4

Chapter 4
Emphasizing
chapter

Institutions,
Cultures, and
Ethics

Global Strategy
Global Strategy
Mike W. Peng
Mike W. Peng

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 Outline
• Understanding institutions
• An institution-based view of strategy
• The strategic role of cultures
• The strategic role of ethics
• A strategic response framework
• Debates and extensions
• Implications for strategists
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 Dimensions of Institutions
DEGREE OF FORMALITY EXAMPLES SUPPORTIVE PILLARS

Formal Institutions  Laws  Regulatory (coercive)

 Regulations

 Rules

Informal institutions  Norms  Normative

 Cultures  Cognitive

 Ethics

Table 4.1

•Institutions: Definitions
 “Humanly devised constraints that structure human
interaction” (North)
 “Regulatory, normative, and cognitive structures and
activities that provide stability and meaning to social
behavior” (Scott)
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 Understanding Institutions (cont’d)
Institutional framework - formal and informal
institutions governing individual and firm
behavior - supported by three pillars
Formal institutions - laws, regulations, rules
- supported by the regulatory pillar (the
coercive power of governments)
Informal institutions - norms, cultures and
ethics - supported by the normative and
cognitive pillars

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accessible website, in whole or in part.
 Understanding Institutions (cont’d)
• What Do Institutions Do?
 Reducing uncertainty
 Signaling conduct as acceptable or not, which constrains
the range of acceptable actions.
• Uncertainty can lead to transaction costs
 Transaction costs: Costs associated with economic
transactions – or more broadly, costs of doing business
 A major source of transaction costs: Opportunism—
defined as “self-interest seeking with guile” (Williamson)
 The possibility of opportunism introduces uncertainty

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 The Costs and Benefits of Informal, Relationship-
Based, Personalized Exchange

Source: M. W. Peng (2003), Institutional transitions and strategic Figure 4.1

choices (p. 279), Academy of Management Review, 28 (2): 275– 4–6
296.
 The costs and benefits of formal, rule-based,
impersonal exchange

Costs/
Benefits
A Benefits

B Costs

T1 T2 Time
Source: M. W. Peng (2003), Institutional transitions and
strategic choices (p. 280), Academy of Management Review, 28
(2): 275–296. 4–7
 An Institution-Based View of Strategy
• There is a need to discuss the relationship between
strategic choices and institutional frameworks
• Influence of task environment has been explored in
strategy literature
 Porter’s “diamond” model explains competitive advantage of
globally leading industries in different countries, criticized for
ignoring history and institutions
• Strategic choices are selected within and constrained by
institutional frameworks in developed economies
• Striking differences between institutions in developed and
emerging economies has pushed the institution-based
view to the forefront
• Strategic choices are direct outcomes of the dynamic
interaction between institutions and firms
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accessible website, in whole or in part.
9
10
 Two Core Propositions
• Managers and firms rationally pursue their
interests and make choices within the formal
and informal constraints in a given
institutional framework.
• While formal and informal constraints
combine to govern firm behavior, in situations
where formal constraints are unclear or fail,
informal constraints will play a larger role in
reducing uncertainty to managers and firms.

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whole or in part.
 Culture

“the collective programming of the mind which

distinguishes the members of one group or category of
people from another.”

Geert Hofstede

12
 The Five Dimensions of Culture
• Power Distance
 Refers to the extent that the members of a society
expect and accept that power is distributed unequally
 In Brazil, the richest 10% of the population receives
about 50% of the national income (high power
distance)
 In Sweden, the richest 10% gets 22% of the national
income (low power distance)

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 The Five Dimensions of Culture
• Individualism vs. Collectivism
 Individualism
 Ties between individuals are loose
 Individual achievement and freedom highly valued
 Collectivism
 Ties between individuals are strong
 Collective accomplishments highly valued
 In difficult times, the United States oftentimes practices layoffs
(individualism) while Japan oftentimes institutes across-the-
board pay cuts (collectivism)

•Masculinity versus femininity

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 The Five Dimensions of Culture
• Uncertainty avoidance
 Low uncertainty avoidance countries: place a premium
on job security, career patters, and retirement benefits;
resist change (Greece)
 High uncertainty avoidance countries: willing to take risk
with less resistance to change (Singapore)
•Long-term orientation
 Cultures with long-term orientation: emphasize
perseverance and savings for future betterment (China)
 Cultures with short-term orientation: want quick results
and instant gratification.

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whole or in part.
 The Strategic Role of Ethics
• Ethics: Norms, principles, and standards of conduct that
govern individual and firm behavior
• All agree - ethics can make or break a firm
• Value of an ethical reputation is magnified during crisis

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 Views on Business Ethics
• Managing Ethics Overseas
 What is ethical in one country may be unethical or illegal in other
countries
• Two perspectives on dealing with ethical dilemmas
overseas (Donaldson)
 Ethical relativism - “when in Rome, do as the Romans do”
 Ethical imperialism - absolute belief that “there is only one set
of Ethics, and we have it!”
• Donaldson’s three guiding principles:
 Respect for human dignity and basic rights
 Respect for local traditions
 Respect for institutional context

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 Views on Business Ethics (cont’d)
• Ethics and Corruption
 Corruption distorts the basis for competition
 Corruption: tendency for inverse relationship with
economic development. There are exceptions
 U.S. firms are subject to the Foreign Corrupt Practices
Act (FCPA)

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 Strategic Responses to Ethical Challenges

STRATEGIC STRATEGIC EXAMPLES IN

RESPONSES BEHAVIORS THE TEXT

Reactive Deny responsibility, do less Ford Pinto fire

than required (the 1970s)

Defensive Admit responsibility, but fight Nike (the early 1990s),

it, do the least that is required Facebook (2011)

Accept responsibility, do all Ford Explorer roll-overs

Accommodative
that is required (the 2000s)

Proactive Anticipate responsibility, do BMW (the 1990s)

more than is required

Table 4.5

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 Debates and Extensions
• Opportunism versus Individualism/Collectivism
• Cultural Distance versus Institutional Distance
• “Bad Apples” versus “Bad Barrels”

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 The Savvy Strategist
• Underlying context of institutional structures, resources
and capabilities impact strategic choices
• Institutions, culture, and ethics implications: homework,
cross cultural intelligence, and ethics are part of strategy
• Institution-based view answers to the four fundamental
questions
 Why do firms differ? Institutional frameworks shape firm
differences
 How do firms behave? Institutional differences
 What determines the scope of the firm? Development of formal
institutional frameworks
 What determines the international success and failure of firms?
Institutional frameworks govern strategic choices

Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in
whole or in part.