Class 1: Introduction and Institutionalist Approach

Why is nationality important to people?

Real differences between countries persist in:
Language Education
Level of economic development Institutions
Political system Culture
Perceived differences between countries
Individual identity and social identity
Three processes of social identity formation:
social categorization
social comparison
social identification
Nationality differences are particularly salient when people have no common history
Nationality then becomes a source for ones own identity and for the identity ascribed to the other
Why is international management different from management tout court?
Cultural, institutional and language differences persist
Leading to differences in management and organization
Nationality forms an important basis for social categorization processes
Leading to cognitive shortcuts like cultural attribution and stereotyping
With the effect that management and organization differs between countries and doing business
cross borders is different than domestic business
What is Comparative & Cross-Cultural Management (C&CCM)?
Studies differences in management styles and organizational approaches between countries
Explains these differences from societal characteristics
Studies ways in which companies can deal with these differences
Theoretical Approaches in C&CCM:
Contingency perspective Institutionalist approach
Globalization theory Culturalist approach
Contingency Approach:
Characteristics of management & organization depend on task environment and related contingency factors.
When looking for the influence of differences in institutional/cultural environment, always control for
differences in: Organization size, degree of dependency, technology or product, and complexity or
changeability of the task environment
Contingency factors: Technology, Environmental, turbulence, Size of the Organization
Organizational characteristics: Formalization, Centralization, Task descriptions, Use of control mechanisms

Given similar circumstances, the structure of an organization that is, the basic patterns of control,
coordination and communication can be expected to be very much the same wherever it is located.
Contingency theorists posit merely a stable relationship between contingencies and structure across different
societies. Hence contingency theory is commensurate with international differences in degree, but not in kind.
The contingency approach only elucidates properties of formal structure and neglects informal structures and
It operates at a high level of abstraction and generality.
Globalization Theory
Economic internationalization and the spread of capitalist market relations
Globalization has been defined as the production and distribution of products and services of a
homogenous type and quality on a worldwide basis.
Linguistic, trade and cultural barriers become less important
Stateless MNCs (Multinational Corporations)
Four possible scenarios:
1. Convergence of economies towards the Anglo- American neoliberal market system.
2. Greater specialization of economies implies that, under pressure of globalization and integration, the
domestic will adapt by specializing more vigorously in what it does best.
3. Incremental path-dependent adaptation focuses on institutions and rules out convergence of one
societal system towards the other. The argument is based the socially constructedness of institutions,
in the sense that they embody shared cultural understandings (shared cognitions, interpretive
frames) of the way the world works
4. Hybridization implies some change in a pathdeviant manner. Hybridization is argued to result from the
process of integration into the global system of individual companies.
Recursiveness: means that to understand or to explain the disposition of actors, one has to 'go back' to culture
and institutions.
Two major sorts of recursiveness:
1. A cross-referencing between what actors have in mind and the more systemic or structural settings
they take for granted
2. Societies are integrated by a continuous cross-referencing between what we call spaces, which are
imagined spaces, differentiated and demarcated around a central meaning, purpose or function
addressed by actors, within a space.
Institutionalist Approach
Focuses on comparisons that highlight differences that cannot be attributed to different goals, contexts,
environments or strategies of enterprises.
Definition of institutions: the humanly devised constraints that structure political, economic,and social
interaction. They consist of both informal constraints (sanctions, taboos, customs, etc.),also known as culture,
and formal rules (constitutions, laws, property rights)
Three types of institutional support:
1. The regulative (formal rules and incentives constructed by the state and other empowered agents of
the collective good),
2. Normative (informal rules associated with values and explicit moral commitments), and
3. Cognitive (abstract rules associated with the structure of cognitive distinctions and taken-for-granted
understandings).
Different sets of institutions result in divergent organization and management practices, and different
advantages and disadvantages for engaging in specific types of activity.
Culturalist Approach:
Characteristics of management and organization are influenced by basic values, norms and beliefs
which differ between social groups
Social groups can be defined by nations, ethnicities, professions, organizations ....
 Like institutions, cultures change only slowly
Two different approaches:
quantitative, looking at dimensions (etic)
The etic, or outside, perspective follows in the tradition of behaviorist psychology and
anthropological approaches that link cultural practices to external, antecedent factors, such as
economic or ecological conditions.
Etic models describe phenomena in constructs that apply across cultures.

qualitative, looking at unique characteristics (emic)

The emic, or inside, perspective follows in the tradition of psychological studies of folk beliefs
(Wundt, 1888) and cultural anthropologists striving to understand culture from the natives
point of view
Emic accounts describe thoughts and actions primarily in terms of the actors self-
understanding
Culture change
Effects of culture on the economy (macro) and on management (micro). And vice versa!
Class 2: Institutional Approach
Institutions:
The humanly devised constraints that structure political, economic and social interaction (Douglass North)
Formal institutions (constitutions, laws. property rights)
hard institutions; proximate institutions
Informal institutions (sanctions, taboos, customs, traditions)
soft institutions, background institutions, culture
Examples of institutions:
Property law Marriage
Works councils Romantic love
European Central Bank
Foundations of institutionalist organization theory (1)
Man is not fully rational (bounded rationality; satisficing; rule-following behavior; logic of
appropriateness; etc.)
Importance of having legitimacy: the general perception that the actions of the organization are
desirable, proper, or appropriate within some socially constructed system of norms
Organizations need to be technically efficient and socially accepted to survive
If demands from institutional environment conflict with efficiency considerations, why would
organizations comply?
Because they are obliged: coercive processes
Because its the right thing to do: normative processes
Because they see it as the self-evident thing to do: mimetic processes
In all cases, institutional pressure leads to isomorphism
In some cases, isomorphism as a result of coercive, normative or mimetic processes is only superficial
decoupling; ceremonial adoption

Types of Institutions (Scott 1995):

regulative: formal rules and regulations - Formal
normative: informal norms, values, conventions, practices, customs, taboos -Informal
cultural-cognitive: shared beliefs, scripts, heuristics and mental models Informal
Overview (Scott, 1995)
Economists Sociologists Organization theorists
regulative normative cultural-cognitive
basis of compliance expedience social obligation taken-for-grantedness
mechanisms coercive normative mimetic
logic instrumentality appropriateness orthodoxy
basis of legitimacy legally sanctioned morally governed comprehensible,
recognizable,
culturally supported
Institutions and convergence between countries:
Introducing ISO 9000 in the German and French car industry
ISO 9000 is a family of standards for quality management Systems
Comprises procedural norms for quality assurance in production, installation, servicing, and design
ISO certification is granted by accredited certification bodies (for 3 years)
Business processes must be described and documented

How do institutions arise?

Institutions are negotiated between powerful factions (regulative)
 Institutions consist of the creation of shared definitions of social reality through interactions (cultural-
cognitive)
Institutions arise if patterns of behavior are infused with value beyond the technical requirements at
hand (normative)
This process is historically specific
Historical specificity of institutions:
Institutions and colonial rule
Institutions inherited from colonial rulers may have long-lasting effects
British colonies:
Indirect rule
Indigenous power structures as conduits of colonial policies
Emphasis on fiscal self-reliance
French colonies:
Direct rule
Centralized from Paris
Integrated into French economy, including subsidies
Effects of colonial rule in Africa
African countries that have been under decentralized (British) rule on average score higher on
the Human Development Index
French influence continues to be important (CFA Franc, trade, investments)
Politically relevant ethnic fragmentation stronger in ex-British colonies

Measuring institutions:
Typological approach: assumes that institutional systems are integrated wholes
Institutional systems can be compared and contrasted, but not measured
Examples typological approach:
Varieties of capitalism
Business systems
Dimensional approach: assumes that the characteristics of institutional systems can be described using
a small number of underlying dimensions
Allows for positioning institutional systems in a multidimensional space and measuring the distance
between two systems
Example dimensional approach:
Country institutional profiles (Kostova: quality management)
Country institutional profiles (Busenitz et al.: entrepreneurship)

Business Systems approach

Developed by Richard Whitley in the 1990s
Business systems: particular ways of organizing, controlling, and directing business enterprises that
become established as the dominant forms of business organization in different societies
Emphasizes coherence between different elements of the institutional environment and between this
environment and the management of firms
Largely descriptive, little underlying theory
Institutions in the Business Systems view
Background institutions
Related to trust relations, collective loyalties toward non-kin, individualism and
authority relations (~ culture)
Proximate institutions
 Related to access to financial and labor resources, system of property rights and political
control (more formal institutions)
The main features of business systems that the approach seeks to explain are:
the nature of firms as economic actors, including the extent to which firms dominate the
economy and how they share risk
the nature of authoritative coordination and control systems within firms, including the
types of authority exercised, and the extent of differentiation and decentralization, and
the nature of market organization, including the extent of interdependence among firms
and the role of competitive versus cooperative ties.
The core argument of the approach is that:
differences in societal institutions encourage particular kinds of economic organization and
discourage other ones through structuring the ways that collective actors are constituted,
cooperate, and compete for resources and legitimacy, including the standards used to
evaluate their performance and behavior.
Five broad kinds of economic actors are particularly important in contrasting business systems:
1. the providers and users of capital
2. customers and suppliers
3. competitors
4. firms in different sectors
5. employers and different kinds of employee.

Connections between dominant institutions and business system features

Fragmented business systems
Coordinated industrial districts
Compartmentalized business systems
State-organized business systems
Collaborative and highly coordinated business systems
A systematic taxonomy on business systems
Dimensional approach: Country institutional profiles (Busenitz, Gmez & Spencer)
Develop institutional dimensions specific to entrepreneurship
Regulatory dimension: laws, regulations and policies that provide support for new business
Cognitive dimension: knowledge and skills pertaining to establishing a new business
Normative dimension: degree to which entrepreneurial activity and creative and innovative thinking
are valued
Class 3-6: Culturalist Approach

What culture is and is not

Where does culture come from?
Emic versus etic approaches
Examples of etic approaches
Culture change
Methodological issues in etic research
Cultural distance
Etic, emic and philosophy of science
Methodological issues in emic research
Examples of emic research

Three levels of factors influencing values & beliefs

1. Personality: specific to individual inherited and learned
2. Culture: specific to group - learned
3. Human Nature: universal inherited

Elements of culture
Values - what someone desires or regards to be important
Beliefs - what someone considers to be true or false
Attitudes positive and negative judgments
Self-perceptions
Cognitive abilities
Stereotypes
Cultural elements exit at deeper and at more superficial levels

Analysis at the level of culture should not be mixed up with analysis at the
individual level
Within-society analysis
Across society analysis
Pan-cultural analysis
 Ecological fallacy
Reverse-ecological fallacy

Level of the culture level of the individual

Why is culture important to people?

Important basis for self-categorization; positive stereotyping of ingroup, negative stereotyping
of out-group
Real differences between cultures

Why is national culture important to people?

Nations have well-defined boundaries
Nations define many institutions
Nations form a salient target of identification
But:
Individuals may identify with national culture in one context, and with higher or lower levels of
aggregation in others

Nominal characteristics/stereotyping versus substantive characteristics/national culture

People of different nationalities have notions of the national character of their own and other
nationalities
mostly stereotypes
Systematic research into values and beliefs also reveals differences between nations
culture

Where do cultures come from?

Adaptive view: cultures are responses to environmental conditions and have survival value
Cultures are systems of socially transmitted behavior patterns that serve to relate
human communities to their ecological settings
Cultural change is a process of adaptation and natural selection
Culture change often begins with adaptation to changes in economic life
Ideas (<> behaviors) tend to support survival-enhancing behaviors

Independent parenting/child training

 More face-to-face-contact
More object stimulation
Less body contact and body stimulation
Baby treated as equal with individuality, own will and own preferences
Baby seen as someone with a potential
Society with more independent individuals

Interdependent parenting/child training

Less face-to-face-contact
Less object stimulation
More body contact and body stimulation
Tight social network
Society with more conformist individuals

Culture and ecology: Dimensions of childtraining practices

Obedience: to what extent are children expected to obey their parents and other adults
Responsibility: emphasis on effortful or time-consuming behavior to the benefit of the family or
community
Achievement: emphasis on attaining a high standard of performance
[Independence, nurturance, self-reliance]

Conclusion:
Basic characteristics of subsistence economy seem to influence cultural values in such a way that
survival of the group is promoted (adaptive culture view):
Hunting, gathering: Individual achievement
Agriculture, animal husbandry Obedience, responsibility
Where do cultures come from? (2)
Ideational view: cultures are shared symbolic systems that are cumulative creations of the mind,
rather than responses to environmental conditions, and may be functional or detrimental
Cognitive view: A societys culture consists of whatever one has to know or believe in order to
operate in a manner acceptable to its members
Material conditions constrain, but do not explain the ideational contents of cultures, which are
cumulative creations of mind
Cultures are systems of shared symbols and meanings, existing not only in peoples heads, but
also out there (in other peoples heads)

Apart from adaptive and ideational influences, some traits are hardwired
In-group out-group distinction
Theory of mind
Assumption of agency
Use of abstraction in language
Use of symbols
Use of personal names
Property
Myths and rituals
Control of fire

Etic and Emic

Etic statements refer to distinctions judged appropriate by the community of scientific
observers
 Emic statements refer to distinctions that are significant, meaningful, real, accurate, or in some
other fashion regarded as appropriate by the actors themselves

Etic = whats really objectively there

o Compare with phonetic sounds: v sounds different from f
Emic = the categories people recognize and use
o Phonemics is about sound differences that carry meaning

etic research
Geert Hofstede: Cultures Consequences
Study based on >100,000 IBM employees in >40
countries
Inductive + deductive analysis
Distinguishes 4 dimensions:
1. power distance:
a. The degree to which the less powerful members of a society accept and expect that
power is distributed unequally
2. uncertainty avoidance:
a. the degree to which the members of a society feel uncomfortable with uncertainty and
ambiguity
3. individualism-collectivism:
a. preference for a loosely-knit social framework in which individuals are expected to take
care of only themselves and their immediate families
versus
b. preference for a tightly-knit framework in society in which individuals can expect their
relatives or members of a particular in-group to look after them in exchange for
unquestioning loyalty.
4. masculinity-femininity:
a. preference in society for achievement, heroism, assertiveness and material rewards for
success. Society at large is more competitive.
versus
b. preference in society for cooperation, modesty, caring for the weak and quality of life.
Society at large is more consensusoriented.
5. (later: long versus short-term orientation):
a. Societies that prefer to maintain time-honoured traditions and norms while viewing
societal change with suspicion
versus
b. Societies that take a more pragmatic approach and encourage thrift and efforts in
modern education as a way to prepare for the future
Linked to a variety of phenomena
Shalom Schwartz:
Study of teachers and students in 40 countries
More deductive than Hofstedes work
Seven dimensions:
1. Embeddedness (security, conformity, tradition)
2. Intellectual autonomy (self-direction)
3. Affective autonomy (pleasure, exiting, varied life)
4. Hierarchy (legitimate ascribed power differences)
5. Egalitarianism (social justice, equality, responsibility)
6. Mastery (ambition, self-assertion, change/.exploit the world)
7. Harmony (unity with nature, protect the world, peace)
Ronald Inglehart
 Two very broad dimensions:
traditional authority vs secular-rational authority
God is very important in respondents life .91
It is more important for a child to learn obedience and religious faith than
independence and determination .89
Abortion is never justifiable .82
Respondent has strong sense of national pride .82
Respondent favors more respect for authority .72
survival values vs self-expression values
respondent gives priority to economic and physical security over self-expression
and quality-of-life .86
Respondent describes self as not very happy .81
Respondent has not signed and would not sign a petition .80
Homosexuality is never justifiable .78
You have to be very careful about trusting people .56
Representative samples
Ingleharts four waves allow to study globalization of culture
Robert House (Globe)
GLOBE dimensions (Practices & Values)
Power distance (~ Hofstede)
Uncertainty avoidance (~ Hofstede)
Humane orientation (fair, altruist, generous, caring behavior encouraged)
Institutional collectivism (collective distribution of resources and collective action encouraged)
In-group collectivism (pride, loyalty and cohesiveness in/to orgs and families encouraged)
Assertiveness (assertive, confrontational and aggressive behavior in relations accepted)
Gender egalitarianism (gender inequality is minimized)
Future orientation (future-oriented behaviors are encouraged)
Performance orientation (performance improvement and excellence is encouraged)
Correlates of modernity (Yang, 1988)
Egalitarian attitudes Individualistic orientation
Belief in gender equality Achievement motivation
Tolerance and respect for others Educational orientation
Low integration with relatives Need for information
Preference for urban life Self-reliance
Secularized beliefs Behavioral Flexibity

Drivers of modernization
Industrialization Drivers of postmodernization
Mass education and literacy Servitization of the economy
Urbanization (from rural to urban Flexibilization of employment
mobility) Suburbanization
From extended to nuclear family Market liberalization
Mass media Growth of non-traditional households
Division of church and state Increasing equality of the sexes
Entry more women into paid workforce

Why does development strengthen self-expression values?

Socio-economic development:
Income and wealth increases
Access to information and education increases
Social capital increases (diversifying human interaction and networks)
This reduces constraints (widens capacity of people to act according to their
own choices)
Leads towards self-expression values
In turn, self-expression values lead towards greater demand for entitlement to choice, including
civil and political liberties, and demand for democratic institutions
Sign and meaning
Man is a social animal with an innate crave for meaning
Meaning is provided if a given cue (social phenomenon) is not senseless, but placed in a
system of meaning
If this succeeds, the sign (e.g., a particular behavior) makes sense
The relationship made between signifier and signified in a particular community is arbitrary
Hence social reality is equivocal, i.e., signs can have many meanings
Separation (in time or in cultural distance) between researcher and subject impedes
understanding the meaning of a sign
To the extent that understanding nevertheless occurs a fusion of horizons has taken place
Conclusions:
Cultures consist of many elements and layers
Culture can contribute to the survival of a community, but also to its demise
Etic studies look at culture from the outside, and converge to a limited number of basic
dimensions
Cultural change is connected with economic and political change
The concept of cultural distance is frequently used, but problematic
Etic and emic studies of culture are rooted in different philosophies of science
Emic studies can inform us about specific characteristics of a culture that typically escape
attention of etic studies
Emic studies, however, are less cumulative than etic studies
Class 7: Systems of management: Japan, East Asia, The Netherlands
Characteristics of Japanese management
Internal organization
HRM
Career employment
Seniority system
Overwork and retirement policies
decision making
Diffuse authority & responsibility
Consensus building: nemawashi & ringiseido
External organization
labor relations
enterprise groups (Keiretsu)

Findings
Japanese consensus process is sequential, with formal meeting at the end
Dutch consensus process is synchronic and iterative, including formal meetings
Japanese consensus based on harmony plus strong sense of hierarchy
Dutch consensus: pragmatic meeting of particularistic minds
Both groups see the other as more hierarchical
Japanese consensus is more comprehensive; Dutch consensus lacks in detail
Culturally informed respondents do not only provide data, but also valuable explanations

Explaining Japanese management: Institutions (1)

Business Systems approach: Japan is a highly coordinated market economy
Ownership control through alliances
Some vertical integration
Limited horizontal integration
Strong alliance coordination of production chains
High collaboration between competitors
Some coordination of sectors
High employee-employer interdependence
Considerable delegation to employees

Other Collective Capitalism countries:

South Korea
o Centralized business conglomerates (chaebol)
o Family ownership (male line); integration ownership-management
o Strong influence of government
o Predatory relations between chaebol and subcontractors
o Limited employer-employee commitment
o Authoritarian/paternalistic management style
o Tall hierarchy
Taiwan
o Networks of family-owned SMEs
o Personal control limits growth of any single firm
o Horizontal coordination through guanxi
o Strongly entrepreneurship-driven
o Employer-employee commitment only where personal obligations exist
o Management informal and centralized
Dutch culture and management
Studies of management in the Netherlands consistently mention the
following characteristics:
Strong emphasis on consensus decision making
o Commitment to equality (- PDI; secular-rational authority)
o Negotiation, but with respect for harmony (- MAS)
o Compromise (+ IDV; - MAS; self-expression)
o Highly structured meetings ( UAI)
Pragmatic (not driven by theory or doctrine) stance of both managers and employees
o Restraint, avoiding strong emotions
o Directness (but avoiding personal attacks)
o Loss of face is of little concern (+ IDV; secular-rational authority)
o Informal relations important
Dutch institutions and management
Important aspects of the institutional environment of Dutch firms:
Very limited direct State involvement
System of labor relations
Corporate governance
o Two-tier system
o Co-optation
Legislation regarding permits
o Environmental permits
o Occupancy permits
o Zoning schemes
o .
Educational system
Class 8: Management in Asia & The Netherlands, International alliances and Mergers &
acquisitions

International collaborative relationship:

A formal agreement between two or more firms from different countries to pursue a set of interests
through the sharing of resources in a context involving uncertainty over outcomes

Co-operative strategies
Licensing: contractual agreement to use a technology, trademark, brand or business model
Strategic alliances: contractual cooperation between independent companies in order to realize
common goals (nonequity based)
Joint ventures: cooperation between independent companies in order to realize common goals on
the basis of common ownership and contract (equity-based)
Acquisitions: cooperation between companies in which at least one looses independence (equity-
based)

Cultural distance, investment risk and political risk

Internal uncertainty or risk:
o Effect depends on what activities of the subsidiary will be.
o If knowledge of local market and institutions are important cooperate in
o alliance or JV.
o If the subsidiary can operate as an isolate avoid internal uncertainty by
o means of WOS.
External uncertainty or risk:
o Market risk reduce exposure by cooperating with partner
o Political risk risk can be reduced by collaborating with local partner
o (JV or alliance) or by limiting the investment (contractual alliance)

How does cultural distance influence collaborative mode choice?

Intensity of interaction within contractual collaboration
Choice between equity non-equity collaboration
Equity share in equity-based collaboration

Non-equity collaboration and cultural distance:

Franchising and Management Service contracts in the hotel industry
Both franchising and management-service contracts are used by hotel chains to internationalize
Franchising:
Royalties, supply-chain markups
Brand name, marketing support, technical advice & training
Management-service contracts:
Royalties, supply-chain markups, management fees, share of profits
Brand name, extensive onsite technical and management support, day-to-day operational
management

How does cultural distance influence collaborative mode choice?

Basic assumptions:
Equity JVs offer more control (uncertainty reduction), but also expose company to more risk
Contractual alliances reduce risk exposure, but offer less control (more uncertainty)
For the fundamental choice between equity non-equity the need to control uncertainty seems
dominant (CD Equity JV)
If an equity JV has been chosen, larger CD leads to desire to reduce risk (CD lower equity
level)
 If a contractual alliance has been chosen, larger CD leads to a desire to reduce uncertainty (CD
contracts offering more control)
Conclusion: tradeoff between risk and uncertainty varies along the continuum between alliance
and equity forms of collaboration

Cultural distance and mergers & acquisitions

Cross-border M&As and cultural differences
Empirical findings of effects cultural differences on M&A success are mixed
Studies report negative (Stahl & Voigt, 2008), positive (Chakrabarti, Gupta-Mukherjee and
Jayaraman, 2009) ) and no effect (Weber, Shenkar & Raveh ,1996)
Hardly any data on moderating effect of integration level and style
Cultural background of acquiring firm influences integration management approach
Class 9: Multinational Corporations

Significance of MNC activity

Most MNC activity can be classified into two major categories:
1. Trade (exports and imports): More than 50% of all trade is made by the worlds largest 500 MNEs
2. Foreign direct investment (FDI): 80% of all FDI is made by the worlds largest 500 MNEs.
Cultural distance and MNC entry mode
Explanation Brouthers & Brouthers:
Perceived investment risk in a country: stability; attitude towards foreign firms
With low investment risk increasing cultural distance drives managers towards collaboration (costs
of direct control > costs of collaboration)
With high investment risk cultural distance drives managers towards wholly-wholly owned
subsidiaries (costs of direct control < costs of collaboration)
Look at subsidiaries from Japanese MNCs
Focus on two types of control by MNC headquarters: ownership levels and expatriate ratio (% of
Japanese in the foreign subsidiarys workforce)
Findings:
Cultural distance increases both the level of ownership and the expatriate ratio
Differences in power distance and individualism drive the effect on ownership level
Differences in individualism and uncertainty avoidance drive the effect on expatriation
Effect is weaker for older subsidiaries

Tentative conclusions
The structure of an MNC needs to fit its environment and its strategy
MNC structure influences the use of coordination mechanisms and the cost of coordination
At high risk levels (political risks and investment climate) cultural distance leads to preference for
WOS
At low risk levels (investment climate) cultural distance leads to preference for equity JVs
 Class 10: Society & Economic Development
Institutions are in fact a liberating force
The only way individual freedom can be obtained is through a collective adherence to duties that define
and protect individual rights for everyone
Institutions free organizations and individuals from the need to contrive new patterns of acting in each
situation they encounter
The game has rules that must be obeyed. Within the rules, several different strategies are always possible

Institutions and legitimacy

Suchman (1995, Academy of Management Review)
Legitimacy is a general perception that the actions of an entity are desirable, proper, or appropriate
within some socially constructed system of norms, values, beliefs, and definitions
Organizational legitimacy is vital for organizational survival and success
Organizations attain legitimacy by conforming to formal/informal institutions
Some scholars: the appearance rather than the fact of conformity is often sufficient for the attainment
of legitimacy
Foreign subsidiaries face dual pressures for legitimacy
Institutions of the host county and institutions of the home country or parent company may be
incompatible
Institutions define how the game should be played
Institutions create order, reduce uncertainty, and facilitate coordination
Complex economic activities have to be supported by sophisticated institutions
An example of sophisticated institutions
Crucial institutions of publiclyheld corporations
Separation of ownership and management
Limited liability: up to the extent of the price per share
A shareholder may sell his shares without first obtaining the permission of fellow shareholders
(escape hatch)
Disclosure requirement

Trust and institutions

Personal/micro-level/concrete/thick trust:
Trust in a specific person based on personal relations and prior interactions
Definition 1: A trusts B when A believes that her interests are included in Bs utility function, so that B
values what A desires because B wants to maintain good relations with A
Definition 2: the belief that the trustee will not take advantage of the trustors vulnerability

An example of misplaced trust from Coleman (1990, Foundations of Social Theory, p. 94): It begins with the
assent by a high school girl to be walked home by a boy. She further assented, at his request, to take a shortcut
through the woods. He then made a sexual advance, which she resisted. She was thereupon roughed up and
sexually assaulted.

Social/macro-level/abstract/thin trust
World Value Survey (WVS) asks: Generally speaking, would you say that most people can be trusted
or that you have to be very careful in dealing with people?
Also named generalized trust
Institutional trust
The trust people have in institutional systems
WVS asks individuals to rate their confidence in the parliament, government, civil service, political
parties, armed forces, police, press, churches, labor unions, the justice and education systems
 Social trust arises from the institutional environment of laws, norms and standards
Fukuyama (1995, Trust: The Social Values and the Creation of Prosperity):
A society with a strong institutional basis is often a high-trust society
The economic function of trust
It reduces transaction costs and the need for monitoring
Not only the cost of striking a deal but also the cost of enforcing any deal that is made
Social trust and its associated institutions are indispensable to a vibrant market economy
When institutions are weak, people have to rely more on personal trust
Putnam (2000, Bowling Alone) finds that in the southern Italian regions trust is more likely to be restricted
to the closed social circle (i.e. family and friends). Why?
Why is guanxi so important in doing business in China?

Culture influences economy

Culture: collective programming of the mind which distinguishes the members of one human group from
another (Hofstede)
Similar to Norths informal institutions
Culture influences your behaviour and your interpretation of others behaviour
Culture changes only slowly
Culture at different levels
Country, Region, Religion, Ethnicity, Organization

Economy influences culture

Karl Marx (1859, A Contribution to the Critique of Political Economy)
The hand-mill produces feudal society and the steam-mill capitalism
Modernization theory borrows heavily from Marxism
Cultures change is a function of increasing wealth and economic development: rich countries show
poorer countries an image of the future
As a result of economic development and globalization, each countrys traditional values will be
replaced by a set of modern values
The convergence school (McDonaldization)
Man is fundamentally an economic creature
Countries that have succeeded in achieving a high level of economic development have come to look
increasingly similar to each other
More than 20 years ago, leisure is important for 20% of Japanese, but over 40% in a recent survey
The persistence school
Country-specific traditional values will persist and crosscountry cultural differences will not disappear
Traditional values will continue to exert an independent influence on the cultural changes caused by
economic development
Inglehart and Baker (2000, American Sociological Review): both schools are partly right
Economic development brings about similar cultural changes
Secularization
Individuation
But each countrys cultural heritage has enduring effects
Rather than converging, they seem to move on parallel trajectories shaped by their cultural heritages
Permanent imprint
Lecture 11 - Comparative corporate governance

Defining corporate governance

The study of power and influence over decision making within the corporation
A narrow, finance/economics-oriented definition
Corporate governance deals with the ways in which suppliers of finance to corporations assure
themselves of getting a return on their investment
Corporate governance is designed to protect shareholders interest
Incentive alignment
Performance-sensitive compensation
Internal control
Board of Directors, AGM of shareholders
External control
Legal and regulatory requirements
The market for corporate control (threat of takeover)
Managers reputation in the managerial labor market

International comparison
Two most researched archetypes
The Anglo-Saxon model: equity finance, dispersed ownership, active markets for corporate control
The Rhineland model: debt financing, concentrated blockholder ownership, inactive markets for
corporate control
In two business systems/institutional environments
Liberal business system/market-based capitalism
Coordinated business system/relational capitalism
Anglo-Saxon (Ryanair) vs. Rhineland (Volkswagen)
1. Finance
Anglo-Saxon: more equity finance
Rhineland: more bank/debt finance
2. Ownership structure
Anglo-Saxon: dispersed, more ownership by investment funds
Rhineland: concentrated, more cross-shareholding with other companies, more ownership by
banks/govt./founding families
3. Relationship between stakeholders and management
Anglo-Saxon:
o Arms length
o The management maximizes shareholder value
o Short-termism: buy low, sell high
Rhineland:
o Close relationships with stakeholders
o The management balances the interests of stakeholders
o Stable, long-term relationships
4. Governance structure
Anglo-Saxon:
o Unitary board: Board of Directors
o US: CEO-Chairman duality
o UK: CEO-Chairman separation is more often
o Shares and share options to motivate managers
Rhineland:
 o Dual board: Supervisory Board (50% each from employees and shareholders) and
Management Board
o Employees have a strong voice
o Managers are not paid as high as in Anglo-Saxon
5. Corporate restructuring
Anglo-Saxon
o Takeover as a credible threat
o Takeover to rescue a failing company, and as a result more mergers and acquisitions in
Anglo-Saxon countries
Rhineland
o Hostile takeovers are less common
o Strong employee opposition to takeover
o When in crisis, assisted by major shareholders, banks, and sometimes the government

The Japanese Model

Bank-oriented finance (read Section III of Aoki 1990)
Cross-shareholding with affiliated companies
The main bank monitors the company closely
As the main cash manager
As the main creditor or manager of a loan consortium
As a major shareholder
Unitary board, few outside directors
Consensus-based decision making
The top management enjoys a high degree of autonomy as long as the company is doing well
They are promoted from within
CEOs income: $0.5-1m at Toyota vs. $15-17m at Ford/GM
Corporate restructuring
The main bank becomes the lead rescuer when the company suffers a business crisis
Aoki (1990: 16): "internal" management naturally abhors "external" interference by the main bank
Companies are almost insulated from takeover threats Management displacement, if it occurs, is
orchestrated by the main bank
Lecture 12 Innovation

Defining innovation
Innovation = invention + commercialization
Not always by the same person or company
Xeroxs Palo Alto Research Centre invented PC graphics interface and mouse, but Apple commercialized
them
(Generally) positive effects on the economy/society
Zipper by Whitcomb Judson in 1893
Fords moving-assembly line in 1913 cut the labor input to assemble a Model T from 106 man-hours to 6
Measuring innovation
Inputs: R&D expenditure, R&D labor force
Outputs: new products/processes/services, patents
Imitation expands a firms existing knowledge set but not the worlds existing knowledge set
Innovation expands not onlybut also
Imitation through the adoption of existing technology is an effective learning

Factor-driven
Rely on basic factors (unskilled labor or natural resources) to make simple goods/services
Compete on price
Use technology from other countries
Efficiency-driven
Rely on heavy capital investment to make more advanced goods/services
Compete on quality
Use AND improve foreign technology
Innovation-driven
Rely on advanced factors (highly skilled labor and cutting-edge technology)
Compete on innovative products/services
Create new technology
Wealth-driven
Shift from wealth creation to wealth redistribution
Excessive demands for social welfare
Little motivation to compete and innovate
 The resource curse: A negative relationship between natural resource abundance and long-term economic
Development
Revenues from natural resource exports appreciation of the real exchange rate divert factors of
production from manufacturing into other activities such as retailing and real estate
Outcome: deindustrialization and lower long-term productivity growth
Other reasons: reduced urgency and incentive to invest in efficiency enhancers and innovation
Another name: the Dutch disease by a 1977 issue of The Economist

National innovation system

A system of actors and relationships that shape a countrys innovation patterns
Main actors: firms, banks, venture capitalists, universities, research institutes, government agencies
Interdependent relationships: the contribution of one actor depends on properties/actions of other actors
The system is an organic whole and is more than the sum of its parts
It can be seen as having two layers
The core: firms innovate in complex interactions with other firm and non-firm actors
The wider setting: education systems, labor markets, financial markets, IP protection, national
technology policy
Main observations in the literature
A one-time historical event may have a long-lasting impact on a countrys NIS
Why are German companies not leading competitors in aircraft, electronics, and telecommunication
equipment?
The interplay between firms and the scientific infrastructure is perhaps the most crucial link
 Scientific research conducted in universities and research institutes will not lead to competitive
advantage unless transmitted to and further developed by industry (Porter 1990: 80-81)
The British chemist William Perkin discovered chemical dye in 1856, but later the chemical dye
industry became a major exporting industry for Germany

Latecomer countries may grow rapidly by exploiting technology already employed by advanced
countries
Technology licensing, technology transfer, reverse engineering
But nothing can substitute serious effort to learn, assimilate, and adapt foreign technology (see the
Hyundai example)
The role of the government
During the catch-up stage: take a more active and even leadership role in technology development
(because the target is clear and the technology already exists)
As a country approaches the technological frontier, its time for the government to take a back seat
and play a merely facilitating role. Why?
IP protection may also vary over stages of development
A weak IP regime is beneficial in the early phase of catch-up but, when the country comes near the
frontier, a strong IP regime becomes advantageous (Odagiri et al. 2010)
E.g., US, Japan, South Korea

Features of the American NIS

Enormous scales (slides 20-23)
Big innovative companies (slides 24-25)
A large trade surplus in intangible assets (slide 26)
Strong IP protection (slide 27)
Vibrant entrepreneurship and high-tech start-ups
Research-intensive universities
Close public-private collaboration in R&D (slide 30)
Strong government support for basic research
NIH, NASA, DOE, NSF
Large military R&D and procurement
Lecture 13 - Networks and Clusters

Social network
Social network: A finite set of actors and the relations defined on them
Relations (ties): friends, classmates, colleagues, etc.
Main reasons for networking: to acquire information or resources, to reduce uncertainty, and to enhance
legitimacy
Actors network positions
Isolates, peripheral actors, central actors
Centrality tends to be positively correlated with status, power, and access to information/resources

Ronald Burt vs. James Coleman

Structural hole (Ronald Burt): the extent to which an actors partners are not directly connected
The extent to which ties are non-redundant from the focal actors point of view
Advantages
High quantity and diversity of information
Brokerage
Autonomy
Power accrues to those who are between two others
A competitive logic
Some network positions are better than others
Network closure (James Coleman): actors are embedded in a densely connected network
They have common partners strong reputational and social constraints on opportunistic behavior
Advantages
Fine-grained information
Trust and reciprocity
Close cooperation
Reduced opportunism
A cooperative logic
One for all and all for one

Embeddedness
Granovetter/Uzzi: economic action is embedded in networks of social relations
Structural embeddedness: high connectivity among actors and high network density
Relational embeddedness: the relationship among actors is characterized by trust, obligation, and
identification
Cognitive embeddedness: shared values, interpretations, and systems of meaning
But over-embeddedness (too much network closure) leads to lock-in
A lack of openness to opportunities and developments outside the network
Network homogeneity
Groupthink
A lack of adaptability to radical shifts in the environment
In short, ties that bind may turn into ties that blind

Networks of companies
Competition and cooperation are two sides of the same coin
Firms have to cooperate in order to remain competitive
Firms should not ask themselves whether to compete or to cooperate, but rather on what dimensions to
compete and cooperate
Also see Porter (1998: 79): Clusters promote both competition and cooperation
Hamel et al. (1989: 133): You cant run from strategic alliances
Cluster
Globalization: increasing international flow of
Goods and services (international trade)
Capital (foreign direct investment)
People
Knowledge
Thurow (1996) The Future of Capitalism
Anything can be made anywhere, everything can be sold everywhere
Levitt (1983) The globalization of markets, HBR
Global village
Clusters: geographic concentrations of interconnected companies and institutions in a particular field (p.
78)
Note geographic proximity facilitates networking
Institutions here refer to universities, training schools, trade associations, government agencies, etc.
A clusters boundaries are defined by the linkages and complementarities across industries and
institutions (p. 79)
Different from Industrial Districts: A concentration of firms in a particular industry within a local region
Why clusters are critical to competition
Clusters and productivity
Better access to employees and suppliers
Access to specialized information
Complementarities
Access to institutions and public goods
Better motivation and measurement due to local rivalry
Clusters and innovation
Clusters and new business formation
A cluster may decline because of
External market/technology shifts
Collective inertia/rigidity