Academic journal article Management International Review

How German, Japanese, and U.S. Executives View Markets and Planning as Alternative Coordinating Mechanisms

Academic journal article Management International Review

How German, Japanese, and U.S. Executives View Markets and Planning as Alternative Coordinating Mechanisms

Article excerpt

Abstract:

* Markets and central planning are alternative mechanisms for coordinating economic activity within economies and firms. A multi-level economics literature describes and contrasts the coordinating characteristics of markets and planning. While it assumes these characteristics reflect the perceptions and decisions of economic actors, this behavioural assumption has not been tested.

* Based on the literature, the study develops hypotheses specifying how executives will perceive the coordinating characteristics of markets and planning. Using existing theory about individualism-collectivism, the study further hypotheses how the perceptions are likely to vary between individualistic and collectivistic cultures. When tested with a sample of top German, Japanese, and U.S. executives, the results, with two exceptions, support the hypotheses.

* Going beyond the hypotheses, the study explores the preferences and underlying logic of executives across nationalities. German and U.S. executives share a similar cognitive structure. Japanese executives exhibit a different cognitive structure which reflects a more collectivistic culture. The study emphasizes the importance of testing the basic behavioural assumptions of economics and the need to consider culture a potential moderator of such assumptions.

Keywords: Markets * Planning--Executive preferences * Germany--Japan * United States

Introduction

Markets and central planning are the two primary ways of coordinating economic activity. This is true for economies (Hayek 1945; Friedman 1962; Marschak 1965) and for firms (Coase 1937; Williamson 1975; Langlois and Robertson 1995). Switching from one form of coordination to the other is usually heavily debated and always regarded as a strategic and important decision. The privatization of public functions and the outsourcing of key activities in a firm's value chain are common examples of such decisions. Despite the frequency and importance of such decisions, little is known about how one key set of economic actors, top business executives, understand and evaluate the tradeoff between markets and planning. While there has been a growing interest in behavioral economics (Wilkinson 2008), the application of economics logic to actual decisions, and to the perceptions which influence those decisions, is largely assumed. Tsang (2006) has recently criticized both the omitting of key behavioral assumptions from theories of economic organization and the lack of assumption-based testing. Our study addresses an important aspect of this issue for markets and planning coordination.

A significant body of literature describes the coordinating characteristics of markets and planning at multiple levels of analysis: the level of the economy (Hayek 1945; Friedman 1962; Marschak 1965), the firm (Williamson 1975; Milgrom and Roberts 1992), and the within-firm level (Eccles 1985; Cowen and Parker 1997). A core behavioral assumption associated with this markets and planning literature is that business and government decision makers use the coordinating characteristics described in this literature to choose between markets and planning when organizing economic activity. This assumption is crucial to the argument that such knowledge and understanding supports more optimal economic design at the firm and economy levels. To date, this assumption has received little or no empirical testing. Our study seeks to complement and enhance the existing literature on markets and planning by exploring the following behavioral research issues:

   To what extent are the views of business executives consistent with
   the coordinating characteristics of markets and planning found in
   the existing literature? And, to what extent do these views vary
   across national cultures?

Since executives continually choose between planning and market coordination for their firms and also exert considerable influence over such decisions at the economy level, it is important to understand the degree of consistency between the literature and business executives on this issue. …

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