Conflict Costs in National and International Business: A Comparative Analysis

There is only a small number of scientific papers dealing with the topic of conflict costs, where two main themes can be distinguished. First, it is the identification of conflict cost variables and the assignment to categories. Scholars differentiate various conflict cost clusters, which are, among others, the costs of conflict to organizations, employees, and customers (Buss, 2011). Another separation approach involves the eight conflict cost categories, which are medical costs, individual psyche costs, wasted time costs, counterproductive work costs, team behavior costs, customer relationship costs, human resource costs, and, finally, legal and dispute costs (Freres, 2013). Four conflict cost clusters were introduced by Dirrler and Podruzsik (2022). These are internal direct conflict costs, which represent costs with a direct effect on the revenues or business outcomes of a company and which are caused by internal stakeholders. These costs are more visible, and companies are expected to measure them via monitoring their key performance indicators such as revenue, performance, and quality parameters.

Internal indirect costs are also caused by internal stakeholders; however, they are less visible and only indirectly affect the outcomes and revenues of a company.

In line with a lower visibility, they are more difficult to measure, and companies need to conduct in-depth analysis, observations, or interviews. This results in less organizations measuring or knowing these costs. External direct and indirect costs are caused by external stakeholders (Dirrler and Podruzsik, 2022). Despite different clustering approaches, the conflict costs comprise mostly the same variables that are also predominantly included in Table 1 (Dirrler and Podruzsik, 2022). Second, scholars have introduced methodologies to determine the financial burden of conflict. Considering the direct financial results, Murtha (2005) claims legal and dispute costs to reach >$100.000 per case, whereas CIPD (2011) states costs of £750 for legal fees and £1000 resulting from the time managers spend on a case. Turnover costs are expected to reach 25%–240% of annual salary costs (Conbere, 2000; Kreisman, 2002). From a temporal aspect, researchers highlight that conflicts demand time that is spent on a conflict instead of other activities, which can in return trigger costs (Freres, 2013; Dirrler and Podruzsik, 2022). The CPP (2008) findings demonstrate that employees spend approximately 2.8 h per week on conflicts, compared to HR personnel who are expected to deal for 1–5 h with conflicts (OPP and CIPD, 2008). Studies present managers to lose 20%–40% of their time due to the management of conflicts (Murtha, 2005; Katz and Flynn, 2013; Thomas and Schmidt, 1976). Dirrler and Podruzsik (2022) focused their time measurement on specific internal indirect conflict cost variables and found that people spend 6 h on these conflict cost variables for conflicts lasting 1 week and 40 h on conflicts of 6–12 months. When multiplying these numbers with an average German salary, costs of 137€ for short conflicts and 911€ for long conflicts could arise for each person involved in the conflict.

In our research, the clusters of Dirrler and Podruzsik (2022) are utilized, and the focus of our work is on internal indirect conflict costs that can be measured in terms of wasted time (see Table 1). This allows us to use the approved methodology of Dirrler and Podruzsik (2022) and concentrate on the cultural comparison. Narrowing the scope of our research does not affect the validity of our research question and hypotheses, as they are based on pure comparison. One cost variable was neglected in our study because we considered the calculation to be distinct from other variables. Two new variables were added because, in our assumption, they were missing in the variable overview of Dirrler and Podruzsik (2022).

Trends like the internationalization of business activities, outsourcing of jobs to foreign countries, and cross-border cooperation increased tremendously over the last years and brought cultural diversity to the center of organizations and increased the scientific work on the topic. Although it is daily business for companies to break down geographic borders and hire people from different cultural backgrounds (Ascalon, et al., 2008), scientific definitions, measurements, and conclusions are diverse. There is no uniform understanding of culture yet (Hofstede, 2006; Tsui, et al., 2007), which leads to a continuous debate about the theory of culture, related methodologies, and effects (Gonzalez, 2008). Tylor (1977) entitled culture as “that complex whole which includes knowledge, belief, art, law, morals, customs and any capabilities and habits acquired by a man as a member of society.” Hofstede (1980) refers to culture as a “collective programming of the mind which distinguishes the members of one human group from another.” Based on the work of Hofstede (1980) and Lane, et al. (2009), culture also comprises beliefs and values that people expect a certain group of society to have in common (Suwannarat and Mumi, 2012). In spite of the fact that some researchers claim culture to not only exist between nationalities, but also within organizations in the form of organizational cultures, for example, research still mostly differentiates culture based on different countries (Suwannarat and Mumi, 2012). Dressler and Carns (1969) define different functions of culture, which entails the communication with others using a common language and the expectation of members of our society on how they behave in certain situations. Culture also helps to define a standard for judgment of right and wrong, and safe and dangerous, and it enables people to identify similar others.

Diversity can be anything that enables people to identify differences between themselves and others (Williams and O’Reilly, 1998). The most widely used distinction of diversity is the split into visible and invisible diversity; whereas cultural diversity along with diversity based on gender, traits, or age belongs to the visible categorization, functional or value diversity forms the invisible diversity cluster (Harrison, et al., 2002). Diversity research is mostly based on three underlying theories. Social identity theory and social categorization theory are based on the concept that individuals use observable characteristics such as cultural features to compare themselves with others, and within that process, they automatically form ingroup and out-groups. People tend to favor in-group members, and often over evaluate the positive attitudes within their own group and make more negative judgments about the out-group members (Tajfel and Turner, 1979, 1986). Similarity theory strengthens these findings by stating that individuals are more attracted to and favor more similar people (Byrne, 1971) and consequently cooperate more with people sharing similar values and beliefs (Williams and O’Reilly, 1998).

When referring to cultural diversity or international cooperation within that study, we refer to a business activity that takes place between people of at least two or more different countries. In contrast, national cooperation is based on a team set up with people from the same country. Former migrations or cross-cultural experiences are not considered, as the basic goal is to understand the overall impacts of cultural diversity on conflict and cooperation.

Different studies indicate that cultural diversity is related to conflict (Vodosek, 2005, 2007; Wickramasinghe and Nandula, 2015; Doucet, et al., 2009; Obsuwan, et al., 2021). Vodosek (2005, 2007) found positive correlations between cultural diversity and all three conflict types and further concluded that it lowered satisfaction, commitment, and performance, but increased the intention to quit. These findings are in line with another study that mentions a link to relationship conflict, which, in turn, lowers the performance (Wickramasinghe and Nandula, 2015) and cultural diversity was found to be an antecedent of conflict (Kankanhalli, et al., 2006; Opute, 2012). Culture is entitled to serve the distringuishing between in-group and out-group members, which can support the identification of conflict parties (Worchel, 2005). In addition, conflict resolution and conflicts themselves are expected to be experienced in different ways depending on one’s culture, and these differences can quickly cause further misunderstandings (VanderPal and Ko, 2014). Another study presents the positive consequences of cultural diversity, mainly due to diverse perspectives and background (Liu, et al., 2008), which is also reflected in task conflict (Paul and Ray, 2013).

Despite numerous findings on the link between cultural diversity and conflict, there were no studies identified that analyzed the effects of cultural diversity on conflict costs.

To test the introduced hypotheses, we developed a questionnaire that was distributed via an online panel provider. To participate in the survey, respondents had to be employed and able to think of a conflict situation. No further restrictions were made in terms of employment types or industries because we did not assume any influence on our hypotheses. The panel provider is located in Germany, and the questions were raised in German language only, since most of the survey participants were Germans. However, as each respondent had to indicate whether his/her conflict situation took place in a national or an international work environment, the individual nationalities could be neglected. The panel members receive a limited amount of survey invitations per month and are paid for their participation. To ensure a high quality of the results, a question was included that requested all participants to enter a certain number. In this way, it was possible to test the alertness of all attendees and exclude nonserious members. Out of 873 survey respondents, 198 were excluded because of early drop-outs or answering the control question wrong. Due to the unknown work environment of individual participants, it was not possible to determine the two groups of national and international cooperation in advance. Within the survey, respondents could individually choose in which set-up the conflict took place and answer the questions accordingly. In total, we received 490 answers for national group conflicts and 185 for conflicts with international group members. Striving for a confidence level of 95% and a margin error of 5%, the sample size was N = 385, considering the German working population of approximately 45.3 million. The overall sample size therefore exceeds the required number of participants for a representative study by far. Assuming that more people work in a national environment, both sample groups are considered to be representative. Germany is considered to be justifiable for the total population because it is the place where the survey was carried out and most members came from. Within the national cooperation cluster, 260 were female and 230 were male. In the international group, the number of male participants (109) slightly exceeded the number of female respondents (76). In both setups, the majority of people were operational employees (international: 118, national: 341), followed by managers on different hierarchies. Only a minority was self-employed – 17 people in the national set-up compared to four in the international environment.

Before distributing the survey, a pretest with 20 participants was performed, in which they were asked to answer the questionnaire and report any difficulties they had in understanding or answering the questions. No major problems were reported, and we only had to sharpen some German terms such as nationality and citizenship. As only minor adaptions were made, we did not conduct a second pretest round.

The first hypothesis is linked to general questions each survey respondent had to answer, before referring to a concrete conflict situation. Everyone had to indicate the degree of international involvement he or she faced at work, ranked from 0% to 100%, followed by the total number of conflicts that they had been personally involved per year. To gather data for hypotheses 2–4, all respondents were asked to think of a concrete conflict situation they currently or previously faced. All subsequent questions had to be answered for that specific conflict situation chosen by the individual. To measure the international involvement, participants had to indicate whether their chosen conflict took place in a national or international set-up. This enabled us to form two groups – one being a culturally diverse group and the other one a homogeneous group, at least based on nationality. Cultural diversity was shortly described in the questionnaire as working with people of other nationalities.

The detection of time spent on internal indirect conflict costs was also based on the selected conflict of each individual. We presented all applicable internal indirect conflict costs shown above and asked the participants to indicate how much time they spent on the individual cost variable. The survey respondents had to enter the amount of time lost in a drop-down field, ranging from 0 to 50. The values of 0–4 could all be chosen, followed by every second number, starting with 6. The Cronbach alpha reported a high reliability of 0.9.

Respondents had to state the conflict duration for their own conflict situation. For this rating, a 5-point Likert scale was chosen, on which participants had to specify their conflict duration, ranging from short to very long. In line with the study of Dirrler and Podruzsik (2022), the terms were shortly described in the questionnaire.

Based on the five conflict stages (Pondy, 1967) and the research of Dirrler and Podruzsik (2022), conflict strength was measured, for the specifically chosen conflict, on a five-level Likert scale ranging from a very weak to a very strong conflict. To avoid any interpretations, the terms were specified in the survey according to previous research (Pondy, 1967; Dirrler and Podruzsik, 2022).

For the first hypothesis, we tested for possible correlations between the degree of internationalization and the number of conflicts. The number of conflicts being the dependent variable. In addition, we conducted a Kruskal–Wallis test to compare the different value ranks of internationalization and detect whether higher percentage ranks and more conflicts appeared concurrently. For the remaining hypotheses, the differentiation of the two conflict groups into national and international cooperation was necessary. When referring to group 1 or the national group, we refer to the 490 participants who assessed a conflict situation with people of the same nationality. Group 2, also called the international group, describes the respondents who answered the questionnaire based on a conflict situation with people of different nationalities. To test hypotheses 2 and 3, we compared the two groups to assess whether they significantly differed in regard to conflict duration or conflict strength. We conducted Wilcoxon rank-sum tests to test whether the two independent samples (national and international groups) indicated different central tendencies for the variables’ duration and strength. As the results were not significant, no post hoc tests were conducted. To test hypothesis 4, we conducted a Wilcoxon rank-sum test to evaluate whether the median of lost time, triggered by internal indirect conflict costs, differed in international and national cooperation. Due to the nonsignificant Wilcoxon result, no subsequent tests were performed.

For the quantitative measurement of conflict costs, all internal indirect costs were used, which could be measured in terms of lost time. Previous studies have shown that the costs are highly correlated, but the variables are not redundant. Comparing the correlation of the conflict cost variables, this picture is confirmed for both the national and international groups. In both cases, the individual costs correlated, but the majority of the values did not exceed 0.7, so redundancy can be ruled out (see Figures 3 and 4).

Figure 3.

(Source: Authors’ own research)

Figure 4.

(Source: Authors’ own research)

When comparing the mean values of lost time of the two set-ups, no clear difference is visible. The mean values are generally very close to each other. The standard deviations also differ slightly. Regarding the min. and max. values, there were participants in both groups who did not face certain costs at all, whereas others reached the maximum of lost time (see Table 2).

We compared international and national conflicts in terms of time spent on certain cost variables, as well as cost amplifiers. The findings of our study are against our hypotheses and expectations. Former research results indicated that specific conflicts were affected by international diversity, for example, in the form of difficulties in teamwork, dissatisfaction, or lower cohesion (Wickramasinghe and Nandula, 2015; Vodosek, 2005; Opute, 2012). We expected a close relation between the mentioned conflict consequences and our cost variables. For example, we thought increased dissatisfaction or difficulties in teamwork among others to be visible in the form of decreased work efforts, wasted time, absences, extra time gathering information, or attacking behavior. The mixed results can mean that the link between conflict consequences and conflict costs cannot be easily made, potentially because consequences might not always directly result in costs. Otherwise, the divergent findings can also be traced back to different definitions of cultural diversity, ranging from the comparison of specific countries (Wickramasinghe and Nandula, 2015) to the differentiation of individualism, collectivism, and horizontal and vertical orientation (Vodosek, 2005). In addition, our research was based on a survey in which individuals had to report on a concrete conflict situation. Vodosek’s (2005) studies were conducted with research groups in different universities, and Wickramasinghe and Nandula (2015) distributed surveys to virtual software development teams. Despite rejecting the hypotheses involving a specific conflict situation, we found support that cultural diversity leads to more conflicts. This adds new insights to the debate whether cultural diversity has an impact on group functioning and conflicts, because overall, it can be stated that there is a positive correlation, which, however, needs to be researched thoroughly. The managerial implications are high when considering the costs of additional conflicts. On average, people highly internationally involved face more conflicts than people in national work environments, which automatically triggers higher costs. Companies that carry out cross-border activities should include these costs when calculating foreign direct investments or planning international projects. Cultural management has received acceptance over the last years (Hjerto and Kuvaas, 2017) and has proven its effectiveness (Inegbedion, et al., 2020). These cost positions can justify cultural trainings and motivate researchers and organizations to get involved in cultural diversity research.

Considering the divergent research findings on cultural diversity and conflict, future research is needed. Prerequisites will be a clear definition of cultural diversity, potentially even stating countries or other criteria. In addition, different variables, ranging from conflict consequences to conflict costs, should be included to analyze any discrepancies between the variables.

Lastly, the research set-up can also influence the research outcomes, emphasizing the need to carefully choose set-ups or vary between target groups and analyze discrepancies here as well. Our research was based on individuals reporting on a personal conflict, with the advantage of involving real situations. However, this also prevented us from participating in data collection and assessing how reliable the data is. Due to the large sample size, the findings are considered to be reliable. A limitation is the imbalance of the two sample groups, whereas the national group accounted for two-thirds of all survey respondents. Future research should increase the culturally diverse respondents and achieve balanced participation. Due to the consistent statistical results, this does not limit the deductions from our study. We did not cluster cultural diversity or consider cultural models differentiating cultural distances. This can also be a factor to be considered in the future. Future research could assess whether greater cultural distances lead to cost differences, compared to smaller distances which have no effect.

We only focused on internal indirect conflict costs, measured in terms of lost time. This does not represent a holistic cost measurement, as many costs are not considered. In addition, this approach measures the lost time of one specific conflict. To gather a holistic overview of conflict costs in national and international setups, all conflict costs should be considered in future research. New models would need to be implemented that enable a broader measuring approach. If participants were asked to report on all conflicts of a year, the quantitative results of the overall costs would also become more precise.