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GSBS6481 International Business Strategy
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Week 4: The Institution-Based View of International Business Strategy
Reference & Readings
Institutions
Formal institutions
Informal institutions
Transaction costs
Institutional distance
National cultural differences
Key concepts
Peng, (2017), Global Strategy, 4th ed. USA: Cengage Learning.
Chapter 4 Emphasizing Institutions, Cultures, and Ethics
Fuentelsaz, L., Garrido, E., Maicas, J. P. 2020. The effect of informal and formal institutions on foreign market entry selection and performance.Journal of International Management, 26, 1-17.
DiMaggio, P. J., Powell, W. W. 1983. The iron cage revisited: Institutional isomorphism and collective rationality in organizational fields. American sociological review, 48, 147-160
Li, W., Hendrischke, H. 2020. Chinese outbound investment in Australia: From state Control to entrepreneurship. The China Quarterly, 243, 701-736.
Historical development of institutional theory
The institution-based view in international business strategy
What do institutions do?
Formal vs. informal institutions
Institutions and culture
Case study: Chinese Outbound Investment in Australia
Early institutional theory in economics
Early institutional economists challenged the conventional cannon that economics could be reduced to a set of universal laws
Instead they insisted that economic processes operated within a social framework that was in turn shaped by a set of cultural and historical forces
Individual behaviour as governed by habit and convention (Thorstein Veblen)
Transaction as a more appropriate of analysis for individual choice ( )
Time and space in economics ( )
Source: based on Scott (2008) Chap 2
Early institutional theory in sociology
and bureaucracy
What is bureaucracy?
A model for a rational and efficient large organization; an ideal form of organizational structure
Characteristics of bureaucracies
Hierarchy of authority; impersonality, written rules of conduct, promotion based on achievement, specialized division of labor, efficiency
Cost of bureaucracies
Loss of individuality, loss of autonomy, lack of individual freedom, specialization
Bureaucracy, the rational spirits organizational manifestation, was so efficient and powerful a means of controlling men and women that, once established, the momentum of bureaucratization was irreversible (DiMaggio & Powell 1983)
Neoinstitutional theory in economics
Transaction cost economics
Institutions and the transaction cost theory
What is transaction costs?
Why is transacting increasing costly?
Institutions for reducing uncertainty and thus transaction costs
Neoinstitutional theory in sociology
From iron cage to institutional isomorphism (organizations / firms are becoming more and more similar)
Three mechanisms of institutional isomorphic change
Please refer to DiMaggio, P. J. and W. W. Powell (1983). The iron cage revisited: Institutional isomorphism and collective rationality in organizational fields. American sociological review: 147-160.(supplementary readingof this session), especially its introduction (p.147) and the section Three Mechanisms of Institutional Isomorphic Change (pp.150-152); and discuss the following questions
What do coercive, mimetic, normative mechanisms mean?
Can you identify any examples of those mechanisms?
An Institutional Framework
Formal and informal institutions govern individual and firm behavior
Formal and informal institutions are supported by three pillars (Scott)
Institution-based view of strategy
Institutions are the rules of the game in a society. (North)
Institutions are more than background conditions
Formal and informal institutions
Institutions directly impact a firms formulation and implementation of strategy
Institutions matter.
But, how do they matter?
What Do Institutions Do?
Institutions affect the strategy of firms by:
Reducing uncertainty.
Signaling conduct as acceptable or not, which constrains the range of acceptable actions.
Uncertainty can lead to transactions costs
Transaction costs: Costs associated with economic transactionsor more broadly, costs of doing business
A major source of transaction costs: Opportunism
The possibility of opportunism introduces uncertainty
How to Reduce Uncertainty?
Two kinds of institutionsinformal and formal reduce uncertainty in economic transactions
Arms-length transaction: based on formal institutions
Formal, rule-based, exchange with third-party enforcement
Relational contracting transaction: based on informal institutions Informal, relationship-based, personalized exchange
Formal v.s. Informal Institutions
Formal Institutions
An expensive legal and regulatory framework of courts, lawyers, regulators, and other mechanisms that enforce laws and regulations to facilitate the widening of markets
Benefits of formal Institutions
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
Informal institutions.
Constraints on socially sanctioned norms of behavior
Norms, cultures, ethics etc.
Informal institutions suggest expected behaviours
Unwritten rules
If formal constraints fail, informal constraints play a larger role in reducing uncertainty
E.g. Guanxi in the Chinese culture
Especially important during transitions
Formal versus informal institutions: Costs and Benefits
Formal, Rule-Based, Impersonal Exchange
Informal Relationship-Based Personalized Exchange
Peng, Global Strategy, 4th Edition
Institutional distance and foreign market entry selection
Institutional distance refers to the extent of similarity or dissimilarity between the regulatory, cognitive and normative institutions of two countries
There are a number of strategic implications to multinational corporations, e.g. their market entry selection
Fuentelsaz, L., Garrido, E., & Maicas, J. P. (2020). The effect of informal and formal institutions on foreign market entry selection and performance.Journal of International Management, 100735.
The model of culture
Culture is like an iceberg.Much is hidden from sight, even for its members.
Hofstedes cultural dimensions
Hofstede was one of the first researchers to measure national culturalanalyze the influence of NATIONAL culture on management practices
EGP, IND, MEX, RUS
Comparing cultural differences across nations
The website that enables you to easily compare cultural differences across nations based on Hofsteds cultural modelhttps://www.hofstede-insights.com/country-comparison/
assumption
assumption
with Prof., a founder of the cross-culture management
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