Institutional Voids and Political Framework Flashcards
Why should there be caution when going global?
Greater success rate when businesses stay local, few companies actually succeed at going global according to Harvard Business Review (2015)
Why is there limited success at going global?
- Lack of understanding of customer needs
- Lack of management skills
- Insufficient knowledge about regulatory/political/cultural differences
How do institutions affect business?
- Rules of the game (formal and informal)
- Basic framework consisting of norms, rules and beliefs which influence behaviour
What are the three pillars of institution according to Scott (2001)?
Regulatory - coercive power of govs, (formal - laws, regs and rules)
Normative - influence of values, beliefs and actions (informal - norms)
Cognitive - internalised, taken for granted beliefs that guide behaviour (informal - culture, ethics)
How do political systems relate to institutionalism?
They consist of formal institutions e.g parties, interest groups, trade unions
They shape economic and legislative framework of EMs
How do economic systems differ?
Market - invisible hand of market forces, gov is hands off
Command - FOPs controlled by the gov, supply, demand and pricing controlled and planned
Mixed - private/nationalised business
How does socialism/communism affect the economic system?
- Group welfare outweighs individual welfare
- Fair wealth distribution
- High state ownership and intervention
Embraced throughout central and Eastern Europe and former Soviet Union until late 1980s
How does the free market ideology affect the economic system?
- Individual interest dominate
- Economic inequality is allowed and tolerated
- Private enterprises operate on the principles of demand and supply
- Dominantly democratic governance
How is confiscation a political risk in the EMs?
Government taking ownership of property without compensation
- South Africa taking white property
- Chinese gov seizing US property after Chinese communists took power in 1949
- Occidental Petroleum assets taken by Venezuela in 2006
How is expropriation a political risk in the EMs?
Government taking ownership with some compensation, usually agree to sell due to implied/explicit coercion
E.g Venezuela took over the country’s last privately held oilfields in 2007
How is nationalisation a political risk in the EMs?
Government ownership affects industries rather than a single company
E.g Mexico in order to control its debt problem nationalised the country’s banking system
How is domestication a political risk in the EMs?
Foreign companies relinquish control completely and partially to nationals
- Private entities allowed to operate on expropriated poverty
- Takes place in the absence of confiscation
- Usually due to economic or social pressures
Why is the risk of expropriation less likely in the future?
- Poor record of running nationalised business
- Nationalisation deters FDI
What are the political risks in the EMs?
General instability - uncertainty about political system
Operation risk - host gov’s possibility of constraining investor’s business operations
Transfer risk - host gov’s possibility of constraining the ability of a subsidiary to send payment out of the country
How has Trump’s trade war with China affected US business?
Ordered to leave China but 87% haven’t and don’t plan to
