CSS - Domestic & International Public Institutions and Culture II Class 4 Pedro Coelhoso

Thought for the Day Facts do not cease to exist because they are ignored. Aldous Huxley

Outline for Today Administrative Announcements Informal Institutions Definitions Culture + Ethics** Integration of Formal Public and Informal Institutions Main Points and Implications Set-up for next class (December 16, 2009)

Formal Public Institutions (Reminder) Questions: What are the rules? Who makes and enforces them? Goal: To expand markets and transact with strangers. International Rule-Making and/or Rule Enforcing United Nations World Bank, International Monetary Fund, World Trade Organization NAFTA, CAFTA, European Union, ASEAN Domestic Rule-Making Local, regional, national governments Dominant religion/religious group (sometimes) Rule-Enforcing Regulatory agencies (includes tax authorities) Police/Militia/Border Patrol Courts Financial Institutions (sometimes)

Domestic Market Infrastructure (Khanna & Palepu: Spotting Institutional Voids in Emerging Markets) Create Physical Infrastructure Roads, Schools, Communication, Energy Credibility Enhancers (third party certification) Information Analyzers and Advisors (analyze information) Aggregators and Distributors (collect and disburse) Transaction Facilitators (provide place of exchange) Regulators and other Public Institutions* (create/enforce rules) Adjudicators* (dispute resolution) * - Enforcement

Informal Institutions Constraints on socially sanctioned norms of behavior. Professional norms do not have the force of law, but are obeyed by those in a profession. Physicians, professors, lawyers, and accountants Commercial norms are adhered to by most persons in a modern economy. In developing nations, personal relations substitute for formal institutions when commercial and professional norms are not well established. 4

Informal Institutions (cont’d) Informal institutions suggest expected behaviors Everyone knows these unwritten “rules”. If formal constraints fail, informal constraints play a larger role in reducing uncertainty. This is especially important during institutional transitions: Fundamental and comprehensive changes introduced to the formal and informal rules of the game that affect organizations as players Transition economies: A subset of emerging economies, such as China, Russia, Poland. 4

Inglehart-Welzel Cultural Map of the World The World Values Surveys were designed to provide a comprehensive measurement of all major areas of human concern, from religion to politics to economic and social life and two dimensions dominate the picture: (1) Traditional/ Secular-rational and (2) Survival/Self-expression values. These two dimensions explain more than 70 percent of the cross-national variance in a factor analysis of ten indicators-and each of these dimensions is strongly correlated with scores of other important orientations. Source: http://www.worldvaluessurvey.org/

The Strategic Role of Culture Culture: The collective programming of the mind which distinguishes the members of one group or category of people from another. (Hofstede) Is the most informal and least codified part of a country’s institutional framework. Impacts the strategy of firms. Know legal regulations Know professional norms Know commercial norms Know cultural rule sets of the society and how it impacts doing business. Formalized for business by Hofstede.

National Culture vs Personal Approach: Who gets served first, second and so on? C’s Father Neighbor – Husband (C) C’s Mother Neighbor – Wife (D) Wife (B) Me (A)

Culture and Strategy (1) Power Distance: Distinguishes the levels of hierarchy accepted by the society. French and Italian managers prefer centralized authority; French and Italian subsidiaries abroad are more likely to have majority ownership control. Solicitation of subordinate feedback and participation (“empowerment”), widely used in Western European and North American countries, is seen as a sign of weak leadership and low integrity in higher power distance countries (Egypt, India, Mexico, and Russia). 4

Culture and Strategy (2) Individualism versus Collectivism: Focuses on the importance of the individual versus the group in social and business situations Individualist U.S. firms often desire to find ways to differentiate, whereas collectivist Japanese firms have a tendency to converge on a defensible position. Because entrepreneurs are usually willing to take more risk, individualistic societies tend to foster relatively more entrepreneurship. Collectivism may result in relatively lower levels of entrepreneurship. Singapore and Japan currently score very low on entrepreneurship. 4

Culture and Strategy (3) Masculinity versus Femininity: Measures the degree of sex role differentiation High masculinity countries “Good” managers are typically assertive, decisive, and “aggressive” (only in masculine countries does this word carry a positive connotation) Firms may have a relative advantage in mass manufacturing (e.g., Japan). High femininity countries Managers are less visible, more intuitive Firms may have a relative advantage in small-scale, customized manufacturing, agricultural and forestry exports, and service industries (e.g., Sweden, Norway, Netherlands, and Denmark). 4

Culture and Strategy (4) Uncertainty avoidance: Identifies the tolerance for ambiguity. Managers in low uncertainty avoidance countries (e.g., Great Britain) rely on experience and training. Managers in high uncertainty avoidance countries (e.g., China) rely more on rules and procedures. Example: The Swissair crash (1998) U.S. commentators: Rules are there to be broken during emergencies! Swissair officials: Rules exist exactly for such emergencies! 4

Culture and Strategy (5) Long-term orientation: Emphasizes perseverance and savings for future betterment Cultures with long-term orientation nurture firms with longer horizons in strategic planning. Japanese and Korean firms are willing to forego short-term profits to focus more on market share. SIA 1.1: Matsushita’s 250-year plan Western firms focus on short-term quarterly profits Chapter 10 Closing Case: In the oil industry, there is a recent tendency to shorten the planning horizon from 10-15 years to 5 years or less. 4

Hofstede Dimensions of Culturea a. When the scores are the same, countries are listed according to their alphabetical order. Arab countries, East Africa, and West Africa are clusters of multiple countries. Germany and Yugoslavia refer to the former West Germany and the former Yugoslavia, respectively. Sources: Adapted from G. Hosftede, 1997, Cultures and Organizations: Software of the Mind (pp. 26, 53, 84, 113, 166), New York: McGraw-Hill. Data on the first four dimensions are based on surveys of IBM employees during 1968–72, first published in G. Hosftede, 1980, Culture’s Consequences, Beverly Hills, CA: Sage Publishing. Data on the fifth dimension are based on surveys of students during the 1980s, first published in The Chinese Culture Connections, 1987, Chinese values and the search for culture-free dimensions of culture, Journal of Cross-Cultural Psychology, 18: 143–164. Table 4.3

Managerial Implications - Culture

Institutional Distance: Research vs. Managers Countries have an institutional distance that can be measured. Do managers perceive a ‘different’ institutional distance that can be measured?

Consider How Institutions Vary Across Countries (www.fias.net) U.S. Italy Russia Nigeria # of days to build a warehouse: permits, inspections, and utilities 40 257 704 350 Cost to fire an Employee (# of weeks wages) 2 17 50 # of documents for exporting 4 5 8 10 # of documents for importing 13 9 Overall Rank 3 53 106 108

The Strategic Role of Ethics** Ethics: Norms, principles, and standards of conduct governing individual and firm behavior Ethics: Not only an important part of informal institutions, but also deeply reflected in formal laws and regulations What is illegal is typically unethical What is legal may be unethical (e.g., lay-offs, pollution) Recent interest in business ethics: Fueled by ethics scandals at Enron, WorldCom, Parmalat, etc Ethics Officer Association: 12 member firms (1992)  1,000 firms (2004).

Managing Ethics Overseas** Ethical standards are different around the world Whistle blowers, ethical in America, are unethical in Japan Microsoft’s competitive actions, after surviving U.S. legal scrutiny, are found to be unethical and illegal by the EU (1) Ethical relativism: do what locals do (2) Ethical imperialism: there is only one right way. (3) Three ethics principles: Respect for human dignity and basic rights. Respect for local traditions (e.g., gift-giving) Respect for institutional contexts

Ethics and Corruption** Corruption: Abuse of public power for private benefit usually in the form of bribery (in cash or in kind) The correlation between a high level of corruption and a low level of economic development is strong The US Foreign Corrupt Practices Act (FCPA - 1977) Many other OECD countries, until the mid-1990s, allowed corruption expenses to be tax deductible – a clear sign of ethical relativism Despite the FCPA, no clear sign U.S. firms are more “ethical” There is a global movement among OECD member countries to criminalize corruption activities since the late 1990s To win the global anti-corruption battle Three supportive pillars will have to work together.

Main Points and Implications Institutions set rules for managerial and firm behavior. Institutions should lower costs for businesses. Formal and informal institutions can be complements and substitutes. Informal institutions are typically harder for a foreign firm and foreign manager to learn. Resource, industry, and institutional factors may lead to conflicting decisions.

Set-Up for Tomorrow Read: Chapter 6 and four supplemental articles Consider: How do their entry mode choices lead to success or failure? Learning Objective: Consider the reasons to expand (or not to expand) and the different modes of entry.