Lecture 9Foreign Contexts:Economic-Financial, Legal-Political, and Socio-Cultural Dimensions

DR. VICTOR Z. CHENUNC CHARLOTTE

Some trivia questionsWhat are the six official languages of UN?If you want to speak two languages to be able to tap into the largest market share of the global GDP, which two languages should you be able to speak?Did you find German/Spanish and even Hindi much easier than Chinese/Japanese/Korea? Do you know why?

Foreign contexts, risks, and strategic responsesExactly how small is our comfort zone, economically, financially, politically, and culturally?What risks do we incur if we conduct business beyond our comfort zone?What are some of the strategic responses to manage such risks?

Political environment

Financial environment

Cultural environment

Economic environmentBoundariesCourse website: http://www.chenzitian.net/teaching/MGMT3274/ In our first lectureDo you prefer a developed market or less developed market?Do you prefer strong protection of your investment/business there?What do you want your government to be like?Do you prefer a English speaking country?Do you believe in God (Abrahamic)?Do you watch sports? What sports?

Exactly how small is your comfort zone?First, economic contextsYou might be more comfortable living in a developed market, with good living standards, high income, and commitment to a market economy.Defined by Organisation for Economic Co-operation and Development (OECD), 32 states are high income OECD members (> US$43,619.3 in 2014).

Minority shareholder protection of High-income OECD countries

Source: International Finance Corporation at http://www.doingbusiness.org/data/exploretopics/protecting-minority-investors Exactly how small is your comfort zone?First, financial contextsThe US is a strong shareholder-centric economy, where minority shareholder protection is strong in terms of:Information disclosureBoard of directors liability and dutyShareholder suitsConflict of interest regulationShareholder rights in corporate decision makingCorporate transparency

12 NationRankShareholder Protection ScoreNew Zealand18.2United Kingdom47.8Ireland67.3Canada77.3Israel117.1Norway127.0Slovenia146.8Denmark176.8France176.8Italy216.7Korea, Rep.216.7United States256.6

Exactly how small is your comfort zone?Third, legal-political contextsAs an example, World Banks World Governance Indicators (WGI)Voice and accountabilityPolitical stability and absence of violenceGovernment effectivenessRegulatory qualityRule of lawControl of corruption

Source: http://info.worldbank.org/governance/wgi/index.aspx#doc/.

Exactly how small is your comfort zone?Third, legal-political contexts (contd)1. Voice and accountability:A countrys citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association, and a free media.2. Political stability and absence of violence:The likelihood of political instability and/or politically-motivated violence, including terrorism.3. Government effectiveness:Quality of public services, civil services, quality of policy formulation & implementation, and government commitment to its policies.4. Regulatory quality:Ability of the government to formulate and implement sound policies and regulations that permit/promote private sector development.5. Rule of law:Rules of society, particularly contract enforcement, property rights, the police, the courts, and low crime/violence.6. Control of corruption:Public power isnt exercised for private gain, including petty and grand or elites/private interests.Do you feel comfortable with the US environment or desire more?

6 NationGovernance ScoreNew Zealand11.21Norway10.57Denmark10.37Canada9.91Ireland9.18United States7.34

Exactly how small is your comfort zone?Finally, socio-cultural contextsIs English an official language?80% of Americans only speak EnglishRemoved Norway, Denmark, and QC of Canada.Do people believe in God?71% of Americans are Christians, including 47% Protestants (e.g., Evangelicals, Mainlines, & Black churches, etc.), plus 21% Catholics.New Zealand: 48% Christians, including 13% Catholics, plus 42% non-religiousIreland: 90% Christians, including 84% Catholics.Canada: 67% Christians, including 39% Catholics, plus 24% non-religious.Where to hang out, e.g., sports?In the US: 39% American football, 15% basketball, 15% Base/softballNew Zealand: cricket (men), netball (women)Ireland: Gaelic footballCanada: ice hockey

Political environment

Financial environment

Cultural environment

Economic environmentBoundariesCourse website: http://www.chenzitian.net/teaching/MGMT3274/ What is your comfort zone?

Cultural environment

BoundariesCourse website: http://www.chenzitian.net/teaching/MGMT3274/ What is your comfort zone?[A]ctually the earth had no roads to begin with, but when many men pass one way, a road is made -- Xun Lu, Writer (1881-1936)

Why do you feel uncomfortable across contexts?Economic/financialOECD standards of open marketLegal/politicalGovernance qualityVoice/accountabilityPolitical stability/absence of violenceGovernment effectivenessRegulatory qualityRule of lawControl of corruptionSocio/culturalLanguagesNorms, customs, social habitsValues/beliefsBecause you face more and/or different behavioral constraints.Institutions

Rules of the game that shape human behaviors and relations.

Douglass C. North1993 Nobel Laureate in EconomicsFormal institutions:

Compliance basis: Coercion

Legitimacy basis: Survival/Legal sanctionsInformal institutions:

Compliance basis: Normative/mimetic

Legitimacy basis:Morally governed/Culturally supported/Conceptually correct

What can you do to be more comfortable?Dont go (presumably not an option)

Change yourself to comply with or adapt to local institutions

Change local institutions to fit your needs

Thought experiment 1Change yourself to comply with/adapt to local institutionsEconomic/financial:Finding the most efficient available options (e.g., fastest, most precise, etc.)Logic: cost-benefit analysisMain ways of learning: calculationsLegal/political:Finding the legal onesLogic: non-violations/penalty/dismissalMain ways of learning: instructions/guidebooksSocio/cultural:Finding the socially/emotionally supported onesLogic: pleasing the teammates; inspiring the fans, etc.Main ways of learning: mimickingYou want to pass a ball to your teammate 94 ft away or your want to take a ball (at 120km/h) from 94 ft away:What is the most efficient way?Is it legal?Is it a pleasure for your teammate or inspirational for your fans?

Thought experiment 2Change local institutionsEconomic/financial:Open marketStrong shareholder protectionLegal/political:GovernanceGovernmentGovernment practicesSocio/cultural:LanguagesNorms, customs, social habitsValues/beliefsHow do you rank these dimensions from the most change-resistant to the least?

Thought experiment 2Change local institutionsSocio/cultural:LanguagesNorms, customs, social habitsValues/beliefs

Legal/political:GovernanceGovernmentGovernment practices

Economic/financial:E.g., Open marketE.g., Strong shareholder protectionSource: Williamson, Oliver E. "The new institutional economics: taking stock, looking ahead."Journal of economic literature(2000): 595-613Oliver E. Williamson2010 Nobel Laureate in EconomicsTheocracy: e.g., Holy See, Islamic states, Iran, Tibetan Government in Exile, and states with state religions (Vatican City)Some new economic norms require regulatory change, e.g., lift of tariff, legal protection of minority shareholders

Future classesRisks of going beyond comfort zones, by dimension (economic, legal-political, socio-cultural)Risk management strategies

Q&A about the team project 1Any remaining questions?

ContactVictor Z. ChenBelk College of BusinessUNC Charlotte

+1 (704) 687-7645

zchen23@uncc.edu

www.ChenZitian.com

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