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Theme 5: Institutional Hazards and Political Risk
Article 12: Alon & Herbert 48
Article 13: Slangen & Beugelsdijk 51
Article 14: Darendeli 53
Theme 6: Global Governance
Article 15: Gereffi 59
Article 16: Nadvi 64
Article 17: Bobby Banerjee 66
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, Theme 1: Introduction International Business Context & Institutional
Contextual Perspectives
Generally said, there are 10 schools of thought about how you use and implement a strategy.
1. Entrepreneurial School: Strategy formation driven by creativity and intuition (visionary leader and
intrapreneurs).
2. Cognitive School: Strategy formation is driven by thinking and mental processes, but managers have
bounded rationality and reality is constructed. Cognitive limits may result in biases in decision-
making. Managers’ background characteristics influence their cognitive base and thereby their
strategic choices.
3. Power School: Strategy formation driven by internal and external power politics. Outcome of
negotiation, coalitions, lobbying, withholding crucial information. Decisions follow the desires of the
most powerful – Considers contextual environment
4. Design School: Clear strategy should be formulated before implemented. Match internal situation of
organisation with external environment. Useful in stable environment, inflexible in fast-changing
environment – Considers contextual environment
5. Planning School: Formal process of steps for planning and control, from analysis of situation to
execution of strategy. Gives clear direction, though static-predicting is difficult.
6. Positioning School: Considers industry context and aims to improve organisation’s strategic position
within that industry (Five Forces). Systematic, though neglects power, politics, culture and other
social elements.
7. Learning School: Strategy is incremental and emerging, with focus on flexibility and development.
Strategy formation is a continuous, evolving process that involves learning. Learning involves both
internal and external aspects – Considers contextual environment
8. Cultural School: Strategy formation as a collective and collaborative process, reflecting the
corporate culture. Emphasizes social processes, beliefs and values. Strong culture can bind people,
but also can explain resistance to strategic change.
9. Environmental School: Strategy is about adapting to environmental conditions. The environment is
determining the existence of you as a firm. There needs to be. A fit between a firm’s structure and
its environment - Considers contextual environment
10. Configuration School: Strategy formation is about transforming the organisational structure. An
organisation is described as its stable configuration of characteristics, which have been adopted for
a period of time in a particular context. These characteristics cause it to behave in particular ways,
and perfect alignment with the context (fit) leads to best strategy. Changing context periodically
requires a transformation to another structural configuration - Considers contextual environment
Another way to combine strategy and context is with the aid of the PESTLE analysis: Political - Formal
institutions (political system), economic - formal institutions (capital market), social - Informal institutions
(national culture), technological, ecological, legal - formal institutions (protection of property rights).
Political, economic and legal belong to the institutional context, whereas social and corporate governance
regimes belong to the societal context.
There are three levels of corporate governance:
1. Institutional and political governance = The national and international arenas where rules that shape
market governance are framed. Power of national actors decline, and regional and international
actors gain significance.
2. Industrial or value-chain governance = The organisation of ties between various actors engaged in a
global supply chain
3. Corporate or intra-firm governance = The firm’s organisation and accountability to various
stakeholders, shareholders, employees, local communities, etc.
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, Article 1: North, D.C., (1991). Institutions. Journal of Economic Perspectives, 5(1),
97-112.
Institutions = The humanly devised constraints that structure political, economic and social interaction. They
consist of both informal constraints and formal rules. Institutions have been devised by human beings to
create order and reduce uncertainty of exchange. The incremental institutional evolution of political and
economic institutions creates the economic environment.
The purpose of this article is to elaborate the role of institutions in the performance of economies (both over
time and in the current world) and illustrate the analysis from economic history. Gradually, trade expands
beyond the village, to bazaar-like economies and eventually to the rest of the world. This shows the
importance of resources in order to define and enforce trade agreements. In small villages trade exists in a
dense social network of informal constraints that facilitates local exchange, and the transaction costs are
low. As trade expands beyond a single village, the possibilities for conflicts over the exchange grow. The
size of the market grows and transaction costs increase sharply because the dense social network is
replaced; hence, more resources must be devoted to measurement and enforcement. The development of
long-distance trade requires a sharp break in the characteristics of an economic structure. Geographic
specialisation begins to emerge as a major characteristic and some occupational specialisation is occurring
as well. The growth of long-distance trade poses two distinct transaction cost problems:
1. The problem of agency, where sedentary merchant would send a relative with the cargo to negotiate
the sale and to obtain a return cargo.
2. Contract negotiation and enforcement in alien parts of the world, where there is no easily available
way to achieve agreement and enforce contracts.
In the last stage, the one we observe in modern western societies, specialisation has increased, agriculture
requires a small percentage of the labour force, and markets have become nationwide and worldwide. In
this final stage, the specialisation requires increasing percentages of the resources of the society to be
engaged in transacting, so that the transaction sector rises to be a large percentage of gross national
product. Therefore, highly specialised forms of transaction organisations emerge. International specialisation
and division of labour requires institutions and organisations to safeguard property rights across international
boundaries so that capital markets can take place with credible commitment on the part of the players.
In every system of exchange, economic actors have an incentive to invest their time, resources, and energy
in knowledge and skills that will improve their material status. But in some primitive institutional settings, the
kind of knowledge and skills that will pay off will not result in institutional evolution towards more productive
economies. To illustrate this argument, there are three types of primitive exchange:
1. Tribal society: Exchange in a tribal society relies on a dense social network. are governed by balance
of power. The group is always endangered and tries to secure its own position. Deviance and
innovation are viewed as threats to group survival.
2. Regional economy with bazaar trading (The Suq): (1) High measurement costs, (2) Continuous
effort at clientisation and (3) intensive bargaining at every margin. In essence, the name of the
game is to raise the costs of transacting to the other party to exchange. What is missing are the
fundamental underpinnings of institutions that would make voluntary organisations viable and
profitable.
3. Long distance caravan trade: The informal constraints that made trade possible in a world where
protection was essential and no organised state existed. While tribal chieftains found it profitable to
protect merchant caravans they had neither the military muscle nor the political structure to extend,
develop, and enforce more permanent property rights.
The long-distance trade eventually led to the rise of the western world. Innovations that lowered transaction
costs consisted of organisational changes, instruments and specific techniques and enforcement
characteristics that lowered the costs of engaging in exchange over long distances.
1. Innovations that increased the mobility of capital were the techniques and methods evolved to evade
usury laws.
2. Innovations that lowered transaction costs, and mainly the bill of exchange and particularly the
development of techniques and instruments that allowed for its negotiability as well for the
development of discounting methods.
3. Innovations that spread risks
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,These specific innovations and particular institutional instruments evolved from interplay between two
fundamental economic forces: the economies of scale associated with a growing volume of trade, and the
development of improved mechanisms to enforce contracts at lower costs.
The institutional context of Western Europe differs from the other illustrations as there is competition among
the fragmented European political units accentuated by changing military technology which forced rulers to
seek more revenue in order to survive. However, there are three other reasons:
1. Political competition in early Europe was more acute than in other parts of the world
2. The relationship between the basic institutional framework, the consequent organisational structure
and institutional change
3. The path dependent nature of economic change that is a consequence of the increasing returns
characteristic of an institutional framework.
Path dependency = Organisations owe their existence to the opportunities provided by the formal and informal
institutional framework. Differing opportunity sets lead to different historical paths.
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, Article 2: Williamson, E.O., (2000). The New Institutional Economics: Taking Stock, Looking
Ahead. Journal of Economic Literature, 38(3), 595-613.
We are still very ignorant about institutions. Chief among the causes of ignorance is that institutions are very
complex.
New Institutional Economics (NIE) = An economic perspective that attempts to extend economics by focusing
on the social and legal norms and rules (institutions) that underlie economic activity and with analysis beyond
earlier institutional economics and neoclassical economics. The NIE states two propositions: (1) Institutions
do matter; and (2) The determinants of institutions are susceptible to analysis by the tools of economic
theory. The New Institutional Economics (NIE) has grown in stature and influence and it has progressed not
by advancing an overarching theory but by uncovering and explicating the microanalytic features and by
piling block upon block until the cumulative value added cannot be denied. It will be useful for the purposes
of perspective to consider the four levels of social analysis. The solid arrows signify that higher level imposes
constraints on level immediately below. The dashed arrows signify feedback to level immediately above.
The New Institutional Economics has four levels: (1) Embeddedness level; (2) Institutional Environment; (3)
Governance level; and (4) Resource allocation and employment level.
(1) Embeddedness level = Informal level – Cultural – Help define the nature of the firm
▪ Social Theory Approach
▪ Informal rules of the game
▪ The level where the norms, customs, mores, traditions, etc. are located
▪ Institutions at this level have a lasting grip on the way a society conducts itself and therefore these
institutions at this level change very slowly.
▪ Change happens over centuries or millennia
(2) Institutional Environment = Formal level – Help define and is defined by the nature of market
organisation
▪ Positive Political Theory or Economic of Property Rights Approach – Concerned with working out
the economic and political complications of level 2 features. The goal is to better understand how
things work.
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