GBS CH 4 EMPHASIZING INSTITUTIONS, CULTURES, ETHICS
- 1. CHAPTER 4 Emphasizing Institutions, Cultures & LEARNING OBJECTIVES 1. understand the concept of institutions, their functions and abilities to reduce uncertainty 2. discuss institution-based view of strategy 3. understand the strategic role of culture 4. understand the strategic role of ethics 1
- 2. Definition: 1) “the humanly devised constraints that structure human interaction” based on the “rules of the game” metaphor (North, 1990). 2) institution is also defined by Scott (1995) as “regulatory, normative, and cognitive structures and activities that provide stability and meaning to social behaviour.” Institutions 2
- 3. To avoid confusion, the institution in the context of the discussion in this chapter is not making a reference to an organization. The institution in this chapter refers as a platform to set the ground rules to govern the interaction in an organization. In contrast, the organization refers to the people (employees) who are pursuing common determination in business or government. Accordingly, an institutional framework that governs individual (employee) and firm behavior is made up of formal institutions and informal institutions. Institutions 3
- 4. A firm’s strategies and performance to a certain extent are determined by institutions that make and enforce the rules and regulations e.g. government may limit the ability of foreign firms to compete in a host country in order to protect local players (protectionism). An institutional framework that governs individual and firm behaviour is made up of formal institutions and informal institutions. 1) Formal institutions is where the government enact and enforce laws, regulations and rules e.g. copyright laws, IPR, competition policy, & contract laws. Businesses must abide with these rules and regulation. Any violation of government laws is subject to action that leads to prosecution. Institutional Framework 4
- 5. 2) Informal institutions is not a pre-established set of rules that individual and firm must abide but it is more of norms, cultures and ethics that governs how they behave e.g., in the context of culture, Japanese whom are known for their work culture practices e.g. honne & tatemae. Honne is one’s true feeling, true desires, and true opinions while Tatemae, on the other hand, refers to “behaviors and opinions displayed in public”. The concepts of honne and tatemae are often used to describe not only thought and behavior among individuals but also at the institutional level in Japan e.g. Japanese companies offer paid vacations that their employees are able to take freely (tatemae). Yet, in many cases, they don’t actually expect their workers to use their vacation time (honne). Accordingly, in the context of ethical behaviour, what is right and wrong may be influenced, to a certain degree, by culture of a firm country in which firm operates. Institutional Framework 5
- 6. 1) According to the system of liberty, the sovereign has only three duties to attend to, namely, external security, internal security (law and law enforcement), and certain public works and certain public institutions.” 2) Smith (1976) further contended that the duty of institution or government is to safeguard external and internal security. 3) Friedman (1982) enhanced the role of institution include to preserve law and order, to enforce private contracts and to foster competitive markets. 4) Government is also expected to provide public goods, correct market failure, reduce inequalities in income and opportunities and stabilize excessive economic fluctuations (Tabellini, 2005). it can be concluded that the key function of institution is to minimize risks associated with doing business by reducing the uncertainties. 6 Key functions of institutions:
- 7. Institution and Uncertainty Businesses all over the world expect institution to be able to reduce uncertainty. Business uncertainty can be the result of economic and political uncertainties. i) economic uncertainty relates to for example the failure to complete transactions as interpreted in contracts. ii) whereby, political uncertainty includes any changes in the political environment that can affect business long-term planning The role of government is to be able to reduce uncertainty as it increases firm’s efficiency and reduce cost of doing business which is also known as transaction cost. Transaction cost may be the result of cheating, misleading and confusing other parties in transactions. Hence, many governments are competing with each other to provide investor-friendly institutional framework to make their countries an attractive location for investment (see Global Competitiveness Report by World Economic Forum - http://www.weforum.org). 7
- 8. Ease of business ranking (2013) Economy Ease of Doing Business Rank Starti ng a Busin ess Dealing with Constructio n Permits Getti ng Electr icity Regist ering Proper ty Gett ing Cre dit Protec ting Invest ors Pay ing Tax es Trading Across Borders Enforc ing Contr acts Resolvi ng Insolve ncy Singapore 1 4 2 5 36 12 2 5 1 12 2 Hong Kong SAR, China 2 6 1 4 60 4 3 4 2 10 17 New Zealand 3 1 6 32 2 4 1 21 25 17 13 United States 4 13 17 19 25 4 6 69 22 6 16 Denmark 5 33 8 14 6 23 32 13 4 34 10 Norway 6 43 23 14 7 70 25 19 21 4 3 United Kingdom 7 19 20 62 73 1 10 16 14 21 8 Korea, Rep. 8 24 26 3 75 12 49 30 3 2 14 Georgia 9 7 3 50 1 4 19 33 38 30 81 Australia 10 2 11 36 37 4 70 48 44 15 18 Finland 11 49 34 21 24 40 70 23 6 9 5 Malaysia 12 54 96 28 33 1 4 15 11 33 49 8
- 9. Institution Based View The focus of institution-based view (Peng, 2002) is on the dynamic interaction between institutions and firms. According to institution-based view there are two main propositions: i. managers and firms consciously pursue their interest and strategies within institutional constraints e.g. firms pursue counterfeiting strategies as their strategic choice as there are weak institutional environment in which there are weak protection on intellectual property rights and complemented by the availability of resources in the form of manufacturing and distribution capabilities. ii. The combinations of formal and informal institutions are supposed to govern firm behaviour. When formal institution fail to lead firm to achieve competitive advantage, firm will then turn to informal institution to reduce uncertainty e.g. political resources in which firm rely on political influence to gain competitive advantage. A case in point is in many developing countries where local firms are unable to compete with global giant players in their home market, they will influence their government to impose some protectionism measures. 9
- 10. The Strategic Role of Culture What is culture? culture is the collection of values, beliefs, behaviours, customs, and attitudes that differentiate one society from another. culture as defined by Hofstede is “the collective programming of the mind which distinguishes the members of one group or category of people from another”. 10
- 11. The Strategic Role of Culture culture is not: 1) inherited but is learned by people and encouraged by societies and government. 2) not static, it changes as society undergoes change, new tradition may be introduced and inculcated within the society. Hence, culture can be defined as the acquired, collective knowledge of a group that they use to interpret experiences. This knowledge in turn translated into values that guide behaviours. 11
- 12. Problems in Dealing with Culture Differences Four (4) cultural variables that affect company to adjust: 1) Company and management orientation the ability to adapt to new culture depends not only on host- country culture but also managers’ attitude or orientation towards its own culture. These three (3) cultural orientations: i) ethnocentrism – a belief that one own way of doing things is the best, and will not seek to adapt to local culture practices e.g. a Malaysian executive person to tell an Indonesian counterpart that Malaysian agricultural technology and quality are better than Indonesian quality thus all processes and procedures in the Indonesian farms & plants must be changed, without exception. ii) polycentric – a belief that firm must seek to do things the way locals do e.g. when in Rome do as the Romans do. iii) parochialism – a belief that the only way to do something is the way it is done in one’s own culture e.g. when a Nokia worldwide marketing executive decides to run a mobile phone advertisement in Europe to be similarly used all over the world. 12
- 13. 2 Host society acceptance it is much easier for firm to succeed in foreign land should the host country is receptive to foreign ways of doing things for example the introduction of new product, technologies or operating procedures. 3 Degree of cultural differences whether key cultural differences are small or great. apparently, some countries are similar to other countries and share many common characteristics such as language, religion, geographic location, and level of economic development e.g. US and UK have a small degree of cultural differences, whereas US and China shows great differences. 4 Ability to adjust to foreign culture the inability to adjust to foreign culture is sometimes associated with culture shock i.e. the frustration of having to adjust to vast different culture and expectations. The ability of individual to adjust to what they find in foreign cultures would lead to successful business assignment. 13 Problems in Dealing with Culture Differences
- 14. Impact of Culture on Businesses 1. Culture plays a critical role for firm when entering a foreign market. Most common mistake done by firms is the inability to understand different culture which may cause a devastating effect. Even an established multinational company like Coca-cola has made blunder in a foreign market e.g. China, the name follows Mandarin characters that was pronounced as “Bite the wax tadpole” 2. Cultural sensitivity training can help to avoid culture blunders. Cultural sensitivity is a state of heightened awareness for the values and frames of reference of the host culture. 3. As a guideline, managers can use variety of well-known frameworks that are useful in understanding the many dimensions of culture e.g. Hofstede Culture Dimensions, Tompenaars Model of National Culture and Globe Project (Global Leadership and Organizational Behavior Effectiveness). 14
- 15. The Strategic Role of Ethics 1) Ethical behaviour refers to norms, principle and standard of conduct that govern individual and firm action. 2) Ethics is commonly referred to the principles of what is right and wrong that individual and firm use to make strategic choices to guide their behaviour. 3) Business ethics are the accepted principles of right or wrong governing the conduct of businesspeople, and an ethical strategy is a strategy, or course of action, that does not violate these accepted principles (Hill, 2007). 4) However, to decide what is right and what is wrong is always ambiguous and not straightforward in various countries. 5) In order to delineate the confusion, most firms come up with code of ethics (sometimes is also called as code of conducts) which is a formal code of conduct that outlined what can or cannot be done within a particular setting. 15
- 16. Impact of Ethics What motivates global firm to operate in ethical manners? There is a debate pertaining to the motives behind ethical behaviour. It can be divided in three different views: i. A positive view suggests that firms are self-motivated to act and behave ethically regardless of any social pressure to do so. ii. A negative view argues that firm is a follower in which they jump onto the “bandwagon effect (following what others do)” under social pressure to appear more legitimate without necessarily becoming more ethical. iii. An instrumental view maintains that ethical behaviour is a useful instrument that can lead to firm profitability. 16
- 17. Dealing with Ethical Dilemmas In dealing with ethical dilemmas when operating in foreign land, Thomas Donaldson (1989) suggests three guiding principles: First, respect for human dignity and basic rights. Basic rights include matters pertaining to health, safety and the need to educate the young mind instead of employing them and this should determine the absolute, minimal ethical thresholds for all global operations around the world. 17
- 18. Dealing with Ethical Dilemmas Second, respect for local traditions. The importance of cultural sensitivity when dealing with foreign traditions aids in avoiding ethical behaviors e.g. nepotism or hiring employees’ children and relatives rather than qualified applicants is illegal according to U.S. equal opportunity law. However, it has become a common practice in India as it is part of employee benefits that help strengthen employee loyalty. Hence, Donaldson advises global companies operating in India to respect Indian practices such as nepotism is not necessarily wrong, at least in India. Third, respect for institutional context. This calls for careful understanding of local institutions. Establishing a code of conduct that ban bribery is less useful unless supplemented with specific guidelines on the scale and scope of locally appropriate gift giving. 18
- 19. Impact of Ethics 1. Studies found a strong correlation between a high level of corruption and a low level of economic development. 2. However, China which reportedly is high in corruption level (see https://www.transparency.org/news/feature/corruption_perceptions_ind ex_2017) which ranked China, experienced among the largest recipients for FDI and same goes with Indonesia which is notorious for corruption is a popular destination for FDI. 19 2017 Rank Country 2017 Score 2016 Score 2015 Score 2014 Score 2013 Score 2012 Score 77 China 41 40 37 36 40 39 96 Indonesia 37 37 36 34 32 32 62 Malaysia 47 49 50 52 50 49 51 South Korea 54 53 54 55 55 56 The index, which ranks 180 countries and territories by their perceived levels of public sector corruption according to experts and businesspeople, uses a scale of score from 0 to 100, where 0 is highly corrupt and 100 is very clean.
- 20. Impact of Ethics Accordingly, there are two possible reasons on why this happen: i. These two economies (China and Indonesia) provide vast potential for business expansion and that the benefits of operating in these countries outweigh the drawbacks of dealing with corruption. ii. Investors who invest in China and Indonesia come from countries (Hong Kong, Taiwan and Japan are among largest investors) which are relatively used to corrupt practices in their home country. Thus, it is possible that the ability to deal with corruption in their home country provide them with learning experience that enables them to deal with corruption in foreign land. 20