Institutional Factors in

Global Business

Dr. Mona BahlYoungstown State University

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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

1.Why Expand across borders; When should it globalize?

Understanding Grolsch’s history

Understanding Grolsch’s performance

Why did Grolsch globalize?

Case Study Questions

Case Study Questions

2. What should be the thrust of the Company’s 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?

Case Study Questions

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

3. Future Path

Will the merger with SABMiller add value or not?

What changes would you suggest to Grolsch’s current strategy?

Case Study Questions

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

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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

a particular industry?

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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 company’s 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 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 arm’s-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.12

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Political Ideologies

Both private and public groups need to balance

each other’s power

Every aspect ofpeople’s lives must be

controlled to preserve order

Only individuals andprivate groups can

preserve personal liberties

Totalitarianism AnarchismPluralism

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Legal Systems

PrecedentPast cases before the courts

UsageHow laws are applied

TraditionNation’s legal history

Common Law

Rules and statutes constitute a

legal code

Defines all obligations, responsibilities, and privileges

Dates to Roman times in the

fifth century B.C.

Civil Law

Theocratic Law

Legal tradition based on religious teachings

Islamic law Jewish law Hindu law

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Legal Map of the World

Civil lawCommon lawBi-juridical/mixed (civil and common law)Islamic law (Sharia)

17http://www.doingbusiness.org/rankings

Economic Differences

• Economic Systems– Capitalist versus Socialist (Communist)

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

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Capital Market

System that allocates financial resourcesaccording 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

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

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

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Largest Currency Markets

UK: $1.33 trillion

US: $0.62 trillion

Japan:$0.24 trillion Source: */Kyodo/Newscom

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• Individual & Business Transactions• Trade & Investment Activity• Trade Deficits• Interest Rates• Inflation

Factors that affect currency movement (Demand & Supply)

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U.S. Balance of Payments

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• Individual & Business Transactions• Trade & Investment Activity• Trade Deficits• Interest Rates• Inflation

Factors that affect currency movement

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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

PPP Estimate of GDP per Capita GDP per Capita

Country (U.S. $) (U.S. = 100)

United States 39,700 39,700Switzerland 47,900 34,700Australia 32,400 32,400Canada 30,600 31,800United Kingdom 35,600 30,800Japan 36,500 29,600Czech Republic 10,600 18,600Hungary 10,000 15,900Mexico 6,600 10,200Turkey 4,200 7,600Source: 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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• Exchange Rate: Rate at which one country’s currency can be traded for another country’s currency.

Definition

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Forward Rate

Rate at which two parties will exchangecurrencies on a specified future date

Forward Contracts

Reduce exchange-rate risk

30, 90, 180 days or custom lengths

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Currency swapSimultaneous purchase and sale of foreign exchange

for two different dates

Currency optionOption to exchange a specified amount of currency on a

specified date at a specified rate

Currency futures contractContract requiring the exchange of a specified amount of a currency

on a specified date at a specified exchange rate, with allconditions fixed and not adjustable

Swaps, Options, and Futures

http://live.wsj.com/video/experts-explain-what-is-the-forex-market/BFE9AA7F-5938-451A-BBC0-43E86EF5A3DF.html#!BFE9AA7F-5938-451A-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

country’s 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.

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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 well established.

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Informal Institutions (cont’d)

• 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 economies, such as China, Russia, Poland.

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

What is your interpretation of this beverage ad???

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

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Hofstede’s Dimensions of National Culture

1. Power Distance

2. Uncertainty Avoidance

3. Individualism - Collectivism

4. Masculinity – Femininity

5. Long Tem Orientationhttp://geert-hofstede.com/countries.html

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CAGE FRAMEWORK

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CAGE FRAMEWORK

Mapping the Distance

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The Competitive Advantage of Nations

1. A 4-year study of 10 important trading nations

2. Account for 50% of world’s total exports in 1985

3. Focus on industries in which each nation’s

companies were internationally successful

4. What are the determinants of national

competitiveness?

(Source: Porter, 1990)

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Firm Strategy,

Structure, and Rivalry

Related and Supporting Industries

FactorConditions

DemandConditions

Determinants of National Competitive Advantage

Source: Porter, 1990

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Determinants of Competitiveness

1. 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

2. Demand Conditions: - Sophisticated and demanding customers pressure companies to

excel and meet high standards

- Anticipate global market trends especially so if a nation’s values

are spreading

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