International management: An institutional perspective
International management: An institutional perspective

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International management: An institutional perspective

Understanding institutions

We live in a social world. Many of the ‘facts’ of our everyday lives are social facts. We tend to take these facts for granted. Take money for example. It is likely that you carry out transactions involving money many times each week. Most of these transactions happen without you giving any thought to whether the money you have in your hand or stored electronically in your bank will continue to work. However, money only works so long as the social beliefs and agreements we have about it continue to function. Sociologists call these self-reproducing patterns of belief and behaviour institutions.

Figure 1 Zimbabwean bank note

Such institutions are fairly stable but they do change. Change can be very rapid where social beliefs in these social facts change. For example, to return to the example of money; one of the underlying causes of the Second World War was the social instability brought about by a collapse of belief in the German currency, brought about by the German government printing additional currency to pay workers, whilst making reparations to the victors of the First World War. A similar process of hyperinflation occurred more recently in Zimbabwe. Below is a short news report from 2008 by NTVKenya on Zimbabwean hyperinflation.

Download this video clip.Video player: Zimbabwean hyperinflation
Skip transcript: Zimbabwean hyperinflation

Transcript: Zimbabwean hyperinflation

SPEAKER:
July, 30th and with a stroke of a pen. There are no more trillionaires, quadrillionaires, or quintillionaires in Zimbabwe. This followed the slashing of 10 zeros from the Zimbabwean currency by the central bank. The re-denomination of the currency meant that $1 trillion turning to just $100, $100 billion into $10, and $10 billion into just $1.
The move was aimed at curbing hyperinflation, but it appears it has had no effect on the economic disaster in the once prosperous Southern African country. The rate of inflation continues to skyrocket. The Central Statistics Office in Harare puts the inflation rate at 11.2 million percent, the highest in the world. Experts believe it could be much higher.
But just what does an 11.2 million percent rate of inflation mean? In Harare, they call it the hour economy. Prices of goods change by the hour. It has been a gradual increase in prices of goods.
In November last year, when the Governor of the Central Bank slashed off three zeroes from the currency a loaf of bread, and other basic commodities cost a few 100 Zim dollars. By December, you needed hundreds of thousands of dollars to buy bread. By January, a loaf of bread and things like tomatoes were costing millions. By April, it was billions.
The old currency will still be in use until the 31st of December. Supermarkets have to quote each item in both currencies until the end of this month as Zimbabweans try to adjust to the new figures. A cash shortage has gripped Zimbabwe after the central bank set a withdrawal limit.
Individuals and companies are allowed to withdraw 300 Zimbabwean dollars a day. That’s just $1 US. For now, Zimbabweans are welcoming the convenience that comes with dealing with smaller notes and figures as they peg their hopes for economic recovery on talks between the ruling ZANU-PF and the Opposition Movement for Democratic Change.
End transcript: Zimbabwean hyperinflation
Zimbabwean hyperinflation
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At the time of writing this course the social institution of money was looking much less stable in Europe as concerns with sovereign debt in several EU states were leading to strong public concerns about the future of the euro as a currency. At times of crisis and transition, formerly taken-for-granted social facts come much more into our awareness as their continuity is threatened.

Another institution which is much in public awareness at the moment is that of marriage. Public debates around the world about the meaning of marriage highlight the ways in which this institution is changing and the ways in which it varies from country to country.

Figure 2 Marriage has changed dramatically in just a few years

Activity 2

Timing: (10 minutes)

In the box below take a few moments to make your own notes about the ways in which the institution of marriage has changed and is changing in recent decades and ways in which this institution varies between different societies.

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Discussion

Within many countries key ways in which marriage has been changing include social expectations about how long a marriage may last and the ease or difficulty of ending it; the extent to which men and women play different social roles within a marriage; the extent to which society condones sexual relations and the birth of children outside of marriage. A way in which definitions of marriage currently seem fluid in some countries is in moves to extend the definition of marriage to include marriage between two men or two women.

There are also differences between countries in understandings of marriage on all the dimensions listed above, but also on factors such as how many people it is possible to be married to at the same time. Underlying social factors influencing these understandings of marriage include: the dominance of religion or secularism in a society; the dominant religion; and the role of marriage in underpinning other kinds of social and economic arrangements (e.g. kinship networks in subsistence agricultural communities).

You may well have listed other factors.

Just as with marriage, there are multiple interlocking social factors which support and help reproduce the institutions which underpin how businesses and other organisations operate.

In the next activity we look at an example of an institution (guanxi) which underpins business practices in many ethnic Chinese societies.

Activity 3

Timing: (25 minutes)

In this activity you will watch a video clip on business practices in China presented by Dr Jane Henry (an Open University Business School academic). In the box below, make some notes about the key points made in the video clip. Pay particular attention to what is said about guanxi (pronounced kwanshee). The clip is about 10 minutes long.

Download this video clip.Video player: Management in Chinese cultures
Skip transcript: Management in Chinese cultures

Transcript: Management in Chinese cultures

Jane Henry
The dominant form of organisation in China is based round the family. Typically an owner/manager sets up a very lean firm privately financed by family members and does business with members of his clan. Indeed it’s just this kind of networking that has enabled Hong Kong and Taiwan to fund much of the enormous expansion we’ve seen in Southern China in recent years.
They do this through a network of contacts in their extended family and they are not just local, these networks span all the countries in the Pacific rim.
Duc Do: Business Manager. Asean Access Ltd
When I visit Vietnam my sister has a small business, and she said why not come back home and help us to expand the business. In terms of finance well when I talk about it with the greater family, my wife’s relatives, my own relatives, the aunts uncles – everybody chip in a little bit, so its basically family financed.
Jane Henry
Is this type of family based entrepreneurship an efficient way of starting up a business?
Duc Do
I guess it would be quite typical for an Asian way of starting up a business, very low cost, very efficient in the beginning, because, you know, I don’t have to spend a lot of time to do market research, I don’t have to spend a lot of time to find the customer base, I don’t have to spend a lot of time to find a supplier base, I can go straight in, do a connection with an existing business within the family, so I have the market base, and then all I need to do is find the right suppliers for the right products that we already have so in that way it is very quick to set up and very efficient in the beginning.
Jane Henry
To build bridges, Chinese people use what they term Guanxi, a form of relationship that entails mutual obligation.
Alan Au: Strand Leader Marketing and International Business, Open University of Hong Kong
It will be natural for the Chinese to believe that when we developed in to friends, OK, we become friends, then I would expect that one time if I have some problem I could go to you and ask for a favour and knowing that you are Chinese then I would expect you to give me the favour if we have this kind of Guanxi, in anticipation that when you ask me a favour back, then I would return it to you, so Guanxi, is really long term so we value long term relationship rather than just some ad hoc type of relationship.
Jane Henry
The use of Guanxi, is a common way of setting up businesses in China.
Dannie Hongchoy: Business Development Manager, Alpha Derma Zhongzhan Company
This company is a joint venture between a Hong Kong and Chinese organisation. This Chinese organisation itself is actually popular in making fashion, in textiles, but through my relatives, through some Guanxi, I have made use of networks, because my husbands side has their roots there when we went there to visit distance relatives. Because of this relationship we managed set up the company and get all the license and finance within 6 months. That’s super speed!
Jane Henry
Danielle hadn’t met these members of her clan before.
Dannie Hongchoy
In China there are different officials, if you happen to be a relative of those officials, of course they would look after your interests because you know you are a part of them, they would look at it that way. They suggest to us what we can do and they will build bridges for us.
Jane Henry
China is undergoing changes and many firms are being privatised like the Shiqiao Garment Company in Pan Yu.
Li Dechang: Managing Director, Shiqiao Craftworks Garment Group (Chinese speaker – voiced over in English)
I think it is a good thing. The change from state owned enterprise to private ownership means that there is less Government intervention, and so I can focus on the day to day operation and the development of the company and devote more time to pure management matters. The purpose of running a business is to make a profit and that’s what I’m doing.
Jane Henry
Despite these changes, Guanxi, is still critical to the way business runs.
Li Dechang
In our society no one can manage independently, you need Guanxi, to get along. In order to further our business, our most important Guanxi is with Government authorities. Then of course we also have personal Guanxi, that’s the way we secure business over our competitors.
Jane Henry
Overseas Chinese management is much less bureaucratic than Western business. Top managers adopt a hands on style that relies on their business instinct, they have fewer corporate staff. Workers are more willing to work together for a common goal.
Magtague clothing, founded 20 years ago by a refugee from China, is typical. Today this medium-sized company has a turnover of 400 million US dollars a year.
Ronald Liu: Director of Marketing and Merchandising, Magtague Clothing
In the last 20 years we have grown from a small factory into a big company with 1,300 people. Since we noticed the competition in South East Asian developing countries is getting tough, we moved some of our production into China in order to cut down the cost and increase our competitiveness.
We don’t have too many middle managers, because we believe small is beautiful. We expect our top management, director and manager, to be hands on in every issue. Always go to the front line to look at what is happening, find a solution and get it executed.
I notice that in Western companies, they put a lot of money into research and development and in most cases, like the big company they used to hire professional consultancy outside the company to give them some specific report in the market research or product research. We don’t do that in Hong Kong. We believe only the company’s management will understand what will be the best for the company.
In Hong Kong most of the companies have a very simple structure. Like us for example, we only have three layers in our organisation which is the top management composing several director and then the line manager and then it is the operator.
Another particular advantage of our company is that most of our managers are multi-skilled. They may have technical knowledge, marketing knowledge, or even financial knowledge. So when a special opportunity comes they can join in, take up extra responsibility and then start the execution right away. So this is something quite different from the Western world because in the Western world, as far as I understand the organisation structure is quite lengthy, so some message may take some time to finalise into action.
Jane Henry
Chinese companies have been very successful in trading and producing goods for other companies but seem to find it more difficult to make the transition to very large global companies producing brands in their own name. One organisation that has achieved this is VTech, a world leader in electronic learning products Western and Asian business practice is contrasted by their Chairman.
Allan Wong: Chairman, VTech Holdings Ltd
The most major differences is the ownership of structures, most founders still own a chunk, a large chunk of the business and they are still controlling the business by and large. This type of management basically can be very efficient because the founders, or the head of the company basically would make all the decisions. So they cut through all the red tape and get things done very quickly. They don’t have to go through an elaborate board directors system. So this kind of quick decision has given lot of agility to Asian companies to compete in the global market. So that’s the one fundamental difference.
The other advantage of Asian business is of course business relationships between businesses. We don’t need a lot of contracts to tie business together. A lot depends on personal relationships, rather than just black and white contracts. Again of course the flip side to it is that one should not really rely on just personal relationship or over rely on personal relationship and ignore the real essence of your competitiveness, which can actually drag you down eventually, but it can be ... I think it is a very good thing. People kind of laugh at the Chinese system of Guanxi between businesses. I mean when you start doing business in China this kind of Guanxi is very important. They kind of look at things in a much longer perspective whereas Western management they tend to inflate the value of the company in a very short time and then in the expense of the sustainable long term growth of the business but in Chinese businesses a lot of them are family businesses, they pass on from generation to generation to generation.
Alan Au
Even nowadays the company structure, the organisational structure in Hong Kong companies, they are still very much controlled by the family. Like, say for example, the Chairman of large corporations, he would expect his Chairmanship would be taken over by his son, probably by the eldest son of the family and he would expect all his subordinates would respect his son.
End transcript: Management in Chinese cultures
(The Open University, 2007)
Management in Chinese cultures
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Discussion

Guanxi refers to a Chinese system of doing business on the basis of personal relationships, which is an important factor in many ethnic-Chinese societies. The particularist focus on relationships and networks in China and the wider Chinese diaspora has a significant impact on the way business is conducted and structured in these societies. Guanxi provides a basis for trust, not just because of the individual relationship, but because the network of relationships a counter-party is embedded in provide opportunities for redress should they default on commitments. For example, if your uncle is highly respected in the business community and you default on your obligations to me, I may go to your uncle who will be concerned with how your behaviour reflects on his reputation. Guanxi is most easily established where there is some existing base for the relationship, for example a kinship tie. However, this is not enough in itself, the relationship needs to be built. Yang (1994) describes this process:

Once the correct (target) person for guanxi overtures has been selected, and the familiarity base has been presented, the next concern is to find the most skilful and diplomatic way of signalling to the other person the intention of engaging in exchange. One needs to find out if the person is amenable to granting aid in return for gifts, and what he or she would most appreciate in a gift. These questions must be presented in a subtle and tactful manner so that one receives answers without appearing to ask questions... A skilled transaction is carried out through suggestion and innuendo; direct or outright requests are avoided

(Yang, 1994, pp. 130–1).

Guanxi has significant implications for the way capitalism is practised in these societies. One major issue is the nature of capitalisation of businesses. There is considerable reliance on raising funds through guanxi networks rather than through open capital markets. Good guanxi fosters the development of trust (xinyong). Kiong and Kee (1998) describe the function of such trust in funding businesses:

At a general level, xinyong refers to the integrity, credibility, trustworthiness, or the reputation and character of a person. In business circles, xinyong also refers to a person’s credit rating. Your capital is your xinyong. They trust you, they will do business with you. This is so especially among the Chinese. Not much capital [is] needed to start a business. If you have xinyong, that is enough. People will give you [financial] credit.

(Kiong and Kee, 1998, p. 85)

Contracts tend to be seen as flexible, a written contract is assumed to be an outline of a business relationship that is conducted within a framework of mutual trust. In contrast in the West, contracts are more typically seen as firmly binding and substituting for trust.

Box 1 Related institutions in the Asia-Pacific region

In societies with a strong ethnic-Chinese influence contracts tend to be seen as flexible, a written contract is assumed to be an outline of a business relationship that is conducted within a framework of mutual trust. However, there are also considerable differences between countries. While the reliance on trust networks within clusters of interlinked firms is often a common feature, this is expressed differently in different countries. For example, in one research study Orru et al. (1991) compared business structures in Japan, South Korea and Taiwan. While these three countries share a common reliance on closely networked and interdependent groups of enterprises, they found the ways in which these enterprise groups are structured to be very different between the three countries. In Japan, enterprise groups (keiretzu) are linked together by the significant cross-ownership of shares between these firms. There is great emphasis on building consensus between group members on important issues and on working together for the benefit of the group of enterprises as a whole. In Korea, by contrast, enterprise groups (known as chaebol) are based on family groups. Chaebol resemble Japanese enterprise groups in their patterns of industrial sector concentration but also have important differences. Rather than being bound together by networks based on mutual business interests and the shares each firm holds in the others’ businesses, chaebol tend to be owned by a single individual or family. Where Japanese enterprise groups tend to meet their supply needs through long-term stable subcontracting arrangements with small firms, chaebol buy or start new firms to cater for their needs. Hence the collaboration between firms in Korean chaebol tends to be rather more centralised than between members of Japanese keiretzu.

In Taiwan, the picture is different again. Here enterprise groups tend to be smaller and based on family businesses. A very high proportion of business capital is raised through family networks and retained earnings. This is in contrast to Japan where there are very active equity and finance markets and to Korea where there is heavy reliance on debt financing. The smaller and more fragmented nature of Taiwanese enterprise groups and the higher proportion of small firms is partly due to the Chinese tradition of inheritance being divided equally between all sons. While these institutionalised forms of organising and doing business are relatively self perpetuating they are also subject to change, from within and without. For example, the role of the chaebol in the Korean economy has been undergoing considerable change with considerable political pressure for reform of the ways in which chaebol operate.

Institutions are not the same as organisations, but they provide the underpinning social structures and mindsets that lead to particular forms of organisation and particular approaches to management. In the next section we move on to consider how such institutions are sustained.

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