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3. The Institutional Context of Multinational Management. Learning Objectives. Understand the national context and how it affects the business environment Understand the influence of the institutional context of countries

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The Institutional Context of Multinational Management

learning objectives
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
learning objectives3
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
learning objectives4
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
institutional context
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
national context
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
social institutions
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
key social institutions that influence organizations
Key Social Institutions that Influence Organizations
  • Three key social institutions that influence business environment
    • The economic systems
    • The level of industrialization
    • The religions


    • Education
    • Level of social inequality
economic systems
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
economic systems11
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
economic systems12
Economic Systems
  • Important implications based on
    • Dominant market type
    • Market transitions
dominant market type index of economy freedom
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
economic systems implications
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
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
  • Cultural and economic changes that occur because of how production is organized and distributed in society
  • Stages of industrialization
    • Pre-industrial
    • Industrial
    • Postindustrial
  • Pre-industrial society: agriculture dominates the economic environment
  • Industrial society: dominance of the secondary or manufacturing sectors
  • Postindustrial society: emphasis on the service sectors
Exhibit 3.3: Selected countries and the distribution of employment by primary, secondary and tertiary sectors
implications of industrialization
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
  • 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
  • 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
  • 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

  • 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
  • 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

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
  • 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
  • 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
education implications
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
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 further
social inequality implications
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
social inequality implications37
Social Inequality: Implications
  • Multinational companies can consider the GINI index as an indicator of the degree of social inequality
the national context and international management
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
the national context and international management conclusion
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