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3

The Institutional Context of Multinational Management

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Learning Objectives (1 of 3)

• Understand the national context and how it affects the business environment.
• Understand the influence of the institutional context of countries on individuals and organizations.
• Define social institutions and understand their basic forms.
• Explain how social institutions influence both people and organizations.

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Learning Objectives (2 of 3)

• Describe the basic economic systems and their influence on multinational operations.
• Understand the basic stages of industrialization and their implications for multinationals.
• Discuss the world’s basic religions and how they shape the local business environment.
• Develop an understanding of education and its effects on multinational operations.

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Learning Objectives (3 of 3)

• Define social inequality and its implications for multinationals.
• Understand the importance of the national context and its connection with other international management areas.

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Institutional Context (1 of 2)

• Institutional Context: Includes other elements of society besides national culture such as:
• Education
• The government
• The legal system
• These can affect important business-related differences among societies.
• May encourage adoption of values inconsistent with national cultures.

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Institutional Context (2 of 2)

• It is important to understand the dominant institutional context of any society, and appreciate its influence on individuals and organizations.
• Understanding the institutional context is critical to effective multinational management.
• At a basic level, a manager cannot completely understand any society without examining its national culture and institutional context.

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

National Context

• National Context: The national context is composed of the respective national cultures and social institutions of a society.
• Intertwined with national cultural forces are social institutions such as:
• The economic system
• Religion
• Education

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Exhibit 3.1:
The National Context and Multinational Companies

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Social Institutions and Their Influence on Society (1 of 4)

• Social Institutions: may be defined as:
• A complex of positions, roles, norms, and values organizing relatively stable patterns of human resources that sustain viable societal structures within a given environment
• Social institutions have profound effects on people’s life conditions, and provide context for psychological differences among people.

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Social Institutions and Their Influence on Society (2 of 4)

• Social institutions can have regulative, normative, or cognitive influence on individuals.
• A regulative social institution constrains and regularizes behaviors through its capacity to establish rules, to inspect and review conformity, and to manipulate consequences to reinforce behaviors

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Social Institutions and Their Influence on Society (3 of 4)

• The cognitive dimension refers to the widely shared knowledge regarding how things are done in a society.
• The normative dimension refers to the values and norms promulgated by the social institutions.

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Exhibit 3.2:
Cross-national Distance as Measured by Institutions

Source: Adapted from Berry, H., Guillen, M.F., and Zhou, N. 2010. “An institutional approach to cross-national distance.” Journal of International Business Studies, 41, 1460-1480.

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Social Institutions and Their Influence on Society (4 of 4)

• Three key social institutions that influence business environment:
• The economic system
• The level of industrialization
• Types of religions

Additionally,

• Education
• Level of social inequality

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Economic Systems (1 of 3)

• Economic systems: network or system of beliefs, activities, organizations and relationships that provide the goods and services of a society
• Typified by extremes of capitalism, socialism and a mix of both
• Important implications based on
• Dominant market type
• Market transitions

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Economic Systems (2 of 3)

• Capitalist/market economy: production is decentralized to private property rights owners who act to make profits in competitive market
• Socialist/command economy: production resources are owned by the state, and production decisions are centrally coordinated
• Mixed economy: combines aspects of capitalist and socialist economies
• E.g., Sweden, France, Denmark, Italy and India

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Economic Systems (3 of 3)

• Economic systems have two major implications for strategic multinational management:
• Dominant market type
• Market transitions

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Dominant Market Type (1 of 2)

• Dominant Market Type: Whether the market and economic system of a country are predominantly capitalist, socialist or mixed.
• The decision whether to operate in another country may depend on the dominant market type.
• In mixed economies, MNCs should subordinate their economic goals and respect social objectives
• Multinational managers may want to consider the Index of Economic Freedom.

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Dominant Market Type (2 of 2)

• Index of Economic Freedom: Defines economic freedom as:
• The absence of government coercion or constraint on the production, distribution, or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty itself
• The index includes 10 indicators ranging from trade and taxation policies, to property rights and regulation, including government intervention in the economy.

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Exhibit 3.3:
Index of Economic Freedom

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Market Transitions

• Market Transitions: Changes societies experience as they move from socialism to a market based economy
• Multinational implications:
• Need to turn around inefficient formerly state-owned companies to become cost effective
• Motivational issues with workers
• Interpersonal trust, teams, meritocracy

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Industrialization (1 of 2)

• Industrialization: Cultural and economic changes that occur because of how production is organized and distributed in society
• Stages of industrialization
• Pre-industrial
• Industrial
• Postindustrial

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Industrialization (2 of 2)

• Pre-industrial society:
• Agriculture dominates the economic environment
• Religious norms, tradition emphasized
• Industrial society:
• Dominance of manufacturing or secondary sector
• Technological development
• Postindustrial society:
• Emphasis on the service sectors
• Need highly skilled workers with specialized skills

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Exhibit 3.4: Distribution of Production Activities by Sector

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Managerial Implications:
Industrialization
(1 of 2)

• Direct correspondence between industrialization and economic development
• Pre-industrial countries provide cheap labor and untapped markets
• But poor infrastructure for business
• Traditional and communal values
• Industrial societies favor innovation and individualism
• Governments provide favorable environment
• Educated labor force

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Managerial Implications:
Industrialization
(2 of 2)

• Postindustrial societies
• Dominance of service sector; knowledge based
• Almost complete demise of agricultural sector
• Significant decline in manufacturing sector
• Increasing emphasis on quality-of-life
• Non economic incentives favored
• Post-materialist values, individual expression, and movement toward more a humane society

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Religion

• Religion: A shared set of beliefs, activities, and institutions based on faith in supernatural forces.
• Religion is an important aspect of most societies.
• Together, Christianity, Islam, Hinduism and Buddhism are followed by almost 71% of the world’s population.
• 20% of world’s population are nonreligious.
• Different religions shape how people do business in different parts of the world.

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Christianity

• Christianity: A religion based on the teachings of Jesus
• The most practiced religion around the world
• Protestantism emphasizes wealth and hard work
• Ten commandments – basis for ethical behaviors
• Dignity of human life, labor and happiness
• Implications for multinationals:
• Business environment conducive to these values
• Sunday holiday for prayer

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Islam

• Islam: Based on submission to the will of Allah (God).
• The Prophet Muhammad was a messenger of Allah.
• The second largest of the world’s religions and growing.
• Islamic laws or Shari’ah, based on The Five Pillars.
• Muslims pray five times a day, fast during Ramadan.
• Implications for multinationals:
• Islam prohibits profiting by exploiting others.
• Islam prohibits the payment or receipt of interest.
• Limited role for women in some Islamic societies.

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Hinduism (1 of 2)

• Hinduism: A broad and inclusive religion with no single founder
• Based on the Vedic scriptures
• Oldest, embodied in the ancient traditions of India
• Currently 760 million Hindus worldwide
• Quest for ultimate reality and truth
• Hindus live life according to the principles of Dharma (righteousness and moral order)
• Belief in Karma and reincarnation

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Hinduism (2 of 2)

• Implications for multinationals:
• Spiritual achievement is an important value
• Respect for elders, age and wisdom
• Hinduism has clear guidelines for ethical behavior
• Inequality in caste system, social structure of India

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Buddhism

• Buddhism: A religious tradition that focuses on the reality of world suffering and the ways one can be freed from suffering
• Craving and desires produce suffering
• Dominant religion in Asia
• Implications for multinationals
• Encourages hard work; laziness seen as negative
• Emphasizes teamwork; all beings are interconnected

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Education

• Education: organized networks of socialization experiences which prepare individuals to act in society
• Central element in organization of society
• Helps construct competencies, professions, and professionals

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Managerial Implications:
Education

• Gives an idea of the skill level of workers in any society
• The more educated, the more skills workers have
• Multinationals can look at educational attainment scores to determine the nature of the workforce
• Other scores relevant:
• Math and Science
• R & D expenditure

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Exhibit 3.9:
Tertiary Enrollment as
Percentage of Relevant Age Groups

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Social Inequality

• Social Inequality: Refers to the degree to which people have privileged access to resources and positions within societies.
• In societies that have high social inequality, a few individuals have the ability to control and use important resources.
• These select few use access to resources to acquire more power, thereby perpetuating inequality.
• Social inequality negatively impacts the degree to which people are attached to work.

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Managerial Implications:
Social Inequality

• Many MNCs are facing significant criticisms for their operations in countries with high social inequalities
• Criticized for paying low wages, using child labor.
• Realizing social responsibility is also in their own interests.
• Implications for Management:
• Many key ethical issues arise in such countries.
• Consider the GINI Index on the degree of social inequality.
• Recognize that social inequality yields more demoralized workers, suspicious of management.

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

The National Context and International Management (1 of 2)

• The national context's role is not only limited to shaping of business practices.
• The national context has significant influence on a company's strategy.
• The national context determines the comparative advantage of nations, which ultimately determines which strategies multinational companies choose.

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

The National Context and International Management (2 of 2)

• The national context plays an important role in the human aspect of international management.
• The educational and family system has important implications as to who is seen as an effective leader.
• The national context can determine the nature of the relationship between workers and their superiors.
• It also determines how people view work and sets the stage for motivation in an international context

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Summary

• To understand a society, it is essential to understand both its national culture and institutional context.
• Social institutions affect individuals and organizations.
• Differing economic systems have major implications for multinational strategic management.
• The degree of industrialization of a society is linked to its economic development.
• Religion, education & social inequality also impact multinational management strategy.