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Why should there be caution when going global?

Greater success rate when businesses stay local, few companies actually succeed at going global according to Harvard Business Review (2015)


Why is there limited success at going global?

- Lack of understanding of customer needs
- Lack of management skills
- Insufficient knowledge about regulatory/political/cultural differences


How do institutions affect business?

- Rules of the game (formal and informal)
- Basic framework consisting of norms, rules and beliefs which influence behaviour


What are the three pillars of institution according to Scott (2001)?

Regulatory - coercive power of govs, (formal - laws, regs and rules)

Normative - influence of values, beliefs and actions (informal - norms)

Cognitive - internalised, taken for granted beliefs that guide behaviour (informal - culture, ethics)


How do political systems relate to institutionalism?

They consist of formal institutions e.g parties, interest groups, trade unions

They shape economic and legislative framework of EMs


How do economic systems differ?

Market - invisible hand of market forces, gov is hands off

Command - FOPs controlled by the gov, supply, demand and pricing controlled and planned

Mixed - private/nationalised business


How does socialism/communism affect the economic system?

- Group welfare outweighs individual welfare
- Fair wealth distribution
- High state ownership and intervention
Embraced throughout central and Eastern Europe and former Soviet Union until late 1980s


How does the free market ideology affect the economic system?

- Individual interest dominate
- Economic inequality is allowed and tolerated
- Private enterprises operate on the principles of demand and supply
- Dominantly democratic governance


How is confiscation a political risk in the EMs?

Government taking ownership of property without compensation
- South Africa taking white property
- Chinese gov seizing US property after Chinese communists took power in 1949
- Occidental Petroleum assets taken by Venezuela in 2006


How is expropriation a political risk in the EMs?

Government taking ownership with some compensation, usually agree to sell due to implied/explicit coercion

E.g Venezuela took over the country's last privately held oilfields in 2007


How is nationalisation a political risk in the EMs?

Government ownership affects industries rather than a single company
E.g Mexico in order to control its debt problem nationalised the country's banking system


How is domestication a political risk in the EMs?

Foreign companies relinquish control completely and partially to nationals
- Private entities allowed to operate on expropriated poverty
- Takes place in the absence of confiscation
- Usually due to economic or social pressures


Why is the risk of expropriation less likely in the future?

- Poor record of running nationalised business
- Nationalisation deters FDI


What are the political risks in the EMs?

General instability - uncertainty about political system

Operation risk - host gov's possibility of constraining investor's business operations

Transfer risk - host gov's possibility of constraining the ability of a subsidiary to send payment out of the country


How has Trump's trade war with China affected US business?

Ordered to leave China but 87% haven't and don't plan to


How can insurance mitigate political risk?

1) Private - insurance of sales, profits, currency inconvertibility, return of capital, non payment of trade receivables by a gov or foreign buyer
2) Government - investment insurance and credit financing
3) Multilateral Investment Guarantee - 100 members, promote private investment by insuring against non commercial risk


Why are property rights important in terms of legal system?

- Produces stability and predictability
- Formal funding in developed markets and informal in EMs
- Stimulate R&D growth


What are institutional voids according to Khanna et al (2005)?

- Absent or unreliable sources of information
- Uncertain regulatory environment
- Inefficient judicial systems


What are the negative effects of institutional voids?

- They reduce market efficiency
- They increase transaction costs: of doing business and finding and monitoring partners
- They cause market failure


Where do institutional voids exist in EMs?

- Product markets of goods and services
- Labour markets of employees, human resource
- Capital markets - money financial investment


How do product markets contain institutional voids?

- Consumer data difficult to obtain
- Lack of market research firms
- Biased information
- Limited access to raw materials
- Sparse network of suppliers
- Lack of quality standards and reliability


How do institutional voids exist in labour markets?

- Lack of education infrastructure: technical and management training?
- English speaking?
- Does the local culture accept expatriates? Can locally hired people be transferred to another country?


How do institutional voids exist in capital markets?

- Effectiveness of banks, insurance companies of investing
- Availability of unbiased info from financial analysed on companies
- Management of financial institutions, transparent decision making? Family ties?


What is culture as an informal institution?

The collective programming of the mind which distinguishes the members of one group or category of people from another (Hofstede, 1997)

Pertinent in forming business relations


What are the different cultural dimensions according to Hofstede?

Individualism vs collectivism

Power distance

Masculinity vs Femininity

Uncertainty avoidance

Long term vs Short term


How do the BRICS and the US differ in terms of Hofstede's dimensions?

US the most individualistic, China the least

Russia most avoidant of uncertainty, China the least

Russia with the greatest power distance, US with the least

China the most masculine, closely followed by US


What is the general culture of the BRIC countries?

BRICs have greater power distance and a centralised decision making process

Highly collectivist - networks are crucial

Resistant to change and new ideas


What are deal oriented cultures compared to relationship oriented cultures?

Focus on the tax, impersonal, use contracts. Avoid small talk. Impersonal approach to settling disputes.

E.g Western world


What are relationship oriented cultures compared to deal oriented?

- Trust is valued
- Relationships highly important in deals
- Chinese guanxi - value of social hierarchy and reciprocal obligatons
e.g Took 9 years to negotiate opening of VW car factory in China