Identifying and Managing Risks Inherent to Cultural Differences in the Case of Production Internationalization

Abstract Ignoring cultural differences can cause unfavourable situations and negatively influence the success of production internationalization projects. A decision to subcontract part of the production or to produce in a foreign country, requires identifying and controlling the risks related to cultural differences. Our research objective was to study these risks and the business practices used to face them. In order to reach this objective, we studied eight (8) Canadian manufacturing companies, that outsourced part of their production to China. Results show that the risks related to cultural differences, can provoke an important divergence between requirements of the Canadian company and the resulting products manufactured by the Chinese subcontractor and cause an additional unexpected manufacturing cost. The risk of misunderstanding and difficulty communicating in addition to difficulty applying quality control practices were critical for most of the studied companies’ managers. However, the identified risks could be controlled with different business practices, which we classified according to their role of mitigation or contingency. Frequent interaction with Chinese partners, developing a good trust-based relationship with them and finding ways of encouraging them to get more involved in the partnership and to suggest solutions and innovations represent some of the important practices to adopt. JEL classification numbers: M1. Keywords: Cultural differences, Production internationalization, International outsourcing, Outsourcing in China, Risk management, Cross-cultural management.