The model

Ursula F. Ott 43

(German–Austrian). We can, therefore, relate the greater effort to higher costs of culture and argue that there is a need to provide incentive schemes to encourage cooperation where these costs are high.

Two types of incentive schemes can be distinguished, namely:

(a) incentives for the ability to cooperate (the capability of parent firms and their representatives for adverse selection ex ante), and

(b) incentives for the effort (learning or shirking) to bridge culturally distant employee groups.

To start with Hofstede’s cultural dimensions, uncertainty avoidance can be linked to the risk attitude of the players; thus a risk-taker might be able to bridge a cultural gap between the American and Asian employees more easily than a risk avoider. Power distance can be linked to the hierarchical structure of the employee groups and the ability to cooperate top-down or bottom-up, respectively. The cultural fit of the hierarchies could be linked to the distance and closeness of groups and to greater or lesser effort to overcome difficulties based on a hierarchical structure. The degree of masculinity can be linked to the type of incentives offered, such as relationship or money-based reward schemes. Individualism can be linked to whether incentive schemes are based on individual or collective behaviour, either in terms of promotion as an incentive for individual achievements or for cooperative group behaviour.

Thus a culturally sensitive approach can be used to predict the likelihood of difficulties with regards to cooperation within an IJV and to identify appro- priate incentive schemes to tackle these difficulties.

Let us now show the relationship between the indices and the effort levels in terms of cultural cooperation. We can assume that we have either performance based on effort levels q(e_Loc, e_For) or a disutility of effort v(e_Loc, e_For) of the local and foreign players which are related to cultural dimensions shown in Hofstede’s indices.

The effort levels associated with masculinity/femininity as a relationship dimension will be shown as e_CC=(e_M, e_F) with the relationship 0≤e_F<e_M≤1.

This means that the feminine society already gives priority to a caring, rela- tionship-based attitude, while the masculine society has to put more effort into cultural cooperation since it does not come naturally to this cultural type. The low effort in building relationships or lack of importance ascribed to such rela- tionships in more masculine cultures might otherwise lead to failure in an IJV.

The individualism/collectivism index shows different attitudes towards in- dividual and group achievement. The priority given to individual performance in cultures ranking high in individualism will lead to less effort being placed on cultural cooperation. This can be represented as e_CC=(e_Ind, e_Coll) and 0≤e_Coll<e_Ind≤1.

The power distance index shows the extent of hierarchical structure and the extent to which power is unevenly spread in different cultures and can also be related to the different set of rules for relationships and appropriate behaviour.

This leads to the following culturally implied cooperative efforts e_CC=(e_HPD, e_LPD) and 0≤e_LPD<e_HPD≤1.

The uncertainty avoidance index shows the attitude towards risk and is not considered of major importance in this context, but rather as an underlying issue.

Incentive contracts to deal with shirking, embezzlement and sabotage are developed in this section. These draw on game theoretical applications found in information economics and contract theory (Holmstrom and Milgrom, 1991; Macho-Stadler and Perez-Castrillo, 1997). Hofstede’s indices provide an ideal basis to correlate the discrete levels (high and low effort) with the extent of efforts to achieve cultural cooperation where e_CC depends on power distance, masculinity and individualism, as discussed above. The incentive schemes are for both players, foreign and local.

Shirking

Proposition. If an IJV has employees of two national cultures, then the incen- tive schemes should take into consideration different effort levels as these are culturally sensitive.

Proof. Let there be two efforts related to the management of an IJV – the effort level of the local representatives and the foreign expatriates. We can distinguish between e_Loc= and e_For= The outcome of the IJV q_i with i ∈{1, 2 . . .n} can be written as q_i(e_Loc, e_For) and q_i=e_Loc+e_For. It is ordered from the lowest to the highest value q₁<q₂< . . .q_n. Let =p_i be the probability for cases in which the agent offers a low level of effort > 0. The principal(s) prefer a high level of effort. If the principal demands high effort e^H (which will be the case when q_i is large for I), the problem becomes interesting since any fixed payment would only get the agent to choose e^L. The incentive payment I(q_i) depends on the final result.

Yet, the final result is a combination of both representatives’ efforts.

The joint incentive scheme can be rewritten in the following way:

such that

e_Loc^H ,e_Loc^L

( ) (e_For^H ,e_For^L )

P_i^L e_Loc^L ,e_For^L

( )

P_i^L

max p_i^H

i=1 n

¦ [ Π

^{( )qi –I q( i(eLoc,eFor))}

]

p_i^H

i=1 n

¦

^{u I q( ( i(eLoc,eFor))) ν– (eLocH )≥U}

Ursula F. Ott 45

Embezzlement

Proposition. If an IJV has employees of two national cultures, then the incen- tive schemes should consider the culturally implied embezzlement.

Proof. Let us consider that embezzling is the reason for both low effort levels.

Thus, we can distinguish between embezzling by the foreign player and embez- zling by the local representative. Under the assumption that embezzling is culturally implied, we can treat embezzling by the local player (in case of a feminine society or collectivist society) as relationship related. Embezzlement by a foreign expatriate could be related to the individualistic or masculine features of the home society. We, therefore, assume that embezzling can occur in various societies, though with different motives and explanations. Thus, it is important to develop incentives based on the different backgrounds and not only on the output level.

Furthermore, let us consider shirking as a culturally implied behaviour. We can, therefore, distinguish between cultures in which shirking is seen as accept- able behaviour and cultures in which it is unacceptable.

Therefore, in an IJV with at least two cultures, we have to consider incentive schemes to prevent embezzling and shirking.

p_i^H–p_i^L

[ ]

i=1 n

¦

^{u I q( ( )i ) ν≥ (eLocH ) ν– (eLocL )}

p_i^H

i=1 n

¦

^{u I q( ( i(eLoc,eFor))) ν– (eForH )≥U}

p_i^H–p_i^L

[ ]

i=1 n

¦

^{u I q( ( )i ) ν≥ (eForH ) ν– (eForL )}

e_Loc^M =q_i–emb_M→e_Loc^L , e_Loc^F =q_i–emb_Rel→e_Loc^L e_Loc^Ind=q_i–emb_Ind→e_Loc^L , e_Loc^Coll=q_i–emb_Coll→e_Loc^L

e_For^H =q_i–emb_M→e_For^L , e_For^F =q_i–emb_Rel→e_For^L e_For^Ind=q_i–emb_Ind→e_For^L , e_For^Coll=q_i–emb_Coll→e_For^L

I q( _i(e_Loc^M )) = F±r_M(e_Loc)

Sabotage

The joint outcome can induce either one or the other agent, or both, to put in a lot of effort. There is an option of sabotaging and another option of learning included in the choice of effort level.

Case 1: The local representative intends to contribute local expertise, raw material, production knowledge and the foreign representative pro- vides technological know-how and managerial skills – effort levels are verifiable when skills are complementary. Thus, both contribute a high level of effort q_i .

Case 2: The local representative contributes a low effort to the IJV, whereas the foreign expatriate works hard and contributes a high effort level

giving q_i .

Case 3: The foreign expatriate wants to put in little effort and the local repre- sentative puts a high level of effort into the IJV. This is the case when the local’s expertise is easily observed and the locals want the IJV to prosper. However, the foreign expatriate only wants production knowledge or market entry knowledge and provides little in terms of managerial or technological know-how (free-rider). This gives the following relationship: q_i .

Case 4: Both representatives rely on the other’s contribution and intend to provide a low effort. Thus, the joint outcome is q_i . Proposition. If an IJV has employees of two national cultures, then the contracts should consider sabotage and learning.

Proof. Let us consider the case when the effort level for both parts of the manage- ment (local and foreign) can be divided into sabotage and learning in an IJV.

Under the assumption that the local agent can use his effort for either sabotaging or learning, =1. The same is true for the foreign partner.

The IJV can have a management team which could have both foreign expatriate and local representative learning or sabotaging, or either party learning and the other one sabotaging. In Table 3.4, the effort required for learning has the value x and the effort for sabotage will be 100−x. The payoffs in the matrix are given for the foreign firm first and the local firm second. The outcome is

I q( _i(e_Loc^F )) = R±r_F(e_Loc)

I q( _i(e_Loc^Ind)) = Promotion

I q( _i(e_Loc^Coll)) = Holidays with the family and so on

e_Loc^H ,e_For^H

( )

e_Loc^L ,e_For^H

( )

e_Loc^H ,e_For^L

( )

e_Loc^H ,e_For^L

( )

e_Loc^Sab+e_Loc^Learn

Ursula F. Ott 47

dependent on the effort levels of both partners. We can show the following pairs of value (100−x; 100−x), (x; x), (x; 100−x) and (100−x; x). The success of the joint venture depends on the Nash equilibrium of both players learning in an IJV.

Incentive schemes are based on the output I[q(e_Loc, e_For)] and are therefore connected to the effort levels of local and foreign players. Since sabotage was related to jobs and cultures with high points of the grid as a response to hierar- chical structures, it is important to consider incentives based on the cultural effort to bridge gaps or differences in power distance e_CC=(e_HPD, e_LPD). Ideally, IJV success is connected to learning instead of cheating which is related to cultures with a lower power distance score.

It is considered human to look for the best outcome within relationships, whether this means to adhere to a group consensus, to play fair, to look out for benefits in order to maximize individual profits or to enjoy the pleasure of manipulating hierarchical structures. The culturally implied moral hazard can be avoided by the appropriate incentive schemes. It is important to distinguish between the cultures which are prone to shirking, embezzling and sabotaging and to target incentive schemes according to the underlying cheating concepts.