Non-market considerations: the socio-political imperative in international business

Welcome to this lecture on Non-Market Considerations: The Socio-Political Imperative in International Business. My name is Timothy Devinney, I'm the University Leadership Chair in International business, and Professor of International Business at the Leeds University Business School. My background is in economics. I have a PhD from the University of Chicago, as well as an MBA and Masters degree from the same institution. I've taught at many institutions. From the University of Chicago through UCLA, Vanderbilt University, the Australian Graduate School of Management, and currently at Leeds University. In addition, I've had many academic positions including editorship of journals, I was the head of several academic organizations and I'm a fellow of the Academy of International Business. In this lecture, what we're gonna do is concentrate on a rather broad topic. What we're going to discuss has a very broad width, but what I'm going to try and do is break it down into a few bits and pieces that would make it interesting to you. It is in no way comprehensive, because this could be a whole series of lectures because of the nature of the complexity and just expansiveness of topic.

Let's start by asking a very basic question. And that question is, what is the socio-political imperative? If we look at the definition of a socio-political institution, we can break this into two main parts and then a third one, which is kind of my addition to this. Normally what you see is individuals talking about macro-institutions and micro-institutions. At the macro level, you essentially have structures which are the rules that determine the rules. At a very basic level, you can see some divisions which are, is this an environment which is driven by the rule of law? Legislatures pass laws, the laws are then implemented. Or is it one that's driven by administrative fiat and that is some group makes administrative decisions and that is that. Countries like the United States, Australia, the UK, Germany, France, they're rule of law countries. There is a process by which laws arise and those laws have an enforcement mechanism. Countries like China, North Korea, to a minor degree, Singapore, are administrative fiat countries, rules are promulgated. There might be a legislature, but that legislature doesn't in fact do much other than approve what the administration is proposing. The fiat could rise from a single individual, or it could arise from a collection of individuals. We can think of the Soviet Union under Stalin, he might have been the source of most of the administrative fiat. In China, it might arise around the Politburo and so on down the line. It isn't necessarily a dictatorship. It just simply implies that there isn't rule of law driving it. It's an administrative structure driving it. If you look at the next level, you can sort of say, well, what about those laws? How did they get implemented? What if they're wrong? What if they were unclear? This is where things like rules of appeal, arbitration, jurisprudence all come in. In other words, how do these laws become active other than being passed? You can have situations in which you have countries which are driven by rule of law, but the implementation of that rule of law is very weak or very messy. India would be a good example of a country, clearly a rule of law driven country, but one in which the court systems are simply overwhelmed, the bureaucracy, appeals or arbitration, none of this occurs in anything other than a glacial way. The rule of law aspect of it is in fact mitigated by this. But you could have others which are places like Singapore, which typically run by administrative fiat, but the rules are very well applied. It's not clear, in some sense, depending on the outcomes you're looking at, which of these is in any way better. There's also an issue related to where do the decision rights for various things reside? At a high level, you can think about executive or presidential models, which you see in places like France and the United States, as opposed to parliamentary models which you see in most other democracies. But also where the decisions reside in terms of how they span through the system. The United States is a system in which there are many very low-level elected officials. You don't see this in many other countries. In places like Germany, the land, the state, places like Bavaria, Hesse, they are very powerful. The federal government cannot act without states being involved. The US is sort of intermediary. We have 50 states, but those 50 states are operating in a different way than they would with respect to the federal government in Germany. In Australia, it's again an intermediate one. In places like France, the provinces are not as material. The macro level is operating over and above micro level, which is where the rules and routines of governance pop out. These can be formal rules and they can be informal rules. Regulatory policies typically are fairly formal. But exchange rate policy, as an example, is not. Corruption in the operation of societal systems is an institution in many ways. It is part of a routine of how things get done. Now, in addition to this, you have a newer phenomena that gets discussed, which is stakeholders and what I call global monitors. Stakeholders are a mix of anything. I'll come back and talk about this. They could be almost anybody from your customers all the way down to local aboriginal groups, to people in the street. But global monitors are a bit different. These are groups which take on basically monitoring rights and the monitoring rights are effectively contested publicly. For example, group like Greenpeace might bring pressure on corporations. What are they doing? Well, they're engaging in monitoring activity. Whether it's socially positive or socially negative monitoring activity doesn't matter. But the key from our perspective is that these are groups which operate outside many of the systems. They are not elected monitors. They are sometimes operating inside countries, but in many cases they're operating outside countries, and this become increasingly important over time. Now for companies, there's the issue of the managing of this risk, this political and societal risk. My definition of this risk is given as discontinuities occurring in the business environment that are (a) Difficult to anticipate and (b) The result of political actions. I think this is important in the first instance because you need to recognize that this risk may not be related to political instability. It might be, but it doesn't have to be because the key here is the difficulty to anticipate. For example, the political risk in North Korea would be considered to be very high and it's not because there is political unrest. It's a repressive dictatorship. It's that the actions arise from individuals, but it's also that they're difficult to anticipate. This is why there was a whole science of Kremlinology during the period of the Soviet Union, because people didn't know the rules by which decisions were made, and therefore they were not easy to anticipate. There was a lot of guesswork and it's this inability to figure this out, which creates the risk if there's instability, but you can predict what you need to predict. You know there's going to be errors, but you can basically understand it. That's a lot easier than worrying about stuff which is just going to appear completely randomly, and you don't have any real ability to predict what it is, all you can do is react. But the second aspect of this, second major aspect of this, is also it has to be potentially significant. If it's minor issues, those discontinuities don't matter, you're really talking about things for which you want to engage in the management.