How to crack Asian business culture

January 28, 2011: 5:00 AM ET

Learn the local rules of business first and more practical advice on expanding your company's footprint in China, Japan and South Korea.

By Katherine Ryder, contributor

The future may well lie with Doing business in Chinathe United States, as President Obama reiterated during his State of the Union speech earlier this week, but that doesn't change the fact that many U.S. executives are still grappling with how to do business with an empowered Asia.

Maxims about how to succeed in Asia are everywhere -- but judging by the high failure rate of U.S. companies in Asia, there is clearly more to the game than delivering your business card with two hands. Now U.S. and European business schools are seizing on the demand for good information about Asia, putting greater emphasis on educating future executives about Asian business culture.

Michael Witt, a professor of Asian business and comparative management at the Singapore campus of INSEAD business school, and an Associate in Research at Harvard's Reischauer Institute, is at the forefront of an emerging field called "Comparative Business Systems." Witt doesn't focus solely on macroeconomic trends, but rather teaches MBA and EMBA students how to capitalize on opportunities by understanding the differences between workforces in different Asian markets.

And the differences, he says, are stark. "Everyone is playing ball," Witt says, "but they're playing very different games."

It all comes down to understanding how people think. "Culture is not how you pick up the chopsticks," says Witt. "It's how you make sense of the world." In other words, the ways in which people interpret facts have a huge impact on how decisions are made and how businesses are run. One way to evaluate culture is to consider how business leaders view the role of the firm in their economy.

In Witt's latest research, he asked senior executives in both the U.S. and Asian countries why their firms exist. Most Americans answered quickly that firms exist to "create shareholder value" -- a mantra in the U.S. business world at least since the early 1980s. But across Asian countries, Witt found, the answer to this simple question varies widely. How top management in China understand their world, for instance, differs starkly from the views of their counterparts in Japan. "When firms partner with each other, they are thinking about what the other side wants," says Witt. "We're adding a key piece of information: it depends on the country."

China

Private firms in China exist to provide shareholder value -- like their U.S. counterparts -- but only for people at the very top. The function of the firm in the private sector in China is mainly about generating family wealth. Most of China's new class of millionaires comes from profitable family-owned businesses. Thus, the idea of most of these businesses is to squeeze as much as possible out of the workers for the benefit of the owner, which is why many large Chinese companies are governed more hierarchically than their Western counterparts.

What foreign firms need to think about carefully when buying or partnering with a private Chinese firm is whether highly valued products are being created. "If you're thinking about taking over a Chinese company," says Witt, "you need to think about what you're really acquiring once the family is out of there."

Executives in state-owned enterprises, which are ubiquitous in China, have their own set of rules and incentives. These firms are considered the strategic tools of the state, and managers often view their positions as steps in their career within the communist party. The overriding objective for many of these managers, Witt says, is to supply resources and compete in global markets in order to propel the country's economic reemergence.

International competitors operating in China should know that they won't be operating on a level playing field, says Witt. Additionally, the dynamics for starting a business in China are completely different from what Western business people might expect. A company might not make quality products, but state assistance helps them in all sorts of ways.

One risk of partnering with Chinese firms, Witt says, is that they might attempt "to find out how you do it and take your business from you in the long-term." Danone's (GDPNF) foray into China ended in 2009 after its partnership with the multi-billion dollar beverage company Wahaha dissolved into an ongoing public brawl, with Danone accusing Wahaha of operating parallel businesses selling virtually identical products.

General Motors (GM), by contrast, has fared quite well in China. The firm is the first carmaker to sell more than two million cars in China and its success is due largely to local partnerships. The company just signed another deal with its Chinese partner, SAIC, to work together to crack India's market. As the once-struggling carmaker knows very well, despite the rocky experiences of some Western firms, the most dangerous thing about dealing with China can be refusing to deal with it at all.

Japan

Like in China, the purpose of the Japanese firm is not solely to maximize shareholder value -- but Japanese firms commonly assume a more family-like focus and strive first and foremost to take care of their employees. This is often a major constraint for foreign firms considering operations in Japan -- given the labor practices often don't mesh well with those of Western counterparts. Many Japanese firms entering a merger insist on retaining their entire workforce as a condition of sale. Companies think of themselves as serving society. "I interviewed someone who said, 'The first thing we need to wonder about is why does society permit our company to exist?'" says Witt.

This focus often translates to weak shareholder rights. Japanese firms provide benefits to employees like stable employment and a good livelihood, but this practice can be a major deterrent for foreign firms. "If you acquire a Japanese firm," says Witt, "you'll find it to be extremely resilient to any changes you would introduce." Firms will make decisions in order to avoid mass layoffs, he says, since questions about staffing levels are built around the assumption that employees will stay with a company for life.

This distinct corporate culture stems from the fact that many of Japan's firms, like Mitsui, trace their existence back hundreds of years. "For a manager, the most important thing is not to improve the business during one's time," remarked one of the executives Witt interviewed in his research. "Rather, I think it is extremely important that when one passes things on to the next manager, to what extent the firm is one whose shape is accepted by society and that one can ensure the permanence of the firm."

Although Japanese firms may enjoy an acceptable return on sales -- and some, like Honda (HMC), Canon (CAJ), and Toyota (TM), may rise to global prominence -- Western business people commonly find themselves surprised by the assumptions of Japanese executives.

South Korea

South Korea, according to a number of corporate executives, resembles Europe more closely than it resembles either Japan or China. The South Korean executive's primary rationale for the existence of corporations is the generation of profit, says Witt. Yet very much like China, the East Asian country boasts its own graveyard of Western companies who have tried to enter the market and failed.

Any Western executive considering work in South Korea should know first and foremost that South Korean labor unions are some of the fiercest in Asia. "When the unions are on strike, it's basically war," says Witt. In 2009, the World Economic Forum cited the difficulty of hiring and firing employees as the reason that Korea dropped so dramatically in its business competitiveness rankings.

Both Carrefour and Wal-Mart (WMT) were unable to strike a balance with union demands and left South Korea in 2006. The top management of both firms hailed either from France or the U.S., and industry-watchers say neither company successfully built a trusting relationship with Korea's unions.

The main thing to understand about a South Korean firm, Witt says, is that it has an eye towards its three major stakeholders -- employees, shareholders, and society. (Samsung's former motto, for instance, is: "We do business for the sake of nation building.") If a foreign firm isn't able to strike a balance and please all three stakeholders, then doing business in South Korea can be extremely difficult.

Also on Fortune.com:

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The strong case for global optimism

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