Flashcards in Institutional Voids and Political Framework Deck (29)
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
Masculinity vs Femininity
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