Lecture 7 (Non western markets, Institutional voids and state-owned enterprises)

Question 1

Effects of government control on performance (Bruton et. al 2015

Answer 1

Government control hurts performance:
– State supports loss-making SOEs
• In emerging markets: stronger social orientation of the government
– SOEs make bad investment or R&D decisions and not punished by the market
• Government control benefits performance: – State subsidies (e.g., free land)
– Government is a customer
• In countries with weaker business-supporting institutions: – Government control of SOEs is more likely
– No effect on government ownership

Question 2

How does Soft budget constraints affect performance? (Bruton et. al 2015)

Answer 2

Soft-budget constraints mean that a firm does not need to respond to the market as it continues to receive resources for continued operations. Easy Money often causes firms to over-invest in production equipment and other physical assets, such that they wind up with overcapacity. Moreover, they tend to ignore market signals and many key technologies. This keeps the firm on a technological path is becoming unviable.”

Question 3

How does A CEO with strong connections to government conduct bad decision (non market decision)? (Bruton et. al 2015)

Answer 3

“The CEO who has worked for the state brings a mindset consistent with state goals and not necessarily with the profit-maximization goals associated with private firms” The focus of such CEO tends to be on the maintenance of employment and other social concerns rather than necessarily firm efficiency. As a result, government control can negatively affect the SOE’s economic performance or may push the SDOE toward production maximisation as opposed to innovation and RIO.

Bruton et al. apply the view of micro-institutions when looking at the CEO and the internal activities at the firm (institution).

Question 4

Definition of institutional voids (rottig)

Answer 4

One of the key characteristics of many emerging markets includes institutional voids, i.e. the lack or underdevelopment of certain institutions.

Due to the existence of institutional voids, MNCs operating in emerging markets face more uncertainty, higher risks and thus, higher transaction costs. Furthermore, MNCs operating in emerging markets have to perform basic functions that are taken for granted in developed markets (such as access to reliable and adequate information, economically sound regulations, efficient judicial systems etc.) themselves, which is the crucial distinction between doing business in these compared
to developed markets.

Main sources of market failures due to institutional voids include: lack of reliable and adequate information for consumers, employers in labor markets and investors to assess the quality of goods, services and investments; misguided regulations by local governments that favor political goals over economic efficiency (such as employment-protection laws to bolster social stability at the cost of labor market flexibility); inefficient judicial systems that are incapable of enforcing contracts in a reliable and predictable way (and so considerably increase uncertainty and consequently transaction costs for MNCs when doing business in these markets); and the absence of intermediary institutions that facilitate economic transactions, such as functioning financial markets, audit committees and certification agencies, as well as aggregators and distributors (which make it considerably more costly to acquire necessary inputs such as financial resources, management talent, technology, etc. and so more risky to conduct business in emerging markets, and also limits the scope for sustainable economic growth in these markets).

Question 5

One specific example of government pressures and MNC responses in emerging countries (rottig)

Answer 5

India has recently revoked Pfizer's patent for a drug to treat cancer and granted an Indian manufacturer, Cipla, the right to produce a generic version of the drug and sell it for a fraction of the price Pfizer had charged.
MNC Responses in Emerging market:
Adapt:
1. Political adaptability
2. Economic adaptability
3. Social adaptability

They can also make use of institutional arbitrage:

1. formal institutional arbitrage
2. informal institutional arbitrage

Question 6

Government pressures (rottig)

Answer 6

Government pressures:
MNCs operating in emerging markets therefore are
confronted with legitimacy pressures for social performance and an active involvement
in their local communities.These informal legitimacy demands are often combined with the formal requirement to grant local governments a stake in the local operations of foreign MNCs or the requirement to partner with local, state-owned companies. Local
governments, therefore, become a central player in the corporate governance system in emerging markets and so have more influence over the actions, structures and strategies of companies compared to governments in developed countries.

Question 7

One (Some) specific example of the institutional environment in many African countries (entrance, enthnic and linguistic variety and role of tribal leaders)

Answer 7

Weak institutions in general:
Modes of entry, accessing resources
– In weak institutional environments: joint ventures – Strong: acquisitions

• Ethnic and linguistic variety
– Increases costs of doing business
– MNCs adopt lingua francas (Swahili)  enhance ties with local stakeholders

• Role of tribal leaders
– Influence many economic and political aspects
– Tribal institutions side by side with institutions of the modern state
– MNCs work with them
• Especially in industries that need a high degree of community embeddedness
(e.g., mining)

Question 8

Some specific example of the institutional environment in many African countries 2 (volatility, corruption, and lack of inclusive growth)

Answer 8

• In South Africa small and medium sized firms have among the highest failure rates in the world (70%), which is largely attributed to external factors.
• Corruption is a source of uncertainty and transaction costs –> dealt with through CSR engagement and alike activities.
• Inclusive growth requires bridging inequalities of market access, which remains a significant challenge for African businesses. Prevailing social norms, such as gender discrimination, as well as the lack of enforcement of property right laws continue to prevent inclusive market access to financial services.

More on dealing with corruption:
– MNCs adopt CSR practices to improve stakeholder relationships
– Senior manages check with officials to clarify or interpret rules and laws (political engagement)

• CSR
– In developed countries: often “discretionary”, result of slack

resources
• To establish legitimacy or differentiate from competitors
– Resource-constrained: important for e.g. financial resource availability