The Institutional Context of Multinational Management

1. 3 The Institutional Context of Multinational Management

2. Learning Objectives • Understand the national context and how it affects the business environment • Understand the influence of the institutional context of countries • Define social institutions and understand the basic forms of social institutions • Understand how social institutions influence both people and organization

3. Learning Objectives • Understand the basic economic systems and influence on multinational operations • Understand basic stages of industrialization and implications for multinationals • Understand the world’s basic religions • Develop an understanding of education

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

5. Institutional Context • Includes other elements besides national culture that can produce important country differences • Dominant institutional context of any society has an effect on individuals and organizations • Understanding the institutional context is therefore extremely important for better multinational management

6. National Context • Made up of the respective national cultures and social institutions of any society • National cultures as well as institutions of any society shape the important norms, values, and beliefs in any society

7. Exhibit 3.1: A Model of the National Context

8. Social Institutions • Complex of positions, roles, norms, and values organizing stable patterns of human resources to sustain important societal structures • Social institutions affect organizations as well as individuals • Help define what are legitimate and correct management practices in a society • Organizations are induced to follow similar paths

9. Key Social Institutions that Influence Organizations • Three key social institutions that influence business environment • The economic systems • The level of industrialization • The religions Additionally, • Education • Level of social inequality

10. Economic Systems • Economic systems: 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

11. Economic Systems • Capitalist/market economy: production is decentralized to private owners • Owners perform these activities to make profits • Socialist/command economy: production resources are owned by the state • Production decisions are centrally coordinated • Mixed economy: combines aspects of capitalist and socialist economies • E.g., Sweden, France, Denmark, Italy and India

12. Economic Systems • Important implications based on • Dominant market type • Market transitions

13. Dominant Market Type: Index of Economy Freedom • 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 policy, taxation policies, and the level of governmental intervention in the economy, to property rights and regulation

14. Exhibit 3.2: Selected Top and Bottom 10 Countries on Index of Economic Freedom

15. Economic Systems: Implications • Decisions to operate in a country can be made based on the dominant economic type • In mixed economies, multinationals should expect to subordinate its economic goals and respect social objectives • Multinationals should also expect to develop more formal relations with the government in mixed economies • Index of economic freedom can be used to determine the extent of governmental intervention

16. 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

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

18. Industrialization • Pre-industrial society: agriculture dominates the economic environment • Industrial society: dominance of the secondary or manufacturing sectors • Postindustrial society: emphasis on the service sectors

19. Exhibit 3.3: Selected countries and the distribution of employment by primary, secondary and tertiary sectors

20. Implications of industrialization • Direct correspondence between industrialization and economic development Industrial societies favor growth and innovation • Governments provide favorable environment • Opportunities for significant market size and growth Pre-industrial countries provide cheap labor and untapped markets • Poor infrastructure for business

21. Industrialization • Postindustrial societies • Domination of service sector, knowledge based • Emphasis on quality-of-life as opposed to economic achievement • Non economic incentives favored • Post-materialist values, individual expression, and movement toward more humane societies

22. Exhibit 3.4: Materialist scores of selected countries

23. Exhibit 3.5: Postmaterialist scores of selected countries

24. Religion • Shared set of beliefs, activities, and institutions that have basis upon faith in supernatural forces • Forms the very foundation of human society • Provides individuals with guidelines to deal with issues • Christianity, Islam, Hinduism and Buddhism are followed by almost 71% of the world’s population • 20% of world’s population are non religious

25. Exhibit 3.6: Distribution of Religions Around the World

26. Christianity • Religion based on the life and 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

27. Islam • Based on the submission to the will of Allah (God) • The second largest of the world’s religion • Islamic laws or Shari’ah, based on five pillars Implications for multinationals • Giving alms • Prohibits the payment or receipt of interest • Society divided by gender - women’s role at home

28. Hinduism • Timeless and eternal religion – 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) • Belief in Karma and reincarnation

29. Hinduism Implications for multinationals • Spiritual achievement is an important value for Hindus • Respect for elders, age and wisdom • Clear guidelines for ethical behavior • Inequality in social structure of India

30. Buddhism • 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 • Encourage hard working – laziness seen as negative • Emphasizes teamwork – all beings are interconnected

31. 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

32. Education: Implications • 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 • Also look at other scores • Math and Science • R & D expenditure

33. Exhibit 3.7: Percentage Enrollment in Tertiary Education for Relevant Age Groups

34. Exhibit 3.8: Percentage of GDP spent on R & D

35. 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 further

36. Social Inequality: Implications • Many MNCs are facing significant criticisms for their operations in countries with high social inequalities • Criticized for using low wages, child labor, workplaces • Realize social responsibility is in their interest too • Many actively avoid countries with high inequalities to prevent potential negative publicity

37. Social Inequality: Implications • Multinational companies can consider the GINI index as an indicator of the degree of social inequality

38. Exhibit 3.9: The GINI Index for Selected Countries

39. The National Context and International Management • Social institutions are key aspects of understanding the business environment in any country • Social institutions shape norms, values, and beliefs that determine acceptable and unacceptable business practices • Along with culture, form national context of a country

40. The National Context and International Management: Conclusion • The national context affects a company’s strategy • Determines the comparative advantage of nations, which ultimately determines which strategies multinational companies choose • Determines the global platform, namely the areas of business that can be performed the best in a country • Human aspect of international management: relationship between workers and superiors, motivation, human resource management, and design