Expert answer:Auburn University Culture Opportunity & Barrier To


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Discussion 1
Culture, An Opportunity & A Barrier To
Business Entry
Think about how it would be possible to conduct a business negotiation
between different cultures and societies with minimum conflict. Refer to the
article in the materials entitled “How to Deal With Cross Cultural Problems In
International Business Negotiation” and pick a recent example from the news
as a case study. Think about how such a compromise could be
possible. Discuss your findings and thoughts. (Links
site.)Links to an external site. (Links to an external
site.)Links to an external site.
Files PDF: How to Deal With Cross Cultural Problems In International
Business Negotiation
Discussion 2
Do you believe that cultural norms in one country should be respected in
business over another? (Links to an external
site.)Links to an external site.
Files PDF: Challenges of doing international business- social factors
On the adapation of the firm to the international business
On the adaptation of the firm to the
international business environment
Manuel Portugal Ferreira
Instituto Politécnico de Leiria
Fernando A. Ribeiro Serra
UNISUL Business School (UNISUL)
Nuno Rosa Reis
Instituto Politécnico de Leiria
Working paper nº 68/2010
Center of Research in International Business & Strategy
INDEA – Campus 5
Rua das Olhalvas
Instituto Politécnico de Leiria
2414 – 016 Leiria
Tel. (+351) 244 845 051
Fax. (+351) 244 845 059
Dezembro 2010
Com o apoio da UNISUL Business School
On the adaptation of the firm to the international business
Manuel Portugal Ferreira
globADVANTAGE – Center of Research in International Business & Strategy
Escola Superior de Tecnologia e Gestão
Instituto Politécnico de Leiria
Morro do Lena – Alto do Vieiro
2411-901 Leiria, Portugal
Fernando A. Ribeiro Serra
UNISUL Business School
Universidade do Sul de Santa Catarina
Rodovia SC 401, km 19
88050-001 Canasvieiras
Florianópolis – SC, Brasil
globADVANTAGE – Center of Research in International Business & Strategy
Nuno Rosa Reis
globADVANTAGE – Center of Research on International Business & Strategy
Escola Superior de Tecnologia e Gestão
Instituto Politécnico de Leiria
Morro do Lena – Alto Vieiro
2411-911 Leiria, Portugal
Phone: +351-244-843317
Fax: +351-244-820310
On the adaptation of the firm to the International Business
This paper advances on the importance of the adaptation of the firm to the
International Business Environment (IBE). The IBE is a distinguishing factor
in international business studies and the firm’s adaptation to the
environment has been presented as a basic survival strategy. We argue
that adaptation is indeed a dynamic and largely internally driven process
that leads the firm to co-evolve with the external environment. The ability
to adapt to different international business environments is developed over
time through the firm’s experiences and built into its routines. Adaptation is
both suggested to incorporate the elements of a planned strategy and of
random variation in search for local peaks given bounded rationality,
imperfect information and the current pool of resources and capabilities.
The ability to adapt to the environment may be conceptualized as a
knowledge-based capability and a potential source of competitive
advantage for the multinational corporation.
Keywords: Adaptation, International Business Environment, MNC,
capabilities, evolution, environmental stability.
“Environmental conditions determine which systems survive and thrive:
those best adapted are most likely to prosper.”
– Scott (1998: 104)
Organizations are open systems with multiple interactions with the
surrounding environment (Aldrich, 1979; Nelson & Winter, 1982; Scott,
2002). The environment provides firms with the resources and offers
opportunities for market-product expansion, but also imposes constraints.
To survive and prosper firms need to search for the right fit, or
configuration, with their environment (Miller, 1992). However, both the
environments and the firms are in continuous change and co-evolve (Nelson
& Winter, 1982; Aldrich & Ruef, 2006).
Organizational adaptation to the International Business Environment
(IBE) is difficult. First, it requires firms to recognize the need to respond
and adapt to environmental changes; and even then they are not always
able to do so. Technological changes or discontinuities, for example, have
been shown to lead to high failure rates (Tushman & Anderson, 1986) with
the explanation residing in the failure to adapt, and the inertia caused by
the focus on the firms’ existing capabilities (Leonard-Barton, 1992, 1995).
Second, adaptation involves the knowledge of multiple environmental
dimensions on the multiple countries where the firm is present, increasing
its complexity (Ghemawat, 2001, Guisinger, 2001). This is frequently
difficult given bounded rationality of the decision making agents (Simon,
1957) and the interplay among the environmental dimensions. Third, to be
able to adapt, firms must hold the necessary skills, capabilities or resources
to do so. However, in conditions of environmental uncertainty and
instability, it is hard to even identify which resources and capabilities are
valuable let alone maintain a long term competitive advantage (Sirmon, Hitt
& Ireland, 2007; Shepherd & McKelvey, 2009; Cantwell, Dunning & Lundan,
The strategy literature has tried to answer the questions of why firms
differ and why there are performance differences between firms (e.g.,
Hawawini et al., 2003; Mackey et al., 2007; Sirmon et al., 2007). The
international business literature, on the other hand, seeks to explain the
motives that lead firms to invest abroad or internationalize their operations
(e.g., Dunning, 1988; Buckley & Ghauri, 1999; Makino et al., 2002). This
paper integrates both areas and suggests that one of the reasons why
multinationals differ is that they deploy different strategies and capabilities
to adapt to the IBE.
In this paper we develop a co-evolutionary argument in explaining how
firms develop an adaptation capability to survive and prosper in the context
of complex and difficult to understand IBEs. Adaptation is posited to occur
at three levels: first, it encompasses both the “traditional” and observable
adaptation to the external market, second it is reflected in the internal
business processes, and third, it is a co-evolving effect whereby firms,
populations of firms, and environments change together. We further explore
how firms are affected by changes in specific dimensions of the IBE.
The support on recent literature, such as the knowledge-based view of
the firm and the evolutionary, permits us the distinction between two main
alternatives: first, that adaptation is essentially characterized by random
variation, which evidences a sub-rational process that just seeks to improve
the current state of affairs. Second, that adaptation is really an intentional
process characterized by intentional variation and the use of best practices.
In this respect it is worth noting that international expansion is a major
form of strategic variation in organizations (Aldrich, 1979). Our discussion
contributes to the essential questions in business and international strategy:
performances”. It is likely that the factors that make firms different – in our
environments – underlie a competitive advantage.
This paper is organized as follows. First, we briefly review a set of
concepts relevant in analyzing the IBE and firms’ adaptation. In the second
section, we put forward a number of conceptually-driven propositions.
Finally, a broad discussion and some avenues for future scholarly inquiry
conclude this paper.
The International Business Environment (IBE) is the distinctive
underlying feature of International Business (IB) research. Nehrt, Truitt,
and Wright (1970: 2), for example, suggested that the IB research is
“concerned with the interrelationship between the operations of the
business firm and international or foreign environments in which the firm
operates”. Guisinger (2000, 2001), in a similar vein, argued that the IBE is
management disciplines. Confirming the importance of the environment,
Scott (2002: 21) wrote that “every organization exists in a specific physical,
technological, cultural and social environment to which it must adapt. (…)
[earlier scholars] tended to overlook or underestimate the importance of
organizations-environmental linkages (…) and indeed the number and
variety of these connections are impressive”.
Multinational corporations (MNCs) are exposed to a higher level of
environmental complexity than purely domestic firms. The environmental
(Ghemawat, 2001) augmenting the likelihood of failure. Indeed, there are
numerous anecdotal stories (Ricks, 1999) of errors and misadaptations that
have resulted in problems for MNCs ranging from a “poor image” to
inexperienced MNCs as well as those more experienced have gone through
such failures, as described in Ricks ‘Blunders in international business’.
Given the complexity associated to the management of geographically
dispersed firms (Casson & Lundan, 2000; Guisinger, 2000; Landier, Nair &
Wulf, 2009), the first step is to truly understand what specifically
constitutes the IBE. To a large extent, the IBE has been treated as a set of
uncontrollable and exogenous variables that are out there (Young, 2000).
Several authors (Guisinger, 2000; Crossland & Hambrick, 2007) noted there
is not a commonly accepted definition of the environment, let alone a
standard method for measuring differences between domestic and foreign
It is well accepted that the IBE is multidimensional. For example,
Ghemawat (2001) posited a framework for accessing the distance between
countries. This framework identified four important dimensions of the IBE:
Culture, Administration, Geography and Economy (CAGE). With a more
environmental dimensions that compose the IBE: Econography, Culture,
Legal system, Income level, Political risk, Tax regime, Exchange rate, and
dimensions to characterize any IBE. Other taxonomies exist, such as the
PEST – which stands for political, economic, sociocultural and technological
factors, and the PESTLE – which adds the legal and environment dimensions
to the analysis of the environment.
Adaptation in international business studies
“The essence of international business is the adaptation that firms must
make when they encounter unfamiliar and difficult surroundings in foreign
– Guisinger (2000)
In the traditional international business view, adaptation is treated as
a passive reaction to external environmental changes, as a response to
contingencies (Pettigrew, 1985) or to the deterministic role of the external
environment in the organizations (Tushman & Anderson, 1986). Adaptation,
in this view, is the search for a better isomorphic fit (be it normative or
mimetic), in a fairly random search for local peaks (Levinthal, 1997). That
is, in this view, adaptation is not an actual strategy but rather a set of
actions that aim at overcoming a specific disadvantage, inefficiency or gap.
Although adaptation to the IBE has not had a major emphasis in IB
studies, its importance is frequently implicit. One example of adaptation in
IB literature is found in the internationalization model of the Uppsala school
(e.g., Johanson & Wiedersheim-Paul, 1975; Johanson & Vahlne, 1977,
internationalization process through a model of knowledge and experience
acquisition that enables the firms to evaluate the risks and opportunities.
Firms internationalize their operations first to psychically closer countries
and as they gain more experience seek increasingly psychically more distant
countries and commit a larger pool of resources. Thus, the entry mode
strategy is not completely decoupled from adaptation.
Another example of how adaptation has not seen its importance fully
recognized is found in Dunning’s (1981, 1988) Ownership- LocationInternalization (OLI) paradigm. O, L and I decisions are posited to drive
efficiency, but adaptation is left out. To tap this absence on the Eclectic
paradigm, Guisinger (2001) proposed the Ownership- Location- ModeAdjustment (OLMA) paradigm, to incorporate the adaptation to the IBE as a
main dimension in firms operations and decisions. More recently, some
authors implicitly consider the importance of the adaptation to the IBE in
the context of relations within a business network (Andersson, Forsgren &
Holm, 2007). Other scholars have focused on the new organizational forms
that emerge from the firm’s adaptation to the environment (Volberda,
1999). Recently, researchers focused on the impact of adaption along the
value chain (Rugman &Verbeke, 2008) and some authors consider it a
strategic resource (Ferreira, Li, Serra & Armagan, 2008).
The MNCs are exposed to a multitude of IBEs from which they depend
for essential resources, clients, financial resources, and broad wealth of
inputs. Moreover, MNCs operating in foreign environments face a liability of
foreignness (Hymer, 1976), that accrues from the lack of knowledge and
insufficient adaptation to the environment. As such, the MNCs face a set of
constraints that differ from those of purely domestic firms. Hence, an
inclusive theory of the MNC must consider the adaptation to the IBE. To
understand the MNC, the researcher needs to have a comprehensive view of
how the MNC interacts with each of its surrounding environments. The
existence of pressure to adapt to local environments was noted by DiMaggio
and Powell (1983) who defined isomorphism as the pressure exerted upon
an organization to resemble existing firms in the same environment. In line
with institutional theory, organizations must comply with the rules, norms
and behaviors set forth by the institutions in the places where they operate,
to build legitimacy (Meyer & Rowan, 1977; DiMaggio & Powell, 1983; Scott,
1995) or according to Kanter (1997) their “license to operate”. When firms
enter unfamiliar environments, they face unfamiliar contexts with rules
defined by the political, social, legal and economic institutions to which they
must comply. This necessity for legitimacy challenges the corporation to
Learning and knowledge strategies
Evolution in the environment forces the firm to learn and to adapt to
new constraints (Aldrich & Ruef, 2006). March (1991) suggested a model of
exploitation and exploration in organizational learning. Lewin, Long and
paradigms, technologies, strategies, and knowledge in hope of finding new
elaborating established ideas, paradigms, technologies, heuristics, and
knowledge” (Lewin et al., 1999). While exploration is associated with the
discovery of new opportunities, innovation, building new capabilities,
investment in the firm’s absorptive capacity (Koza & Lewin, 1998),
exploitation is associated with improving the use of the existing capabilities,
technologies and assets that the firm holds. It is important to balance these
two pressures to, on one hand, assure current viability and, on the other, to
insure future prospects (Lavie & Rosenkopf, 2006).
Koza and Lewin (1998) and Lewin et al. (1999) suggested that while in
stable environments an exploitation behaviour may lead the firm to obtain a
competitive advantage, in unstable environments the exploitation strategy
may lead the firm to be stuck in a competence trap (Levinthal & March,
1993). The core competencies become ‘core rigidities’ (Leonard-Barton,
1992, 1995) when the challenges require a new set of capabilities or
resources but the firm is unable to attain them. This suggests that the
firm’s history constrains its behaviour, therefore searching for market
opportunities tends to be mainly in the surrounding landscape – that is: a
local search. The outcome is that firms find it easier to use of the existing
set of resources in developing market offerings and in entering into
unfamiliar markets.
Adaptation should stop when the marginal costs supersede the
additional benefits derived from it. The implementation of this rationale is
not free from difficulties. On one hand, adaptation is a process of search for
a peak in the landscape (Levinthal, 1997) and as such is based in trial-and10
error. That is, the benefits are assessed after the costs have been incurred,
meaning the ex ante costs are needed to capture uncertain, probabilistic (ex
post) benefits. On the other hand, the search for alternatives may only be
carried within local landscape boundaries, which does not guarantee more
that a local maximum. That is, adaptation may need to be multidimensional and occasional adjustments in single variables are insufficient
(Winter, 2000). Therefore we argue that adaptation, besides incorporating
the elements of a planned strategy, as suggested previously, is also a
process of search for a best maximum peak, achieved through an
experimental trial-and-error process.
To conclude, while exploration and exploitation processes or strategies
lead to variation, the exposure to the IBE determines the selection, and the
ability to adapt determines the likelihood of success, as we suggest in the
model of figure 1. For example, exploratory processes induce variation in
the population of MNCs with undetermined effects on the success or failure
of firms. On the other side, it is not likely that exploitative processes
generate significant additional variation. In this case a significant change in
the IBE may lead the MNC to be selected out.
Additional insights may be drawn from co-evolutionary theory, where
both adaptation and learning may occur, driving the likelihood of success.
McKelvey (1997) and Scott (2002) suggested that the evolution of the firm
cannot be dissociated from the evolution of the surrounding environment.
Evolutionary theory has been used to explain different patterns of survival
and growth (Aldrich & Ruef, 2006). Lewin et al. (1999) argued that new
organizational forms evolve in the interplay between the environment and
firms’ strategies in conditions of environmental uncertainty. Burgelman and
Grove (2007) proposed a framework that aims at balancing the adaptation
to the current environment and the ability to adapt to an evolving
environment to achieve corporate longevity.
The co-evolutionary theory suggests that adaptation occurs at two
levels: macroevolution – that represents the adaptation of the firm to its
external environment, and microevolution – that represents the internal
adaptation of the fir …
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