Chapter 3The Institutional Context of Multinational Management

Institutional Context & Social Institutions

• Institutional context includes other elements besides national culture that can produce important business related differences among societies• Understanding institutional context is important for better multinational management

• Social Institutions evolve within constrains of national culture and it is defined as:• A complex of positions, roles, norms, and values organizing stable patterns

of human resources to sustain important societal structures. • There are three key social institutions influencing businesses

• Economic systems• Level of industrialization• Religions

• Other important social institutions• Educational systems & Family

• Institutional context includes other elements besides national culture that can produce important business related differences among societies• Understanding institutional context is important for better multinational management

• Social Institutions evolve within constrains of national culture and it is defined as:• A complex of positions, roles, norms, and values organizing stable patterns

of human resources to sustain important societal structures. • There are three key social institutions influencing businesses

• Economic systems• Level of industrialization• Religions

• Other important social institutions• Educational systems & Family

Social Institutions and Influence on Society

• Three Dimensions of Social Institutions:• Regulative social institution:

• Capacity to constrains behaviors through rules • Cognitive social institution:

• Refers to widely shared knowledge regarding how things are done (self-control)

• Normative social institution: • Refers to values and norms promulgated by the

social institution

• Three Dimensions of Social Institutions:• Regulative social institution:

• Capacity to constrains behaviors through rules • Cognitive social institution:

• Refers to widely shared knowledge regarding how things are done (self-control)

• Normative social institution: • Refers to values and norms promulgated by the

social institution

Social Institutions and Influence on Organizations

• The pressure to follow similar paths in management practices is organizational isomorphism

• Coercive isomorphism: • social institutions forces organizations to adopt certain

practices• Mimetic isomorphism:

• organizations purposefully copy the strategies of the most successful organizations

• Normative isomorphism: • organizations indirectly copy designs, cultures and

strategies by conforming to professional and technical norms (Happen without conscious effort)

• The pressure to follow similar paths in management practices is organizational isomorphism

• Coercive isomorphism: • social institutions forces organizations to adopt certain

practices• Mimetic isomorphism:

• organizations purposefully copy the strategies of the most successful organizations

• Normative isomorphism: • organizations indirectly copy designs, cultures and

strategies by conforming to professional and technical norms (Happen without conscious effort)

1) Economic Systems

• The system of beliefs, activities, organizations, and relationships that provide the goods and services of a society• Capitalist/market economy:

• production is decentralized to private owners (ex., owners perform activities to make profits)

• 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 (ex., Sweden, France, Denmark, Italy, and India)

• The system of beliefs, activities, organizations, and relationships that provide the goods and services of a society• Capitalist/market economy:

• production is decentralized to private owners (ex., owners perform activities to make profits)

• 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 (ex., Sweden, France, Denmark, Italy, and India)

Implications from Economic Systems

1. Type of Economic Systems associated with level of government intervention• MNC may want to see the index of economic freedom to determine the extent of

governmental intervention• For example: In mixed economies, multinationals should expect to subordinate its

economic goals and respect social objectives. Also, MNC should expect to develop more formal relations with the government.

2. Market transitions changes societies experience as they move from socialism to a market-based economy.• Opportunity to MNC but will need to turn around inefficient, formerly state-owned

companies to perform business functions and there may be important motivational issues with workers

3. Privatization refers to the transfer of state ownership to private individuals and provide significant opportunities to invest in foreign companies and to access new markets and cheap labor.

1. Type of Economic Systems associated with level of government intervention• MNC may want to see the index of economic freedom to determine the extent of

governmental intervention• For example: In mixed economies, multinationals should expect to subordinate its

economic goals and respect social objectives. Also, MNC should expect to develop more formal relations with the government.

2. Market transitions changes societies experience as they move from socialism to a market-based economy.• Opportunity to MNC but will need to turn around inefficient, formerly state-owned

companies to perform business functions and there may be important motivational issues with workers

3. Privatization refers to the transfer of state ownership to private individuals and provide significant opportunities to invest in foreign companies and to access new markets and cheap labor.

2) Industrialization

• Refers to how production is organized and distributed in society• Pre-industrial society:

• agriculture dominates the economic environment• Industrial society:

• dominance of the secondary or manufacturing sectors

• Post-industrial society: • emphasis on the service sectors

• Refers to how production is organized and distributed in society• Pre-industrial society:

• agriculture dominates the economic environment• Industrial society:

• dominance of the secondary or manufacturing sectors

• Post-industrial society: • emphasis on the service sectors

Industrialization Implications

• Direct correspondence between type of industrialization and economic development:• Industrial societies favor growth and innovation,

present significant market size and growth, and are favorable environment for business

• Pre-industrial countries provide cheap labor and untapped markets

• Post-industrial societies put emphasis on quality-of-life as opposed to economic achievement

• Direct correspondence between type of industrialization and economic development:• Industrial societies favor growth and innovation,

present significant market size and growth, and are favorable environment for business

• Pre-industrial countries provide cheap labor and untapped markets

• Post-industrial societies put emphasis on quality-of-life as opposed to economic achievement

3) Religion

• Shared set of beliefs, activities, and institutions that have basis upon faith in supernatural forces• Forms the foundation of human society and

provides individuals with guidelines to deal with issues

• Christianity, Islam, Hinduism, and Buddhism are followed by almost 71% of the world’s population

• Shared set of beliefs, activities, and institutions that have basis upon faith in supernatural forces• Forms the foundation of human society and

provides individuals with guidelines to deal with issues

• Christianity, Islam, Hinduism, and Buddhism are followed by almost 71% of the world’s population

Christianity

• Religion based on the life and teachings of Jesus• The most practiced religion around the world• Protestantism emphasizes wealth and hard work for

the glory of God• Ten commandments provides the basis for ethical

behaviors

• Religion based on the life and teachings of Jesus• The most practiced religion around the world• Protestantism emphasizes wealth and hard work for

the glory of God• Ten commandments provides the basis for ethical

behaviors

Islam

• Religion based on the submission to the will of Allah (God)• The second largest of the world’s religions• Muslims live according to Islamic laws or Shari’ah• Based on five pillars: confession, prayer, alms-giving, fasting,

and pilgrimage to Mecca• Implications for multinationals:

• Accommodate praying five times a day• The Ramadan: a month of fasting• Natural concern with social justice• Prohibits the payment or receipt of interest• Gender roles

• Religion based on the submission to the will of Allah (God)• The second largest of the world’s religions• Muslims live according to Islamic laws or Shari’ah• Based on five pillars: confession, prayer, alms-giving, fasting,

and pilgrimage to Mecca• Implications for multinationals:

• Accommodate praying five times a day• The Ramadan: a month of fasting• Natural concern with social justice• Prohibits the payment or receipt of interest• Gender roles

Hinduism

• Acceptance of the ancient traditions of India that are based on the Vedic scriptures• Currently 760 million Hindus living around the world• Belief in reincarnation• The caste system• Ethical behaviors; respect for parents

• Implications for multinationals• Spiritual achievement is an important value for most Hindus• Caste system is very pervasive • Need to be aware of caste system, e.g.. lower caste

supervising higher caste can be a problem

• Acceptance of the ancient traditions of India that are based on the Vedic scriptures• Currently 760 million Hindus living around the world• Belief in reincarnation• The caste system• Ethical behaviors; respect for parents

• Implications for multinationals• Spiritual achievement is an important value for most Hindus• Caste system is very pervasive • Need to be aware of caste system, e.g.. lower caste

supervising higher caste can be a problem

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

• Encourages hard work; laziness is seen as negative• Emphasizes teamwork; all beings are

interconnected• Emphasis on compassion and love

• 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 is seen as negative• Emphasizes teamwork; all beings are

interconnected• Emphasis on compassion and love

Religiosity

• Is the indication of the importance of acceptance of the core philosophies of religion in one’s life

• Understanding country level religiosity is useful because gives MNC an idea of the degree of responsiveness needed to accommodate religion on business practices

• Is the indication of the importance of acceptance of the core philosophies of religion in one’s life

• Understanding country level religiosity is useful because gives MNC an idea of the degree of responsiveness needed to accommodate religion on business practices

4) Education

• Organized networks of socialization experiences that prepare individuals to act in society• Central element in organization of society• Helps construct competencies, professions, and

professionals• Implications to Multinationals:

• Gives an idea of the skill level of workers in any society• Usually the more educated, the more skills workers have• Educational attainment scores help MNC to determine the

nature of the workforce

• Organized networks of socialization experiences that prepare individuals to act in society• Central element in organization of society• Helps construct competencies, professions, and

professionals• Implications to Multinationals:

• Gives an idea of the skill level of workers in any society• Usually the more educated, the more skills workers have• Educational attainment scores help MNC to determine the

nature of the workforce

Globalization and Convergence

• Globalization is pushing organizations to be more similar• Global customers and products• Growing levels of industrialization and economic

development• Global competition and global trade

• Other Convergence forces• Cross-border mergers, acquisitions, and alliances• Cross-national mobility of managers• Internationalization of business education

• Globalization is pushing organizations to be more similar• Global customers and products• Growing levels of industrialization and economic

development• Global competition and global trade

• Other Convergence forces• Cross-border mergers, acquisitions, and alliances• Cross-national mobility of managers• Internationalization of business education