Institutions in Business Strategy - Essay Example

s in Business Strategy s From a business strategy perspective, s are the intangible norms, regulations and procedures that dictate how people interact within a given social and economic setting. Essentially, rules making up institutions reflect the values and interests of involved parties. Often, institutional rules and norms are long-standing traditions and routines inscribed in formal and informal economic and social interactions (Peng, 2014). However, certain forms of rules and norms in institutions are temporary, and are applicable only in the context of certain operational protocols in business interactions. Institutions fall into two broad categories: formal institutions, and informal institutions. Formal institutions are codified rules and procedures that are legally recognized and applied by legitimate governments. Constitutions, trade agreements, and economic treaties are examples of formal institutions. On the other hand, informal institutions are sets of rules and procedures governed by social norms and behavioral practices adopted by social units like families and communities (Peng, 2014). Religious beliefs and ethnic practices are examples of informal institutions. In business, both formal and informal institutions are influential in domestic and foreign business operations. In Muslim societies, social norms and practices dictate that people of the Islam faith are religiously prohibited from consuming pork foods and alcoholic drinks among other products. Any business organization that markets pork products or alcoholic drinks in Muslim societies will hardly realize profits because the informal institution of Islam dictates that certain norms and practices must be observed by Muslim consumers. With respect to formal institutions, constitutions, trade agreements and legal courts define and interpret the operational frameworks that both domestic and foreign business entities exercise their business practices. Legal systems determine the level of taxes that organizations pay to revenue authorities, and legal systems also arbitrate issues between business organizations and other stakeholders within a business environment. Technically, norms and procedures that create institutions are meant to create predictability and certainty in interactions within a business environment (Peng, 2014). Therefore, institutions are frameworks where business strategies can be implemented. Role of Institutions in Foreign Market Entry In foreign investments, business entities are more interested in market certainties than they are interested in profitability. Market uncertainties increases business risks, thus correspondingly increasing business costs. As elaborated earlier, institutions enhance certainty and predictability of interactions within a business environment. Therefore, the main role of institutions in entering foreign markets is to reduce uncertainties by providing legally derived business regulations, mitigating the effects of trade barriers, and protecting and enforcing property rights (Griffith & Lindsey, 2005). Foreign investors are comfortable when formal and informal institutional structures can guarantee stability and improve the ease of doing business. Strong formal institutions that are free from effects of corruption and political influence can guarantee stability of business environments for foreign investors. Also, favorable informal institutions that embrace ethics and respect foreign firms will reduce frictions between foreign investors and local participants in a business environment. Specifically, formal institutions like judicial systems and investment laws play a critical role during entry and operation within a foreign market. Judicial systems prevent overexploitation of foreign companies by defending objective implementation of business regulations. Foreign firms can easily obtain operation permits only if a nation’s judicial system guards against corrupt practices that can otherwise overcharge foreign business entities (Griffith & Lindsey, 2005). Also, investment laws fast-track the processes of verifications, approvals and notifications to commence operations. Simply, formal institutions provide structural frameworks followed by foreign entities while entering foreign markets. Similarly, informal institutions determine the extension of trust and attitudes towards foreigners. Religious institutions play a central role in most people’s lives. Relationship between a foreign organization’s business practices and local consumers depends on norms and traditions of the local cultural practices. A host nation with a culture that trusts and welcomes foreigners will definitely attract foreign companies, while a host country whose informal institutions preach against foreigners will discourage foreign companies from entering its markets. Role of Culture in International Business Strategies In making internationalization business strategies, culture is an influential factor that must be taken into consideration. Culture comprise of social values, beliefs, practices and trends of people within a given environment. Specifically, culture is the way things are done within a given society (Bell, 2015). Employees in western nations like USA and France may be accustomed to 8-hours jobs. In this case, an 8-hours shift is a dominant culture in western nations. However, employees in developing nations of Asia and Africa are used to 12-hours shifts. In this case, such employees in developing nations are accustomed to longer working hours compared to their counterparts in western nations. If a company moves from India into France, such a company’s working practices will have to be adjusted because of the cultural difference between Asia and Europe. Working hours will be reduced from the normal 12 hours in India to only 8 hours, simply because it is a cultural practice for citizens of western nations to work for 8 hours. In this case, it is apparent that culture is an influential determinant in deriving international expansion strategies. Besides the illustration of working hours, culture has several dimensions which include: language, religion, education, economic philosophies, and social structures among others. Language and education are usually the greatest cultural dimensions worth considering in internationalization strategies (Griffith & Lindsey, 2005). An American automobile manufacturing firm wishing to move to Kenya should first consider whether Kenya has enough qualified engineers to work in its production lines. Absence of qualified engineers in Kenya will necessitate outsourcing of personnel from other foreign labor markets, thus leading to high labor costs. Therefore, entering into a culture with limited skillful workforce will have detrimental effects on a company’s human resource options. Also, language barriers can impede effective marketing communications. An American firm entering China will have to hire new marketers to design customized promotional messages; a move that may lead to loss of intended meanings to Chinese consumers. Therefore, all the relevant cultural dimensions must be considered during foreign entry strategies. Entry Barriers in Syria Corruption, violence, and constitutional failures are the leading elements that scare away foreign investors within any nation. When there is a constitutional failure, formal institutions like courts, investment laws, and arbitration tribunals are compromised. The detrimental effects of constitutional failures are worsened by the culture of corruption. In a nation, tyranny and anarchy causes a constitutional failure. On the other hand, greed and poverty triggers and sustains a culture of corruption (Bell, 2015). Currently, a nation like Syria is not only experiencing a constitutional failure, but also a profound culture of bribery and corruption. Because of war, anarchy and corruption, Syria has the weakest formal and informal institutions. In Syria, there are no functional judicial systems to enforce business regulations. In addition, the religious norms that are supposed to guard against the culture of corruption have been eroded by years of desperation, poverty, and greed. In this case, the weak institutions in Syria serve as the highest barriers to entry into the Syrian market. Reference List Bell, J. (2011). Choice of foreign market entry modes by service firms: Role of market knowledge. Management International Review, 19 (4), 89-106. Griffith, D & Lindsey, T. (2005). Effect of cultural distance on entry mode choice, international diversification, and MNE performance: A meta-analysis. Journal of International Business Studies, 36(7), 270-283. Peng, H. (2014). Global Strategy (3rd ed). Mason, OH: Cengage Learning. Read More