Purpose and Perspectives of Chapter 4

This chapter looks beyond the industry-based and resource-based views of strategy to the
institution-based view and how the wider influences of governments, cultures, and ethics,
as well as the rules of the game unique to various institutions, affect strategy options and
choices. The text explores transactional costs, hybrid organizations, institutional logic, and
formal and informal constraints. Hofstede’s five dimensions of culture and a framework of
strategic responses to ethical issues are also addressed as part of the institution-based
view of strategy.

Purpose and Perspectives of Chapter 6

Firms enter foreign markets for a variety of reasons. Such a move requires strategies
geared toward managing the industry conditions, the competitive repertoire, and the
institutional uncertainties in the host countries. Entering foreign markets is crucial for
global strategy, so this chapter develops a comprehensive model for such a move based on
the strategy tripod. In that development, we focus on three crucial dimensions: where,
when, and how—known as the 2W1H dimensions.

CHAPTERS 4 & 6 DISCUSSION

1. Taxes are one aspect of formal institution that Americans are familiar with.
Can you think of other examples of formal institutions that affect individuals
and businesses?
Possible answers can include: Individual: speed limits; laws concerning behavior
(violence, drugs, threatening others, etc.). Business: regulations for approved business
transactions; rules governing non-profits; rules for medical research or environmental
companies; safety regulations; rules for stock offerings, etc.

2. How does the institution-based view complement and differ from the industry
based and resource-based views? Why has the institution-based view become
a third leg in the strategy tripod?

The institution-based view is a leading perspective of strategy that argues that in

addition to industry-and firm-level conditions, firms also need to take into account wider
influences from sources such as the state and society when crafting strategy. The
industry-based view suggests that the strategic task is mainly to examine the
competitive forces affecting an industry, and it focuses on the external opportunities
and threats. The resource-based view concentrates on the internal strengths and
weaknesses of the firm. This view posits that it is firm-specific capabilities that
differentiate successful firms from failing ones. The institution-based view combines
both the industry-based and resource-based views and further argues that in addition to
industry-level and firm-level conditions, firms also need to take into account the impact
of governmental rules, economic reforms, and even the cultural codes that govern an
organization. The five dimensions of culture proposed by Hofstede would be useful to
understand the institution-based view.

To answer the question of how firms behave, the three leading perspectives lead to the
formation of the strategy tripod. The industry-based view and the resource-based view
represent the two legs of the strategic tripod with the institution-based view as the third
leg.

3. List one example of institutional transitions from developed economies and

one example from emerging economies. What are their similarities and
differences?
Though countries make different political choices—communism or capitalism—their
economic policies have been quite similar. All governments are interested in market
development and economic growth. Initially, in all emerging economies, competition
was virtually nonexistent. Markets were closed and industries were protected.
Institutional transitions are economies that are moving from central planning to market
competition. Examples include countries like Russia, China, and Poland. An example of
an institutional transition from a developed economy would be IKEA, which entered the
Russian market. An example of institutional transition from an emerging economy
would be China’s investments in Central and Eastern Europe, in the fields of
infrastructure, new technology and renewable energy.

4. ON ETHICS: Assume you work for a New Zealand company exporting a

container of kiwis to Haiti. The customs official informs you that there is a
delay in clearing your container through customs and it may last a month.
However, if you are willing to pay an “expediting fee” of US$200, he will try to
make it happen in one week. What would you do?
At present, the U.S. Foreign Corrupt Practices Act (FCPA), which is a U.S. law enacted in
1977 that bans bribing corrupt foreign officials, makes exceptions for small “grease”
payments to get goods through customs abroad. If the payment is not too big (probably
less than $1000 dollars and the lawyers thought it was okay), a person would probably
not be against paying that “tax” to get his or her goods through. This problem comes up
quite a lot in the developing world. Customs officials often hold up perishable and time-
sensitive items (parts, seasonal products) for days and weeks at a time unless they get
paid, so the person may have to pay a little. But if the requested payments started to
rise, then the firm would have to take some action, such as speaking to the customs
officials’ superiors, or even thinking about cutting back operations in that country or
shipping through different ports. If every country criminalizes bribery and every investor
resists corruption, their combined power would eradicate it. However, this will not
happen unless FCPA-type legislation is institutionalized and enforced in every country.

5. Pick an industry in which firms from your country are internationally active.
What are the top five most favorite foreign markets for firms in this industry?
Why?

According to Credit Suisse, one of the top five growth industries in China is the personal
computer industry. The foreign markets to explore would be India and other countries
from Southeast Asia. This region is attractive because of its enormous potential. For
example, India has a huge population with upwardly mobile aspirations and has been
impacted by the Internet revolution. Students could refer to Lenovo’s strategies to
conquer the Indian market.

Any company targeting a new and critical market must learn from its experiences. It
must remember that every country is unique and must suitably modify its strategies. It
must forge partnerships with retail outlets, multibrand format stores, and regional
distributors. It must target smaller cities and towns. Strategic tie-ups with local and
regional bodies/agencies would certainly help these foreign industries.

6. From institution-based and resource-based views, identify the liability of

foreigners confronting MNEs from emerging economies interested in
expanding overseas. How can such firms overcome them?

Institution-based views suggest that such MNEs might encounter not only regulatory
risks from their home government but also hostility and suspicion from those countries
they wish to enter. Recent examples include Middle Eastern companies that sought to
invest in aspects of U.S. infrastructure. Furthermore, as relations between countries
change, the policies toward such companies could change.

Resource-based views include the possibility that the emerging economy may not
provide the firm with access or the environment that would enable the firm to develop
some of the key resources needed. It may have valuable firm-specific resources and
capabilities that enable success in its home country, but they may not leverage
overseas where market needs are different.

7. ON ETHICS: By definition, entering foreign markets means not investing in a

firm’s home country. What are the ethical dilemmas here? What are your
recommendations as (1) MNE executives, (2) labor union leaders of your
domestic (home country) labor forces, (3) host country officials, and (4) home
country officials?
Clearly there are several stakeholders (those affected by the decision to enter the
foreign market) who have different interests. Those who benefit will likely see the
decision as good, while those adversely affected may feel that the decision was
unethical.

MNE executives are likely to see the decision as one involving economics, not ethics.
Their reservations about the decision to invest in foreign countries may involve the
impact of a negative perception on the part of the public in their home country. They
could reason that investing in the foreign country would be more economically
rewarding than investing at home. The profits thus generated would ultimately benefit
even the company’s operations in the home country.

Host country officials are likely to also view it as an economic issue unless they are
concerned that the MNE could create competition for companies already in the market.
However, the entrance of a new foreign competitor could also help domestic
companies improve their quality and efficiency in order to compete with the new
entrant.

Home country officials and unions may view the decision as one in which the company
lacks loyalty to either its employees or its country. They could also analyze the reasons
for the shift into the new country and figure out how they can change existing
regulations or labor practices in order to make their country more appealing for
investment.

8. Entry timing refers to whether there are compelling reasons to be an early or

late entrant in a particular country.

• What are some benefits to first-mover firms? Provide a specific example of

benefits enjoyed by a firm that has chosen to be a first-mover firm in a foreign
market.

• What are some benefits to late-mover firms? Provide a specific example of

benefits enjoyed by a firm that has chosen to be a late-mover firm in a foreign
market.

• Benefits enjoyed by first-mover firms include proprietary technology, preemptive

investments, the ability to erect entry barriers for late entrants such as high
switching costs, avoidance of clashes with dominant firms at home and
opportunities to build precious relationships with key stakeholders such as
customers and governments. Some examples of first-mover firms are Japanese
multinationals that have cherry-picked leading local suppliers and distributors in
Southeast Asia as new members of the expanded keiretsu networks and prevented
late entrants from the West from accessing these local firms; American, British,
French, German, and Russian aerospace firms that competed intensely for Poland’s
first post-Cold War order of fighters; Matsushita, Toyota, and NEC were leaders in
 their respective industries in Japan, but Sony, Honda, and Epson all entered the
United States ahead of the leading firms; Citigroup, JP Morgan Chase, and
Metallurgical Corporation of China entered Afghanistan, earning a good deal of
goodwill from the Afghan government eager to woo more foreign investment.

• Benefits enjoyed by late-mover firms include getting a free ride on first movers’
pioneering investments, resolution of technological and market uncertainties and
first mover’s difficulty to adapt to market changes. Some examples of late-mover
firms are Amazon who hoped to get a free ride on some of Flipkart’s earlier
investments; After some uncertainties were removed by the release of the world’s
first electric vehicle (EV), the Leaf, Tesla as well as BMW, GM, and Toyota recently
joined the market with their own EVs; Greyhound, the incumbent in intercity bus
service in the United States, is financially struggling, but Megabus, the new entrant
from Britain, adapted by using curbside stops (like regular city bus stops), making
travel by bus more appealing to a large number of passengers.