Einheit 3: informal institutions Flashcards
informal institutions
Unwritten, norms, traditions, social practices
(e.g., customs of how meetings are held: length of
talking about private life, the weather, etc.)
-> normative: social norms, values, beliefs
-> cognitive: shared beliefs, assumptions, mental models shaping an individuals perception of the world
iceberg model to structure informal institutions
The Iceberg Model
can be used to structure the
informal institutional
environment
Visible elements are
readily noticeable and
understood, but they
represent only a small
part of a much broader
context
The true essence of a
society lies beneath
the surface
visible:
Artifacts/visible behviors
-organizational strucutres, processes, language, symbols etc
deep/invisible:
Values and social morals:
-values, beliefs, and norms that people endorsed and acknowledge
Basic assumptiosn:
-unconscious beliefs and fundamental premises that are usually not articulated and rarely questioned (eg. ethnic culture, religion etc)
culture as a risk
Culture is an important contextual
factor for IB and represents a major IB risk
Risks in international Business
-> commercial risk
-> currency (financial) risk
-> country risk
-> cross-cultural risk
Cross-cultural risk is
a situation or event
in which a cultural
misunderstanding
puts value at stake
language as dimension of communication
Language is a complex system of communication used by humans to
convey meaning, express thoughts, share ideas, and interact with
one another
Verbal: Words spoken or written convey explicit messages
Non-Verbal: Gestures, expressions, and body language convey meaning
without words
Paraverbal: Vocal aspects like tone, speed, and pauses accompany verbal
communication
Extraverbal: Contextual factors and visuals complement verbal
communication for enhanced understanding
Effective communication involves understanding and utilizing these various
dimensions reflecting a deeper comprehension beyond verbal and written
exchanges!
language challenges
Varying degrees of (English) proficiency: Create comprehension and/or production
Challenge of finding semantic equivalents (see marketing blunders)
Different communication norms and discursive styles: employees from different cultural backgrounds hear and interpret in different ways (e.g., head-nodding in the US vs. Japan, Swiss/Germans prefer a more concise and brief style vs. elaborate and talkative style in Austria)
Language similarity (differences) associated with increased trustworthiness (distrust): can result in the formation of language-based subgroups affecting MNC structure and management
Emotional challenges: non-native speakers might not be comfortable speaking English or another corporate language and employees fluent in the corporate language can enhance their organizational position and power
Language shapes the way we think
Language diversity
Language diversity and its positive effects
Firms can develop company-specific language (‘company-speak’) resulting in stronger cohesion
Increased in-group feeling in an environment where everybody speaks ‘bad English’
Models of culture
Culture
often refers to learned, shared, and enduring orientation
patterns and it is demonstrated through values, ideas, attitudes, behaviors, and symbols
National/societal culture
Ethnic culture
Organizational culture
Professional culture
Language
Religion
Gender
etc.
learning of culture
Acquired by people over time
Transmitted from one generation
Acquired in the early years of life (e.g. language, negotiation,
conflicts
interrelatedness and sharing of culture
One element of culture is deeply connected with other elements
Sharing:
-Cultural values are passed between group members:
-> parents
->Other adults
-> school
Unlike political, legal, economic systems, culture is rather difficult to identify and analyze
approaches to the concept of culture
Etic approach:
-Assuming an outsider’s viewpoint when
analyzing culture and behaviors
-Objective analysis and comparison of
different cultures
-Aim is to compare and understand
cultural similarities, differences, and
patterns across societies
-Detached from specificities of a culture
by deploying universal or cross-cultural
categories, theories, and frameworks
Emic approaches:
-Assuming an insider’s viewpoint when
analyzing culture and behaviors
-Emphasizes internal meanings, values,
and interpretations by a culture’s
members
-Aim is to understand the unique
perspectives, beliefs, symbols, and
practices of a particular cultural group
-Direct engagement with members of a
culture
(all following models are etic approaches)
Hofstede model of how culture affects global business
-4 (+2) dimensions
-Based on an empirical study in a large
MNC (IBM) in 1968: surveying >116,000
respondents from 70 countries
-Not without criticism
6 dimensions that capture cultural differences
- Power distance:
Distribution of power
(e.g., age, seniority, or
wealth) within society
and the acceptance of
those with less power
in the situation
-> low power distance (consultation of subordinates, hierarchy only for sake of convenience) vs high power distance (hierarchy: organization reflects natural differences, authority to be respected) - Uncertainty avoidance:
The degree to which
members of society
feel uncomfortable
with ambiguity and
uncertainty
-> low uncertainty avoidance (unc. as fact of life, ambiguity tolerated, readiness to take risks, toleration of innovation) vs high uncertainty avoidance (predictability, resistance to change, consensus over conflict) - Masculinity vs femininity (now: motivation towards achievement and success):
The degree to which
masculine (e.g., assertiveness, competition) vs feminine (e.g., cooperation,
empathy) traits are
valued
-> masculinity (distinct gender roles, men assertive, women nurturing, live to work, acquisition of wealth) vs femininity (fluid gender roles, both in nurturing roles, quality of life) - Individualism vs. collectivism:
The degree to which
individuals prioritize
their self-interests over
group interests
-> individualism (identity based on individual, value standards apply to all) vs collectivism (identity based on social group, values differ according to group)
later added:
5. Long- vs. short-term orientation
short term (need for achievement, short-term profits, managers and employees in different camps) vs long term (accountability, future market development, owner-managers and workers share same aspirations)
- indulgence vs restraint
Relates to how societies regulate their impulses and desires, particularly in the realm of enjoying life and having fun.
Globe project model of how culture affects global business
-9 dimensions
-Partially triggered by criticism of the
Hofstede study
-Built on Hofstede
-Sampled different firms across 62
countries
dimensions:
-uncertainty avoidance
-performance orientation
-assertiveness Extent to which individuals are competetive, confrontational and aggressive)
-future orientation
-humane orientation (Degree to which a collective encourages and rewards individuals for being fair, altruistic, generous, caring & kind to others)
-insitutional collectivism (Degree to which organizational & societal institutional practices encourage & reward collective action and distribution of resources)
-in-group collectivism (Degree to which individuals express pride, loyalty & cohesiveness in their organizations, families or friends)
-gender egalitarianism
-power distance
Compared cultural values (‘should be‘)
with cultural practices (‘as is’)
-> value vs. practices provides
more information but creates
challenges
->How should I approach this
as a company?
->Should I focus on the
practices or the values?
->What are the (dis-)advantages?
Addresses some of the criticism related
to the Hofstede dimension
Hall project model of how culture affects global business
-3 dimensions
-purely theoretical model
-more focused
1) Context
Refers to the differing methods by which cultures construct meaning, employing varying ratios of context and information.
-> Low vs. High Context Cultures
->Low Context Cultures:
People communicate their intended messages very directly and clearly through verbal expressions. Examples: Germany, USA or Scandinavian Countries
-> High Context Cultures: Message can only be decoded by combining the verbal expression with the context in
which the communication takes place.
Examples: Japan, Korea, Brazil or Saudi Arabia
2) Time
Delineates how diverse cultures orient themselves temporally, perceiving time as either
-> monochronic or polychronic.
-> monochronic: Time is used in a linear way: One activity at a time (e.g., Northern Europe, North America): task-focused, making schedules, concerns focused on shorter term, control systems and deadlines)
-> polychronic: People tend to focus on multiple tasks (e.g., Latin America, Mediterranean, Middle East): more holistic and people-focused, focused on long term, sharing of implicit knowledge, flexible control systems involving people)
3) Space
Encompasses various cultural constructs in defining and organizing space, ingrained
unconsciously in individuals.
-> Intimate, Personal, Social & Public Space
-> Intimate Space: Very close relationships, such as family members, romantic partners, or close friends. Physical contact is common in this space & people feel comfortable
sharing personal information.
->Personal Space: Interactions with friends, acquaintances, or colleagues. Conversations happen at a comfortable distance, allowing for both engagement & a sense of personal space.
-> Social Space: The distance at which formal conversations, such as in business
meetings or social gatherings, take place. People maintain a respectful distance while
still engaging in conversation.
->Public Space: Public gatherings or interactions with strangers. In this zone, people feel a sense of anonymity & are less concerned with personal interactions.
Some cultures (e.g., Latin America or the Middle East) tend to have smaller personal space bubbles, while North America or Northern European Countries typically have larger personal space bubbles.
coconuts vs peaches
Coconuts
‘Hard’ on the outside
Rarely smile at strangers just
met, do not engage in
conversations easily
Once you break through the
harder shell, they become
close and loyal friends
Peaches
‘Soft’ on the outside
Very friendly to people they
have just met, chat, share
information
Real private self is hard to
crack and become real friends
kluckhohn & strodtbeck model
One of the earlier cultural models.
Their model is based on the
assumption that all societies
must answer a limited number
of universal problems and the
way they do so reflects their
cultural values. The model
features six dimensions
Trompenaars model
Trompenaars’ work is based on
Hofstede and a large-scale survey
conducted with 15,000 managers in
over 50 countries. The focus is on how
societies are organized and how
respondents would handle
business dilemmas or
interpersonal situations.
Trompenaars’ model features 7
dimensions.
reflections on etic approach (vs emic)
Within-country differences are ignored:
The common practice of equating culture with nation-states is critical because country boundaries
may be arbitrary, better alternatives may need to be considered, and culture is not homogeneous within
countries.
Etic approaches focus on generalizability and comparability:
Specific nuances of cultures might be overlooked
paradoxes when studying culture
cultural dimensions provide tentative guidelines for interaction
No culture is static or completely homogenous:
Cultures change and individuals differ from each other
(e.g., Japan since the 1950s: strongly influenced by Western culture; younger
generation less collectivistic)
Cultural values are on a spectrum:
Cultures are usually not found on the extreme ends of a spectrum (e.g. no country is fully individualistic)
Value trumping as a challenge:
At times, a particular value becomes dominant, while in other
circumstances, this same value recedes to the background
supranational actors
Complement national
and subnational institutions
-> Creation of organizations (e.g., UN)
fostered the importance of the supranational institutional
environment
-> These organizations
create, maintain, and execute supranational institutions
->Bridge part of national
institutional differences
civil society organizations:
Political guiding forces as
collaborators and monitors
International economic organizations
Reducing trade barriers,
promoting fair competition,
resolving trade disputes
supranational institutions (e.g. GATT)
civil society organizations
Include NGOs, charities, trusts, foundations, advocacy groups
Independent from the state (improving CSO-state relations)
Transcend borders and both collaborate and monitor International Business (bridge national institutional differences)
Activities follow their primary agenda of influencing governmental and corporate agendas
->Information gathering (lobbying, advocacy, monitoring, auditing)
-> Standard setting (e.g., fair trade, forest stewardship)
-> Behavior modification of MNCs via contentious targeting or
collaboration (e.g., demonstrations, organized boycotts)
Concerns: geographical disparity, less public scrutiny, sources
of funding
e.g. Greenpeace, WWF
behavior modification -> role of CSOs for MNCs
CONTENTIOUS TARGETING
= The practice of scrutinizing or challenging multinational enterprises due to their significant economic, social, or environmental impacts.
-> e.g. CSOs urged Shell to divest from South Africa to pressure apartheid regime
-> Activists organized global campaigns,
protests, boycotts, and media
campaigns to pressure Shell
-> Shell faced significant economic losses
due to activist pressure
Shows that civil society can:
Impact MNEs’ transaction costs
Influence MNEs’ liability of foreignness
Shape MNEs’ strategic decisions
Affect MNEs’ financial returns
COLLABORATION:
-ETI (Ethical Trading Initiative) guided
Tesco in implementing the ETI Base Code
which ensures workers’ rights standards
and responsibly sourcing
-The Body Shop maintains high ethical
standards across supply chain through
the CSOs help
Local social movements can impact MNEs
foreign investments
MNEs engage with NGOs across different
geographical contexts
Civil society plays a role in global business
governance
IMF
International economic organizations: IMF provides financial assistance and economic policy advice
The International Monetary Fund (IMF) is an international financial institution
established in 1944 (during the Bretton Woods Conference).
Aim: Provide a forum for cooperation on global monetary issues, facilitate the growth of international trade, and contribute to the stability of the international monetary system
Structure: 190 Countries. Each member’s financial contribution (or quota) determines
its voting power and access to financial resources from the IMF
Activities:
-Exchange Rate Stability: By providing a forum for member countries to discuss and
coordinate policies related to their currencies
-Financial Assistance: to members facing payment problems, helping them stabilize their economies and restore confidence in their currencies
-Policy Advice: regarding economic policies, fiscal responsibility, and financial stability by conducting regular economic assessments of member countries
World Bank
World Bank provides assistance in developing countries
The World Bank is an international financial institution that provides financial and
technical assistance to developing countries for development projects and programs.
was established in 1944 (during the Bretton Woods Conference).
Aim: Reduce poverty and support sustainable development by providing financial resources, technical expertise, and policy advice to developing countries
Structure: Two main institutions: International Bank for Reconstruction and
Development (IBRD) & International Development Association (IDA)
Activities:
-Financial Assistance: Provides loans, grants, and guarantees to support a wide range of development projects, including infrastructure, education, healthcare, and environmental
sustainability
-Technical Assistance: Offers technical assistance and knowledge sharing to help countries design and implement effective development strategies.
todays framework of world trade
Today: GATT, GATS and TRIPS form the most important framework of world trade
GATT (1948)
GATS (1995)
TRIPS (1995)
-> WTO (1995)
GATT
General Agreement on Tariffs and Trade
Multilateral agreement with the aim of promoting international trade by reducing or eliminating trade
barriers
Established in 1947 (became effective in 1948), after World War II
Emerged from the Bretton Woods Conference
Aim: Prevent trade wars and contribute to global economic stability
Criticism: Exclusion of certain issues, such as services and intellectual property
Transitioned to the World Trade Organization (WTO) in 1995 with the Uruguay Round negotiations
GATS
General Agreement on Trade in Services
Facilitates the expansion of trade in services while respecting the regulatory autonomy of member
countries
Covers a wide range of services, including financial services, telecommunications, tourism, and
professional services
Established as part of the Uruguay Round negotiations that led to the creation of the WTO in 1995
Aim: Create a framework for the liberalization of international trade in services by establishing rules
and commitments among WTO member countries
Criticism: Balance between liberalization and the need for regulatory autonomy in sensitive service
sectors, potential negative impact on public services and cultural diversity
TRIPS
Trade Related Aspects of Intellectual Property Rights
Established as part of the Uruguay Round negotiations that led to the creation of the WTO in 1995
Harmonises intellectual property standards internationally
Covers a wide range of intellectual property rights such as patents, copyrights, trademarks, trade
secrets, and industrial designs
Aim: Balance between promoting innovation and ensuring access to intellectual property for the
broader public while establishing a framework for fair and equitable international trade
Criticism: Access to essential medicines, impact on public health & issues related to cultural and
traditional knowledge
Trade agreements
enhance trade relations between nations
International trade deals between two or more countries are designed to enhance
economic cooperation and reduce trade barriers through:
-Cost-effective trade: Involve reduction or elimination of tariffs on specific goods
and services
-Measures beyond trade: Often covering areas like intellectual property rights,
environmental standards, or cooperation in various industries
Contracts can be set up to accommodate for:
-Customization: Countries can tailor the terms of the agreement to meet their
specific economic needs and priorities
-Political Influence: Influenced by political considerations, as countries seek to
advance economic and geopolitical interests
examples: CETA; EU-Mercosur; NAFTA
CETA
Comprehensive Economic and Trade Agreement
Trade Liberalization: Aims to liberalize trade between Canada and the EU by reducing or eliminating tariffs and other barriers to trade
Market Access: Provides increased market access for Canadian and European businesses to each other’s markets, creating new opportunities for exporters and investors
Regulatory Cooperation: Promotes regulatory cooperation, encouraging alignment and mutual recognition of standards and regulations
Investment Protection: Includes provisions for the protection of investments, ensuring that investors from both parties are treated fairly and providing mechanisms for dispute resolution
Negotiations were initiated in 2009 and the agreement was concluded in 2014
CETA has been provisionally applied since 2017, meaning the agreement is in effect on a provisional basis, while awaiting ratification by all EU member states
EU MERCOSUR
Trade agreement between the EU and MERCOSUR members (Argentina, Brazil,
Paraguay and Uruguay)
Aim: Establish a comprehensive partnership and free trade area between the EU and the MERCOSUR countries
Includes the reduction or elimination of tariffs and trade barriers, improved market
access for businesses from both regions & encourages the alignment and mutual
recognition of standards and regulations
Negotiations for the agreement concluded in June 2019, after almost two decades of
talks
But: Still needs to undergo legal scrutiny, translation & approval processes. Then it can be formally signed, followed by ratification by national parliaments and the potential for provisional application before full implementation
Challenges: Has faced challenges and discussions regarding environmental and
sustainability concerns, among other issues (e.g. Rainforest Deforestation)
NAFTA
North American Free Trade Agreement
Was a multilateral trade agreement between Canada, USA & Mexico which came into effect in 1994
Aim: Eliminate barriers to trade and investment between the three North American nations
Included trade liberalization, enhanced market access for businesses, investment
protection, dispute resolution, intellectual property, energy cooperation and other
aspects
In 2020, NAFTA was superseded by the United States-Mexico-Canada Agreement
(USMCA) which introduced some modifications to the original agreement
how do distance and difference matter
Just as individuals must adapt to new climates, businesses and their employees must navigate and adjust to institutional distances and differences, learning to operate effectively within diverse regulatory, cultural, and operational frameworks
Differences between institutional environments influence
firm behavior beyond national institutional characteristics
institutional distance
Differences in formal and informal
institutional environments create
difficulties for MNCs
International management as the
“management of distance”
Navigating different institutional
environments becomes a core task in
global business
Relevant for multinational firms if not
perfectly bridged by supranational
institutions
CAGE Framework
Geographic distance is a good indicator of logistical costs
and other challenges for international firms
CAGE framework as most prominent concept to capture distance
developed by Pankaj Gehmawat
focuses on cultureal, administatrive, gepgraphic, and economic differences or distances between firm’s host and home markets
Kogut & Singh
Kogut & Singh focus on culture and propose and develop a
measure of cultural distance
Kogut and Singh (1988) relate to the cultural concept of Geert Hofstede to develop a measure of cultural distance.
They compound the differences across the four original dimensions of Hofstede
using normalized Euclidean distance.
Their approach received a lot of attention and has been applied in many studies – at the same time the concept receives substantial criticism today.
Berry et al. formative measure of institutional distance
Berry et al. (2010) developed
the discussion further; based on
the CAGE dimensions, they
incorporate three conceptual
perspectives:
-a national business system
perspective
-a national governance
systems perspective
-a national innovation
systems perspective
Differences across nine
dimensions are supposed to
capture the institutional
distance between nations.
dimensions: economic, financial, political, administrative, cultural, demographic, knowledge, connectedness, geographic
Lindner and Puck
Lindner and Puck took a different approach and develop a reflective measure of institutional distance
Lindner & Puck (2024) use machine learning methods to analyze financial markets and apply information theory to obtain a holistic and reflective measure of institutional distance.
‘Information distance’ measures the amount of information necessary to understand one economy,
given all information on another economy is available
Core assumption: national lead indices on
financial markets reflect the institutional
characteristics of national economies.
Differences in financial market behavior across national markets, thus reflect the distance
between the markets.
