reflect essay
ccc777
Week8-presentation1.pptxWeek 8
BUSI7280 Formal Institutional Environments
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This week’s question
What is more important in determining business success:
the external business environment
or
Internal business strategy
Business success under globalization
International Management Report
Last week
Formation of groups
Choice of organization
Choice of country
This week
Sources of information on host country
Due October 14
2,000 words
30% of grade
This week’s work
Political factors – managing political risk
Legal factors – managing under host country laws
Economic factors – identifying and understanding economic trends
Managing an internationalized business
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How would you approach managing in a host country?
Individually
What points came up in your mindfulness pause reflection?
What assumptions are you making about a host country?
In small groups
What attitude should international managers have to host countries?
The success and failure of firms are enabled and constrained by institutions
because formal and informal institutions govern individual and firm behavior.
Institution based view
Dimensions of Institutions
Formal institutions include:
Host country laws, regulations and rules
Vehicles range from regulation to coercion
Informal institutions include:
Norms, culture and ethics
Vehicles are normative and cognitive behaviour
Formal and informal
Understanding how institutions operate – 3 pillars
Regulatory pillar
the coercive power of governments
Normative pillar
how norms of behaviour influences individuals and firms
Cognitive pillar
The internalized, taken-for-granted values and beliefs which guide individual and firm behaviour
Institutions are important for business because they can reduce uncertainty
Uncertainty increases transaction costs
Institutional frameworks can reduce opportunistic behavior by establishing explicit and universal rules
But institutions are not static; they evolve over time
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Institutions come from political systems
The complete set of institutions, political organizations, and interest groups in a country
The relationships among institutions, and the political norms and rules that govern their functions
Individualism: primacy of the rights and role of the individual
Collectivism: primacy of the rights and role of the community
Democracy as a political system – participation of citizens in decision making
Freedom of opinion, expression, religion, media, association, and access to information
Exercise of citizen power through elected representatives
Citizen equality in opportunity and treatment under law
Free, fair and regular elections
Protection of individual and property rights
Fair and independent court system
Totaliarianism – subordinates individuals to the interests of the collective
Authoritarianism – regime tolerates no deviation from state ideology
Fascism – aims to control every aspect of daily life
Secular – single political party that does not allow challenge to authority
Theocratic – political system where government represents and follows a religious system
Which is the best? – it depends on who and where you are? If the authority of the state is essential to survival authoritarianism might be very attractive. If you have a strong religious belief which includes the idea that the world will end soon and there will be a judgement by god – a theocratic state might be attractive
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Political Risk – when government decisions have a negative impact on business
Systemic – affects all firms
weakened property rights, restrictions on freedom
Procedural – affects some firms
excessive red tape, corruption, breaches of contract
(Re-)Distributive – targeting profits
tax discrimination, unilateral trade barriers, expropriation of assets
Catastrophic – civic disasters
civil disorder, coups, war, responses to natural disasters
Assessing Risk
Distinguish between:
Commercial risk – competitive pressures, technological change, market changes
Environmental risk – culture, legal-political, general economic forces
Effects of political risk:
Costs investors some or all of their investments
Forces them to accept lower-than-projected rates of return
Threatens the sustainability of local activities
Managing political risks
Diversify asset portfolios
Hold political risk insurance
Asset/personnel security management
Form joint business ventures
Lobby and form prominent alliances
Undertake community initiatives
Engage in financial hedging
Develop agile and resilient supply chains
Guru time – what is political risk and why is it important
https://www.youtube.com/watch?v= epXdJGSiSbc
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A legal system creates, interprets and enforces laws in a specified jurisdiction
Sources of law:
Common law
Civil law
Theocratic law
Customary law
Mixed systems
Trends in legal systems:
The preference for stability
The influence of national legacies
Host country laws impacting on businesses
Constraints on foreign ownership and control of the economy
Property rights protecting ownership of Land, property, intellectual property
Fundamental basis for a market economy
Should be recognised, unambiguous and enforceable
But if not enforceable = high transaction costs
Host country laws impact on business ability to operate
Operational concerns
Starting a business
Entering and enforcing contracts
Hiring and firing local workers
Closing down the business
Strategic concerns
Product safety and liability
Market place behavior
Product origin and local content
Legal jurisdiction
Arbitration
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Economic development and business
Level of economic development indicates:
Current market potential
Current market conditions
Rate of change indicates:
Future market potential
Future market conditions
Possible first-mover advantages – the advantage of being the first entrant to a new market
Drivers of economic development
Activity of private firms:
mobilize productive resources
generate technological change
Firms need conducive business environment to be innovative and entrepreneurial
Market economy
Strong property rights
Key government role: to create conducive preconditions, while preventing excesses of market economy
How can you decide if a market is attractive or not?
Benefits:
size of the economy;
likely economic growth.
Costs; corruption, lack of infrastructure, regulatory costs
Risks: political, legal, economic
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2018 Global Risks
Individually note what you think the top risks to international business are.
In project groups compare this with WEF’s report at
http ://reports.weforum.org/global-risks-2018/global-risks-of-highest-concern-for-doing-business-2018/ #
Which apply to the country you have chosen for your project?
International Management Report Workshop
What sources of data do you need for ‘your’ company and ‘your’ country?
Where will you get these data?
Are there sources of evidence other than data that you need to be considering?
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Democratic Citizen participation in decision making
High level civil rights
Totalitarian Centralized decision making
Low level civil rights
Political system
Economic system
Market Invisible hand
Competitive
Command Central planned
Cooperative
In di
vid ua
lis m Collectivism
Is there a match?
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Democratic
Citizen participation in
decision making
High level civil rights
Totalitarian
Centralized decision
making
Low level civil rights
Political system
Economic system
Market
Invisible hand
Competitive
Command
Central planned
Cooperative
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Is there a match?
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Economic Analysis – Lagging Indicators
Indicator Implications for business Economic growth (e.g. ∆ GDP) Change in profit; future investment
Inflation (e.g. CPI) Value of future revenues and input costs
Government debt (e.g. debt/GDP) Potential tax increases; future interest rates
Income distribution (e.g. Gini index) Size of customer base; security risks; base of pyramid opportunities
Labour force and unemployment Labour costs, price competitiveness
Interest rates (e.g. cash rate) Cost of capital; return on capital
Currency volatility Value of translated revenue, costs, and profit; future competitiveness
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Economic Analysis –Lagging Indicators
Indicator Implicationsfor business
Economic growth (e.g. ∆ GDP) Change in profit; future investment
Inflation(e.g. CPI) Value of future revenues and input costs
Governmentdebt (e.g. debt/GDP)Potentialtax increases; future interestrates
Income distribution (e.g. Gini index)Size of customer base;security risks;base of
pyramidopportunities
Labourforce and unemploymentLabour costs, price competitiveness
Interestrates (e.g. cash rate) Cost of capital; return on capital
Currency volatility Valueof translated revenue, costs, and profit;
future competitiveness
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Economic Analysis – Leading Indicators
Indicator Implications for business Confidence indexes – e.g. consumer sentiment, business outlook
Investment expenditure; consumer spending; business start-ups
Financial market indexes – share, bond, commodity
Return on invested capital; capital raising; cost of raw materials
Trade indexes – e.g. Baltic Dry Index, Global Competitiveness
Volume and cost of trade; future growth
Investment indexes – e.g. Purchasing Manufacturers Index (PMI)
Supply orders; current inventories; expected future investment; future sales and prices
Housing and construction indexes e.g. median house prices
Asset prices; debt levels; rental costs
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Economic Analysis –Leading Indicators
Indicator Implicationsfor business
Confidence indexes –e.g. consumer
sentiment, business outlook
Investment expenditure; consumer spending;
business start-ups
Financial market indexes –share,
bond, commodity
Returnon invested capital; capital raising;
cost of raw materials
Trade indexes –e.g.BalticDry Index,
Global Competitiveness
Volumeand cost of trade; future growth
Investmentindexes –e.g. Purchasing
Manufacturers Index (PMI)
Supply orders; current inventories;expected
future investment; future sales and prices
Housing and constructionindexes e.g.
median house prices
Asset prices;debt levels; rental costs
