PowerPoints week 4

Question 1

What is Distance?

Answer 1

In the IB context, distance typically refers to the extent of differences between country pairs

Assumption: differences prevent or disturb the information flows between firms & markets
complexity to cross-border activities

Distance introduces
and increase the challenges
friction

Question 2

Distance measurement: (5 types)

Answer 2

Geographic distance Institutional distance
Economic distance
Cultural distance
Multi-dimensional distance

Question 3

Geographic distance

Answer 3

• concepts dates back to more than half a century ago, well established in international trade literature
• not that frequently used anymore.
• When used, measures distances between ports, capitals or major cities

Question 4

Institutional Distance

Answer 4

The core argument: cultural distance does not entirely capture the complexity associated with cross-border activities

Introduced to the literature relatively late

Encompasses differences in the regulatory, normative, and cognitive pillars of institutions

Question 5

Factors that reduce Institutional/administrative distance

Answer 5

o Common history and political ties
o Preferential trade agreements
o Common currency
o Political union(s)

Question 6

Factors that increase Institutional/administrative distance

Answer 6

Factors that increase distance

o Barriers to trade

• Tariff-based barriers
• Nontariff barriers

o Unilateral

o Institutional infrastructure

Question 7

Economic distance

Answer 7

Differences in:
• Wealth
• Income
• Standard of living

Ghemawat, identifies two approaches for international expansion:

1. Aggregation, - (replicate existing competitive advantage)
2. Economic Arbitrage,

Not many researches sorely rely on the concept of economic distance

However, economic factors are often incorporated in multidimensional measures

Question 8

Cultural Distance

Answer 8

• One of the most frequently used measurements in IB
• Increased complexity to deal with foreign partners, hence more risky investments

Hofstede:
- IDV vs Collectivism: degree individuals are integrated into groups

• PDI - extent to which the less powerful members of org. and institutions accept/expect that power is distributed unequally
• UAI - society’s tolerance for uncertainty and ambiguity
• MAS vs feminity - distribution of roles between genders
• LTO - notion of time

Question 9

Survey of Values (Schwartz)

Answer 9

Schwartz (1994) surveyed value, 31countries (or 41 regions), identifying 7 country-level value orientations

=
summarized in 3 dimensions:

Conservatism vs Autonomy Hierarchy vs Egalitarianism
Mastery vs Harmony

-
Schwartz (1994) distinguishes between two levels of cultural dimensions:

culture-level vs individual-level dimensions

Question 10

Measuring CD (Kogut & Singh)

Answer 10

Based on Hofstede’s 4 dimensional framework.

Weaknesses of CD:

• The illusion of symmetry:
• The illusion of stability
• The illusion of linearity
• the illusion of causality
• the illusion of discordance
• the assumption of corporate homogeneity
• the assumption of spatial homogeneity

1. • The illusion of symmetry:
     - Assumes equal distance between countries (A to B = B to A)
2. • The illusion of stability:
     - Assumes culture stays the same
3. • The illusion of linearity:
     - Assumes cultural distance evolves in a linear way
4. • The illusion of causality:
     - culture is not the only aspect that causes differences
5. • the illusion of discordance:
     - Assumes that all aspects of cultural distance matters equally
6. • the assumption of corporate homogeneity
     - Assumes alignment between corporate and national culture
7. • the assumption of spatial homogeneity
     - ashumus uniformity within one nation

Question 11

Diamond Model Approach

Answer 11

National prosperity not inherited, but created:

• Not due to natural endowments
• Not due to nature of labor pool
• Not due to interest rates or currency rates

National competitiveness dependent on the ability of its industries to:

• Innovate
• Upgrade

Domestic pressures & challenges create competitive firms

Question 12

Single Diamond Analysis

Answer 12

1. Factor Endowments
   - Distinguishes a hierarchy of factors
   - basic (natural resources, climate ect.)
   - Advanced factors (capital, telecoms, infrastructure - created by individuals, companies & governments)
2. Demand Conditions
   - Domestic demand
   xx Need sophisticated domestic customers
   xx Need demanding domestic customers
3. Related & Support Industries
   - presence of internationally competitive suppliers or related industries
   - often results in clusters forming - knowledge flows then help
4. Firm Strategy, Structure & Rivalry
   - different management ideologies (German engineering vs US short-term profit maximization)
   - domestic rivalry important to sustain competitive advantage

Question 13

Nature of the Diamond

Answer 13

• Individual attributes helpful
• Diamond is however a system
• The attributes are reinforcing
• The diamond creates an environment that promotes the emergence of clusters of competitive industries
• Clusters can be expected to be:
  xx Linked vertically and/or horizontally
  xx Clusters are typically geographically concentrated
• The diamond is unique to specific industries being studied
  xx Not possible to identify a national or regional economy
  diamond

Question 14

Diamond Model

Role of the Government

Answer 14

Role of the Government = controversial

View 1: supporter and helper in the industry
View 2: Should be left to the invincible hand

Porter argues both are wrong

Government should be both: catalyst & challenger, transmit & amplify the attributes of the diamond.

Governments should seek to:

• Focus on specialized factor creation
• Avoid intervening into factor & currency markets
• Enforce product, safety & environmental standards
• Limit direct cooperation amongst industry rivals
• Promote goals that lead to sustained investment
• Deregulate competition, enforce domestic antitrust policies

Question 15

Double Diamond Analysis (DDA)

Answer 15

Home-based Single Diamond Incomplete:

• Causality
• Predictive power

National Competitive Advantage = the capability of firms engaged in value added activities in a specific industry in a particular country to sustain this value added over long periods of time in spite of international competition.

KOREA vs Singapore

DDA Takeaway
- Possible to identify domestic&international influences on national competitiveness

• The degree to which domestic & international influences on national competitiveness matter differ across countries
• There seems to be opportunities for government policies to pursue active policies for strengthening both domestic & international diamonds for a country
• Current national competitiveness driven by strong estelements of national diamond
• Future competitiveness arguable is primarily related to the weakest element of the national diamond

Question 16

Doe country matter?

Answer 16

Country does matter for foreign subsidiary performance as much as industry effects.

Choice of host country is at least as important as the choice of industry in determining foreign subsidiary’s performance

Important to consider the match between industry and country (interaction effect)
xxx EMs, country & industry effects are more important
xxx AEs, corporate & affiliate effects are more important