Economic 05: Define institutions in the context of business strategy, and explain the role of institutions when considering entering a foreign market. Explain the role of culture in how these...

Economics

Economics
Institution Based Strategy View
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Institution based Strategy
Modern day organisations are increasingly becoming multinational and setting up
usiness globally rather than just limiting operations to the home country. When venturing in
foreign markets, it is imperative for the organisations to align their strategy in accordance
with the existing environment. One of the key components of this external environment is the
presence of various formal and informal institutions. The formal institutions tend to constitute
the regulatory pillar and essentially comprises of rules, regulations and laws. On the other
hand, informal institutions are cognitive and normative in nature and tend to constitute
culture, ethics and norms (Peng, 2006). Collectively, these institutions have a significant
influence of organisations based on which strategic decision making is ca
ied out. The end
esult is that organisations tend to tweak their strategy as they venture out in various markets
which may have significant different institutions and hence the business strategy that may
work in the domestic market may prove to a massive failure in the foreign market (Marinov,
& Marinov, 2012).
One of the key roles of institutions is to provide a certain environment where the
company can actually predict the future under various scenarios with some degree of
certainty. An objective analysis of any business strategy can only be facilitated in such an
environment only. Further, it also ensures that various transactions can be enacted within a
given framework which would be considered enforceable. The underlying law and rules play
a significant role in this regard as lack of legal enforceability can result in operational issues
in the foreign country. Besides, the formal institutions through the aegis of rule provide the
legal framework within which it has to perform business and hence allows the business to
take a call in this aspect. Hence, it is quite apparent that the formal institutions go a long way
in providing a predictable business environment to the foreign company (Peng, 2006).
It is apparent from the above discussion that the formal institutions tend to play a
critical role in the organisational entry and strategy in the foreign market. But, it does not
Institution based Strategy
imply that informal institutions are less important than their formal counterparts in any
egard. With regards, to the underlying cost and benefit associated with complying with these
informal institutions from an organisational point of view, the graph indicated below is
helpful.
The above graph makes perfect sense as in the initial phase high costs may be
involved for a foreign company to...