have themselves existed, in one form or another, for several centuries. We can examine their earlier history, perhaps starting with the latter part of the 18th century, to see how they originated, and to what extent their success depended upon colonialism and the political weakness of the states into which they extended their operations. 
Modern international trade grew up in close relation with European colonialism, both formal colonialism and special trading relations between industrial countries and the countries that provided them with primary goods. As recently as the period between the two World Wars, approximately half the trade of Europe consisted of interchanges between the major European powers and their dependencies. This pattern, in which a particular ethnic (or national) group dominates the exchange, is not totally unlike the ancient and medieval trading patterns that we described in the preceding paragraphs. As with those earlier patterns, organizational and ethnic loyalties generally do not compete but mutually reinforce each other. The ethnic frictions arise principally on the boundaries of the organizations, in the relations between the trading partners. 
The Changed Situation Today 
Today's multinational corporation finds itself in quite a different world. First, although there remains a large Third World, a much greater fraction of the trade than before takes place wholly within the First and Second Worlds, and the same kinds of commodities flow in both directions along many trading routes. 
Second, the suppliers of primary goods are no longer always dependencies of the suppliers of manufacturing goods - both in a formal governmental sense and in a real sense. The Arab oil nations of the Middle East are the most visible examples of this major shift in the structure of power. 
Third, the multinational corporation is not mainly engaged in the production of goods in one country for trade to another country; it has more and more multinational manufacturing operations and even fractionation of manufacturing operations for a single product among many sites. In some cases it even serves primarily as a common source of investment funds for relatively independent business operations in different countries. Or, its international component may consist largely of the sharing among its local sites of advanced technology that it creates through common R&D operations, or purchases. Each of these different patterns creates its own special opportunities and its own peculiar problems of management and operation. 
Adapting to Ethnic Diversity 
There are probably few recipes that will succeed uniformly across all of these variant situations, but there are a few generalizations that hold for all of them. 
The End of the "Outpost". We have seen that many of the earlier international trading groups, and even multinational corporations were outposts of a particular ethnic group or society or national state. In the 21st Century, the "outpost" mentality is most unlikely to succeed. National and ethnic sensitivities are simply too great to provide such entities with a friendly environment. The oil industry learned this several decades ago in the Middle East (and elsewhere), and the same lesson is being repeated widely. Today, the nation state, with the particular loyalties that bind it together in each instance, defines the rules of the game for companies that wish to do business within its borders. The traditional tools of force and bribery that created and maintained the colonial and quasi-colonial systems, although they have certainly not disappeared, are becoming less and less reliable and effective, especially where the local ethnic ties are especially strong and even dominant over family ties. And the more extensive the operations that a company conducts within a country, apart from the traditional trading operations, the weaker the traditional means of control become. 
Even scientists today are regarded as predators, or "imperialists" if they claim the right to do science in foreign lands without the full permission, and indeed collaboration, of the local scientists. No geologist today can carry a rock out of Mainland China without the permission of the Chinese government and collaboration with Chinese geologists. No archeologist can excavate a Mayan temple or an African riff valley without corresponding permission and collaboration. I negotiated for nearly a year with the Chinese government before receiving permission to establish an office in Beijing, staffed by one Western scientist and a Chinese clerical assistant, for the Committee on Scholarly Exchange With China. International science today is truly multinational and multiethnic. 
Quite similar requirements are being placed today on multinational companies. There will soon be very few multinational companies that are not culturally and ethnically and nationally diversified. That may be a good thing or a bad thing, but its merits are hardly worth debating, for it is a political and ideological reality. 
The Future of Ethnic Loyalties 
My second generalization is that the success of the multinational enterprise in the coming years is going to depend very much on what happens in general to attitudes of ethnic and national loyalty. Here the issue is not whether ethnicity wins out over a more traditional nationalism, or vice versa. The issue is whether people can learn to handle the competing demands that will be placed upon them by corporate and local loyalties, respectively, and whether national and ethnic entities can learn to tolerate and work with the ethnically diverse corporate entities within their borders. We should already be learning something about these matters from the experience of the European Economic Community, both its successes and the stresses it is experiencing. 
Cultural Niches 
My third generalization goes back to my opening comment: that successful competition often, perhaps usually, requires a company to find a niche that distinguishes its products or its services from those provided by other companies. In some cases cultural diversity provides such niches. There is both a supply side and a demand side to the creation and maintenance of "cultural" niches. On the supply side, a company, because of its home base, may have employee skills and resources available that are not as readily available elsewhere in the world. For example, for a number of years the United States may have had a quasi-monopoly of the skills of assembly-line methods for manufacture, or at least a significant comparative advantage in the deployment of such skills. As history has shown us, in this and other cases, such an advantage is likely to be transient. 
On the demand side, a company, by familiarity with a particular culture, may have an advantage in adapting products to the preferences of that culture. It is claimed, probably with some justification, that the weakness of Western companies in Japanese markets is partly due to their failure to understand some of the cultural bases for product preference. 
With respect to its impact on culture-based niches, the internationalization of management and business is a two-edged sword. On the one hand, as a company succeeds in internationalizing its management and its operations, it may acquire enough cultural sophistication in the areas in which it operates to exploit niches that are present in those cultures. On the other hand, in its home base, a company will be able to rely less and less on its superior understanding of cultural differences and preferences as a basis for carving out and defending niches. 
Recent decades have provided us with all sorts of examples of changes in niche advantages with the growing internalization of business. To mention one, some of the important bases for the Japanese success derived from the ability to change domestic practices by cultural borrowing: the introduction of modern methods of quality control being a salient example. There was nothing to prevent American companies from using these methods with equal effect, except that many companies had not bothered to understand them (especially the distinction between inspection and quality control), and thereby to implement them. Another example was the speed with which Japanese auto manufacturers sensed the presence of a market for small cars in the U.S., and exploited also the reputation of their cars for mechanical reliability (traceable to quality control). 
A trend that is reducing many traditional niche advantages throughout the world is the steadyspread - for whatever reason - of worldwide acceptance of Western products closely linked to Western popular culture: everything from rock music to bluejeans. You can speculate as well as I can about how permanent a trend this is. 
Corporation and Nation State 
This brings me to my final topic: the compatibility of the multinational corporation with the national state. We may be reminded of the tensions that existed over centuries between the Church and the Holy Roman Empire, and the wars of Guelphs with Ghibelllines that these tensions produced in Italy. The multinational corporation has responsibilities: to remain solvent, and grow, and produce profits for its stockholders. The national state has responsibilities: to maintain order, to provide services, and to assure the economic welfare of its citizens. The tensions between these sometimes competing goals is evident when we look at the international trade policies or immigration policies of contemporary nations. Nation states are unlikely to relinquish what they regard as their clear responsibilities for formulating and executing national economic policies. 
It will be very easy for the national state to feel threatened by the multinational corporation, and to seek to defend itself against what it regards as a new colonialism. Again, we already have numerous historical examples of such reactions in many parts of the world. It will call for all of our wisdom and statesmanship - whether we be representatives of the corporation or the state - to find a constructive model for the coexistence of these entities, in which both corporation and state feel capable of meeting their obligations to their respective clients. 
Coexistence of national corporation and state is likely to be facilitated if there are other players in the game - in the form of organizations that can promote and maintain various kinds of economic cooperation among smaller or larger groups of states. Historically, the United States of America was just such an experiment in economic cooperation - but with a strong political structure to support it. The European Economic Community, with a weaker political structure, is the most important single experiment of this kind in the world today. Its arduous task is to establish rules of the game that its member states will regard as fair, and which will thereby enable them to trade with each other and live comfortably with the corporate organizations that are criss-crossing their borders. The experiment, with all of its starts and stops, has been successful beyond expectations up to the present moment, but no final verdict is in. 
A similar function must be performed by international monetary agencies, whose task it is to get comparable agreement on fair rules of the game governing exchange rates and the flows of investment funds. Here, I think we are still very far from satisfactory arrangements - arrangements that will promote economic stability around the world at the same time that they convince the national states that they retain adequate control over their own economic fates, and hence can discharge their responsibilities to their citizens. What these arrangements could be I will have to leave to others who are more expert than I am on these matters. 
Conclusion 
In my comments I have perhaps emphasized problems more than opportunities. I hope this emphasis is not interpreted as a counsel of despair. There is already a powerful current of internationalization of business flowing in the world. The question is not whether that trend will continue; the question is whether we can shape and steer it so that it can contribute to the making of an understanding of how markets or organizations operate. 
We will need also to understand at some depth the ways in which we human beings acquire and respond to the loyalties that tie us to the groups in which we live and with which we work. Our task is to create and implement "we's," loyalties, that will contribute to human productivity and collaboration and which will counter the destructive consequences of misplaced loyalties that are so prevalent in the world today. Success in this task is crucial to the future of our world economy and society.