IBC exam

Berry & Zhou Reading: An institutional approach to cross-national distance

key focus: a new institutional and multidimensional approach to measuring cross-national distance
9 proposed dimensions of cross-national distance:

1. economic: GDP per capita, inflation, trade openness

2. financial: credit access, stock market development

3. political: democracy level, policy stability, WTO membership

4. administrative: colonial ties, legal system, language

5. cultural: adapted from WVS to replicate Hofstede’s dimensions

6. demographic: age structure, life expectancy birth rate

7. knowledge: patent output, scientific publication rates

8. global connectedness: tourism inflow/outflow

9. geographic: physical distance

Haxhi reading: institutional perspective on corporate governance

CG: structure of rights and responsibilities among stakeholders in a firm

core concerns:

• monitoring executives and boards

• protecting minority shareholders

• corporate disclosure and transparency

• employee and stakeholder participation in decisions

formal vs informal institutions in CG

formal institutions: laws, listing rules, compliance codes

informal institutions: business culture, networks, social norms

hard law vs soft law (CG)

hard law: mandatory, state enforced, one-size-fits-all

soft law: voluntary, self regulatory, flexible

→ governed by comply or explain principle (firms must disclose deviations, not necessarily comply)

comparative models of CG: two types

shareholder oriented (Anglo-American)

• dispersed ownership, strong investor protection, flexible labour market

• CEO power is high, markets play key monitoring role

stakeholder oriented (continental Europe)

• concentrated ownership, weaker minority rights, broader stakeholder goals

• includes employees, creditors, and state as key actors

3 European stakeholder CG models

state capitalist hybrid (France, Belgium): strong capital markets, confrontational labour relationsh, active state

consensus stakeholder model (Germany, Netherlands): coopoerative labour-management, dual boards, less state interference

mixed market economies (Eastern and Southern Europe): weak enforcement, low market capitalization, civil law influence

International Business

the pursuit of value creation by public and private organizations in foreign countries

• includes both foreign firms entering a country and domestic firms expanding their operations abroad

motives for internationalizing

• growth (new markets)

• resource seeking (natural or human resources)

• risk reduction (diversified portfolio)

• efficiency (cost advantages through operations)

• strategic assets (technology, talent, brand)

Liability of Foreignness

when foreign firms face disadvantages in host countries. Arises from:

• spatial distance: travel, coordination costs

• cultural unfamiliarity: learning curve, local adaptation

• legitimacy issues: seen as outsiders

• home-country constraints: limits on what MNEs can do aborad

MNEs cope with distance via

• developing internal capabilities (FSAs)

• isomorphism: mimicing local firms to gain legitimacy

CAGE framework (Ghemawat)

4 dimensions of distance:

1. cultural: values, religion, language, social norms

2. administrative: legal and political systems

3. geographic: physical distance, time zones

4. economic: income levels, development, labour costs

OLI model/Eclectic Paradigm (Dunning)

3 sources of advantage:

Ownership (O): inque firm assets (tech, brand skills)

Location (L): host country benefits (resources, demand)

Internalization (I): benefits of controlling operations rather than outsourcing

Uppsala Model

• firms expand gradually as they gain experience

• early steps: export to nearby countries

• later steps: set up sales subsidiaries and production facilities

Institution-Based View (IBV) (Peng)

\emphasizes the role of institutions in shaping firm behavior and performance. It suggests that organizations operate within a framework of formal (laws, contracts, regulations) and informal norms (social expectations, corruption, trust) that affect their strategies

Williamson: New Institutional Economics

focuses on how institutions reduce transaction costs and shape organizational behaviour

core assumption: humans are boundedly rational and opportunistic

4 level of social analysis (williamson model)

L1: Embeddedness (informal institutions)

L2: institutional environment (formal rules of the game)

L3: governance (contracting and organizational forms)

L4: resource allocation and employment (neoclassical economics)

• the 4-level model helps explain:

  • why cultures and legal systems differ across countries

  • how firms must adapt governance depending on institutional environments

L1: Embeddedness (informal institutions)

• customs, traditions, norms

• evolve very slowly

• not easily altered through policy

• most relevant to cultural context and long-term path dependency

L2: institutional environment (formal rules of the game)

• laws, constitutions, and property rights

• set by the state, influenced by history, politics, culture

• change is infrequent but faster than L1

L4: resource allocation and employment (neoclassical economics)

• prices, output, incentives

• occurs continuously (daily or weekly)

• assumes that institutional frameworks are fixed

• traditional economics focuses only here, but NIE emphasizes that L1-3 shape L4 outcomes

L3: governance (contracting and organizational forms)

• firms choose governance structures to minimize transaction costs

• highly sensitive to asset specificity, uncertainty, and frequency of transactions

• change is relatively quick

North Reading: Institutions

• institutions are humanly devised constraints that structure political, economic, and social interaction

• include: formal rules (constitutions, laws, contracts) and informal norms (traditions, customs, codes of conducts

• key assumptions:

  • economic actors have bounded rationality

  • information is costly to obtain

  • there is uncertainty in human interaction

path dependency

current choices are shaped by historical trajectories

institutions evolve through (2)

path dependency

incremental change

institutions vs organization

institutions = the rules

organizations = the players

poor institutional frameworks lead to

• high transaction costs

• weak property rights

• limited investment and innovation

NBS systems are shaped by

• how the state, financial system, and labour market operate

• how authority and trust are distributed

• how coordination between firms and institutions is structured

3 structuring dimensions of business systems (NBS)

1. the nature of the firm: owernship, internal labour markets, degree of decentralization

2. market organization: degree of competition

3. coordination and control systems: role of trust, hiearchy, relationships

6 types of business systems (NBS)

1. fragmented systems

2. coordinated industrial districts

3. compartmentalized systems

4. collaborative systems

5. highly coordinated systems

6. state organized systems

fragmented systems (NBS)

• firms operate independently with minimal institutional coordination

• labour markets are flexible and short term

• institutions offer little support for innovation

• example: Southern Italy, Mexico

coordinated industrial districts (NBS)

• dense inter-firm networks in specific regions

• SMEs are embedded in local ecosystems with vocational training

• examples: Northern Italy, Catalonia

compartmentalized systems (NBS)

• segmented institutions with limited cross-sector coordination

• firms are often large, diversified conglomerates

• labour and education are poorly integrated with business needs

• examples: UK, US, Canada

collaborative business systems (NBS)

• strong cooperation between firms, labour, state, education

• stable employment and high investment in human capital

• examples: Germany, Netherlands

Highly coordinated systems (NBS)

• strong integration between institutions: education, labour, business

• long-term planning and consensus-based governance

• firms emphasize competence building and systemic innovation

• examples: Japan (post WWII), Switzerland

state organized systems (NBS)

• state controls industrial policy, directs innovation efforts

• firms may be state owned or tightly regulated

• competition is limited, innovation is top-down

• examples: postwar france, south Korea (modern)

5 types of innovation strategies (NBS)

1. dependent

2. craft-based responsive

3. generic

4. complex, risky

5. transformative

dependent innovation (NBS)

• firms rely heavily on foreign firms for tech/design

• internal capacity is weak, often just assembly

• common in fragmented systems

craft based responsive innovation (NBS)

• rooted in local know-how and artisan skills

• highly adaptive, incremental, tailored to niche markets

• common in coordinated industrial districts

generic innovation (NBS)

• standardized, efficiency-focused innovation

• easily scaled across markets

• typical in compartmentalized and state-organized systems

complex, risky innovation (NBS)

• high-tech, long term innovation

• high uncertainty and investment

• strongest in collaborative and highly coordinated systems

transformative innovation (NBS)

• disruptive innovation that creates or redefines industries

• requires long-term capital, stable institutions, and a bold vision

• found in highly coordinated and collaborative business systems

tacit vs codified knowledge

tacit: hard to transfer, requires context, often tied to skills and experience

codified: transferable, documented, accessible to outsiders

knowledge variety (cognitive vs organizational)

cognitive complexity: how many fields of science/tech are combined
orgnaizational complexity: how many institutions contribute to, and store knowledge

North definition: Institutions

“humanly devised constraints that structure political, economic, and social interactions.”

These include:

• Formal institutions: laws, property rights, constitutions, regulations

• Informal institutions: traditions, customs, norms, social conventions

institutional theory assumptions

bounded rationality: decision makers operate under constraints (limited time, info, cognition)

self-interest: actors aim to maximize outcomes but may act in self-interest

→ institutions help align incentives and reduce transaction costs

institutional weakness

when rules are ambiguous, inconsistent, and unenforced → leads to unpredictability and higher risk

agency theory and institutional context

• principle-agent problems are central to corporate governance

• owners (principles) want returns

• managers (agents) may pursue self-interest

• institutions reduce agency problems via:

  • legal protections

  • formal governance mechanisms

  • transparency and oversight

institutional variation across countries

1. institutional weakness: when rules are ambigous, inconsistent, or unenforced

2. rule based vs relationship based systems

   1. rule based: transparent, legalistic, stable for outsiders

   2. relationship based: opague, informal, harder to navigate

varieties of capitalism (NBS)

• state involvement

• financial system

• skill development

• authority and trust

political risk in IB

political risk = threat to business from political events or instability

types of political risk:

• ownership: expropriation, nationalization, corruption

• transfer: sanctions, embargoes

• operational: security issues, regulatory interference

how to mitigate political risk

• international strategies:

  • legal tools, risk insurance

  • diversify FDI locations, build strategic alliance

• local strategies:

  • partner with locals, engage stakeholders, maintain low porfile

  • contribute visibly to local economy to build goodwill

the dutch case/VOC

Netherlands’ business system is shaped by:

• water management (canals)

• trade (Dutch East India Company)

• Calvinist values (thrift, sobriety, responsibility)

governance: coalition based, consensus building
social traits: low power distance, high individualism
economic structure: small firm dominance, export driven economy

Dutch corporate governance

• weak market for corporate control → hostile takeovers rare

  • strong anti-takeover protections: priority shares, certificates

• limited cross-shareholding and bank ownership

• concentrated shareholding remains common

• governance focused more on stability, coordination, and stakeholder interests than market discipline

Hofstede: levels of culture

• national level: deep values acquired early in life, hard to change

• organizational level: based more on practices, can be learned or unlearned

• individual level: shaped by both national and organizational influence

culture

the collective programming of the mind that distinguishes members of one group from another

6 cultural dimensions: Hofstede

1. power distance

2. uncertainty avoidance

3. individualism vs collectivism

4. masculinity vs femininity

5. long term vs short term orientation

6. indulgence vs restraint

power distance (Hofstede)

• degree of acceptance of unequal power and authority

• high PDI: centralized structures, obedience, status hierarchy

• low PDI: consultation, equality, flatter organizations

• implications: affects management stryle, employee relations, decision making

uncertainty avoidance (Hofstede)

• comfort with ambiguity, unpredictability, and risk

• high UAI: preference for rules, structure, risk aversion

• low UAI: flexibility, informal norms, innovation tolerance

• implications: influence contract design, planning legal protections

individualism vs collectivism (Hofstede)

• relationship between individual and group

• individualistic cultures: autonomy, self interest, personal achievement

• collectivist cultures: group loyalty, harmony, consensus

• implications: affects HR practices, incentives

masculinity vs femininity (Hofstede)

• distribution of emotional gender roles

• masculine cultures: competition, assertiveness, material success

• feminine cultures: care, modesty, quality of life

• implications: influences negotiation style, workplace dynamics, leadership expectations

long term vs short term orientation (Hofstede)

• time horizon of values and decision making

• long term: thrift, perserverance, future-oriented planning

• short term: tradition, face-saving, immediate results

• implication: influences investment behaviour, product cycles, customer relationships

indulgence vs restraint (Hofstede)

• extent to which desires and impulses are freely expressed

• indulgent: leisure, optimism, freedom

• restrained: duty, control, pessimism

• implications: marketing, motivation systems, consumer culture

core takeaways for week 3: cultural distance

• hofstede dimensions provide a structured, quantifiable way to compare cultures

• support Kogut & Singh’s CD Index: cultural distance calculated from dimension differences

• model is foundational for CAGE framework (Ghemawat) → cultural component

• helps IB firms decide:

  • how much to adapt vs. standardize across cultures

  • whether to enter via JV, acquisition, or greenfield

  • how to manage cross-cultural teams, incentives, and conflictS

Reading: Hofstede, Schwarts, or managerial perceptions?

key cultural frameworks compared

• Hofstede’s dimensions (4 used here): power distance, uncertainty avoidance, individualism, masculinity

• Schwartz’s dimensions: conservatism vs autonomy, hierarchy vs egalitarianism, mastery vs harmony

• managerial perceptions → captured via direct Likert-scale survey responses on perceived cultural difference

key findings:

• all five CD measures positively related to likelihood of greenfield investment

• greater CD: higher tendency to choose GF over acquisition

• Hofstede and Schwartz had similar explanatory power

• most influential dimensions:

  • hofstede: power distance, individualism

  • schwartz: conservatism, hierarchy, egalitarian commitment

Dikova & Van Witteloostuijn: Cross-border acquisition abandonment and completion

• higher formal institutional distance (esp. procedural complexity) → lower probability of completion and longer deal duration

• cultural distance in power distance and uncertainty avoidance → reduces completion likelihood

• experience with prior CBAs increases resilience to institutional distance

• especially effective against formal barriers like regulatory hurdles

• experience has a moderating effect, but doesn’t eliminate delays entirely

effect of institutional and cultural differences on Mergers and Axquisition

• institutional and cultural distance can:

  • reduce likelihood of deal completion

  • increase the time between announcement and closing

• two types of institutional distance matter:

  • formal: legal procedures, investor protections

  • informal: power distance, uncertainty avoidance

• higher instituional distance:

  • integration more difficult

  • post-merger performance may suffer

  • firms are more likely to prefer GF over acquisiton

Scott institutional frameworks: 3 pillars

1. regulative (rules)

2. normative (values)

3. cognitive (beliefs)

iceberg model of culture

• surface level (visible): behaviours, symbols, customs

• deep level (invisible): values, assumptions, beliefs

• most cultural influence operates below awareness

criticism: hofstede’s model

pros:

• clear dimensions, widely used

• strong empirical base

cons:

• based on 1 company, 1 industry

• dimensions may be outdated or too broad

• overlooks within-country cultural diversity

• assumes cultural stability (ignores change over time)

GLOBE project

• aims to link leadership effectiveness to cultural values → finding: leadership preferences are contextual

• 9 dimensions

  • power distance

  • Uncertainty Avoidance

  • Institutional & In-Group Collectivism

  • Humane Orientation

  • Assertiveness

  • Gender Egalitarianism

  • Future Orientation

  • Performance Orientation

Shenkar’s criticism of cultueral distance

• critiques CD as overly simplistic and flaws

• 7 hidden illusions/assumptions:

  1. symmetry: assumes A → B = B → A

  2. stability: assumes cultures don’t change

  3. linearity: assumes impact of CD is always linear

  4. causality: assumes CD directly causes business outcomes

  5. discordance: assumes all dimensions matter equally

  6. corporate homogeneity: ignores firm-level cultural variation

  7. spatial homogeneity: assumes countries are culturally unform

Aguilera and Jackson: crossnational diversity of corporate governance

model that puts corporate governance into three key stakeholder groups: capital, labour, management

→ diversity in CG stems from national institutional configuartions that shape how these actors interact

Capital: dimensions and institutional influences (A&J model)

dimensions that define capital:

1. financial vs strategic interests: financial = focus on returns, strategic = control

2. liquidity vs commitment: liquid capital exists easily, committed capital is locked in

3. equity vs debt control: equity = shareholder governance, debt = creditor oversight

institutions that influence capital:

• property rights

• financial systems

• interfirm networks

labour: dimensions and institutional influences (A&J model)

dimensions that define labour

1. internal participation vs external control

   1. internal: involvment in decision making

   2. external: reliance on strikes, bargaining, protests

2. firm specific vs portable skills

   1. specific = investment in the firm, higher stake

   2. portable = exit easier, less incentive for participation

institutions shaping labour:

• representation rgihts (weak (US) = external control, strong (Germany) = internal participation)

• union organization (class unions = external control (US, UK), enterprise unions = internal participation (Japan)

• skill formation systems (firm based or corporatist (Germany, Japan) - firm specific skills, internal voice, market or state based (US) = portable skills, internal voice)

management: dimensions and influences (A&J model)

dimensions:

autonomous vs. committed

→ autonomous = mobility across firms, external job markets

→ committed = long-term careers in one firm, internal promotion

financial vs. functional orientation

→ financial = focus on shareholder value, finance metrics

→ functional = technical competence, production, operations

institutional influences:

• managerial ideology

  → US: generalist, finance-driven, hierarchical (autonomous + financial)

  → Germany: technical, pluralist, consensus-based (committed + functional)

• career patterns

  → open markets (US): external hiring, high pay dispersion, performance incentives

  → closed markets (Japan): internal promotion, job security, collective management

stakeholder interaction types (A&J model)

• class conflict

• insider-outsider conflict

• accountability conflict

Haxhi & Aguilera: Institutional configuration approach to cross-national diversity in corporate governance

• explains why corporate governance (CG) codes vary across countries

• rejects single-variable explanations (e.g., legal origin or stakeholder/shareholder dichotomies)

• proposes an institutional configurational framework based on three institutional domains:

  → Capital, Management–Labour, and the State

• investigates how these domains interact to shape:

  • code voluntarism

  • diversity of issuers

  • institutionalization (how embedded codes become in national practice)

institutional domains and their roles (H&A paper)

1. Capital domain

   • refers to the structure and fluidity of financial markets

   • includes: size of capital markets, property rights protection (minority shareholder protections)

2. Management–Labour domain

   • captures labor-management relations and authority structures

   • includes: degree of cooperation or conflict, strength of managerial dominance

3. State domain

   • degree of legal intervention or regulatory activism

   • includes: legal tradition (Civil Law vs. Common Law), permissiveness vs. interventionism

4. Code domain

   • soft law approach

features of governance codes (3) (H&A paper)

1. voluntarism: codes are typically nonbinding

2. diversity of issuers: many different types of actors are involved in making codes

3. institutionalization: extent to which codes are embedded, accepted, and revised over time

mechanisms of CG (H&A paper)

• Institutional complementarity

  → interactions between institutional domains can reinforce or balance each other

  → e.g., permissive state + strong capital + cooperative labor = pluralistic governance norms

• Equifinality

  → different combinations of institutional domains can lead to similar outcomes

  → e.g., both Belgium (Civil Law) and USA (Common Law) reach high code institutionalization through different routes

4 governance types (H&A)

P1: market driven

P2: stakeholder oriented consensus

P3: state centred

P4: inconsistent/mixed market

P1: market driven (H&A)

State	Capital	Management–Labour	Code Voluntarism	Issuer Diversity	Institutionalization	Examples
Permissive state(minimal interference)	Fluid capital markets (dispersed ownership, investor pressure)	Weak labor coordination (limited voice)	High	High	High	UK, USA

P2: stakeholder oriented consensus (H&A)

State	Capital	Management–Labour	Code Voluntarism	Issuer Diversity	Institutionalization	Examples
Permissive state (enabling, not enforcing)	Smaller capital markets (bank- or family-based)	Coordinated labor (collective bargaining, trust-based systems)	High	Medium	High	Netherlands, Sweden, Denmark

P3: state-centred (H&A)

State	Capital	Management–Labour	Code Voluntarism	Issuer Diversity	Institutionalization	Examples
Interventionist state (strong regulatory role)	Concentrated capital (state or elite control)	Fragmented/conflictual labor (limited inclusion)	Low	Low	Medium–High	France, Belgium

P4: inconsistent/mixed market (H&A)

State	Capital	Management–Labour	Code Voluntarism	Issuer Diversity	Institutionalization	Examples
Interventionist civil law state	weak capital markets (low protection, low capital)	Fragmented labor (low institutional strength, class conflict, state dependency)	Low	Low	Low	Greece, Italy, Portugal

oversocialization and danger in institutional theory (A&J)

Oversocialization = relying too heavily on abstract, generalized social rules while ignoring variation and agency

• A&J argue for actor-centered institutionalism, emphasizing:

  → Stakeholder identity and preferences

  → How actors engage with institutions and co-create governance practices

• Governance should be seen as the outcome of structured but negotiable relationships

diversity levels explained

result of:

• institutional environment

• industry characteristics

• organization factors

• actor coalitions

approaches to enhancing diversity (pros and cons)

1. self-regulation/voluntary codes (CGCs)
   pros: flexible, less resistance
   cons: often symbolic

2. industry standards/best practices (esg ratings)
   pros: peer benchmarking, can work well in high public visibility
   cons: uneven uptake across firms and sectors, no guaranteed process

3. quotas (Norway 40%)
   pros: rapid change in numbers, signals commitment
   cons: provokes backlash, risks focusing on compliance over inclusion

4. legal requirements (California state bill 826)
   pros: strong enforcement, creates legal accountability
   cons: can be challenged as unconstitutional, less flexible
   

california case

• SB-826 required public companies headquartered in California to have women on their boards

• Initially led to rapid increases in female board representation

• But faced legal challenges → declared unconstitutional in 2022 (equal protection clause)

• Highlighted the tension between legal activism and business autonomy

• Reinforced the importance of combining policy tools (law + soft power + investor pressure) for lasting impact

what is CG

ensuring that those who provide capital (owners) can secure returns and monitor control

agency problem (Jensen & Meckling)

• when principals (owners) hire agents (managers) to make decisions

• agents may pursue personal interest over firm value

• governance mechanisms are needed to align interest and reduce agency cost

mechanisms of governance

informal: trust, norms, reputation
formal:

• regulation (laws, codes)

• ownership structures (blockholders, activism)

• boards (structure, committees)

• incentives (pay, bonuses, stock options)

• external pressures (auditors, analysts, media)

key CG actors

• owners: individuals, banks, governments, etcx

• managers: training, mobility, executive compensation (a governance mechanism that seeks to align managers’ and owners’ interests through salary, bonuses, and especially long-term incentive compensation contingent on performance such as stock options)

• boards: dual leadership, committees

• employees, unions stakeholders

• country level actors: legal systems, capital markets, product/labour markets

ownership patterns (CG)

• Anglo-American (US, UK): dispersed ownership

• Continental Europe (Germany, Spain, Italy): concentrated ownership

  • business groups, cross-shareholdings, golden shares

• OECD 2020: significant variation in ownership concentration by market and by company

  • Netherlands: 121% market cap/GDP

  • US: 212%, Switzerland: 257%, Sweden: 194%

• emerging markets: BRICs often show high concentration, political ties, and informal controls

boards of directors variation

vary in:

• size

• independence (insiders vs. outsiders)

• composition: one-tier (US, UK) vs. two-tier (Germany, NL)

• committees: audit, compensation, nomination

• dual leadership: separation of CEO and chair roles

• codetermination (employee representation in Germany’s supervisory boards)

market vs network oriented systems

• market-oriented:

  • capital market discipline, M&A activity, faster restructuring

  • risks: short-termism, hostile takeovers, underinvestment

• network-oriented:

  • strong ties, trust-based control, long-term perspective

  • risks: excessive protection, undervaluation, limited innovation

comparative CG models

• shareholder-oriented (Anglo-American)

  • control via markets, liquid stock exchanges, independent boards

  • emphasis on transparency and shareholder value

  • strengths: capital allocation, innovation funding, profit focus

  • weaknesses: short-termism, hostile takeovers, inequality

• stakeholder-oriented (Rhineland, Germanic/Scandinavian)

  • control via consensus, banks, dual boards, employee voice

  • strengths: internal monitoring, long-term investment, trust

  • weaknesses: entrenchment, inefficiencies, non-liquid markets

CG in BRIC (brazil, russia, india, china)

stakeholder view of the firm

• firms operate within a web of stakeholders:

  • internal: owners, boards, management, employees

  • external: governments, creditors, NGOs, regulators, customers

  • systems interact with labor, capital, and product markets