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Core readings Week 1 to week 10 notes
- Institution
- Kings College London (KCL)
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What is, and to what purpose do we study, international business?Opportunities to engage across national boarders are rapidly growing in scope and complexity, while only
marginally reducing the challenges of managing across boarders. IB studies how businesses are able to
transcend national differences.
IB matters because local context matters
• Wide variety of opportunities and challenges arise from their position as outsider to a local context
different than their home country. They thus develop organisational structures and processes to exploit
those opportunities, and they manage challenges arising from the exposure to multiple contexts.
• Business is shaped by its context hence scholars study the phenomena surrounding businesses.
• IB researchers looking beyond single countries can recognise contextual issues make them explicit and
thus enable systematic analysis. This is essential for theory development, and only when theories have
received empirical support in a variety of contexts can we confidently assume their general or universal
validity.
• General awareness of national differences for individuals and organisations engaging in business. This
focus on how differences in national contexts matter and how individuals and organisations deal with such
differences is at the core of IB.
Indigenous research and international business
• Indigenous research investigates business in a single contest while relating to global conversations by
exploring new phenomena through the lens of established theory, or by applying existing theories in novel
contests with the aim to deepen or extend them.
• A focus on a single country may be a good starting point for a scholarly career in the fields
• However single country studies are often insufficient to generate knowledge of more than local value
because they fail to identify what this context has in common with other contexts and what is truly unique.
• Two common fallacies are observed:
- One is to assume everything is the same unless proven otherwise (general theory illusion)
- Two is to reject the applicability of experiences elsewhere and develop entirely new models that almost
invariably “reinvent the wheel” - exceptionalism illusion
International business and the quests for general theory
• A general theory is supposed to be valid context-free, but context is essential in explaining what businesses
do, hence the quest for a general theory might be holding back advanced IB research
• General theory tends to be highly abstract but when the general theory is applied, it needs to be
contextualised hence both general and specific aspects of a theory are necessary and work in combination
to generate higher level knowledge that helps practise. It would be really hard to find a general finding that
applies on its entirety to all countries because every single international business theory needs a
contextualisation.
• Hence, unfortunately it is a yes - general theories in IB can hold back advanced research because they fail
to provide real and testable information that applies to every single contexts globally
Conclusion
• IB scholars examine how and why national business context matter and how individuals and corporations
manage such contextual variations. With an acute awareness of local contests, IB scholars integrate context
and general theories to generate new theoretical and practical insights.
• Globalisation accelerates business interfaces across countries, while only marginally reducing differences
in national contexts
,Comparing capitalisms: Understanding institutional diversity and its implications for international
business
Gregory Jackson and Richard Deeg, 2008
INTRODUCTION
Meaning of institutions in IB remains contested and institutional theory remains characterised by an eclectic
set of approaches. Institutions - “rules of the game” (North, 1990) = regulative, normative or cognitive
parameters that influence organisations and its transaction costs.
• Comparative capitalisms (CC) = examines how institutions across several economic domains interact to
form distinct national varieties of capitalism. National configurations or types - generate a particular
systematic logic of economic actions and competitive advantages related to complementarities among
those institutions. Emphasis on how and why institutions differ across countries.
• Key contribution of CC - non-market forms of coordination, rather than focusing on institutional
distance, CC developed a theory of comparative institutional advantage in which different institution
settings have different outcomes in terms of influencing economic activity (e.g. organisations). Institutions
are seen as both constraints but also as resources for solving problems through non-economic sets of
commitments. CC approach focuses on the supply side of the economy = how institutions shape the supply
of inputs (e.g. skills, capital) collectively available to firm. This approach has been used to explain e.g.
Japan’s comparative advantage
• IB analyses how firms deal with institutions, the CC approach analyses how institutions impact MNEs and
how strategy is shaped by the institutions
• Four key dimensions on how institutions have been studied in the IB and CC literatures:
- How firms are embedded in institutions
- Institutional configurations at the national level
- The approach to competitive advantage
- Understanding of institutional change
International business: Variable-based approaches to institutional analysis
An important focus of the IB literature is on how host country institutions shape the mode of entry of foreign
businesses by creating restrictions, costs or hazards for MNEs. Institutions may affect timing, location, or
entry mode decisions in different ways. When contractual hazards increase MNEs are likely to choose a
wholly owned subsidiary, then political hazards increase MNEs will rely more on joint ventures, and so they
will when institutions are underdeveloped.
• Cultural difference increases the cost of entry, decreases the efficiency of operations, and hampers the
ability of firms to transfer core competencies or home country practices (Barkema & Vermeulen, 1997;
Brouthers & Brouthers, 2001). Institutional distance is hypothesised to increase transition costs, making it
harder for MNEs to obtain reliable information, and discouraging investment into institutionally distant
countries. Conversely, governments may treat foreign MNEs different
• Argument that says institutions impact the competitive advantage of firms through their capability of
adapting to different institution environments = firms are argued to be more successful if they adapt to or
develop capabilities that complement the risk, cost or resource environments of different countries.
• The IB literature has demonstrated the importance of institutions, such as host country context, for the
strategy and performance of MNEs. A major contribution is the analysis on how MNEs deal with
institutions by adapting their strategy and structure when facing distant institutions.
• Critical observations of the explanation of the IB literature in their interpretation of institutions:
- Thin view in stressing how institutions constraint strategic choice = firms remain self-interested actors
with stable preferences, although constrained by institutional rules and norms, but institutions socialise
the diverse set of actors related to the firm (e.g. managers, employees, owners, partner firms..) or shape
the interests among those stakeholders, thus the capabilities of firms to pursue different strategies.
- Variable-based approach views institutional diversity along discrete parameters, hence neglecting the
potential for interactions among these different institutional dimensions/parameters ?????
, - Comparative advantage view is that of an organisation whose strategies fit the institutional
environment, however this IB literature Saus little about the advantages of the institutional
arrangements themselves, apart from the degree to which they support market activity.
- The IB literature has little explicit theory about the origin or change of diverse institutions.
Comparative capitalism: Case-bases comparisons of institutions-as-configurations
Institutions are viewed as being systemically interdependent configurations, rather than in isolation. The
internal cohesion between institutions leads to patterns of institutions at a national level and particular
strategies at a strategies at a firm level.
• Focus on three approaches to examine how the CC literature has approached the study of institutions to
identify common features within this literature
- The variety of capitalism approach
- The national business systems approach
- The governance approach
• Common elements of these three approaches - studying institutions as resources for non-market forms of
coordination, comparison of I situational configurations that stresses their integrity as national cases, a
theory of comparative institutional advantage for different types of economic activity, and a broad notion
of institutional path dependence
• The CC literature often sees institutions in terms of resources for strategic coordination across different
institutional domains. Firms seek to develop core competencies and dynamic capabilities, but the pursuit of
these competencies and capabilities requires firms to develop and manage successful relationships with
other micro-agents, as in transaction cost, or principal-agent approaches.
• But whereas new institutional economics conventionally sees institutional structure as following firm
strategy (e.g., firms create structures that are efficient for them), strategy is seen as being constrained by
institutional structures and thereby leads to differ ent firm behaviour across institutional settings
• On this basis, distinction between two basic types of capitalism: coordinated market economies (CMEs)
and liberal market economies (LMEs).
- In LMEs, like the US, UK or Canada, the market plays the dominant role in coordinating the economic
behaviour, and the state remains an enforcer of contracts. All LMEs share the following characteristics:
short-term orientated company finance, deregulated labour markets, general education, and strong inter-
, company competition. Firms are more successful when their strategies seek to exploit easily transferred
assets = this gives institutional advantage in radical forms of innovation
- In CMEs, like Germany, Sweden or Austria, firm behaviour is coordinated through non-market
mechanisms. They utilise long-term industrial finance, cooperative industrial relations, vocational and
firm-specific training, and cooperation in technology across companies. This context gives institutional
incentives and capabilities for firms to pursue production and market strategies that seek to exploit the
advantages of non-transferable assets = institutional advantage in incremental forms of innovation
- Thought that mixed cases of LME and CME will underperform countries with pure form of either type
of capitalism - U-shaped model were countries that cluster around purer forms perform better
economically.
Reconciling institutional diversity and IB
By looking at Table 3, it seems that IB and CC literature have very different views on institutions.
• IB sees institutions from a firm-firm-centred perspective and emphasises how these constraint MNE
stratifies by creating costs for the transfers of home country practices. Where institutions are too distant,
MNEs must substitutive their own resources and power for control in order to adapt and manage the
institutional environment.
• CC sees institutions more broadly as influencing actors’ identities, interests and capacities for action.
Institutions shape the supply of inputs, such as finance or human capital, collectively available to firms.
The CC approach needs to develop a more dynamic view of institutions and rims that is better equipped to
understand the evolving interdependency between them in an international contexts.
• MNE strategies: MNEs seek competitive advantage through at least three distinct types of strategies:
- Aggregation of activities based in a home country or the export of home country practices abroad to
achieve standardisation and economies of scale
- Adaptation to diverse host-country environments
- Arbitrage through selective specialisation of activities in different locations (arbitrage = the
simultaneous buying and selling of assets, securities, currencies or commodities in different markets in
order to take advantage of different prices for the same asset)
• The success of different strategies depend on the institutional contexts and its factors, such as degree of
development or institutional distance from the host country. A greater focus is needed, in the CC approach,
on country-specific aspects of MNE strategies rather than looking at the whole institutional configuration
and generalising from there.
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