Multi-Culturality and Economic Organization

19 May 2006 at 4:10 pm 10 comments

| Nicolai Foss |

Transaction cost scholars have increasingly become interested in the way economic organization is shaped by the “institutional environment,” for example, how the legal regime impacts internal organization or the boundaries of the firm (e.g., this paper). A paper that seems to have stimulated much of this is Oliver Williamson’s 1991 paper on “Comparative Economic Organization.”

To my knowledge relatively little interest has been devoted to the how the softer rules of the game, notably those that may be placed under a “culture” heading may impact economic organization, although quite some research in international business has dealt with this (e.g., this paper).

As far as I know no research has dealt with the implications of “multi-culturality” within a given territory for economic organization.

Perhaps this is because the notion is a relatively recent one; one that perhaps primarily belongs to the realm of politically correct discourse, and because we don’t have really convincing economics-based conceptualizations of culture, not to mention what it means to have multiple cultures inside a given geographical territorium.

Nevertheless, this is a potentially rich research subject. It may also become a pressing one, as the US and the Europe (and other regions in the World) become increasingly multi-cultural. Here is some extremely prelim speculation.

Cultures may be thought of, in a very crude characterization, in terms of focal points that pick out solutions to underlying games, some more like coordination games and some more like PD games. Although we know very little about how players reason when they are placed in new games, there are some indications that they rely on precedents and analogies. To put it crudely, immigrants may play games in their new country the way they used to play them in the old country. Some of this may be dys-functional as when players from low-trust cultures play defect strategies in high-trust cultures. Players from high-trust cultures may become suckers in low-trust cultures. Also, cultural mix may increase information and communication costs for obvious reasons.

A likely result is that market transaction costs increase. (In turn this may give rise to increased intra-culture trade and decreased inter-culture trade). What will happen to internal transaction costs? To the extent that people self-select into firms based on culture, internal transaction costs may not increase. The net effect is that firms would expand their boundaries.

Anyway, this is merely one possible, and loose, take on what is a potentially important and certainly unexplored research area in applied new institutional economics. Any opinions and suggestions out there?

Entry filed under: - Foss -, Institutions, Theory of the Firm.

Capabilities as Compensation Natural and Artificial States, and Firms

10 Comments Add your own

  • 1. Jung-Chin Shen  |  20 May 2006 at 12:02 am

    A very quick and simple response would be that one thing that has been often discussed elsewhere seems to be missing here: the relation between diversity and creativity/innovation. Perhaps the prediction of the effect of multi-culturality on firm boundary should take into account the possible trade-off between transaction costs and innovation.

  • 2. Yvonne Borkelmann  |  20 May 2006 at 7:22 am

    I think the “crude” example of the immigrants is too static to derive a conclusion. I agree that at first when multi-culturality raises, the transaction cost raises, and as described given employees’ self-selection on culture into firms, internal transaction cost may not increase, thus firms expand their boundaries.

    However, as already noted in the blog entry, culture is derived on precedents, so it is learned/can be learned. The “immigrants” will continuously play games and there will be communication about the outcome of games played by other immigrants. It is very well possible, that over time people “learn” the other culture and understand the new focal points. As an example I am thinking of many of the – even from very distant cultures – 2nd generation immigrants that actually are very well educated/integrated into our society and are able to play games in both “cultures”, these people seem to have two sets of focal points.

    With the assumption that the above is possible, these people may self-select into firms with the new culture, internal transaction cost still don’t increase, however, market transaction costs should decrease – especially intra-culture trade transaction costs, thus firms’ boundaries may shrink.

    Obviously during the whole process of “learning”, there are higher transaction costs and additionally there is a cost of coordination on which focal point to use in a given game, possibly the net effect is 0.

  • 3. Nicolai Foss  |  20 May 2006 at 9:54 am

    Jung-Chin, Yes, perhaps. However, I know of very little serious analysis of this. The only conceptual paper I know is one by Edward Lazear, but that begins by _assuming_ that there these diversity benefits. I know of no serious empirical analysis that supports the “cultural diversity leads to innovation, creativity, etc.” I am probably just ignorant. If anyone knows of any such analysis, please let me know.

    Yvonne, You are very right. However, I think there is ground for arguing that these learning effects are larger for some cultures than for others. For example, in the context of the Western European situation, as a crude generalization, Asians would seem to have a steeper ” learning curve” (or at least “adaptability curve”) than immigrants from Arabic countries.

  • 4. Jung-Chin Shen  |  20 May 2006 at 12:43 pm


    How about he following three articles?

    McLeod, Poppy L., Sharon A. Lobel, and Taylor H. Cox. 1996. Ethnic diversity and creativity in small groups. Small Group Research 27: 248-265.

    And two explanations:
    (1) Ron Burt. 2004. Structural holes and good ideas, AJS.

    (2) Nemeth, Charlan J. 1995. Dissent as Driving Cognition, Attitudes, and Judgments. Social Cognition 13: 273-291.

  • 5. Nicolai Foss  |  20 May 2006 at 12:59 pm

    Jung-Chin, A great many thanks!! The Burt reference is obvious — but I hadn’t thought of it.

  • 6. Bo Nielsen  |  20 May 2006 at 3:06 pm

    A couple other references:

    Searching for Common Threads: Understanding the Multiple Effects of Diversity in Organizational Groups
    Frances J. Milliken, Luis L. Martins
    Academy of Management Review, Vol. 21, No. 2 (Apr., 1996) , pp. 402-433

    Joint Impact of Interdependence and Group Diversity on Innovation, Gerben S. Van der Vegt & Onne Janssen, Journal of Management, Vol. 29, No. 5, 729-751 (2003)

    Multicultural Teams: Increasing Creativity and Innovation by Diversity, Gassmann O. Creativity and Innovation Management, Volume 10, Number 2, June 2001, pp. 88-95(8)

  • 7. Bo Nielsen  |  20 May 2006 at 3:09 pm

    Nicolai, you may also consult with Sabina (at CBS currently) as she is doing her dissertation on diversity on boards and the effect on internationalization behaviour and outcome (not sure how she measures outcome though). Anyway, in the board and TMT literatures there are a few studies dealing with this issue – albeit they often define cultural diversity in different terms.

  • 8. Jung-Chin Shen  |  21 May 2006 at 8:06 am

    That’s funny. Nicolai’s school is hosting this conference

  • 9. Nicolai Foss  |  21 May 2006 at 8:22 am

    Well, it is a big school ;-)

  • 10.  |  1 April 2010 at 6:52 am

    culture is something unique, we can not see it but we can feel it

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Nicolai J. Foss and Peter G. Klein, Organizing Entrepreneurial Judgment: A New Approach to the Firm (Cambridge University Press, 2012).
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Peter G. Klein, The Capitalist and the Entrepreneur: Essays on Organizations and Markets (Mises Institute, 2010).
Richard N. Langlois, The Dynamics of Industrial Capitalism: Schumpeter, Chandler, and the New Economy (Routledge, 2007).
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