Theme 1: Introduction IBC - Lecture 1.1 2
Theme 1: Institutional Context - Lecture 1.2 4
Theme 2: Societal Cross-National Context, NBS - Lecture 2.1 11
Theme 3: Cultural context and societal analysis - Lecture 3 16
Theme 4: Regulatory Context - Comparative CG - Lecture 4 21
Theme 5: Institutional Hazards & Political Risk - Lecture 5 29
Theme 6 - Global Governance - Lecture 6 33
1
,Lectures International Business Context
Theme 1: Introduction IBC - Lecture 1.1
IBC consists of institutional, societal, regulatory, and political factors that influence business.
Purpose of the course
- Main contextual factors (e.g. institutional, societal, political, and regulatory) that influence
strategy formulation and implementation?
- How do nations differ systematically in terms of their (in)formal institutions and their NBS?
- What are some of the cross-country cultural models broadly used in IB research and is there
a ‘best’ model?
- What is political risk and how is it influenced by institutional and cultural factors?
- How is governance (e.g. characteristics, aspects, mechanisms) practiced in different
countries, within value chains, and supra-nationally (global governance)?
Contextual Perspectives
Strategy: different theoretical schools of thought within strategy
‘Different schools’, pay attention to in which of these schools is the context relevant:
Schools in Strategy & Organization
● Entrepreneurial School
Strategy formation driven by creativity and intuition (visionary leader with great creativity and
intuition where the market is going & ‘intrepreneurs’ = entrepreneurs within an organization).
This is very demanding and dependent on CEO, must have right leader.
E.g. Steve Jobs and Apple.
● Cognitive School
Psychology research background. Strategy formation is driven by processes of thinking and
mental processes, but managers have bounded rationality and reality is constructed.
Cognitive limits may result in biases in decision making. Managers’ background
characteristics influence their cognitive base and thereby their strategic choices.
E.g.
● Power School
Political Science. Strategy formation driven by internal and external power politics. Outcome
of negotiation, coalitions, lobbying, withholding crucial info, etc. Decisions follow the desires of
the most powerful.
E.g.
● Design School
Architectural background. Clear strategy should be formulated before implemented. Match
internal situation of organization with external environment. Useful in stable environment,
inflexible in fast-changing environment.
● Planning School
Operations perspective. Formal process of steps for planning and control, from analysis of
situation to execution of strategy. Given clear direction, through static - predicting is difficult.
● Positioning School
Military Strategy. Considers industry context and aims to improve organization’s strategic
position within that industry (Five Forces). Systematic, though neglects power, politics,
culture, social elements.
● Learning School
2
, Strategy is incremental and emerging, with focus on flexibility and development. Strategy
formation is a continuous, evolving process that involves learning. Learning involves both
internal (e.g. developing core competencies) and external aspects (the environment).
● Cultural School
Anthropology. Strategy formation as a collective and collaborative process, reflecing the
corporate culture. Emphasizes social processes, beliefs and values. Strong culture can bind
people, but also can explain resistance to strategic change.
● Environmental School
Biology. Strategy is about adapting to (changing) environmental conditions. Deteminism- the
environment as an actor. There needs to be a fit between a firm’s structure and its
environment.
● Configurational School
Strategy formation is about transforming the organizational structure. An organization is
described as its stable configuration of characteristics, which have been adopted for a period
of time in a particular context. These characteristics cause it to behave in particular ways, and
perfect alignment with the context (fit) leads to best strategy. Changing context periodically
requires a transformation to another structural configuration.
Which strategies consider context?
7 out of the 10 schools are really strongly concerned with what is going on with the IBC.
→ Power, Design, Learning, Environmental, Configurational, Cultural, Planning, Positioning
Environment: PESTEL approach
- Political formal institutions e.g. political system
- Economic formal institutions e.g. capital market
- Social informal institutions e.g. national culture
- Technological out of our scope
- Ecological out of our scope
- Legal formal institutions e.g. protection of property rights
Translate this PESTEL approach into different contextual perspectives.
❖ Institutional context
- Political: formal institutions, political regimes
- Economic: formal institutions, e.g. capital market
- Legal: formal institutions, e.g. protection of property rights
❖ Societal context
- Social: informal institutions, e.g. national cutlure, norms, beliefs
- Corporate Governance Regimes: stakeholder vs shareholder
Both: Global Governance Regimes
Levels of Governance
● Institutional and political governance
→ The national and international arenas where rules that shape market governance are
framed.
→ Where power of national actors decline, regional and international actors gain
significance.
● Industrial or value-chain governance
→ The organization of ties between various actors engaged in a global supply chain.
● Corporate or intra-firm governance
→ The firm’s organization and accountability to various stakeholders, shareholders,
employees, local communities, etc.
3
, Theme 1: Institutional Context - Lecture 1.2
Article 1.1 - Institutions - North (1991)
‘Institutions are humanly devised constraints that structure political, economic and social interaction’ -
North (1991), they create order and reduce uncertainty of exchange.
→ Formal rules: constitutions, laws, property rights
→ Informal constraints: sanctions, taboos, customs, traditions, codes of conduct
Incremental institutional evolution of political and economic institutions create the economic
environment.
North’s purpose: to elaborate the role of institutions in the performance of economies with analysis
from economic history. A village has a small scale with low transaction costs, compared to World
trade with long distance and a lot of transaction costs involved.
Agency problem & contract negotiation involved:
- Agency problem: when you appoint an agent to be a representative in trade, then relying on
them to do their best work on your behalf. Take advantage or disadvantage of this situation.
- Contract negotiation: different understanding of what terms mean in different places.
How were these problems managed in early long distance trade?
Often there were trading houses, relying on personal ties (family member was involved), voluntary
constraints, ostracism. Expansion of markets: specialized producers, scale economies and
impersonal contact enforcement.
What kind of institutions developed to manage agency problems and contract negotiation?
→ Initially secure property rights, judicial system, and complex governance structures limit agency
problems in hierarchical organizations. → To limit agency problems.
● In modern societies, significant amount of resources in society engaged in transacting.
● Service sector grows to dominance over manufacturing.
● Specialized forms of organizations safeguard transactions across borders.
What state of institutions at the suq, caravan trade, tribal society?
Example: Istanbul bazar, negotiate about a carpet. There was a level of information asymmetry about
the quality and the price. There is not a bureau of consumer protection in the bazar, very low
governmental controls but about bargaining. There are high transaction costs by the buyer. Why? If
there was an innovation that would have protected the consumer it would threaten the sellers in the
bazar because they own their money on tourists.
So: Information asymmetry / Low governmental controls / High transaction costs
Why? Information would threaten livelihood / No incentive to alter institutions
Institutional Evolution in Europe. What institutional innovations?
- Interest rates decreased contracting costs (writing and enforcing)
- Institutions supporting bills of exchange (negotiability and discounting)
- Accounting procedures developed to monitor agents
- Pricing information for commodities
- Risk insurance and portfolio diversification
What explains differences? Nature of context: higher levels of political competition. Path dependency
means that history matters:
4
Theme 1: Institutional Context - Lecture 1.2 4
Theme 2: Societal Cross-National Context, NBS - Lecture 2.1 11
Theme 3: Cultural context and societal analysis - Lecture 3 16
Theme 4: Regulatory Context - Comparative CG - Lecture 4 21
Theme 5: Institutional Hazards & Political Risk - Lecture 5 29
Theme 6 - Global Governance - Lecture 6 33
1
,Lectures International Business Context
Theme 1: Introduction IBC - Lecture 1.1
IBC consists of institutional, societal, regulatory, and political factors that influence business.
Purpose of the course
- Main contextual factors (e.g. institutional, societal, political, and regulatory) that influence
strategy formulation and implementation?
- How do nations differ systematically in terms of their (in)formal institutions and their NBS?
- What are some of the cross-country cultural models broadly used in IB research and is there
a ‘best’ model?
- What is political risk and how is it influenced by institutional and cultural factors?
- How is governance (e.g. characteristics, aspects, mechanisms) practiced in different
countries, within value chains, and supra-nationally (global governance)?
Contextual Perspectives
Strategy: different theoretical schools of thought within strategy
‘Different schools’, pay attention to in which of these schools is the context relevant:
Schools in Strategy & Organization
● Entrepreneurial School
Strategy formation driven by creativity and intuition (visionary leader with great creativity and
intuition where the market is going & ‘intrepreneurs’ = entrepreneurs within an organization).
This is very demanding and dependent on CEO, must have right leader.
E.g. Steve Jobs and Apple.
● Cognitive School
Psychology research background. Strategy formation is driven by processes of thinking and
mental processes, but managers have bounded rationality and reality is constructed.
Cognitive limits may result in biases in decision making. Managers’ background
characteristics influence their cognitive base and thereby their strategic choices.
E.g.
● Power School
Political Science. Strategy formation driven by internal and external power politics. Outcome
of negotiation, coalitions, lobbying, withholding crucial info, etc. Decisions follow the desires of
the most powerful.
E.g.
● Design School
Architectural background. Clear strategy should be formulated before implemented. Match
internal situation of organization with external environment. Useful in stable environment,
inflexible in fast-changing environment.
● Planning School
Operations perspective. Formal process of steps for planning and control, from analysis of
situation to execution of strategy. Given clear direction, through static - predicting is difficult.
● Positioning School
Military Strategy. Considers industry context and aims to improve organization’s strategic
position within that industry (Five Forces). Systematic, though neglects power, politics,
culture, social elements.
● Learning School
2
, Strategy is incremental and emerging, with focus on flexibility and development. Strategy
formation is a continuous, evolving process that involves learning. Learning involves both
internal (e.g. developing core competencies) and external aspects (the environment).
● Cultural School
Anthropology. Strategy formation as a collective and collaborative process, reflecing the
corporate culture. Emphasizes social processes, beliefs and values. Strong culture can bind
people, but also can explain resistance to strategic change.
● Environmental School
Biology. Strategy is about adapting to (changing) environmental conditions. Deteminism- the
environment as an actor. There needs to be a fit between a firm’s structure and its
environment.
● Configurational School
Strategy formation is about transforming the organizational structure. An organization is
described as its stable configuration of characteristics, which have been adopted for a period
of time in a particular context. These characteristics cause it to behave in particular ways, and
perfect alignment with the context (fit) leads to best strategy. Changing context periodically
requires a transformation to another structural configuration.
Which strategies consider context?
7 out of the 10 schools are really strongly concerned with what is going on with the IBC.
→ Power, Design, Learning, Environmental, Configurational, Cultural, Planning, Positioning
Environment: PESTEL approach
- Political formal institutions e.g. political system
- Economic formal institutions e.g. capital market
- Social informal institutions e.g. national culture
- Technological out of our scope
- Ecological out of our scope
- Legal formal institutions e.g. protection of property rights
Translate this PESTEL approach into different contextual perspectives.
❖ Institutional context
- Political: formal institutions, political regimes
- Economic: formal institutions, e.g. capital market
- Legal: formal institutions, e.g. protection of property rights
❖ Societal context
- Social: informal institutions, e.g. national cutlure, norms, beliefs
- Corporate Governance Regimes: stakeholder vs shareholder
Both: Global Governance Regimes
Levels of Governance
● Institutional and political governance
→ The national and international arenas where rules that shape market governance are
framed.
→ Where power of national actors decline, regional and international actors gain
significance.
● Industrial or value-chain governance
→ The organization of ties between various actors engaged in a global supply chain.
● Corporate or intra-firm governance
→ The firm’s organization and accountability to various stakeholders, shareholders,
employees, local communities, etc.
3
, Theme 1: Institutional Context - Lecture 1.2
Article 1.1 - Institutions - North (1991)
‘Institutions are humanly devised constraints that structure political, economic and social interaction’ -
North (1991), they create order and reduce uncertainty of exchange.
→ Formal rules: constitutions, laws, property rights
→ Informal constraints: sanctions, taboos, customs, traditions, codes of conduct
Incremental institutional evolution of political and economic institutions create the economic
environment.
North’s purpose: to elaborate the role of institutions in the performance of economies with analysis
from economic history. A village has a small scale with low transaction costs, compared to World
trade with long distance and a lot of transaction costs involved.
Agency problem & contract negotiation involved:
- Agency problem: when you appoint an agent to be a representative in trade, then relying on
them to do their best work on your behalf. Take advantage or disadvantage of this situation.
- Contract negotiation: different understanding of what terms mean in different places.
How were these problems managed in early long distance trade?
Often there were trading houses, relying on personal ties (family member was involved), voluntary
constraints, ostracism. Expansion of markets: specialized producers, scale economies and
impersonal contact enforcement.
What kind of institutions developed to manage agency problems and contract negotiation?
→ Initially secure property rights, judicial system, and complex governance structures limit agency
problems in hierarchical organizations. → To limit agency problems.
● In modern societies, significant amount of resources in society engaged in transacting.
● Service sector grows to dominance over manufacturing.
● Specialized forms of organizations safeguard transactions across borders.
What state of institutions at the suq, caravan trade, tribal society?
Example: Istanbul bazar, negotiate about a carpet. There was a level of information asymmetry about
the quality and the price. There is not a bureau of consumer protection in the bazar, very low
governmental controls but about bargaining. There are high transaction costs by the buyer. Why? If
there was an innovation that would have protected the consumer it would threaten the sellers in the
bazar because they own their money on tourists.
So: Information asymmetry / Low governmental controls / High transaction costs
Why? Information would threaten livelihood / No incentive to alter institutions
Institutional Evolution in Europe. What institutional innovations?
- Interest rates decreased contracting costs (writing and enforcing)
- Institutions supporting bills of exchange (negotiability and discounting)
- Accounting procedures developed to monitor agents
- Pricing information for commodities
- Risk insurance and portfolio diversification
What explains differences? Nature of context: higher levels of political competition. Path dependency
means that history matters:
4
