Keywords: Budgetary systems; Slack-creation behavior; Ethical position; National culture
1. Introduction
Companies may potentially achieve a number of important benefits from a well-crafted budget,including more focused attention to goals (by managers), more efficient allocation of resources,
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better coordinated activities throughout the organization, and a benchmark to help control costs.Tracy (2004) claims that a budget is a powerful business tool and the ability to prepare accuratebudgets is one of the most important skills of any manager. This may be particularly true in theglobal marketplace within which many companies operate; indeed, US multinational (MNCs)employed 29.6 million workers worldwide in 2004 (BEA, 2006).
Hofstede (1991) noted that an individual’s culture had an impact on the person’s views on anumber of topics, including one’s view of the budgetary process. Over the past two decades,a number of studies have examined the impact of various cultures with respect to budget-ing systems. Frucot and Shearon (1991) study uses managers in Mexico to study budgetaryparticipation; Lal, Dunk, and Smith (1996) use managers in New Zealand to consider thepropensity to create budgetary slack; Davila and Wouters (2005) use managers from a MNCthat is located in North America, Europe, Asia, and Southeast Asia to examine intentionalbudgetary slack; Douglas and Wier (2005) use Chinese and US managers to compare ethical posi-tion with respect to budgetary slack; Collins, Holzmann, and Mendoza (2005) compare MBAsfrom the US and Latin America to observe differences in machistic tendencies and budgeting;and Lau and Tan (2006) use managers in Singapore to analyze various aspects of budgetaryparticipation.
However, the extant literature on budgetary systems is relatively silent with respect to theEgyptian national culture. The present study investigates the relationship between slack-creationbehavior in budgetary systems and ethical position of two (potentially) different corporate cul-tures within the Egyptian national culture. We used a survey to capture managers’ self-reportedmeasures of company budgeting practices, budgeting behaviors, and ethical values of Egyp-tian managers working for US firms in Egypt and Egyptian managers working for Egyptianfirms.
While no single definition of budgetary slack has been developed to guide research in this area,a suggested definition of budgetary slack is that it is the intentional underestimation of revenuesand productive capabilities and/or overestimation of costs and resources required to complete abudgeted task (Dunk & Nouri, 1998; Lal et al., 1996). Stated more simply for the purposes of thepresent study, we define budgetary slack as the difference between planned performance targets(e.g., budgeted spending) and actual firm performance (e.g., actual spending).
Our results show higher (lower) levels of participation in the budget-setting process for Egyp-tian managers working in US (Egyptian) firms, higher (lower) levels of incentive for Egyptianmanagers to create slack in US (Egyptian) firms, and more (less) frequent slack-creation behav-ior among Egyptian managers employed by US (Egyptian) firms. Based on the Ethical PositionQuestionnaire, we also found differences between the ethical position of the managers employedby US firms in Egypt and the managers employed by Egyptian firms in Egypt. Further, ourresults suggest that an Egyptian manager’s ethical position helps to mitigate slack-creationbehavior.
Because the budgetary process is so critical to firm success and relies so heavily on humaninvolvement and judgment, our results should be of interest to the management of multinationalfirms as they engage in the budgetary process in each country where the firm is located. The increas-ing globalization of business also heightens the importance of understanding cultural differencesand their effects on the myriad of business processes (Collins et al., 2005).
The remainder of the paper is organized as follows. In the next section, we discuss the back-ground and develop our research questions. In the third section, we describe the sample and theempirical tests. Section four contains the results of the empirical analyses. The final section ofthe paper provides a summary of the study.
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2. Background and development of research questions
2.1. Culture
Culture describes a system of shared or collectively held values, a “broad tendency to prefercertain states of affairs over others” (Hofstede, 1980, p. 19). Shared values lead to societal normsand corporate norms, which influence the structure and functioning of institutions and organi-zations. A wide range of studies have examined the impact that culture may have on enterprisestructure and function (Ledford, Wendenhof, & Strahley, 1995), management style, corporateidentity and ethics, decision-making methodologies and approaches to personnel management(Balkaran, 1995), and many aspects of accounting and management control systems (Douglas &Wier, 2000, 2005; Gray, 1988; Harrison, 1992, 1993; Hopwood, 1983).
From 1967 to 1973, Hofstede conducted one of the most comprehensive studies of how nationalculture affects personal values in the workplace. Hofstede collected and analyzed data from over100,000 individuals who worked for IBM in 40 countries. From those results, and later additions,Hofstede (1980) developed a model that identifies four primary dimensions to differentiate cultures(Table 1). These dimensions are (1) uncertainty avoidance, (2) individualism, (3) power distance,and (4) masculinity. Later, Hofstede, Neuijen, Ohayv, and Sanders (1990) investigated the effectsof national culture (Danish and Dutch nationals) across twenty organizations. They found thatorganizational differences have many elements other than those explained by national culturaldifferences. Smith, Peterson, and Schwartz (2002) claim that we need to better understand howgeneralized values are linked to specific actions. In so doing, we can gain a better understandingof why particular behaviors prevail in a given culture.
Welch and Welch (1997) investigated the issue of individual variations in acceptance ofshared values and beliefs and argued that a consistent set of organizational values might bean unattainable goal, one that might be even more difficult in foreign joint ventures and multi-national corporations (MNCs). Kohls and Buller (1994) note that a subsidiary may adopt anaccommodation strategy, agreeing to the values of its foreign parent or partner to obtain orpreserve the business relationship. Instead of opposing the MNCs organizational culture, indi-viduals from other cultures (i.e., members of foreign subsidiaries or ventures) may act in aselective, calculated pattern (Willmott, 1993). Perhaps these individuals recognize where their
Table 1Comparison of Hofstede’s mean scores for cultural dimensionsa
Societal value dimensions (Egypt) Egypt Arab worldb
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best interests lie, advocate shared values, and engage in suitable behaviors to protect theirjobs, improve their careers, obtain rewards, and generally maximize their own self-interest(Welch & Welch, 1997). O’Connor (1995) suggests that the issue of conflicting cultures ismost relevant for the multinational subsidiary located in a different country than the headoffice.
2.2. Budgeting systems and budgetary slack
Budgeting systems are an essential management tool and the success of a budget program islargely determined by who participates in the process and what oversight mechanisms exist; thatis, when budgets are self-imposed, too much budgetary slack may be included, which might resultin inefficiency and waste (Garrison, Noreen, & Brewer, 2006). In general, budgeting systems thatallow employees to participate in planning activities (i.e., self-imposed or participative budgeting)provide opportunities for slack-creation behavior, which is usually considered a problem for firms(e.g., Davis, DeZoort, & Kopp, 2006; Dunk, 1993; Dunk & Perera, 1997). However, slack-creationbehavior can have positive consequences if managers focus on factors such as product quality orcustomer service, rather than strictly meeting budget targets (Davila & Wouters, 2005).
Among the factors affecting the level of slack identified by previous research are corporate size,diversity and decentralization (Merchant, 1981), task characteristics (Young, Fisher, & Lindquist,1993), information asymmetry (Chow, Waller, & Waller, 1988; Dunk, 1993; Onsi, 1973; Stevens,2002), use of budget-based incentives and “truth-inducing” versus “slack-inducing” pay schemes(Chow et al., 1988; Jennergren, 1980; Waller, 1988), management attitudes towards achieve-ment of budget goals (Dunk, 1993; Merchant, 1985; Onsi, 1973), individual risk aversion (Kim,1992; Young, 1985), reputation and ethical concerns (Stevens, 2002), and social pressure (Young,1985).
A number of studies have explored national cultural differences in budgeting system designvariables (e.g., budgetary participation, standards tightness, budget emphasis, etc.), which Harrelland Harrison (1994) characterize as providing the opportunity and incentive necessary to cre-ate budgetary slack (e.g., Bailes & Assada, 1991; Chow, Hwang, Liao, & Wu, 1998; Douglas& Wier, 2005; Shields, Chow, Kato, & Nakagawa, 1991; Ueno & Sekaran, 1992; Ueno & Wu,1993). As nations vary across culture-specific dimensions, their common values, organizationalsolutions, and individuals’ reactions to them also vary. In relatively high power distance cul-tures (e.g., Egypt), society members accept that power in institutions is distributed unequally.Superiors are expected to make decisions unilaterally and they typically do not seek partic-ipation from employees. Leaders are expected to distance themselves from subordinates andgive complete and explicit directions to their employees. In low power distance cultures (e.g.,US), members seek power equalization and demand justification for power inequities. Manydecisions are made by work teams whose members share power and decision-making responsi-bilities.
Parnell and Hatem (1999) conducted a survey of top-executive members of the AmericanChamber of Commerce in Egypt to identify behavioral differences between American and Egyp-tian employees. Two items that were included in the survey are relevant to the present study:(1) “I very much desire to participate in decisions”, and (2) “I seek participation in decisionsfrom subordinates”. Results of this 1999 study provide strong support for the notion that manage-ment behavior is embedded in culture. Specifically, soliciting participation in decision-making isviewed positively by American managers, but viewed as a sign of weakness associated with poorleadership skills and low integrity by Egyptian managers.
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Several studies (e.g., Bailes & Assada, 1991; Harrison, 1992; Harrison, McKinnon,Panchapakesan, & Lueng, 1994; Ueno & Wu, 1993) found a negative correlation betweenpower distance and individualism demonstrated in the value systems of most countries: a coun-try low (high) on power distance would be expected to be high (low) on Individualism. Thecultural groups for the present study exhibit this same relationship, i.e., Egyptian scores aremoderate for power distance and low for individualism, whereas, Anglo-American scores arelow for power distance and high for individualism. This discussion suggests our first researchquestion:
RQ1: Is the opportunity to participate in the budget process higher (lower) in US (Egyptian)companies employing Egyptian individuals?
Harrell and Harrison (1994) remind us that opportunity is a necessary but insufficient conditioncausing managers to shirk their responsibility to the firm. There must also be incentive to do so.For example, Jennergren (1980), Chow et al. (1988), and Waller (1988) found evidence of theinfluence of pay schemes and other budget-based financial incentives on budgetary slack. Theresults of studies by Onsi (1973), Merchant (1985), and Dunk (1993) suggest that managementemphasis on achievement of budget goals can influence budgetary slack. Other studies includedindividual personality attributes and found evidence of the effect of risk aversion (Kim, 1992;Young, 1985), reputation and ethical concerns (Stevens, 2002), and social pressure (i.e., the desire“to avoid being accused of shirking or misrepresenting productive capability” [Young, 1985, p.832]) on budgetary slack.
As it describes a national culture’s attitude toward risk (i.e., the extent to which a societytends to consider itself threatened by the uncertainty of the future and by ambiguous situations),Hofstede’s Uncertainty Avoidance might provide insight regarding an individual’s incentive tocreate budgetary slack. The Masculinity value dimension, with its emphasis on assertiveness,competition, and recognition, suggests that individuals might be motivated by the challenge oftight budget standards. Individual competition and recognition needs (influenced by both mas-culinity and individualism) would suggest different responses: greater (lesser) use of budget-basedfinancial incentives in nations higher (lower) on those value dimensions, and more (less) rigidmanagement attitudes toward achievement of budget goals. Daley, Jiambalvo, Sundem, and Rondo(1985) found masculinity (uncertainty avoidance) to be positively (negatively) associated withstandards tightness in Japanese firms; Bailes and Assada (1991) and Daley et al. (1985) found bothIndividualism and Masculinity to be positively associated with performance-contingent rewardsin Japanese firms.
As noted in Table 1, the differences in Egyptian and US value dimensions of uncertaintyavoidance, masculinity, and individualism, as well as the effect of these values on the design ofbudgeting systems as discussed above, provide the basis for our second research question:
RQ2: Is the incentive to create slack higher (lower) in US (Egyptian) companies employingEgyptian managers?
Harrell and Harrison (1994) suggest that participation is a necessary but not sufficient con-dition for slack-creation behavior. However, the extant literature generally supports the notionthat (1) if managers are allowed to participate in the budgeting process, and (2) incentives tocreate slack are present, then information asymmetry is usually associated with greater bud-getary slack (e.g., Dunk, 1993; Dunk & Perera, 1997). Similarly, differences in national culturesettings might influence opportunity (RQ1) and incentives (RQ2) to create budgetary slack.Studies previously discussed suggest that both opportunity (i.e., participation) and incentivesmight be higher (lower) in US (Egyptian) firms; therefore, our third research question is asfollows:
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RQ3: Will the mean slack-creation behavior response be higher (lower) for Egyptian managersemployed by US (Egyptian) companies?
2.3. Budgeting systems and ethics
Hofstede (1980, p. 19) described the “self-fulfilling prophesy” of shared values that lead to“political, organizational, and intellectual structures and processes” that create perceptions ofreality and reinforce societal norms and shared values. Other studies report that individual valuesare influenced by the organizational culture of the foreign parent, and developing these individualvalues in subsidiaries to agree with the foreign parent occurs through the process of selectionand/or socialization (O’Connor, 1995; Soeters & Schreuder, 1988). According to Trompenaars& Hampden-Turner (1998, p. 187), “We need to accept influences from the depth of our innerconvictions and the world around us. In the final analysis culture is the manner in which thesedilemmas are reconciled, since every nation seeks a different and winding path to its own idealsof integrity.”
Based on a large number of business failures over the past several decades (e.g., savingsand loans, Enron, WorldCom), research on the topic of ethics and an individual’s ethical posi-tion has become widely encouraged in the US. This body of research also includes studiesof cross-cultural differences in ethical values. For example, based on Hofstede’s (1980) fourcultural dimensions, Cohen, Pant, and Sharp (1992) proposed a framework for evaluating theimpact of national cultural differences on ethical decision-making. Cohen, Pant, and Sharp(1993) used Hofstede’s (1980) measures of national culture to identify ethical implicationsassociated with uncertainty avoidance, individualism, masculinity, and power distance. In thisdiscussion, the authors claimed that an understanding of differences in cultural values canhelp explain why responses to ethical dilemmas vary between countries, and that this under-standing can provide the basis for building an effective system of multinational organizationalcontrols.
Cohen, Pant, and Sharp (1995) examined differences in the ethical decision-making of auditorsin three countries who worked for the same multinational public accounting firm. The results oftheir study suggest that the values associated with respect for and acceptance of authority (highpower distance), coupled with concern for one’s place in a social group (collectivism), are moreconducive to high ethical standards. Cohen et al. (1995) found that differences in ethical judgmentsand intentions occurred even though all subjects were from the same firm in the same professionand subject to the firm’s own code of conduct.
Forsyth (1980) argued that it is an individual’s ethical position (i.e., idealism, relativism) thatinfluences the ethical judgments reached and developed an instrument to measure one’s ethicalposition. This instrument is called the ethics position questionnaire (EPQ) and contains a list oftwenty short statements, ten that measure Idealism and ten that measure relativism. The idealismscore is computed by adding the scores for the first 10 items and the relativism score is calculatedby adding the scores for the final ten items. The stance individuals take with respect to thesetwo factors allows researchers to predict certain differences in an individual’s moral judgmentprocesses (Forsyth, 1980).
In the presence of information asymmetry and incentives to create slack, we wouldexpect relativists to believe there are many ways to look at moral issues and to beskeptical of specific ethical principles. This suggests that as relativism increases, slack-creation behavior might increase. Conversely, idealists assume that good consequences arealways possible, rather than admitting that consequences are often a mix of good and bad
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(Forsyth, 1980). This view suggests that as idealism increases, slack-creation behavior mightdecrease.
The EPQ has been used in a number of studies to examine the measurement properties ofthis instrument in a business context. Arrington and Reckers (1985) used the EPQ to test theassociation between relativism/idealism and the seriousness of tax evasion, social responsibilityof the tax evader, and the perception that tax compliance is a social norm. The authors found thatas relativism increased, the judgment of seriousness of tax evasion decreased, judgment of socialresponsibility decreased, and the view of tax evasion as a social norm increased. The oppositeeffect was found for idealism.
Redfern and Crawford (2004) used the EPQ to investigate differences in ethical ideologyof managers in the People’s Republic of China (PRC). The results indicated that statisti-cally significant differences in ethical ideology existed between the managers in the Northernregion and those in the Southern region. On average, managers in the South scored higheron Idealism than managers in the North. The researchers speculated that these differencesmight be attributed to the fact that managers in the Southern regions of the PRC are exposedmore frequently to Western lifestyle practices and ideology than managers in the Northernregions.
While the extant body of research on budgetary slack has primarily tested traditional agencyvariables (e.g., risk aversion, information asymmetry, pay schemes), more recent studies haveincluded ethics as a variable of interest. For example, Douglas & Wier (2000, 2005) incorporatedan ethical dimension in their studies of budgetary slack and found that ethical ideology, givenopportunity and other incentives, helps to explain slack-creation behavior. Specifically, they foundthat as relativism increased, slack-creation behavior increased and as idealism increased, slack-creation behavior decreased.
However, given the opportunity and incentive to create budgetary slack, some individuals mightcreate less than the maximum amount of slack under slack-inducing conditions. Accordingly,Stevens (2002) conducted an experiment to examine the concept that budgetary slack, with itspotential to mislead a manager and transfer resources to the subordinate, is likely to raise ethicalconcerns for a subordinate. Although Stevens used only one question to measure the ethicalposition of the participants, the results suggest that an individual’s ethical position may be effectivein controlling opportunistic behavior (the propensity to create budgetary slack). We examine thispossibility with the following research questions:
RQ4: Will Egyptian managers employed by US (Egyptian) companies exhibit higher (lower)levels of Idealism?
RQ5: Does an Egyptian manager’s ethical position, as measured by the ethics position ques-tionnaire, mitigate slack-creation behavior?
3. Research method
We used survey research techniques to solicit managers’ perceptions of various factors thatmight be related to the design and effectiveness of budgeting systems (see Appendix A for a copyof the survey). The measurements of budgeting practices and budgetary slack used in this studywere adapted from Umapathy’s (1987) survey of budgeting practices in US industry. Others wereadapted from prior research (Dermer, 1975; Douglas & Wier, 2000, 2005; Jaworski & Young,1992; Merchant, 1981, 1985; Onsi, 1973). All of these measures seek self-reported informa-tion from the participants. We also collected the following demographic variables: age, gender,education, position, and experience.
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3.1. Participants
Our sample consisted of 395 individuals from 28 US and 31 Egyptian firms. We matchthe firms based on total assets (within a range of 80–110%) and type of business. Participantsincluded a range of income levels, education, and age. Preliminary interviews were conductedto clarify the issues under investigation, to draw out new issues, and to clarify the termi-nology used in our instrument. A telephone contact was made with each participant to seekagreement on participation. Subsequently, the survey instrument was mailed to each partici-pant along with a stamped-addressed envelope. A follow-up telephone call was placed to thosewho failed to respond to the mailing. As Panel A of Table 2 indicates, the response rate was75.9%.
Demographic data of the two subject groups are presented in Panel B of Table 2. The meanage (standard deviation) for Egyptian managers who work for US firms is 44.6 (8.9) years,compared to 41.3 (10.1) years for those working in Egyptian firms. Mean (standard deviation)years experience with the firm is 7.3 (3.2) and 6.7 (3.3) years for US and Egyptian employers,respectively. Industry experience mean is 9.7 (4.3) for US firm managers and 10.4 (6.3) years forEgyptian firm managers. The managers are predominantly male (67.7% in US firms, 62.7% inEgyptian firms), and married (70.9% and 67.6% in US and Egyptian firms, respectively). Otherdemographics are reported in Panel B of Table 2.
Differences in the demographic makeup of the two subject groups were tested for signifi-cance by including the demographic variables as covariates in the data analysis described below.None of the demographic variables was significantly correlated with the measures of budgetparticipation, incentive to create slack, or slack-creation behavior. Between-group differencesare investigated and some significant differences are detected. For example, Egyptian managersworking in US firms are older than their Egyptian firm cohorts with mean ages of 44.6 and41.3, respectively (p ≤ 0.001). As expected, the older US managers have more experience overall(p ≤ 0.001) although no significant differences in experience in the industry are detected. Nobetween-group differences are detected for gender or marital status.
3.2. Research instrument
Previously validated questions (see Appendix A) used to measure the cultural and ethicalvariables hypothesized to affect budgeting systems at the organizational level (i.e., differences inbudgeting system attributes), and at the behavioral level (i.e., differences in individual attitudesand behavior) are categorized below by factor of interest. The questions were presented in randomorder on an Arabic-language survey instrument. Survey participants responded to these questionsusing a five-point Likert-type scale for each factor. All measures used in our survey instrumenthave been validated in previous studies. For each construct, we performed confirmatory factoranalyses to ensure the questions loaded appropriately. Explained variance for each factor is pre-sented in Table 3 by origin of firm. As well, Cronbach’s α for each construct is presented inTable 3.
3.2.1. Budgetary participation (BP)We used a three-item measure of BP developed by Merchant (1981), adapted in our study to
assess company practices rather than the individual’s participation experience, one measure usedby Onsi (1973), and one measure used by Douglas & Wier (2000, 2005). These questions elicitemployees’ perception of their “influence on budget plans” (Merchant, 1981, p. 821).
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Table 2Sample size (Panel A) and sample demographics (Panel B)
Reasons for non-responseConfidentiality 63No reason given 32
Demographic variable US firms’ respondents Egyptian firms’ respondents
Panel BMean age (S.D.) 44.6 (8.9) 41.3 (10.1)Mean years experience (S.D.) 7.3 (3.2) 6.7 (3.3)Mean years experience in industry (S.D.) 9.7 (4.3) 10.4 (6.3)Percent male 67.7 62.7Percent married 70.9 67.6
a One respondent from a US firm did not report their highest attained degree.b One respondent from an Egyptian firm did not report the industry of employment.
3.2.2. Incentive to create slack (ICS)We adapted a four-item measure of ICS previously validated by Onsi (1973), as well as a
two-item measure derived from Dermer (1975; see also Merchant, 1981). These assess the tight-ness of budget standards (defined in Chow, Shields, and Wu (1999), p. 448, as “the ex anteprobability that an employee can attain his or her performance plan”), use of budget-basedincentives, and management attitudes toward achievement of budget goals in the respondents’companies.
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Table 3Comparison of reliability and explained variance across US and Egyptian firms (dependent variable = SCB)
Rotation method: Varimax with Kaiser normalization.a Extraction method: principal components analysis.
3.2.3. Relativism and idealismThe two dimensions developed by Forsyth (1980) were measured using his ethics position
questionnaire. The questionnaire contains a series of 20 statements to which respondents indicatetheir degree of agreement or disagreement. The idealism score is computed by summing the scoresfor the first 10 items and dividing by 10, and the relativism score is calculated by adding the scoresfor the final 10 items and dividing by 10. The stance individuals take with respect to these twofactors may influence the ethical judgments reached.
3.2.4. Slack-creation behavior (SCB)We used the four-item measure of slack-creation behavior developed by Umapathy (1987)
for our dependent variable. The measures elicit respondents’ self-reported willingness toengage in slack creation and other budget gaming behaviors (e.g., shifting funds betweenaccounts to avoid budget limits and intentionally understating forecasted revenues or overstatingcosts).
4. Results
In Table 4, we report the bivariate correlations among the various endogenous and control vari-ables. Spearman correlations are reported (Table 4, Panel A) based on the fact that the variablesof interest are measured on an ordinal level (Jaccard & Becker, 2002). The correlation analy-sis indicates that slack-creation behavior (SCB) is positively related to budgetary participation(BP), incentive to create slack (ICS), relativism (REL), and negatively correlated with idealism(IDEAL). In Table 4, Panels B and C, we show the correlations for the Egyptian and US firmsamples, respectively. For the Egyptian sample, we find only a positive and significant relationbetween slack creation (SCB) and relativism (REL). For the US sample, while we find positiveand significant correlations between slack creation (SCB) and relativism (REL), we find negativecorrelations between slack creation and idealism (IDEAL). Neither the US nor the Egyptian sam-ple shows a significant relation between slack-creation behavior (SCB) and incentive to createslack (ICS).
4.1. Research question #1
We examined the level of participation in budgeting for those individuals employed by US firmscompared to those in Egyptian firms. Results of mean difference t-tests for Research Questions 1through 4 are presented in Table 5. Mean (standard deviation) response on the participation mea-
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Table 4Spearman correlation coefficients (p-value in parentheses)
Variablesa BP ICS SCB IDEAL REL
Panel A: total sample of Egyptian and US firms (n = 300)BP 1.00ICS 0.096b (<0.10) 1.00SCB 0.274c (<0.01) 0.236c (<0.01) 1.00IDEAL −0.125d (<0.05) −0.272c (<0.01) −0.561c (<0.01) 1.00REL 0.388c (<0.01) 0.235c (<0.01) 0.606c (<0.01) −0.499c (<0.01) 1.00
a Definitions of variables: budgetary participation (BP) is the extent employees participate in the budget-setting process.Incentive to create slack (ICS) variable is the extent employees are pressured for various reasons to build slack in the budgetprocess. Slack-creation behavior (SCB) variable is the extent employees overstate the costs they expect or understate therevenues they expect. Idealism (IDEAL) and relativism (REL) are the two components of an individual’s ethical position,using the EPQ. The idealism score is computed by summing the scores for the first ten items and dividing by ten, and therelativism score is calculated by adding the scores for the final ten items and dividing by ten.
b Statistically significant at 0.10 (two-tailed tests).c Statistically significant at 0.01 (two-tailed tests).d Statistically significant at 0.05 (two-tailed tests).
sure for Egyptian managers (3.79 [0.81]) working for US firms compared to Egyptian managersworking for Egyptian firms (2.82 [0.92)]) was significantly higher (t = 9.70, p-value < 0.01). Withrespect to our first research question, this result suggests that Egyptian managers who work inUS firms have more opportunity to participate in the budget process than their counterparts whowork in Egyptian firms.
Table 5Univariate test results: subgroup comparisons
a Variables are previously defined under Table 3.b Statistically significant at 0.01 (two-tailed tests).
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4.2. Research question #2
Previous research findings suggest that opportunity alone would be an insufficient cause ofbudgetary slack. Incentive is also a necessary condition. We questioned whether national culturaldifferences in Hofstede’s Uncertainty Avoidance and Masculinity constructs would result in dif-ferences in the extent to which budgeting systems provide such incentives. For research question#2, we explored the possibility that Egyptian managers working in US firms might have moreincentive to create slack than their counterparts in Egyptian firms. The mean (standard devia-tion) response for Egyptian managers working for US firms (4.08 [0.63]) compared to Egyptianmanagers working for Egyptian firms (3.63 [0.81]) was higher (t = 5.45, p-value < 0.01). Withrespect to our research question, this finding suggests that Egyptian managers who work in USfirms have more incentive to create budgetary slack than their counterparts who work in Egyptianfirms.
4.3. Research question #3
The third research question considered slack-creation behavior when both opportunity andincentive to create budgetary slack exist. The mean (standard deviation) response observed forEgyptian managers (3.57 [0.90]) working for US firms compared to Egyptian managers workingfor Egyptian firms (2.42 [0.98]) was higher (t = 10.61, p-value < .01). This result indicates thatthe existence of both opportunity and incentive is associated with opportunistic behavior to createbudgetary slack.
4.4. Research question #4
The fourth research question considered each Egyptian manager’s ethical position, specif-ically the level of idealism, and compared the level of idealism of those who work in USfirms with those who work in Egyptian firms. For idealism, the mean (standard deviation)score for Egyptian managers (3.16 [0.96]) working for US firms was lower (t = 10.35, p-value < 0.01) than those of Egyptian managers working for Egyptian firms (4.18 [0.69]).With respect to relativism, the mean (standard deviation) score for Egyptian managers(3.52 [0.72]) working for US firms compared to Egyptian managers working for Egyp-tian firms (2.38 [0.72]) was higher (t = 13.71, p-value < 0.01). This finding suggests that theEgyptian managers who work for US firms are more likely to believe that desirable con-sequences can be achieved without violating moral guidelines (Forsyth, 1980) and are lesslikely to participate in deviant behavior toward their firm (Henle, Giacalone, & Jurkiwicz,2005).
4.5. Research question #5
Our final research question explored the notion that an Egyptian manager’s ethical positionmight mitigate slack-creation behavior. Cultural differences may influence opportunity (RQ1) andincentives to create budgetary slack (RQ2), and to increase slack-creation behavior (RQ3). Differ-ences in ethical ideology (RQ4) might mitigate these effects, resulting in observable differencesin a model of slack-creation behavior.
Panel A of Table 6 shows the regression results for self-reported slack-creation behav-ior (SCB) regressed on budgetary participation (BP), incentive to create slack (ICS), and
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Panel A: regression analysis for respondents from US and Egyptian firms (n = 300)a
BP 0.089 1.861b
ICS 0.075 1.681b
IDEAL −0.346 −7.269c
REL 0.389 7.345c
Adjusted-R2 0.450F-statistic (d.f. = 4) 62.279
Panel B: regression analysis for respondents from Egyptian firms (n = 142)a
BP 0.074 0.742ICS 0.052 0.618IDEAL −0.078 −0.664REL 0.220 1.811b
Adjusted-R2 0.022F-statistic (d.f. = 4) 1.808
Panel C: regression analysis for respondents from US firms (n = 158)a
BP 0.005 0.088ICS 0.093 1.630b
IDEAL −0.551 −7.106c
REL 0.199 2.565d
Adjusted-R2 0.505F-statistic (d.f. = 4) 40.994
a SCB = β0 + β1 BP + β2 ICS + β3 REL + β4 IDEAL + ε.b Significant at 0.10 level.c Significant at 0.01 level.d Significant at 0.05 level.
the individual’s ethical position, which includes both idealism (IDEAL), and relativism(REL). The model is significant (F = 62.279; p-value ≤ 0.001) with positive coefficients forbudgetary participation (BP) and relativism (REL). These positive coefficients indicate thatself-reported, slack-creation behavior is a function of budgetary participation and relativism.1
The negative coefficient on IDEAL indicates that slack-creation behavior decreases as idealismincreases.
Regression results of the slack-creation model for the Egyptian firm subjects appear in Table 6,Panel B. The model is not significant (F = 1.808; p-value = 0.131). Table 6, Panel C shows theresults of the slack-creation model for those subjects working for the US firms. This model isstatistically significant (F = 40.994; p-value < 0.001). The results show positive coefficients forrelativism (REL) indicating that slack-creation behavior increases with relativism. In addition,the negative coefficient for idealism (IDEAL) indicates that slack-creation behavior decreaseswith idealism. As relativists are skeptical of specific ethical principles, slack-creation behaviorwould increase as relativism increases. Conversely, slack-creation behavior would decrease asidealism increases.
1 Regression analyses controlling for attained education levels, type of degree, and position with the firm yield substan-tially the same results.
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5. Summary and conclusions
For the past several decades, culture has become a topic of interest to academics andprofessionals. Arguments over its definition and assessments of its influence on corporate effec-tiveness and control procedures transcend the usual business discipline boundaries, attesting tothe importance of understanding culture’s impact on the firm. Insights gained from this areaof research may lead to the effective development and advancement of skills (Morden, 1995)and ethical decision-making (Cohen et al., 1992) that are appropriate for a multinational oper-ating environment, as well as for the multi-cultural business environment that is prevalent inthe US.
Hofstede et al. (1990, p. 288) claimed that, “differences in values among populations of employ-ees of national subsidiaries of a multinational company should be a conservative estimate ofdifferences among the national populations at large (because they share the same worldwidecorporate culture).” To examine this claim, we used survey research techniques to solicit Egyp-tian managers’ perceptions of various factors that have been shown to influence the design andeffectiveness of budgeting systems.
Our research findings identify differences in system design variables, as well as a relation-ship between opportunity and incentives to create slack. Of particular interest to this study, weobserved differences between Egyptian firms and US firms operating in Egypt and employ-ing Egyptian participants. Consistent with prior studies demonstrating that individual valuesare associated with corporate practices of the foreign parent (e.g., Hofstede et al., 1990;O’Connor, 1995), our data showed that Egyptian managers working for US firms were morerelativistic and less idealistic than their counterparts in Egyptian firms. This suggests that thenational culture of the country in which the firm’s corporate headquarters is located appearsto have an influence on budgetary design variables, as well as the ethical position of a firm’semployees.
In particular, we believe our study contributes to the extant literature on national culturaldifferences by exploring the impact of the Egyptian culture on budgeting system variables andbehaviors commonly associated with those variables. Specifically, we find that Egyptian managerswho work in US firms have more opportunity to participate in the budget process, have moreincentive to create budgetary slack, and exhibit higher levels of idealism than their counterpartswho work in Egyptian firms. Further, our results suggest that the existence of both opportunityand incentive is associated with opportunistic behavior to create budgetary slack, and that slack-creation behavior is a function of budgetary participation and relativism (slack-creation behaviordecreases with idealism).
Although Welch and Welch (1997) argued that a consistent set of internalized organizationalvalues is an unattainable goal made even more difficult in foreign joint ventures and MNCs,the development of individual values in subsidiaries in line with those of the head office mayhave been accomplished through the process of selection and/or socialization, as suggested bySoeters and Schreuder (1988). The Egyptian subsidiaries of US firms may have adopted anaccommodation strategy as suggested by Kohls and Buller (1994), agreeing to the values ofthe US foreign parent to obtain or preserve the business relationship. The interpretation maybe that the individuals in these organizations advocate shared values and engage in suitablebehaviors to protect their jobs and generally maximize their own self-interest (Welch & Welch,1997).
From a practical standpoint, our findings should be of interest to the management of multina-tional firms with respect to budgetary processes. Our study suggests that a number of differences
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exist between the Egyptian managers in the MNCs and the Egyptian managers in the Egyptianfirms, which could impact a wide range of business processes to the extent that the compa-nies/managers interact or compete with each other. For example, if cost containment is of primaryconcern, senior management would prefer to limit the amount of slack-creation behavior of man-agers. On the other hand, these behaviors may be acceptable (or even encouraged) if the MNCis trying to compete with local firms from a position of superior product quality or exceptionalcustomer service. Accordingly, our findings might help inform the budgeting process in otherforeign countries in which the MNCs operate.
Our results also might help inform other control procedures in MNCs. Recall that Cohen etal. (1993) suggest that an understanding of differences in cultural values can help explain whyresponses to ethical dilemmas vary between countries. Further this understanding can provide thebasis for building an effective system of multinational organizational controls. Finally, our resultsmight help personnel managers in MNCs to more accurately focus their recruiting and trainingefforts, based on the specific goals of the firm.
According to Morden (1995, p. 16), “A fundamental implication of (. . . contributions . . .) tothe developing body of experience and knowledge about international culture and managementis that cultural interpretation and adaptation are a prerequisite to the comparative understandingof national and international management practice. Such knowledge can be applied to (. . . the)effective development of skills and competencies appropriate to the different market and oper-ating environment.” Although multinational companies may modify their management systemsto suit the national cultures in which they operate, the substantial costs that may be incurred inexcess resource expenditures and in lost productivity make it imperative that we understand thecomplicated effects of cultural differences.
We acknowledge a number of limitations associated with our study. Although we obtaineda high response rate for our survey, there exists the possibility of a non-response bias thatwe did not detect.2 It is also possible that a self-selection bias is present in the employmentchoice of Egyptian managers (Egyptian firms vs. US firms located in Egypt). In addition, wedid not administer Hofstede’s Value Survey Module so it is not possible to compare the cul-tural value characteristics of our participants with Hofstede’s calculations. This was a difficultdecision to make, but based on the focus of our study (budgets), and our desire to seek pro-fessional subjects (rather than students), the time commitment had to be limited as much aspossible.
Future research is needed to address the unresolved issue of the value-modification mechanism.Are values shaped within the organization in a manner consistent with value-modification theories(e.g., Grube, Mayton, & Ball-Rokeach, 1994; Rokeach, 1972)? For example, when employeesare presented with feedback concerning their values, attitudes, and behaviors, are they motivatedto change those values, attitudes, and behaviors to be consistent with a referent norm? Or, areorganizational values the result of selection-socialization (Soeters & Schreuder, 1988), wherefirms hire and retain individuals who already demonstrate such values, and let go those who donot? Future research could address not only specification of value differences, but also possibledifferences in the centrality (i.e., importance) of particular values within the value system. Themore central the value, the more important will be its impact and effect on differences acrossnations (Harrison & McKinnon, 1999, p. 490).
2 Our analysis revealed no significant differences between the early and late responders on any of the dimensionsreported in Table 2, Panel B.
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Appendix A
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