Chapter 1: globalising business
What determines the success and failure of firms around
the globe
Institution-based view: formal and informal rules of the game
Resource based view: firm-specific resources and capabilities
Institution based view
Doing business around the globe requires knowledge about formal and informal rules of doing business
indifferent countries
Formal rules like requirements to treat domestic and foreign firms as equals
Informal rules about culture, norms and values
This view shed light on what is behind the firms their performance around the globe
Resource based view
Focuses on a firm’s internal resources and capabilities
LOF = Liability of foreigness = the more a firms origins differ from the host environment, the less the
firm has experience within the host country
What is globalization?
A process leading to greater interdependence and mutual awareness among economic, political and
social units in the world and among actors in general
Explain the concept of international business and global
business
IB = a business that engages in international economic activities and the action of doing business
abroad
GB = business around the global including both international activities and domestic business
activities
Liability of outsidership
Distant origins
Lack of local experience
Lack of nearby experience
lack of familiarity, network and legitimacy in the local context
liability of outsidership
The Liability of Outsidership describes difficulties related with the entrance to a new foreign market
where the firm does not have any position in businessrelevant networks
,Chapter 2: economic, political and
legal systems
Formal institutions
Are normally the government
Laws, regulations, rules
Informal institutions
Behaviours are morally right or wrong, and what is important and not within a society
Norms, cultures, ethics
What do institutions do?
The key role is to reduce uncertainty
Uncertainty increases transaction costs
Institutional framework can reduce the potential for opportunistic behaviour by establishing
rules
They are not static and evolve over time
Two propositions
1. Managers and firms rationally pursue their interest and make choices within the formal and
informal constraints in a given institutional framework
2. Although formal and informal institutions combine to govern firm behaviour, in situations where
formal constraints are unclear or fail, informal constraints will play a larger role in reducing
uncertainty and providing constancy to managers and firms
Political systems
Refers to rules of the game on how a country is governed politically
Political risk is the risk when political changes may negatively impact domestic and foreign firms
Democracy: citizens elect representatives to govern the country
Totalitarianism = dictatorship: one person exercises political control over the population
Economic systems
Rules of the game how a country is governed economically
Market economy: invisible hand of market forces
Command economy: commanding height in economy (factors are state owned and controlled)
Legal systems
Rules of game how a country’s law are enacted and enforced
Civil law: statutes and codes to form legal judgement
Common law: precedents and traditions from previous judicial decision
Case law: rules that are created by precedents of cases in court
Intellectual property rights
Patents: legal rights awarded by government to inventors of new technological ideas, which are
given exclusive rights to derive income from these inventions
Copyrights: legal rights of authors and publishers to publish their work
, Trademarks: legal rights of firms to use specific names, brands and design to differentiate their
products
In practice
Entering a new country, do your homework by developing an understanding of the formal
institutions governing firm behaviour
Changes in formal institutions can be anticipated by engaging in processes in economic, political
and legal systems
When doing business in countries with strong propensity for informal relational exchanges, insist
on formalize the contract right away may backfire
Most developed economies are supported by strong and effective formal institutions
Most underdeveloped economies are held back by weak, ineffective formal institutions
, Chapter 3: culture, religion and
language
Informal institutions come from information and are part of culture. They tell individuals what behaviour
is right and proper, and what is unacceptable
Cultures have nog clearly defined origin but this has evolved over time
Ethnocentrism: within a society, we find our own culture as natural, rational and morally right
Culture can be seen as the collective programming of the mind which distinguished the members of one
group or category of people from another
3 ways to systematically understand cultural differences
1. Cultural context
Low context culture:
communication is taken at face value without much reliance on unspoken context. Yes means
yes. What you say is what you get and what you mean
North America & Western Europe
High context culture:
communication relies a lot on the underlying unspoken context, which is as important as the
words used. Yes does not necessarily mean yes, I agree, it might be: yes, I hear you
Arab & Asian countries
2. Cultural clusters
The cluster approach groups countries that share similar cultures together as one cluster
Civilization = the highest cultural grouping of people and the broadest level of cultural identity people
have firms are more comfortable doing business with other countries in the same cluster. There is a
common history, religion and no liability of outsidership
3. Cultural dimensions
Hofstede’s 5 dimensions
Individualism
Masculinity – femininity
Uncertainty voidance (Germany/japan/Korea do not like uncertainty and have lots of rules)
Long-term orientation
Power distance
How to calculate cultural distance: Kogut & Singh
US = the home country
J = country that you compare with the US
There is a lot of critique on this index:
Illusion of symmetry: it assumes that the cultural distance between country A and B is similar to
the distance between country B and A
Illusion of stability: it is measured at a single point in time and assumed constant over time
Illusion of linearity: only one measure to explain location of MNE, entry mode and success of
foreign activities
Illusion of causality: it should not be studied in isolation but with geographic distance
Illusion of discordance: assumption that all distance between home and host country is equally
What determines the success and failure of firms around
the globe
Institution-based view: formal and informal rules of the game
Resource based view: firm-specific resources and capabilities
Institution based view
Doing business around the globe requires knowledge about formal and informal rules of doing business
indifferent countries
Formal rules like requirements to treat domestic and foreign firms as equals
Informal rules about culture, norms and values
This view shed light on what is behind the firms their performance around the globe
Resource based view
Focuses on a firm’s internal resources and capabilities
LOF = Liability of foreigness = the more a firms origins differ from the host environment, the less the
firm has experience within the host country
What is globalization?
A process leading to greater interdependence and mutual awareness among economic, political and
social units in the world and among actors in general
Explain the concept of international business and global
business
IB = a business that engages in international economic activities and the action of doing business
abroad
GB = business around the global including both international activities and domestic business
activities
Liability of outsidership
Distant origins
Lack of local experience
Lack of nearby experience
lack of familiarity, network and legitimacy in the local context
liability of outsidership
The Liability of Outsidership describes difficulties related with the entrance to a new foreign market
where the firm does not have any position in businessrelevant networks
,Chapter 2: economic, political and
legal systems
Formal institutions
Are normally the government
Laws, regulations, rules
Informal institutions
Behaviours are morally right or wrong, and what is important and not within a society
Norms, cultures, ethics
What do institutions do?
The key role is to reduce uncertainty
Uncertainty increases transaction costs
Institutional framework can reduce the potential for opportunistic behaviour by establishing
rules
They are not static and evolve over time
Two propositions
1. Managers and firms rationally pursue their interest and make choices within the formal and
informal constraints in a given institutional framework
2. Although formal and informal institutions combine to govern firm behaviour, in situations where
formal constraints are unclear or fail, informal constraints will play a larger role in reducing
uncertainty and providing constancy to managers and firms
Political systems
Refers to rules of the game on how a country is governed politically
Political risk is the risk when political changes may negatively impact domestic and foreign firms
Democracy: citizens elect representatives to govern the country
Totalitarianism = dictatorship: one person exercises political control over the population
Economic systems
Rules of the game how a country is governed economically
Market economy: invisible hand of market forces
Command economy: commanding height in economy (factors are state owned and controlled)
Legal systems
Rules of game how a country’s law are enacted and enforced
Civil law: statutes and codes to form legal judgement
Common law: precedents and traditions from previous judicial decision
Case law: rules that are created by precedents of cases in court
Intellectual property rights
Patents: legal rights awarded by government to inventors of new technological ideas, which are
given exclusive rights to derive income from these inventions
Copyrights: legal rights of authors and publishers to publish their work
, Trademarks: legal rights of firms to use specific names, brands and design to differentiate their
products
In practice
Entering a new country, do your homework by developing an understanding of the formal
institutions governing firm behaviour
Changes in formal institutions can be anticipated by engaging in processes in economic, political
and legal systems
When doing business in countries with strong propensity for informal relational exchanges, insist
on formalize the contract right away may backfire
Most developed economies are supported by strong and effective formal institutions
Most underdeveloped economies are held back by weak, ineffective formal institutions
, Chapter 3: culture, religion and
language
Informal institutions come from information and are part of culture. They tell individuals what behaviour
is right and proper, and what is unacceptable
Cultures have nog clearly defined origin but this has evolved over time
Ethnocentrism: within a society, we find our own culture as natural, rational and morally right
Culture can be seen as the collective programming of the mind which distinguished the members of one
group or category of people from another
3 ways to systematically understand cultural differences
1. Cultural context
Low context culture:
communication is taken at face value without much reliance on unspoken context. Yes means
yes. What you say is what you get and what you mean
North America & Western Europe
High context culture:
communication relies a lot on the underlying unspoken context, which is as important as the
words used. Yes does not necessarily mean yes, I agree, it might be: yes, I hear you
Arab & Asian countries
2. Cultural clusters
The cluster approach groups countries that share similar cultures together as one cluster
Civilization = the highest cultural grouping of people and the broadest level of cultural identity people
have firms are more comfortable doing business with other countries in the same cluster. There is a
common history, religion and no liability of outsidership
3. Cultural dimensions
Hofstede’s 5 dimensions
Individualism
Masculinity – femininity
Uncertainty voidance (Germany/japan/Korea do not like uncertainty and have lots of rules)
Long-term orientation
Power distance
How to calculate cultural distance: Kogut & Singh
US = the home country
J = country that you compare with the US
There is a lot of critique on this index:
Illusion of symmetry: it assumes that the cultural distance between country A and B is similar to
the distance between country B and A
Illusion of stability: it is measured at a single point in time and assumed constant over time
Illusion of linearity: only one measure to explain location of MNE, entry mode and success of
foreign activities
Illusion of causality: it should not be studied in isolation but with geographic distance
Illusion of discordance: assumption that all distance between home and host country is equally
