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Institutional Factors in

Global Business
Dr. Mona Bahl
Youngstown State University

Welcome Question
Which country has the highest percentage of internet
users

US
Japan
Iceland
UK

84.2% (21)
86.3% (17)
96.5% (1)
89.8 (14)

http://data.worldbank.org/indicator/IT.NET.USER.P2/countries?
order=wbapi_data_value_2013+wbapi_data_value+wbapi_data_value-last&sort=desc

Case Study Questions

1.Why Expand across borders; When should it


globalize?
Understanding Grolschs history
Understanding Grolschs performance
Why did Grolsch globalize?

Case Study Questions

Case Study Questions


2. What should be the thrust of the Companys international strategy? ;
Where should the company target its efforts? Who is required to
carry it out?

How well has Grolsch performed internationally?


What are the key elements and limitations of its emphasis on
adaptation to international markets?

http://www.youtube.com/watch?v=IfBtZOuq_vI

Case Study Questions


3. Future Path
Will the merger with SABMiller add value or not?
What changes would you suggest to Grolschs
current strategy?

https://www.youtube.com/watch?v=9LI2MOd6aKM

Learning goals
I.

Institutional Influences on business


I.

Politico - Legal

II.

Cultural

III. Economic

II. Quantitative Tools to Evaluate Institutional


Influences
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Institutional Environment
Widely known & accepted systems of practice,
technologies & rules of social interaction, which
are normatively recognized & established in a
society. Behaviors contrary to them are met with
social disapprobation and even costly sanctions.
(Lawrence, et.al. 2002)
Fundamental political, social and legal ground
rules which establish the basis of all economic
activities, and organizations are expected to
conform to them in order to be accorded
legitimacy and support.
(North, 1990)
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Institution-Based View of Strategy


and International Management
Institutions provide guidelines to firms as to how they
can act, what can be done with legal or other
guarantees, to reduce uncertainty and increase
economic activity.
Questions:
What role do international institutions play across
countries?
Why does the role of an institution vary across
countries?
What role do different institutions play in a country for
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a particular industry?

What Do Institutions Do?


Institutions affect the actions of firms by:
Reducing uncertainty.
Signaling conduct as acceptable or not, which
constrains the range of acceptable actions.
Uncertainty can lead to higher costs of doing
business (called transaction costs):
Harder to plan companys business
Harder to write a contract/make purchases/sales
Reduce investments
Not all firms/industries equally impacted.
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Dimensions of Institutional Environment


1. Regulatory Institutions

- formally codified, enacted & enforced

structure of

laws in a community/nation (Rules)

2. Normative Institutions
- standards & commercial conventions, e.g., those
established by professional & trade associations
(Binding expectations)

3. Cognitive Institutions
- axiomatic beliefs about expected standards of
behavior specific to a culture (Taken for granted
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understandings)

Formal Institutions
Formal Institutions: A legal and regulatory framework
of courts, police, lawyers, regulators, and other
mechanisms that create and enforce laws and
regulations to facilitate the widening of markets
Benefits of Formal Institutions
Lower costs
Support arms-length transactions by bringing
distant parties (strangers) together.
Foster rule-based transactions that attract new
players into a global economy that cannot operate
on informal institutions alone.
Facilitate economic expansion and growth
NOT all business transactions need formal institutions.
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Political Ideologies
Totalitarianism

Anarchism

Pluralism

Both private and public


groups need to balance
each others power
Every aspect of
peoples lives must be
controlled to preserve order

Only individuals and


private groups can
preserve personal liberties

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Legal Systems
Common Law

Tradition
Nations legal history

Precedent
Past cases before the courts

Usage
How laws are applied

Civil Law
Dates to Roman times in the
fifth century B.C.
Rules and statutes constitute a
legal code

Defines all obligations,


responsibilities, and privileges
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Theocratic Law
Legal tradition based on religious teachings
Islamic law

Jewish law

Hindu law

15

Legal Map of the World

Civil law
Common law
Bi-juridical/mixed (civil and common law)
Islamic law (Sharia)
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Economic Differences
Economic Systems
Capitalist versus Socialist (Communist)

Financial Markets
Capital Markets (Trading and hedging securities)
Forex Markets (Trading and hedging currencies)

http://www.doingbusiness.org/rankings

17

Capital Market
System that allocates financial resources
according to their most efficient uses
Debt: Repay principal plus interest

Bond has timed principal & interest payments

Equity: Part ownership of a company

Stock shares in financial gains or losses

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Foreign Exchange Market


Market in which currencies are bought and sold and
their prices are determined

Conversion: To facilitate transactions, invest directly abroad,


or repatriate profits

Hedging: Insure against potential losses from adverse


exchange-rate changes

Arbitrage: Instantaneous purchase and sale of a currency in


different markets for profit

Speculation: Sequential purchase and sale (or vice-versa)


of a currency for profit

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Largest Currency Markets

UK: $1.33
trillion
US: $0.62
trillion
Japan: $0.24
trillion

Source: */Kyodo/Newscom

20

Factors that affect currency movement


(Demand & Supply)

Individual & Business Transactions


Trade & Investment Activity
Trade Deficits
Interest Rates
Inflation

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U.S. Balance of Payments

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Factors that affect currency movement

Individual & Business Transactions


Trade & Investment Activity
Trade Deficits
Interest Rates
Inflation

23

Purchasing Power Parity

Relative ability of
two countries
currencies to buy
the same basket
of goods in those
two countries
http://www.federalreserve.gov/releases/h10/current/default.htm

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National Wealth at PPP


Country

PPP Estimate of
GDP per Capita
GDP per Capita
(U.S. $)
(U.S. = 100)

United States
39,700
Switzerland
47,900
Australia
32,400
Canada
30,600
United Kingdom
35,600
Japan
36,500
Czech Republic
10,600
Hungary
10,000
Mexico
6,600
Turkey
4,200

39,700
34,700
32,400
31,800
30,800
29,600
18,600
15,900
10,200
7,600

Source: Based on data from Organization for Economic


Cooperation and Development (OECD), Statistics
section (www.oecd.org).

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24-Hour Trading

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Definition
Exchange Rate: Rate at which one countrys
currency can be traded for another countrys
currency.

27

Forward Rate
Rate at which two parties will exchange
currencies on a specified future date
Forward Contracts
Reduce exchange-rate risk
30, 90, 180 days or custom lengths
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Swaps, Options, and Futures


Currency swap
Simultaneous purchase and sale of foreign exchange
for two different dates

Currency option
Option to exchange a specified amount of currency on a
specified date at a specified rate

Currency futures contract


Contract requiring the exchange of a specified amount of a currency
on a specified date at a specified exchange rate, with all
conditions fixed and not adjustable
http://live.wsj.com/video/experts-explain-what-is-the-forexmarket/BFE9AA7F-5938-451A-BBC0-43E86EF5A3DF.html#!BFE9AA7F5938-451A-BBC0-43E86EF5A3DF

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The Strategic Role of Culture


Culture: The collective programming of the mind which
distinguishes the members of one group or category of
people from another. (Hofstede)
Is the most informal and least codified part of a
countrys institutional framework.
Impacts the strategy of firms.
Can know legal regulations (not enough)
Can know professional norms (not enough)
Can know commercial norms (not enough)
Know cultural rule sets of the society and how it
impacts doing business.
Formalized for business by Hofstede. 30

Informal Institutions
Constraints on socially sanctioned norms of
behavior.
Professional norms do not have the force of law,
but are obeyed by those in a profession.
Physicians, professors, lawyers, and
accountants
Commercial norms are adhered to by most
persons in a modern economy.
In developing nations, personal relations
substitute for formal institutions when
commercial and professional norms are not
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well established.

Informal Institutions (contd)


Informal institutions suggest expected behaviors
Everyone knows these unwritten rules.
If formal constraints fail, informal constraints play a
larger role in reducing uncertainty.
This is especially important during institutional
transitions:
Fundamental and comprehensive changes
introduced to the formal and informal rules of the
game that affect organizations as players.
Especially true if enforcement is low.
Transition economies: A subset of emerging
32
economies, such as China, Russia, Poland.

What is your interpretation of this beverage ad???

Why did this ad campaign fail in the Middle East???


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http://media.pearsoncmg.com/ph/bp/bp_video_links/2013/mgmt/ib/IB2013_MyGym_EntryStrat.html

Hofstedes Dimensions of National


Culture
1. Power Distance
2. Uncertainty Avoidance
3. Individualism - Collectivism
4. Masculinity Femininity
5. Long Tem Orientation
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http://geert-hofstede.com/countries.html

CAGE FRAMEWORK

35

CAGE FRAMEWORK

Mapping the Distance

36

The Competitive Advantage of Nations


1.

A 4-year study of 10 important trading nations

2.

Account for 50% of worlds total exports in 1985

3.

Focus on industries in which each nations


companies were internationally successful

4.

What are the determinants of national


competitiveness?
(Source: Porter, 1990)
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Determinants of National Competitive Advantage


Firm
Strategy,
Structure,
and Rivalry
Factor
Conditions

Demand
Conditions

Related and
Supporting
Industries
Source: Porter, 1990

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Determinants of Competitiveness
1.

2.

Factor Conditions:
-

Not simply factors of production but specialized assets and skills


specific to particular industries

Created and nurtured through sustained investment

World-class institutions to support

Factor disadvantages challenge and spur innovation

Demand Conditions:
-

Sophisticated and demanding customers pressure companies to


excel and meet high standards

Anticipate global market trends especially so if a nations values


are spreading
39

Determinants of Competitiveness (2)


3.

Related and Supporting Industries:


-

Internationally competitive home-based suppliers create


advantages in downstream industries

Ongoing exchange of ideas and information

R&D, Innovation and upgrading of processes

4.

Firm Strategy, Structure, and Rivalry:


-

Italy: SMEs, Germany: Hierarchical O&M practices

Differences in commercial goals, values and perceptions of risk

Type of education system

Individual motivation to work and expand skills

Presence of strong local rivals


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The Role of Government


1.

Focus on specialized factor creation

2.

Avoid intervening in factor and currency markets

3.

Enforce strict product, safety, and environmental


standards

4.

Sharply limit direct cooperation among industry rivals

5.

Encourage sustained investment in human skills,


innovation and in physical assets Tax policies

6.

Deregulate competition and enforce antitrust policies

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http://business.blogs.cnn.com/2013/08/28/the-worlds-most-innovative-companies/