25-07-2022

International Business
Management
WEEK 3

Strategic Management – Strategy

Formulation
Two perspectives –
 The Industry/Organization perspective
 Focus on industry level factors in formulating firm strategy
 Explains 20% variation in firm performance
 Framework - Porter’s 5 forces model

 The Resource based view

 Focus on firms' own resources and capabilities in formulating firm
strategy
 Explains 36% variation in firm performance
 Framework - VRIN analysis

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In 1998, in a deal worth $36 billion, US based Chrysler was acquired by

Daimler-Benz of Germany, and the so-called alliance or "merger of equals"
was named DaimlerChrysler. It was not a good fit, as the two cultures never
really merged—though Daimler-sourced platforms helped make vehicles like the
Chrysler 300C, Dodge Charger and Challenger, and Jeep Grand Cherokee much
better than their predecessors—and Daimler sold Chrysler in 2007 to Cerberus,
a private equity firm in the U.S., for just $7.4 billion

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International Business : Role of

Institutions
Firm’s strategy and performance in an
international business context is influenced by –
• Host country regulatory environments
• Home and host country culture differences
• Home and host country language differences
• Host country business environment – corruption, rule of
law etc.
• Host country political set up etc.

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International Business : Role of

Institutions

I/O view: Industry

Effects

RBV: Firm’s
resources and Strategy Performance
capabilities

Institutions Based
View: Role of host
country
environment

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Institutions
Formal and informal policies popularly known
as “the rules of the game.”

Institution-based view on
global business - leading perspective
in which firms’ success is correlated to
monitoring, decoding, and adapting to changing
the rules of the game.

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Types Of Institutions

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Formal Institutions
Formal institutions:
laws, regulations, and rules.

Regulatory pillar:
coercive power
of governments

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Informal Institutions
Informal institutions:
norms, culture, and ethics.

Normative pillar - Cognitive pillar

how the values, – internalized
beliefs, and actions values and
of other relevant beliefs that
players influence guide individual
the behavior of and firm
focal individuals behavior.
and firms.

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Informal Institutions
 Normative institutions are norms and values that structure
choices
 Emphasizing how things should be done and defining legitimate
means to accomplish them.
 Closely related to professionalism
 Firms that adapt to host country ‘norms’ find it easier to transact
with other organizations in the host country

 Cognitive Institutions are more closely associated with the

culture of the host country

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Why focus on Institutions?

The key role of institutions is to reduce uncertainty by constraining
the range of acceptable actions.
Political or economic uncertainty can be potentially devastating to firms
because uncertainty surrounding economic transactions can lead to
transaction costs, the costs of doing business.
Transaction costs also arise from opportunism i.e. “self interest seeking
with guile”
• Opportunism implies misleading, cheating, and confusing other parties

Institutions define the rules of the game, mitigating violations and

keeping transaction costs minimal.

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Formal Institutions
1. Political Systems – Democracy vs. Totalitarianism
2. Legal Systems – Civil, Common and Theocratic
3. Property Rights and Intellectual Property Rights
4. Economic Systems – Market, mixed and
command economy

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Political Systems
A political system refers to how a country is governed politically
Democracy - political system in which citizens elect representatives to
govern the country on their behalf.
• Supports global business by preserving individual’s right to freedom
of expression and organization.
Totalitarianism (or dictatorship) - system in which one person or party
exercises absolute political control.
• Communist totalitarianism – China, Cuba, Laos, North Korea, and
Vietnam
• Right-wing totalitarianism – Philippines, South Africa, Taiwan and
most Latin American Countries (recently democracies)
• Theocratic totalitarianism – Iran and Saudi Arabia
• Tribal totalitarianism -- Rwanda

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Political Systems – Implications for

Business
 Democracy is in general more conducive for global business
 Starting a business is an act of economic expression, a democratic set-up
allows freedom of expression

 Political Stability positively impacts foreign investment

• Though research shows that higher levels of a political party tenure lead to
corruption, less responsiveness, negatively influence foreign investment

 Right wing political parties are seen as more accommodative for

foreign investment
 Political uncertainty, corruption, less responsiveness from host
governments increase transaction costs of doing business

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Political Systems – Implications for

Business
 Totalitarianism countries often experience wars, riots, protests, chaos
and breakdown
 Such uncertainty increases transaction cost of doing business
 For ex- Zimbabwe has recently demanded that foreign mining
companies cede 51% equity without compensation
 But, totalitarianism may not always be bad for international business
 Firms have to developed capabilities to manage adversities in such
environments

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Legal Systems
A legal system refers to the rules of the game on how a
country’s laws are enacted and enforced. The first,
regulatory pillar that supports institutions.

Theocratic
Civil Law
Law
Common
Law

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Legal Systems
 Civil Law – Uses comprehensive statutes and codes as a primary means to form legal
judgments.
 Common Law – English in origin
• Shaped by precedents and traditions, as well as judicial interpretation.
• Relative to common law, civil law has less flexibility, because judges only have the
power to apply the law.

 Theocratic Law – based on religious teachings.

• Islamic law is the only surviving example of a theocratic legal system that is formally
practiced by any governments.

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Legal Systems
Civil Law countries Common law Theocratic law
countries countries
Argentina, Austria, Australia, Canada, Iran, Saudi Arabia,
Belgium, Brazil, Chile, Hong Kong, India, United Arab Emirates
China, Egypt, France, Ireland, Israel, Kenya, (not fully)
Germany, Greece, Malaysia, New
Indonesia, Italy, Japan, Zealand, Nigeria,
Mexico, Netherlands, Singapore, South
Russia, South Korea, Africa, Sri Lanka,
Sweden, Switzerland, United Kingdom,
Taiwan United States,
Zimbabwe

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Legal Systems – Implications for

Business
 Common law is more confrontational as parties can influence judges to
get decisions in their favor
 Contracts in common law countries are more detailed to cover all
possible contingencies as common law tends to be under-defined
 Negotiating contracts increases transaction costs
 ‘Writing ’perfect’ contracts is not possible due to ‘bounded rationality’
 Hence, common law countries present higher transaction costs for
investing firms
 Countries with theoretic law require firms to adapt their business
practices
 For ex – In Saudi Arabia, have to operate two branches for males and
females, increasing cost of doing business

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Legal Systems – Property Rights

 Legal rights to use an economic property (resource) and to
derive benefit from it.
• In Africa only 1% of the land is formally registered

 Unavailability of tangible property makes it difficult to raise

finances to start businesses
• Fund in such countries are usually borrowed from family and
friends
• Average firm size in countries with less property rights is usually
small

 Firms in such countries have weaker capabilities

• Limited funds to upgrade capabilities (invest in R&D)
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Legal Systems – Intellectual Property

Rights
Rights associated with the ownership of intellectual property,
intangible property that results from intellectual activity, such as
books, videos, and websites.
• Patents, Copyrights, Trademarks

IPR needs to be asserted and enforced through a formal system

that is designed to provide an incentive for people and firms to
innovate.
• In China, counterfeiters are prosecuted if their profits exceed $ 10,000
• China is known for fake DVDs and Rolexes, Russia is known for pirated
software, Italy is known for counterfeit luxury goods

Transaction costs of doing business is higher in countries is

higher with weaker Intellectual Property Rights
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Economic Systems
Rules of the game on how a country is governed economically.

Mixed
Economy

Market Command
Economy Economy

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Economic Systems
 Market economy – characterized by the “invisible hand” of market forces
and a laissez faire approach from the government.
• Factors of production are in private hands
• Government performs functions that private firms cannot – building roads,
defense etc.

 Command economy – all factors of production are government- or state-

owned and controlled, and all supply, demand, and pricing are planned by
the government.
• More government control over factors of production

 Mixed economy – characterized by elements of both a market economy

and a command economy.
• In practice, no country has adopted either a pure market or pure command
system.

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Private Ownership Vs. State

Ownership
State Owned Businesses
PRO CON
 Developed in response to  Lack of accountability
failure of private firms  Lack of concern for
during Great Depression. economic efficiency

Privately Owned Businesses

PRO CON
 Performance incentives for  Risky business practices
workers (the better you lead to financial crisis and
work, the better your pay). recession.

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Economic Systems – Implications for

Business
 Lesser bargaining power of foreign firms with respect to
state owned enterprises
 Prevalence of lobbying with host country governments for
favorable terms of business
 Increases transaction costs of doing business

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Measuring Quality of Formal

Institutions (http://info.worldbank.org/governance/wgi/
)
Worldwide Governance Indicators (WGI) published by World Bank
(6 dimensions)
1. Voice and accountability - Perception of the extent to which a country's citizens
can participate in selecting their government, as well as freedom of expression,
freedom of association, and a free media.
• Typical industries affected – media, communications, press, entertainment etc.
2. Political Stability and Absence of Violence/Terrorism - Perceptions of the
likelihood of political instability and/or politically motivated violence, including
terrorism.
• Typical industries affected – Industry which require high fixed costs
3. Government Effectiveness - Perceptions of the quality of public services, civil
service and the degree of its independence from political pressures, the quality
of policy formulation and implementation, and the credibility of the
government's commitment to such policies.
• Typical industries affected – Industries sensitive to national interests in a country
(electricity generation, distribution etc.)

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Measuring Quality of Formal

Institutions
4. Regulatory Quality - Perceptions of the ability of the government to
formulate and implement policies and regulations that permit and
promote private sector development.
5. Rule of Law - Perceptions of the extent to which agents have
confidence in and abide by the rules of society, and in particular the
quality of contract enforcement, property rights, the police, and the
courts, as well as the likelihood of crime and violence.
6. Control of Corruption - Perceptions of the extent to which public
power is exercised for private gain, including both petty and grand
forms of corruption, as well as "capture" of the state by elites and
private interests.

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Measuring Quality of Formal Institutions

- https://www.heritage.org/index/about
Heritage Foundation’s – Economic Freedom Index
 Economic freedom is the fundamental right of every human to control
his or her own labor and property.
 In an economically free society, individuals are free to work, produce,
consume, and invest in any way they please.
 In economically free societies, governments allow labor, capital, and
goods to move freely, and refrain from coercion or constraint of
liberty beyond the extent necessary to protect and maintain liberty
itself.

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Measuring Quality of Formal

Institutions
Economic Freedom Index
 Four broad dimensions and 12 sub-dimensions
1. Rule of Law (property rights, government integrity, judicial
effectiveness)
2. Government Size (government spending, tax burden, fiscal health)
3. Regulatory Efficiency (business freedom, labor freedom, monetary
freedom)
4. Open Markets (trade freedom, investment freedom, financial
freedom)

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Informal Institutions

Socially
transmitted
information,
part of the Informal
heritage institutions
we call cultures,
ethics, and
norms.

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Culture
“the collective programming of the mind which
distinguishes the members of one group or
category of people from another.”
Geert Hofstede

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Components of Culture
Religion

Social
Structure Culture Language

Education

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Social Structure
 Two dimensions explain differences among cultures
• The basic unit of social organization is the individual, as opposed to
the group
• A society is stratified into classes or castes

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Social Structure
 The individual
• In many Western societies, the individual is the basic building block of
social organization.
• Emphasis on individual achievement
 The group
• The primary unit of social organization in many non-Western societies
• Importance of group membership/identification
 Sources of transaction costs –
• Where basis of organization is individual
◦ Lack of loyalty, difficulty in team formation
• Where basis of organization is the group
◦ Lack of entrepreneurship, slow decision making

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Social Structure
 Social Structure refers to the way a society broadly organizes its
members – with rigidity or flexibility
 Two key terms – social stratification and social mobility
 Social Stratification – hierarchical arrangement of individuals into
social categories such as classes castes and other divisions of the
society
• Ex – caste system in India, urban-rural classification in China
 Social mobility – degree to which members of a lower social strata can
move to a higher social strata
 MNEs need to be careful while dealing with socially stratified countries
• The most suitable person for the job may not be technically most
qualified
• Ignorance of “social structure” may also be a reason for transaction costs
of doing business

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Religion
A major manifestation of culture
Economic implications of Christianity
• Protestant ethics promotes the spirit of capitalism
Economic implications of Islam
• Prohibits the payment or receipt of interest
Economic implications of Hinduism
• Hindus value their spiritual rather than material
considerations

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Religion
Economic implications of Buddhism
• Does not emphasize wealth creation
• Entrepreneurial behavior is not stressed culturally, but still
acceptable
• Does not support the caste system, individuals do have some
mobility and can work with individuals from different classes
Economic implications of Confucianism
•Three key teachings of Confucianism - loyalty, reciprocal
obligations, and honesty - may all lead to a lowering of the cost
of doing business in Confucian societies
•Guanxi

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Language
 Spoken Language
• Language structures the way we see the world
• In English there is one word for snow, but Eskimos have 24 different
words for snow!!!
• Countries with more than one language often have more than one
culture
o In Canada, tensions between English and French speaking cultures
• Chinese is the mother tongue of the largest number of people
• English is becoming the language of international business
• Ignorance to local language can lead to higher costs of business
o Example – GM’s Chevrolet Nova, when translated into Spanish means
“No go” (no va)

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Language
 Unspoken Language
• Nonverbal communication
o Raising of eyebrows, smile etc.
o Often culturally bound
o A simple Thumbs-up sign is taken as vulgar in Greece
o Personal space
o 5 to 8 feet in US, while in most American countries it is 3 to
5 feet
o Keeping 5-8 feet distance in Latin Americas maybe seen as
keeping aloof

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Education
 Formal Education
• Medium through which individuals learn languages and
other skills
• Socializes the young into the values and norms of a
society
• Provides a national competitive advantage

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Effect of Cultural Difference – The

Context Approach
Context is the background against which interaction takes place.

 In low-context cultures, communication is usually taken at face value without much

reliance on unspoken conditions or assumptions.
• “No” means “no.”
 In high-context cultures, communication relies heavily upon unspoken conditions or
assumptions.
• “No” does not necessarily mean “no.”
 Negotiators in high context cultures, often involves lawyers at the last stages of
contract drafting
 High context cultures increase the transaction costs of doing business for
firms/managers belonging to a country with a low context culture

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Effect of Cultural Difference – The

Cluster Approach
Groups countries that share similar cultures into a cluster.

The underlying view of this approach is that people and firms are more comfortable doing business with
other countries within the same cluster. Having a common language, history, religion, or culture reduces
transaction costs when operating abroad.

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Effect of Cultural Difference – The

Dimension Approach - https://www.hofstede-
insights.com/product/compare-countries/
 Distinguishes cultures across multiple dimensions
 Hofstede’s dimensions of culture
• Power distance
• Uncertainty avoidance
• Individualism vs. collectivism
• Masculinity vs. femininity
• Long-term vs. short-term orientation

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Effect of Cultural Difference – The

Dimension Approach
 Power distance refers to how a society deals with the fact that people
are unequal in physical and intellectual capabilities.
o What are the attitudes toward hierarchy and the level of respect for
authority?
o How reluctant are employees to express disagreement with their
managers?

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Effect of Cultural Difference – The

Dimension Approach
 Uncertainty avoidance measures the extent to which different cultures
socialized their members into accepting ambiguous situations and
tolerating uncertainty.
 High uncertainty avoidance cultures prefer more rules, SOPs, more
security and greater career stability
 Managers have low risk appetite, employees exhibit less
aggressiveness, lifetime employment is common

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Effect of Cultural Difference – The

Dimension Approach
 Individualism vs. collectivism focuses on the relationship between the
individual and his or her fellows.
 Hiring and promotions in collectivist countries is more based on
paternalism rather than individual achievements and capabilities
 Countries scoring higher on individualism have higher GNP and a freer
political system

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Effect of Cultural Difference – The

Dimension Approach
 Masculinity vs. femininity looks at the relationship between gender
and work roles.

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Effect of Cultural Difference – The

Dimension Approach
 Long-term vs. short-term orientation refers to the extent to which a
culture programs its citizens to accept delayed gratification of their
material, social, and emotional needs.
 Countries which exhibit higher levels of longer term orientation have
higher investment rates

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Effect of Cultural Difference – The

Dimension Approach
Focuses on multiple dimensions
of cultural differences both
within and across cultures.

Sources: G. Hofstede, “Cultural constraints in management theories,” Academy of Management Executive 7, no. 1 (1993): 81–94 and G. Hosftede,
Cultures and Organizations: Software of the Mind (New York: McGraw-Hill, 1997) 25, 26, 53, 84, 113, 166. For newest update, see
http://www.geerthofstede.com.

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Cultural Difference – Implications for

Business
 Contracts are more detailed in ‘low context countries’
• This reduces opportunism and hence transaction costs
• In high context countries most agreements are unspoken and not written
down, increasing chances of opportunistic behavior

 High power distance is correlated with lower interpersonal trust

• Trust deficit increases transaction costs of doing business

 Managers in individualistic countries tend to differentiate their products

• Managers in collectivist cultures follow each other

 Managers from low ‘uncertainty avoidance’ countries perceive high

transaction costs of doing business in countries with high ‘uncertainty
avoidance’

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Cultural Difference – Implications for

Business
Honoring time
• Managers from high indivdualism countries (e.g. US) treat time as a valuable
and limited resource
• Managers from high collectivist countries view time from a different and
longer perspective – e.g. “manana” in Latin America; “Bukra” in Arabic
• Arab often regard a deadline as an insult.

•Openness to Change
• Western people believe that an individual can exert control and bring change
• In many non-western countries control is considered as external; people
believe in destiny or will of God
• In societies that emphasize tradition, change may threaten way of life

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Cultural Difference – Implications for

Business

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Thank You………..

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