Increasing competitiveness in the global economy has compelled a substantial number of multinational companies to outsource and offshore their business activities to foreign countries, particularly within Asia (Ernst, 2006). This has frequently resulted in both challenges and opportunities, but the current shift in the types of activity offshored embodies new critical challenges. This is especially so for SMEs (small and medium enterprises) who may be lured by the business prospects that offshoring presents, but may lack the experience and resources to overcome these challenges, in particular, the day-to-day management of employees in a cross-cultural work environment. This paper adopts a case study approach to explore the cultural challenges SMEs face when offshoring and employing knowledge workers abroad.
According to Balasubramanian and Ashutosh (2005), a new, second wave of offshoring is underway, which is characterised by firms who are offshoring more than simple manufacturing, and are now relocating knowledge and innovation activities (Lewin, Massini & Peeters, 2009). Theoffshoring of knowledge activities and innovation requires a critical understanding of how to managelocally recruited knowledge workers who are performing these knowledge-based activities in the context of an international management environment. This paper argues via a German Thai case studythat cross-cultural discontinuities between expatriate management and their locally recruited staff represent a significant barrier to effective knowledge work. Such cross-cultural discontinuitie scan negate the potential benefits that attract SMEs to offshore their activities in the first place. The paper has two keyaims, firstly to identify the cultural discontinuities which exist within the German-Thai workplace, and secondly, to assess the potential impacts these cultural discontinuities have on work performance and quality.
LITERATURE REVIEW AND CONTEXT
Offshoring Business Activities
Offshoring has frequently been termed the most visible consequence of globalisation (e.g. Auer, Besse & Meda, 2006). Akey driver of this offshoring process has often been access to comparatively low cost labour; firms seek to relocate their business activities to countries where labour is cheaper. While this global division of labour is often suggested as the primary reason for offshoring (Farrell, 2005), other aspects also play a significant role in business decisions to locate internationally. These include the need to secure raw materials located overseas (e.g. Fifarek, Veloso & Davison, 2008), the desire to diversify and overcome the risks related to currency fluctuations (e.g. Vestring, Rouse & Reinert, 2005), and the requirements to access free trade areas and be closer to key markets (Kelly, 2001).
While the cost savings of operating aboard are generally well understood, there are a variety of invisible costs and challenges associated with offshoring, which are generally less acknowledged (String fellow, Teagarden & Nie, 2008). For example, cultural differences have been noted as one of the most significant barriers when operating overseas, particularly in terms of managing staff. These cultural issues are frequently nuanced towards particular cross-cultural interactions, and often require specific understanding or practical experience. Developing an awareness and understanding of these cultural issues and interactions is fundamentally important to firms operating in the domain of the creative knowledge industries. It is particularly important for SMEs that are unlikely to possess the experience or financial resources necessary to address the cultural issues affecting their work quality and performance.
Deciding whether to offshore and operate internationally can become a business dilemma. On the one hand it provides significant benefits, including considerable scope and flexibility to cut costs, address local issues, and differentiate from competitors who remain focused at home (Miroshnik, 2002). In contrast, international operations can also represent critical business challenges. For example, while offshoring might be economically feasible, the employment of relatively cheap labour, and the potential loss of jobs in the firm's home country often represents a moral quandary (Bardhan, 2006). There are also wide ranging issues such as the difficulty in protecting intellectual property (Bidanda, Arisoy, & Larry, 2006), the choice in offshore location, and the services a firm can provide by offshoring to a particular location (Pyndt & Pederson, 2006).
This paper argues that one of the most significant issues affecting SMEs who choose to offshore their activities is understanding and responding to the cultural differences between locally recruited knowledge workers and the firm' sexpatriate management. Through a case study of a German software developer operating in Northern Thailand, this paper identifies key cultural discontinuities that exist, and explores their impact on work performance and quality. The focus is on knowledge work, which is expanding relative to the growth of the knowledge economy and the offshoring of knowledge activities. Knowledge work is also more susceptible to differences in culture due to its heavy reliance on communication (Smith & Rupp, 2002), which in turnrepresents significant potential for conflict (Scarbrough, 1999).
Growth of the Knowledge Economy and Offshoring Knowledge Activities
Over the last two decades, knowledge has emerged to become a distinguishing feature of the world's economy (Barrera, 2007). The fundamental importance of knowledge to economic success has led to creation of the term 'knowledge economy'. It was Drucker (1966) who, heavily influenced by Machlup (1962), introduced the concept of the knowledge economy. Since the 1960s, there has been growing debate over the definition, but continuing agreement that the leading edge of the economy is primarily influenced by innovation, technology, knowledge production and knowledge dissemination (Powell & Snellman, 2004). The knowledge economy is generally defined as the effective utilisation of intangible assets such as knowledge, skills, and innovation as key resources for competitive advantage and economic success (ESRC, 2005). Knowledge has become the primary driver of growth in many countries, with economic trends signifying that traditional agrarian and manufacturing activities have been in steady decline and are less resilient to financial crises (Carlaw, Oxley, Walker, Thorns & Nuth, 2006). The emergence of the knowledge economy and increasing internationalisation of knowledge activities means that employee remuneration and skill are becoming overshadowed by creativity and the ability to innovate. This requires new ways of thinking about managing knowledge workers (employees), and the natural result is a global race for talent, where knowledge workers, and the way these knowledge workers are managed have become critical to the success of firms operating within knowledge-based industries. The increasing growth of knowledge economies and subsequent offshoring of knowledge-based activities has created a need to understand culture and perhaps most importantly, the subsequent impact that different cultures have on management, organizational performance and quality.
The relationship between culture and work performance is well known, inextricably linked, and complex (Hartog& Verburg, 2006) and expatriate managers play a critical role in managing locally recruited human resources. Managers must understand how to effectively lead local employees to perform, but these local employees frequently possess different expectations of management as well as differences in their task readiness related to cultural disparities (Petison & Johri, 2008). Similarly, Rodsutthi and Swierczek (2002) found that the characteristics of leaders and their cultural background had a powerful effect on staff. One of the most internationally and culturally diverse knowledge industries is software development, which is built on a foundation of knowledge (Schware, 1992). The software development industry has gradually expanded from the sole domain of developed countries to become aglobal endeavour, where internationalisation and offshoring have played a significant roles in building the software industry in countries such as India, Brazil and China (Cochran, 2001).
Offshoring Software Related Knowledge Work
The software development industry contributes to the global knowledge economy via its intrinsic features and fits the key definitions and strands of the knowledge economy literature in multiple ways. For example, the software development industry can be described as knowledge intensive, producing both new technology and intellectual property. Software is also consistent with two common perspectives of the knowledge industries, one where knowledge is considered a product, and one where knowledge is used as a tool. Software organisations that thrive in the knowledge economy are deeply involved in producing knowledge and organizing themselves around continuous learning and innovation. Software development has therefore become a multisite, multicultural and globally distributed industry (Herbsleb, Zubrow, Goldenson, hayes & Paulk, 2001). Despite some sizeable contenders, the global software industry is fragmented, consisting mainly of small and niche firms (Nowak & Grantham, 2000). In more developed economies, there are skills shortages in the software industry, which have resulted in steadily rising wage costs (Trendle, 2008). To offset these skills shortages and rising wage costs, international offshoring occurs, but these primarily small firms face significant issues in managing international knowledge workers. While the most well-known offshoring locations for software are the BRIC countries (Brazil,Russia, India, China), non-BRIC countries are also inheritors of a...