lecture #2 - instl factors_mb_f15-a
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mbaTRANSCRIPT
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/