MANAGEMENT-Evaluate Roles, Responsibilities & Impact of Global Institutions on Multinational Enterprises (MNE)
It was during the phase of Second World War that a need for establishing global institutions was highlighted. The economic and political policies of countries were meant only for their protection and progress due to which international trade was suffering to a great degree. Realizing the situation, the officials of several of several countries met in Breton Woods in the year 1944 and agreed upon having a fixed exchange rate among currencies so that international trade can take place in a smoother manner. This led to the establishment of the first global institution with the name of International Monetary Fund (IMF) along with several other institutions namely World Trade Organization (WTO), World Bank, International Criminal Court and United Nations. The purpose of these institutions was to not only improve international trading among nations but also ensure that peace and harmony is maintained in the world. In countries where political and social regulations cannot be sustained and peace and future of the common people is at stake, assistance from United Nations is taken-United Nations also play its role when nations get into conflict with each other so in order to ensure that peace and order is maintained in the world. United Nations is divided into several divisions-each division is dedicated to its mission where the sole purpose is to make the world a better and peaceful place by providing facilities such as education, food, shelter, employment and law enforcement in all member nations. The purpose of World Bank is to offer loans to developing and under developed countries so that they can invest considerably in significant projects related to education, poverty eradication, construction of roads and bridges and overall up-gradation of lifestyle of common population. World Trade Organization (WTO) is an important global institution whose aim is to encourage trade by setting up currency exchange rates and ensuring sound implementation of trade and tax laws for all countries.
The role of these global institutions is very important in the present era of globalization. Businesses in all regions now consider it mandatory to have international presence so as to improve their revenues, brand equity and most of all, stay ahead in competition. In the absence of global institutions, there will not be any standard trade laws and nations will have weaker economies and it is likely that they would get into rivalries with each other and resultantly, the peace of the world might be lost. Globalization requires that nations interact with each other in a friendly manner and trade takes place smoothly- the role of global institutions is helpful in this regard (Global Strategy, n.d.). Global institutions can also be referred to as governing bodies since they define what is acceptable among countries and organizations doing international business and what are the factors or issues which are regarded as unacceptable and intolerable.
Besides the mentioned responsibilities of global institutions, it also plays an essential role in reducing uncertainty. Global institutions have a strong influence on the decision making of organizations as well as individuals because they provide a guideline on what is acceptable and what is not in the eyes of law. Global institutions lessen uncertainty in both political and economic arena. When there is political uncertainty, long term plans formulated by domestic and multinational organizations go obsolete and resources are wasted. Due to this, the performance of organizations suffers and they become less efficient and less stable. When there is uncertainty in economy, exchange rates become unstable and international transaction among businesses suffers. Economic uncertainty also affects the business parties’ obligations to fulfill their trading contracts which results in severe economic losses. Global institutions offer a complete framework consisting of rules and regulations and even spell out ways to resolve disagreements and conflicts. Global institutions have laid down laws for the protection of domestic and international investors in order to reduce uncertainty in the political and economic global environment (Peng, 2014).
Ways to Reduce Uncertainty
Primarily, there are two ways employed by global institutions to reduce uncertainty namely;
Informal, Relationship based, Personalized Exchanges
Jansson (2007) suggests that informal, relationship-based personalized exchanges are usually regarded as the first stage of business transactions where the two business parties deal with each other in an informal way while developing a strong relationship on trust and mutual understanding. Business mostly takes the form of a network and is regarded as the traditional form of market dealing. The next level of business transactions is more formal, rule-based and impersonal. Here, the two parties which were in an informal business dealing transforms into a formal setting where third party institutions intervene in order to make the economic business exchange more beneficial and efficient while adhering to the trade laws. In formal exchanges, the contract terms are laid down so that the business takes place in a systematic manner and if a conflict arises during the course of business, the relevant institution can resolve the matter with peace and harmony while ensuring that no economic losses occurs to any party.
The area of strategy and strategic management mainly focuses on only the resource based views and industry based views and always neglected the institutional based perspective of business strategy. Institutions are bodies which govern the game by specifying the do’s and the don’ts . The institution based view suggests that strategic choices which are made available to organizations and individuals for moving forward are a product of dynamic type of interaction between the global institutions and the organizations or individuals respectively. The factor of environment which is based on political, economical, social, technological and legal framework is brought into light as per the concept of institutional based perspective of business strategy. This perspective has two main components. Firstly, the managers are required to keep the institutional framework in mind before making any strategic decisions. The framework is likely to pose some restraints which can either be formal or informal. Secondly, whether institutional relationships are formal or informal, they play a key role in managing an organization’s behavior. With regards to the role of institutions in reducing uncertainty, informal restrictions are seen as more efficient while allowing managers to take important strategic decisions. Analysing these two components, we can refine our concepts by mentioning that strategic choices are not only a result of resources based on the capabilities of an organization or the overall structure and trend of the industry but also linked to the framework of a global institution which is based on its formal and informal restraints (Garridoa, Gomezb, Maicasc, Orcosd, 2014).
Michael Porter presented the Diamond Model which aims at not only the creation of competitive advantage but also on its sustainability. The four factors which explain the diamond model include firm strategy, structure and rivalry; factor endowments, related and supporting industries and; domestic demand. According to the first factor, rivalry can be determined by interaction of the overall strategy of the firm and the structure of the industry in which it operates-it basically highlights the industry based perspective of business strategy. Factor endowments refer to the factors of people, land and water in a region which are directly involved in the activity of production. After this comes the related industries which have a key role in providing support to one or more industries. The final factor of domestic demand is the one which makes the organizations undergo innovation and improvement so as to satisfy the needs and wants of the global market (Rugman, D'Cruz, 1993). Although this diamond model proposed by Porter is of great significance and is quite useful for professional organizations and researchers who seek to build and sustain competitive advantage but it ignores the concept of institutions and its role in making strategic choices. Although internal resources, favorable industry structure, meeting the customers’ demands and having sound strategies is important in creating and maintaining competitive advantage but the model ignores the crucial role played by institutions in this regard. There are certain formal and informal constraints which are presented by institutions and which are kept into consideration while making imperative strategic decisions and this point is what contradicts with the strategic diamond model suggested by Porter (Peng, Wang, Jiang, 2008).
References
Garridoa,E., Gomezb,J., Maicasc, J. P.,Orcosd, R. (2014). The institution-based view of strategy: How to measure it. BRQ Business Research Quaterly. 17 (2), 82-101.
Global Strategy. (n.d.). What are the main global institutions? And how do they relate to international trade?. Available: http://www.global-strategy.net/main-global-institutions/. Last accessed 9th Jan 2016.
Goldin, I. (2013). Do We Need New Global Institutions?. Available: http://www.theglobalist.com/do-we-need-new-global-institutions/http://www.theglobalist.com/do-we-need-new-global-institutions/. Last accessed 9th Jan 2016.
Jansson, H. (2007). International Business Strategy in Emerging Country Markets: The Institutional Network Approach. Cheltenham: Edward Elgar Publishing, Inc. p30-45.
Peng, M. (2014). Global Strategy. 3rd ed. Mason: Cengage Learning. p20-249.
Peng, M. W., Wang, D., & Jiang, Y. (2008). An institution-based view of international business strategy: A focus on emerging economies. Journal of International Business Studies, 39: p920–936.
Rugman, A.M., D'Cruz, J.R. (1993). The 'Double' Diamond Model of International Competitiveness A Canadian Experience. Management International Review. 33 (2), p17-39.
