1. Chapter 3
The Institutional Context of
Multinational Management
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2. Learning Objectives
•• Understand the national context and how it affects the
Understand the national context and how it affects the
business environment
business environment
•• Understand the influence of the institutional context of
Understand the influence of the institutional context of
countries
countries
•• Define social institutions and understand the basic
Define social institutions and understand the basic
forms of social institutions
forms of social institutions
•• Understand how social institutions influence both
Understand how social institutions influence both
people and organization
people and organization
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

3. Learning Objectives
•• Understand the basic economic systems and influence
Understand the basic economic systems and influence
on multinational operations
on multinational operations
•• Understand basic stages of industrialization and
Understand basic stages of industrialization and
implications for multinationals
implications for multinationals
•• Understand the world’s basic religions
Understand the world’s basic religions
•• Develop an understanding of education
Develop an understanding of education
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

4. Learning Objectives
•• Understand social inequality and its implications for
Understand social inequality and its implications for
multinationals
multinationals
•• Understand the importance of the national context and
Understand the importance of the national context and
its connection with other international management
its connection with other international management
areas
areas
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5. Institutional Context
•• Includes other elements besides national culture that
Includes other elements besides national culture that
can produce important country differences
can produce important country differences
•• Dominant institutional context of any society has an
Dominant institutional context of any society has an
effect on individuals and organizations
effect on individuals and organizations
•• Understanding the institutional context is therefore
Understanding the institutional context is therefore
extremely important for better multinational
extremely important for better multinational
management
management
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

6. National Context
•• Made up of the respective national cultures and social
Made up of the respective national cultures and social
institutions of any society
institutions of any society
•• National cultures as well as institutions of any society
National cultures as well as institutions of any society
shape the important norms, values, and beliefs in any
shape the important norms, values, and beliefs in any
society
society
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

7. Exhibit 3.1: A Model of the
National Context
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8. Social Institutions
•• Complex of positions, roles, norms, and values
Complex of positions, roles, norms, and values
organizing stable patterns of human resources to
organizing stable patterns of human resources to
sustain important societal structures
sustain important societal structures
•• Social institutions affect organizations as well as
Social institutions affect organizations as well as
individuals
individuals
•• Help define what are legitimate and correct
Help define what are legitimate and correct
management practices in a society
management practices in a society
•• Organizations are induced to follow similar paths
Organizations are induced to follow similar paths
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

9. Key Social Institutions that
Influence Organizations
•• Three key social institutions that influence business
Three key social institutions that influence business
environment
environment
•• The economic systems
The economic systems
•• The level of industrialization
The level of industrialization
•• The religions
The religions
Additionally,
Additionally,
•• Education
Education
•• Level of social inequality
Level of social inequality
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

10. Economic Systems
•• Economic systems: system of beliefs, activities,
Economic systems: system of beliefs, activities,
organizations and relationships that provide the goods
organizations and relationships that provide the goods
and services of a society
and services of a society
•• Typified by extremes of capitalism, socialism and a
Typified by extremes of capitalism, socialism and a
mix of both
mix of both
•• Important implications based on
Important implications based on
•• Dominant market type
Dominant market type
•• Market transitions
Market transitions
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11. Economic Systems
•• Capitalist/market economy: production is decentralized
Capitalist/market economy: production is decentralized
to private owners
to private owners
•• Owners perform these activities to make profits
Owners perform these activities to make profits
•• Socialist/command economy: production resources are
Socialist/command economy: production resources are
owned by the state
owned by the state
•• Production decisions are centrally coordinated
Production decisions are centrally coordinated
•• Mixed economy: combines aspects of capitalist and
Mixed economy: combines aspects of capitalist and
socialist economies
socialist economies
•• E.g., Sweden, France, Denmark, Italy and India
E.g., Sweden, France, Denmark, Italy and India
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

12. Economic Systems
•• Important implications based on
Important implications based on
•• Dominant market type
Dominant market type
•• Market transitions
Market transitions
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

13. Dominant Market Type: Index
of Economy Freedom
•• The absence of government coercion or constraint on
The absence of government coercion or constraint on
the production, distribution, or consumption of goods
the production, distribution, or consumption of goods
and services beyond the extent necessary for citizens
and services beyond the extent necessary for citizens
to protect and maintain liberty itself
to protect and maintain liberty itself
•• The index includes 10 indicators ranging from trade
The index includes 10 indicators ranging from trade
policy, taxation policies, and the level of governmental
policy, taxation policies, and the level of governmental
intervention in the economy, to property rights and
intervention in the economy, to property rights and
regulation
regulation
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

14. Exhibit 3.2: Selected Top and
Bottom 10 Countries on Index
of Economic Freedom
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15. Economic Systems: Implications
•• Decisions to operate in a country can be made based on the
Decisions to operate in a country can be made based on the
dominant economic type
dominant economic type
•• In mixed economies, multinationals should expect to
In mixed economies, multinationals should expect to
subordinate its economic goals and respect social objectives
subordinate its economic goals and respect social objectives
•• Multinationals should also expect to develop more formal
Multinationals should also expect to develop more formal
relations with the government in mixed economies
relations with the government in mixed economies
•• Index of economic freedom can be used to determine the
Index of economic freedom can be used to determine the
extent of governmental intervention
extent of governmental intervention
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

16. Market Transitions
•• Changes societies experience as they move from
Changes societies experience as they move from
socialism to a market based economy
socialism to a market based economy
•• Multinational implications
Multinational implications
•• Need to turn around inefficient formerly state-owned
Need to turn around inefficient formerly state-owned
companies to become cost effective
companies to become cost effective
•• Motivational issues with workers
Motivational issues with workers
•• Interpersonal trust, teams, meritocracy
Interpersonal trust, teams, meritocracy
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

17. Industrialization
•• Cultural and economic changes that occur because of
Cultural and economic changes that occur because of
how production is organized and distributed in society
how production is organized and distributed in society
•• Stages of industrialization
Stages of industrialization
•• Pre-industrial
Pre-industrial
•• Industrial
Industrial
•• Postindustrial
Postindustrial
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18. Industrialization
•• Pre-industrial society: agriculture dominates the
Pre-industrial society: agriculture dominates the
economic environment
economic environment
•• Industrial society: dominance of the secondary or
Industrial society: dominance of the secondary or
manufacturing sectors
manufacturing sectors
•• Postindustrial society: emphasis on the service sectors
Postindustrial society: emphasis on the service sectors
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

19. Exhibit 3.3: Selected countries and the
distribution of employment by primary,
secondary and tertiary sectors
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20. Implications of
industrialization
•• Direct correspondence between industrialization and
Direct correspondence between industrialization and
economic development
economic development
Industrial societies favor growth and innovation
Industrial societies favor growth and innovation
•• Governments provide favorable environment
Governments provide favorable environment
•• Opportunities for significant market size and growth
Opportunities for significant market size and growth
Pre-industrial countries provide cheap labor and
Pre-industrial countries provide cheap labor and
untapped markets
untapped markets
•• Poor infrastructure for business
Poor infrastructure for business
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21. Industrialization
•• Postindustrial societies
Postindustrial societies
•• Domination of service sector, knowledge based
Domination of service sector, knowledge based
•• Emphasis on quality-of-life as opposed to economic
Emphasis on quality-of-life as opposed to economic
achievement
achievement
•• Non economic incentives favored
Non economic incentives favored
•• Post-materialist values, individual expression, and
Post-materialist values, individual expression, and
movement toward more humane societies
movement toward more humane societies
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22. Exhibit 3.4: Materialist scores
of selected countries
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23. Exhibit 3.5: Postmaterialist
scores of selected countries
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24. Religion
•• Shared set of beliefs, activities, and institutions that
Shared set of beliefs, activities, and institutions that
have basis upon faith in supernatural forces
have basis upon faith in supernatural forces
•• Forms the very foundation of human society
Forms the very foundation of human society
•• Provides individuals with guidelines to deal with issues
Provides individuals with guidelines to deal with issues
•• Christianity, Islam, Hinduism and Buddhism are
Christianity, Islam, Hinduism and Buddhism are
followed by almost 71% of the world’s population
followed by almost 71% of the world’s population
•• 20% of world’s population are non religious
20% of world’s population are non religious
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

25. Exhibit 3.6: Distribution of
Religions Around the World
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26. Christianity
•• Religion based on the life and teachings of Jesus
Religion based on the life and teachings of Jesus
•• The most practiced religion around the world
The most practiced religion around the world
•• Protestantism emphasizes wealth and hard work
Protestantism emphasizes wealth and hard work
•• Ten commandments – basis for ethical behaviors
Ten commandments – basis for ethical behaviors
•• Dignity of human life, labor and happiness
Dignity of human life, labor and happiness
Implications for multinationals:
Implications for multinationals:
Business environment conducive to these values
Business environment conducive to these values
Sunday holiday for prayer
Sunday holiday for prayer
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

27. Islam
•• Based on the submission to the will of Allah (God)
Based on the submission to the will of Allah (God)
•• The second largest of the world’s religion
The second largest of the world’s religion
•• Islamic laws or Shari’ah, based on five pillars
Islamic laws or Shari’ah, based on five pillars
Implications for multinationals
Implications for multinationals
•• Giving alms
Giving alms
•• Prohibits the payment or receipt of interest
Prohibits the payment or receipt of interest
•• Society divided by gender -- women’s role at home
Society divided by gender women’s role at home
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

28. Hinduism
•• Timeless and eternal religion – no single founder
Timeless and eternal religion – no single founder
•• Based on the Vedic scriptures
Based on the Vedic scriptures
•• Oldest, embodied in the ancient traditions of India
Oldest, embodied in the ancient traditions of India
•• Currently 760 million Hindus worldwide
Currently 760 million Hindus worldwide
•• Quest for ultimate reality and truth
Quest for ultimate reality and truth
•• Hindus live life according to the principles of
Hindus live life according to the principles of
Dharma (righteousness)
Dharma (righteousness)
•• Belief in Karma and reincarnation
Belief in Karma and reincarnation
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

29. Hinduism
Implications for multinationals
Implications for multinationals
•• Spiritual achievement is an important value for
Spiritual achievement is an important value for
Hindus
Hindus
•• Respect for elders, age and wisdom
Respect for elders, age and wisdom
•• Clear guidelines for ethical behavior
Clear guidelines for ethical behavior
•• Inequality in social structure of India
Inequality in social structure of India
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

30. Buddhism
•• Religious tradition that focuses on the reality of world
Religious tradition that focuses on the reality of world
suffering and the ways one can be freed from suffering
suffering and the ways one can be freed from suffering
•• Craving and desires produce suffering
Craving and desires produce suffering
•• Dominant religion in Asia
Dominant religion in Asia
Implications for multinationals
Implications for multinationals
•• Encourage hard working – laziness seen as negative
Encourage hard working – laziness seen as negative
•• Emphasizes teamwork – all beings are interconnected
Emphasizes teamwork – all beings are interconnected
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

31. Education
•• Education: organized networks of socialization
Education: organized networks of socialization
experiences which prepare individuals to act in society
experiences which prepare individuals to act in society
•• Central element in organization of society
Central element in organization of society
•• Helps construct competencies, professions, and
Helps construct competencies, professions, and
professionals
professionals
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

32. Education: Implications
•• Gives an idea of the skill level of workers in any
Gives an idea of the skill level of workers in any
society
society
•• The more educated, the more skills workers have
The more educated, the more skills workers have
•• Multinationals can look at educational attainment
Multinationals can look at educational attainment
scores to determine the nature of the workforce
scores to determine the nature of the workforce
•• Also look at other scores
Also look at other scores
•• Math and Science
Math and Science
•• R & D expenditure
R & D expenditure
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

33. Exhibit 3.7: Percentage
Enrollment in Tertiary Education
for Relevant Age Groups
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

34. Exhibit 3.8: Percentage of GDP
spent on R & D
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35. Social Inequality
•• Refers to the degree to which people have privileged
Refers to the degree to which people have privileged
access to resources and positions within societies
access to resources and positions within societies
•• In societies that have high social inequality, a few
In societies that have high social inequality, a few
individuals have the ability to control and use important
individuals have the ability to control and use important
resources
resources
•• These select few use access to resources to acquire
These select few use access to resources to acquire
more power, thereby perpetuating inequality further
more power, thereby perpetuating inequality further
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

36. Social Inequality: Implications
•• Many MNCs are facing significant criticisms for their
Many MNCs are facing significant criticisms for their
operations in countries with high social inequalities
operations in countries with high social inequalities
•• Criticized for using low wages, child labor, workplaces
Criticized for using low wages, child labor, workplaces
•• Realize social responsibility is in their interest too
Realize social responsibility is in their interest too
•• Many actively avoid countries with high inequalities to
Many actively avoid countries with high inequalities to
prevent potential negative publicity
prevent potential negative publicity
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

37. Social Inequality: Implications
•• Multinational companies can consider the GINI index
Multinational companies can consider the GINI index
as an indicator of the degree of social inequality
as an indicator of the degree of social inequality
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

38. Exhibit 3.9: The GINI Index for
Selected Countries
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39. The National Context and
International Management
•• Social institutions are key aspects of understanding
Social institutions are key aspects of understanding
the business environment in any country
the business environment in any country
•• Social institutions shape norms, values, and beliefs
Social institutions shape norms, values, and beliefs
that determine acceptable and unacceptable business
that determine acceptable and unacceptable business
practices
practices
•• Along with culture, form national context of a country
Along with culture, form national context of a country
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

40. The National Context and
International Management:
Conclusion
•• The national context affects a company’s strategy
The national context affects a company’s strategy
•• Determines the comparative advantage of nations,
Determines the comparative advantage of nations,
which ultimately determines which strategies
which ultimately determines which strategies
multinational companies choose
multinational companies choose
•• Determines the global platform, namely the areas of
Determines the global platform, namely the areas of
business that can be performed the best in a country
business that can be performed the best in a country
•• Human aspect of international management:
Human aspect of international management:
relationship between workers and superiors,
relationship between workers and superiors,
motivation, human resource management, and design
motivation, human resource management, and design
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.