Cultural gap between China and the USA

As the leading nations of the world, China and the USA need to interface frequently in order to discuss problems, and hopefully reach an understanding and finally an agreement.

In any discussion, the individuals from one nation will try reaching out to their counterparts from the other nation. Unfortunately, the framework of mental reference, not to mention the verbal and body languages, can be serious impediments to constructive communication. Therefore, it is important that the interlocutors be aware of these mental and behavioural differences, are able to recognize them and finally adjust to them.

Frustration MountFrustration mounts when we don’t get understood. Source: Reuters

Let us look at this cultural and behavioural gap that exists between nations, and particularly between China and the USA, and more broadly between the East and the West.

Since the 1970’s a series of studies have been conducted that try to characterize the average national cultural features. Three of the most commonly used models are from:

  • Geert Hofstede, a Dutch psychologist from Maastricht University in The Netherlands
  • Fons Trompenaars, a Dutch organizational theorist and management consultant
  • GLOBE (Global Leadership and Organizational Behavior Effectiveness Research) Project.

All these studies aim to characterize cultural behaviour across nations through a variety of aspects. At the core of each of these studies are a series of key behavioural dimensions that are graded towards two opposite poles. An example would the pairing between individualism and collectivism, where each country would be rated on this individualism-collectivism spectrum.

There are many shortcomings in these models as they do not intend to represent the whole range of human behaviours in a nation. They are only an approximation of key social behaviours. But, at the same time, these measurements can be the beginning in understanding the cultural gap that can exist between two nations.

We will use the model developed over the last 40 years by Geert Hofstede (www.geert-hofsted.com) to assist in our understanding of national behaviour. The data originates from a study done in the 1970’s of IBM managers located across the world.

Over the years this model was refined and extended to other countries. From the 4 dimensions, it has been expanded to 6 dimensions. The model also allows people to easily compare countries in order to identify potential behavioural challenges. By using the Hofstede model, comparing China with the USA, we obtain this graph.

Comparison of China and the USAComparison of China with the USA as per the Hofstede Cultural Model. Source: www.geert-hofstede.com

We can clearly see that of the 6 cultural dimensions studied, 3 have major differences. These might cause misunderstanding between individuals who might not be aware of them. Let us look at what each dimension aims to evaluate. All material quoted is from www.geert-hofstede.com.

Power Distance index: “This dimension expresses the degree to which the less powerful members of a society accept and expect that power is distributed unequally. The fundamental issue here is how a society handles inequalities among people. People in societies exhibiting a large degree of Power Distance accept a hierarchical order in which everybody has a place and which needs no further justification. In societies with low Power Distance, people strive to equalise the distribution of power and demand justification for inequalities of power.” Russia here achieves a score of 93 making it a highly hierarchical society.

Individualism versus Collectivism: “The high side of this dimension, called individualism, can be defined as a preference for a loosely-knit social framework in which individuals are expected to take care of only themselves and their immediate families. Its opposite, collectivism, represents a preference for a tightly-knit framework in society in which individuals can expect their relatives or members of a particular in-group to look after them in exchange for unquestioning loyalty. A society’s position on this dimension is reflected in whether people’s self-image is defined in terms of “I” or “we”.” It is to be noted that the USA at 91, has the highest score for the Individualism dimension among the 102 nations studied.

Masculinity versus Femininity: ”The Masculinity side of this dimension represents a preference in society for achievement, heroism, assertiveness and material rewards for success. Society at large is more competitive. Its opposite, femininity, stands for a preference for cooperation, modesty, caring for the weak and quality of life. Society at large is more consensus-oriented. In the business context Masculinity versus Femininity is sometimes also related to as “tough versus tender” cultures.” Often, the following analogy is used: in a high masculine society, people tend to “live to work”, while a low masculine society (i.e. feminine) people tend to “work to live”. Japan scores 95, while Sweden scores 5.

Uncertainty Avoidance Index (UAI): “The Uncertainty Avoidance dimension expresses the degree to which the members of a society feel uncomfortable with uncertainty and ambiguity. The fundamental issue here is how a society deals with the fact that the future can never be known: should we try to control the future or just let it happen? Countries exhibiting strong UAI maintain rigid codes of belief and behaviour and are intolerant of unorthodox behaviour and ideas. Low UAI societies maintain a more relaxed attitude in which practice counts more than principles.” Russia scores high again at 95.

Long Term Orientation versus Short Term Normative Orientation: “Every society has to maintain some links with its own past while dealing with the challenges of the present and the future. Societies prioritize these two existential goals differently. Societies who score low on this dimension, for example, prefer to maintain time-honoured traditions and norms while viewing societal change with suspicion. Those with a culture which scores high, on the other hand, take a more pragmatic approach: they encourage thrift and efforts in modern education as a way to prepare for the future. In the business context this dimension is related to as “(short term) normative versus (long term) pragmatic” (PRA).”

Indulgence versus Restraint: “Indulgence stands for a society that allows relatively free gratification of basic and natural human drives related to enjoying life and having fun. Restraint stands for a society that suppresses gratification of needs and regulates it by means of strict social norms.” This is where Mexico scores high with a 97.

The Hofstede model allows an easy cultural comparison between any nations. It can be used by corporations who are sending people to work around the world, as well as by governments who need to interface with other nation’s government.

Other individuals have tried to visually represent the differences between the western and eastern approaches. A book was written in 2015 by Yang Liu on that topic: East meets West. Originally from Beijing, the author has studied in Berlin, worked in Singapore, London and New York, and now teaches at the University of Applied Sciences in Berlin. As a graphic designer, she was able to visualize the differences between the eastern and western worlds.

Problem-solving approachApproach for problem solving in the West and in the East. Source: Yang Liu.

After looking at the overall group behaviour, we can also try to understand what motivates individuals, and this is where the work done by A. Maslow can assist us. A university professor, considered a leading psychologist of the 20th century, studied motivation in western individuals.

He developed a theory called the Hierarchy of Needs. This theory is taught in all business schools. If the same basic principles established by Maslow are used to determine the desires of individuals in an eastern society, we arrive at a different approach in how best to impact people’s behaviour.

Comparison of the Hierarchy of NeedsComparison of the Hierarchy of Needs between the West and Asia. Source: Unknown

The cultural gap between China and the USA is substantial and can be challenging. But, if our goal is to live in harmony, the leaders of the world will need to work together, and that means understanding how the other party naturally tends to behave. This gap must be bridged, and both parties need to work at it.

Bridging the Gap

Pierre

The extent of government centralization

As one endeavours to understand how the Chinese government operates, the word “centralization” will often come across in documents and discussions. All countries have a central government and to various extent regional political entities. The key question is, to what extent are the power relationship and the decision making process distributed between the various levels of government.

In China, there are 32 regional authorities (provinces, autonomous regions and municipalities) under the control of the central government. The provinces and autonomous regions are further divided into prefectures, counties, townships and villages.

In addition to the central government, there exists a range of national regulatory bodies which can issue directives that impact the lower levels of government.

Let us look at an article that was published in the Shanghai Daily on March, 7, 2017 as we try to understand the dynamic between the various levels of government.

_______________________________________________________________

Better toilets will help boost tourism

Shanghai Daily, Source: Xinhua, March 7, 2017

 Toilet at a Tourist Destination

CHINA plans to boost its tourism sector by upgrading infrastructure and giving the public easier access to travel information, a government document said yesterday.

The National Tourism Administration unveiled the plan in a development guideline for the tourism industry during the 2016-2020 period. It echoes the country’s national strategy to spur the service sector.

According to the document, roads to the country’s major tourist attractions will be renovated by 2020 to meet growing travel demand. Large tourist destinations will have easier internal transportation.

In the next four years, the country will add 20 inter-region bike lanes with a total length of 5,000 kilometers to boost zero-emission travel. More tour buses and recreational vehicle campsites will also open.

Toilets at tourist sites have long had a nasty reputation of being unhygienic. To address the problem, the country aims to install and upgrade 100,000 restrooms. Toilets at major tourist sites should apply stringent hygiene standards with environmentally friendly cleaning approaches at most facilities.

The document also outlines plans to build a more integrated information sharing system and provide visitors higher-quality services.

China’s tourism revenue totaled about 4.69 trillion yuan (US$689.7 billion) in 2016, up 13.6 percent year on year. Domestic tourists made 4.44 billion trips last year, an increase of 11 percent, official data showed.

Tourism plays a key part in the world’s second-largest economy as the country moves to build an economy driven by the service sector and consumer spending rather than trade and investment.

By 2020, the country will spend about 2 trillion yuan on the tourism sector, which will contribute more than 12 percent of GDP, according to the plan.

__________________________________________________________________

Here are some points to highlight in order to explain the context of the document:

  • The National Tourism Administration is a quasi-governmental body at the national level which issues directives that lower government levels must implement.
  • The tourism industry was identified as a key economic development sector as the national government tries to re-align the economy away from “investments in fixed capital” and “exports”, towards “household consumption”.
  • The “2016-2020” period is the timeframe for “The 13th Five-Year Plan for Economic and Social Development of the People’s Republic of China”. The year 2020 is stated again in the last paragraph.
  • A budget in capital investments for roads for 2017 was released on March 5, at the National People’s Congress, two days before the article was published.

We can clearly see in the article that the central government will immerse itself in the minutia of governing when it impacts national objectives. It will not hesitate to provide detailed guidelines that all levels of government must implement.

It also indicates that the autonomy of the lower government levels is limited by whatever the national government elects to get involved in. There are few areas of decision that are entirely at the lower levels. If any action is undertaken by the lower governmental level, it must be validated by the national government, unless a national directive has been issued on that topic.

This most probably reduces the level of initiatives that are taken at the lower levels by government employees as they await decisions and directives from the national government. This is clearly a top-down government structure, not a bottom-up approach to governing.

Not a good way to encourage the development of initiative that has been identified as vital for the future growth of China.

Pierre

Netflix, Not in China

Netflix is in every country in the world except North Korea, Syria and China. For North Korea and Syria, it is easy to figure out why, but for China it is more complex. Let us have a look at what has prevented Netflix from entering China.

Netflix Around the WorldCountries where Netflix was offered in early 2017. Source: Business Insider.

Early on, Netflix knew that they had to proceed carefully with their efforts to enter China. They communicated extensively with the national government, interfaced with the proper government departments and studied the business landscape. They were determined to try to find a way into China with its population of 1.4 billion. Unfortunately, they encountered challenges that could not be resolved.

The first hurdle was regulatory. The Chinese government, similarly to western governments established a series of rules that govern what cannot be shown in films, on TV and through on-line streaming. Topics related to health (smoking, drinking, etc.), and sexuality have been extensively regulated in a large number of countries, including Canada, Europe and the USA. China, through SAPPRFT (State Administration of Press, Publication, Radio, Film and Television) has established a more comprehensive series of regulations. Here are the categories of topics that are banned:

  • Does not meet the national conditions and social systems, to the detriment of national image, endangers national unity and social stability
  • Damages ethnic groups unification
  • Violates the state policies on religion
  • Promotes feudal superstitions contrary to science
  • Exaggerates terrorist violence, or shows ugly behaviors that potentially induce crime
  • Contains pornographic or vulgar content
  • Distorts ethnic cultural traditions
  • Harms public morality, adversely affects minors

For each category, comprehensive details were provided resulting is many topics normally covered in shows produced in the West coming into conflict with these rules.

Like so many regulations in China, there is substantial leeway in their interpretation, making life more challenging for companies that need to meet those regulations.

These guidelines were tightened in early 2016, and affected foreign companies like Disney and Apple who both had been able to develop a market for their online entertainment content. Both saw their online services permanently interrupted.

Netflix could not find a way around these comprehensive regulations.

Netflix Regulatory ChallengesNetflix faced regulatory constraints in China. Source: Bidness Etc.

The other challenge that Netflix encountered was the strong desire from the national government to support local champions. Over the years, China has endeavoured to develop local companies in support of a “Made in China” policy that it frequently advocates. This policy is applied firmly particularly if the foreign company has no capabilities to improve the Chinese society. In this area, Netflix was not able to demonstrate that it possessed technology that would be of value in the Chinese market. Even if it had, Netflix would have had to follow the challenging content rules in order to obtain an operating permit.

Netflix - AlibabaNetflix and Alibaba squaring off in China. Source: Bidness Etc.

So, as with many other foreign internet companies like Twitter, Google, Facebook, eBay; Netflix will not be operating in China. Netflix has elected to license in-house developed programs to Chinese companies. But these will bring only modest revenues compared to being able to serve this large market. Instead, Chinese companies, like Alibaba and Tencent will continue providing on-line video streaming services as Netflix had nothing to offer that was of interest to the government.

Pierre

Note: For further details on the regulatory requirements, refer to: https://qz.com/630159/chinas-new-television-rules-ban-homosexuality-drinking-and-vengeance/, or to the original site in Chinese where one can use Google translation to obtain it in English: http://www.gov.cn/flfg/2010-05/20/content_1609751.htm.

Economically, is China no. 1 or no. 2?

Is China the leading nation with its newly acquired economic might, or is the USA still the economic leader? The economic forces that we will briefly analyse are the size of the economy, the level of international trading, foreign investments, and the financing provided to other countries.

Over the last 30 years, the economic growth of China has been phenomenal. The most talked about measurement to assess the economic might of a nation is the GDP (i.e. creation of economic wealth). The challenge in comparing countries is that the value of the GDP needs to be converted from the currency of the country into a common currency, generally the US dollar. Often the number that is used is the GDP at CER (Current Exchange Rate, also called Nominal), compared to the GDP at PPP (Purchasing Power Parity).

GDP at CER is the GDP in local currency converted into US currency using the currency exchange rate at the time the two countries are compared. The challenge for this method is that the currency exchange rate is at times established artificially and is often subject to rapid fluctuation due to external factors.

For 2016, China’s GDP was 74.4 trillion RMB. For 2016, the value of the Chinese currency was on average 6.6 RMB to the US$, while in early March 2017 it was 7.0 RMB to the US$. Let us convert the Chinese GDP from RMB into US$, for these two values.

  Value in trillion
  In RMB In US$
 

Rate of

Rate of

 

6.6

7.0

Chinese GDP

74.4

11.1

10.6

Comparison of China’s GDP at two different exchange rates.

We note that the value of the Chinese GDP has shrunk by US$0.5 trillion (11.1 – 10.6), while in fact, the actual GDP value has remained the same.

The comparison of the GDP at PPP uses the actual wealth generated in goods and services, and the resulting power of consumption that is compared between two nations. It is for that purpose that for an end result that better reflects the reality, the GDP at PPP is used. In the CIA Factbook, one of the most comprehensive accessible database that covers all countries, comments on the GDP for China read: “Note: because China’s exchange rate is determined by fiat rather than by market forces, the official exchange rate measure of GDP is not an accurate measure of China’s output; GDP at the official exchange rate substantially understates the actual level of China.”

The following table presents the GDP converted in US$ at PPP for the G20 nations.

gdp-at-ppp              GDP of the G20 countries in US$ at PPP. Source: CIA Factbook

We see that the GDP of China at US$21.3 trillion is the largest in the world, even exceeding the combined current economic might of the 28 states in the European Union. It also exceeds the GDP of the USA by almost 15%. In fact, China’s GDP surpassed the US GDP in 2015. No other country approaches the economic might of these two nations.

A country can also impact or influence another country through trade. By using data from the CIA Factbook for exports and imports, we see that China’s Total Trade value marginally exceeds the numbers from the USA. For this analysis, we have added to China a portion of the numbers for Hong Kong.

 

Export value

Import value Total Trade
  US$ trillion US$ trillion

US$ trillion

China (partial HK)

2.2

1.6

3.8

USA

1.5

2.2

3.7

International Trade for China and the USA. Source: CIA Factbook

Another manner in which a country can economically influence another one is through FDI (Foreign Direct Investment). There are two types of FDI: Outward FDI where companies in one country invest in another country, and Inward FDI where a country receives foreign investments. This table illustrates both types of FDI. The Inward FDI value, for China (including HK) in 2014 (232 US$ billion) matched what the USA received (US$231 billion). For 2013, China trailed the USA by 15%. For the Outward FDI, the USA leads over China with China rapidly catching up.

outward-and-inward-fdiOutward and Inward FDI. Source: UNCTAD

Lastly, countries can influence other countries by lending them money. In this case, the USA has historically been the leader. Recently, China pulled off an amazing feat by launching a competitive institution that rivals the US. Since the Bretton Woods Agreement of 1944, the global framework for the world economy was dominated by the leading powers at the end of WWII. With the rapid growth of China, it came knocking at those doors, which remained closed. So China decided to introduce its own international banking organization. In 2014, China launched the Asian Infrastructure Investment Bank (AIIB) with the implicit goal of rivaling the World Bank, which is indirectly controlled by the USA. The USA encouraged western nations not to join the AIIB, but it failed. By the end of 2016, the AIIB already had 57 member nations, with 6 more aiming to join.

So overall, where does China stand? Let us tabulate the above information.

 

China

USA

GDP at PPP

+15%

 Trailing

Trade

Slight lead

 Decreasing

FDI

Catching up

Slight lead

Foreign Lending

Catching up

Solid lead

Comparative information. Sources: Various

There is no obvious economic leader, but what is clear is that over the last decade, China has nearly caught up with the USA in all aspects of what can impact the economic might of a nation. With a population of 1.38 billion compared to 0.32 billion for the USA (4 times smaller), it is a sure bet that in the near future China’s economic might will exceed the power of the USA, and in fact will easily surpass the USA by the middle of the 21st century.

So the answer to our question is: “It can be said that China has the largest economy. But in terms of economic might, the USA remains number 1, but only marginally. Within a decade or so, China will have taken over that position”.

Pierre

What’s globalization all about?

Globalization has been a major topic of conversation for years. Recently, it became even more prevalent with the UK decision to exit the European Union (i.e. Brexit) and the election of Donald Trump as the president of the USA. Many countries are seeing a resurgence of populist politicians who embark on a discourse that clearly states that globalization is bad. We could examine the origins or the theoretical benefits of globalization but instead we will look at its global economic consequences.

Globalization has always existed, but its pervasiveness has drastically increased over the last 40 years with the development of new technologies. A simple way of quantifying the extent of economic globalization is to chart the historical evolution of Global Trade as a percentage to the World GDP (Gross Domestic Product) over the years. International trade is the calculation of the value of goods and services that transit between countries (i.e. the sum of exports and imports for each country). GDP is the calculation of the economic wealth generated in a country over a period of time, generally one year. If we add the GDP for each country, we obtain the World GDP. This graph presents the evolution over the years of this ratio (value of Global Trade / value of World GDP) since 1980.

global-trade-since-1980Economic globalization of the world. Source: BBC

This graph has three clear periods. The first between 1980 and 1993 sees a stable period. Between 1993 and 2008, we see rapid growth. Beyond 2008, there is a levelling. The change in the 1990’s is linked to the emergence of developing countries, particularly China, with the rapid increase of their role in becoming the production locations of the world. Since the 2008 recession, the world has seen a levelling of international trade, which is the result of a general economic slowdown, combined with protectionist efforts in some countries.

From 1993 to 2008, economic globalization increased by 50% (from 40 in 1993 to 60 in 2008). With substantially higher GDP growth rate in developing countries than in developed nations, many more jobs were created in developing countries than in the developed ones. This can be confirmed by analyzing the flow of Inward FDI (Foreign Direct Investments, i.e. productive investments entering a foreign countries), which is a source of new jobs in the countries that receive those investments from companies that are located outside that country.

fdi-inflows  Inward FDI, global and by categories of economies, 1995-2014 (Billions of US dollars). Source: http://www.worldinvestmentreport.org/wir2015/wir2015-ch1-global-investment-trends/

We first see that the flow of investments across nations has substantially increased over the years, confirming the on-going internationalization of economies. We also see that the percentage of Inward FDI allocated to developing economies has increased from roughly 38% to 55%. Let us see how this compares to the population by regions.

  Inward FDI by region Population
  1995 2014 Billion % of world
Developing Economies 38% 55% 5.9 81%
Developed Economies 62% 45% 1.4 19%
Total: 100% 100% 7.3 100%

Analysis by geographic areas. Sources: UNCTAD, CIA Factbook

It is interesting to note that in spite of the increase of Inward FDI into developing nations, from 38% to 55% (i.e. the creation of new jobs), it is not yet in proportion to their population. Developing countries want Inward FDI in proportion to their share of the world population, and at 55%, they are substantially short of the 81% that they want. This analysis explains why, generally, developing countries are avid supporters of economic globalization. A recent speech by China’s President (Xi Jinping) given at the World Economic Forum in Davos confirms China’s keenness to see the globalization process continue.

Two keys issues are often raised against globalization. The first issue is not that the absolute wealth of people living in developed countries has decreased but that their economic wealth has barely improved contrary to the substantial increase in developing nations. So, people in rich countries are dissatisfied to see their relative position weakened. This phenomenon has been identified in studies that indicate that individual happiness is often derived from the gap with our “neighbours”. People in rich countries see that individuals in poor countries are getting richer, but that their own economic position is not improving, and for a consumption based society, that is simply not acceptable.

The other issue is wealth distribution between individuals (i.e. the Gini Coefficient). On a world basis, the equality of wealth distribution between nations has substantially improved, but on a national basis, the equality has worsened. This is consistent across the world, affecting some countries more than others. For example, in China, in the 1980’s, everyone was equally poor, while in the last 10 years substantial economic inequality emerged. Gone is the equal society. The national government has acknowledged this situation and is working to correct it.

Overall, globalization has accelerated the realignment of the relative distribution of wealth. People in developing countries have benefitted from this realignment. People in developed nations have seen their economic position increase only marginally if at all. Therefore, relatively speaking, they are worse off. Welcome to the greatest economic realignment in the history of the world.

Pierre