Week 2: Leadership, Institutional Change and Implications

Week 2: Leadership, Institutional Change and Implications

“Framework for Country Analysis … South Korea: Institutional Vulnerability and Financial Crisis … Financial Crisis, IMF Intervention and Company Strategy … Turbulent Environments & Global Strategy: McDonald’s Soviet Venture … Institutional Environments of Singapore, Turkey and Chile … Conclusion and Weekly Assessment II”
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Summaries

  • Leadership, Institutional Change and Implications > 2.1 Framework for Country Analysis > Framework for Analysis of Country Environment
  • Leadership, Institutional Change and Implications > 2.2 South Korea: Institutional Vulnerability and Financial Crisis > A Historical Account on the Evolution of South Korea
  • Leadership, Institutional Change and Implications > 2.2 South Korea: Institutional Vulnerability and Financial Crisis > South Korean Aspirations and Setbacks
  • Leadership, Institutional Change and Implications > 2.2 South Korea: Institutional Vulnerability and Financial Crisis > Stakeholders and Their Perspectives
  • Leadership, Institutional Change and Implications > 2.3 Financial Crisis, IMF Intervention and Company Strategy > Financial Crisis
  • Leadership, Institutional Change and Implications > 2.3 Financial Crisis, IMF Intervention and Company Strategy > Currency and International Competitveness
  • Leadership, Institutional Change and Implications > 2.4 Turbulent Environments & Global Strategy: McDonald's Soviet Venture > Soviet Union in the 1990s
  • Leadership, Institutional Change and Implications > 2.4 Turbulent Environments & Global Strategy: McDonald's Soviet Venture > Case Study: McDonald's Soviet Venture
  • Leadership, Institutional Change and Implications > 2.4 Turbulent Environments & Global Strategy: McDonald's Soviet Venture > Risk and Hedging Strategies
  • Leadership, Institutional Change and Implications > 2.5 Institutional Environments of Singapore, Turkey and Chile > Institutional Environment of Singapore
  • Leadership, Institutional Change and Implications > 2.5 Institutional Environments of Singapore, Turkey and Chile > Institutional Environment of Turkey
  • Leadership, Institutional Change and Implications > 2.5 Institutional Environments of Singapore, Turkey and Chile > Institutional Environment of Chile
  • Leadership, Institutional Change and Implications > 2.6 Conclusion and Weekly Assessment II > Week 2: Concluding Remarks

Leadership, Institutional Change and Implications > 2.1 Framework for Country Analysis > Framework for Analysis of Country Environment

  • In using the framework, we begin by looking at the country’s context.
  • Each country has a prevailing ideology, which is influenced by its context, especially its historical context.
  • The vision of its leaders together with the ideology, determine the country’s objectives.
  • As we saw last week in the case of Japan, in order to understand a country’s environment and how it can affect business opportunities, it is helpful to begin by focusing on the social, political, economic and institutional environment.
  • We refer to this simply as the country’s context.
  • The ideology and its interpretation by current leaders molds the country’s objectives.
  • Countries have objectives which basically define what they want to achieve.
  • Objectives define where the country wants to get to in 5, 10, or 20 years.
  • All countries naturally want to become more prosperous.
  • We can assume that economic growth is one of the primary objectives of most, if not all, countries.
  • Some countries have the objective of limiting income inequality, and they take clear and strong actions to promote equality.
  • Scandinavian countries tend to focus on this objective more than, say, the US, or some Latin American countries.
  • So do some of the East European countries that had communist governments in the 20th century.
  • Countries also have other objectives that may be determined by historical factors, or by the vision of their current leaders, the cultural context, and other factors.
  • Some countries, like India, that were colonized by other countries for a long time, and finally got rid of their foreign domination in the 20th century, have a strong desire to be independent.
  • This has resulted in the so called “Import Substitution Development Strategies” that led countries to try and make all critical inputs, like steel, for themselves, rather than rely on foreign suppliers, in the years immediately following independence.
  • This is not always the most efficient way for a country to grow, since some of these industries, like steel, require a lot of capital, and poor countries do not have enough capital to invest.
  • Countries that are focused on self-reliance are often unwilling to welcome foreign direct investment, which can benefit the economy by generating economic value locally, creating jobs and bringing new technology.
  • This attitude toward foreign direct investment has changed over time and even countries like India, which were relatively closed after becoming independent, began encouraging foreign direct investment in the last couple of decades.
  • All countries would like to protect themselves from foreign invaders, but some are forced to put a greater emphasis on defense owing to their geographic location and historical factors.
  • Now, the objectives of a country, combined with the vision of its current leaders, result in a strategy for achieving the objectives.
  • His defense and diplomacy strategy encompasses attempts to change the Japanese constitution and increase military preparedness and engagement, and also to strengthen Japan’s ties with the US and countries in the Asia Pacific region through diplomacy and trade agreements such as the Trans Pacific Partnership.
  • Over time, one can see the outcomes of the country’s strategy, and the programs and policies it spawns.
  • There are a number of other influential stakeholders in a country, who affect the setting of objectives and the sequence going from objectives and strategy, to programs, policies, and outcomes.
  • A very powerful stakeholder in some countries is the military.
  • In many countries, all across the world, from Chile, to Turkey, to Pakistan, and Korea, the military has played a significant role in changing institutions and setting objectives and managing country strategy.
  • In the following sections this week, we will look at small cases of a few different countries to illustrate how parts of the framework are useful in understanding country environments.

Leadership, Institutional Change and Implications > 2.2 South Korea: Institutional Vulnerability and Financial Crisis > South Korean Aspirations and Setbacks

  • As we saw in the last unit, South Korea grew rapidly during President Park’s rule from 1961 to 1979.
  • During the 1980s South Korea continued with its strong economic growth.
  • The concentrated governance structure, with close connections between the military and business groups, called chaebols, and the cross-holding of ownership between companies, created lack of transparency.
  • One of the big problems that was gradually created, by the strategy of favoring capital intensive industries, like chemicals and ship-building, was that the chaebols had very high debt and were highly exposed during business downturns.
  • Unlike Japan, where industrial development had been financed largely by domestic savings, in South Korea, the funding came in the form of loans from foreign lenders.
  • So what happened these countries began to also get euphoric and say, well gee, all the this money is coming in, let’s take it and use it.
  • Professor: During the 1970s and 80s, the world had been very impressed by the Asian miracle as the four Asian tigers, South Korea, Taiwan, Singapore and Hong Kong, grew very rapidly.
  • These countries, and others following in their footsteps, like Thailand and Malaysia, attracted a lot of capital, both by way of foreign direct investment and foreign debt.
  • Of course, some of the clever investment bankers then went to the Thai Central bank and said look we know that the Thai Baht will never devalue, why don’t you sell us your dollars forward? So all of their reserves and of course when the Baht started to devalue and they were in deep trouble.
  • Professor: Investors panicked, and capital rapidly fled from country after country.
  • When foreign lenders and investors lost confidence in the region, and there was a massive exodus of capital, South Korea was swept up in the flood.
  • So you had this bifurcation of the economy, so to speak, which resulted in the chaebols getting even stronger, and even to this day if you look at the small and medium size enterprises in Korea, most of them are reliant on the chaebols for their business in one direction or the other.
  • Professor: Now, I would now like you to read a short case on the environment in South Korea in 1997, when the debt crisis hit.
  • Ask yourself what challenges and opportunities result from a situation like this, for stakeholders, including local and multinational companies.
  • Think about what the fall in the local currency, the won, means for companies, that manufacture in South Korea, and sell locally, versus in a foreign market.
  • What are the implications for companies that manufacture abroad, say in the US, and sell their products in South Korea, versus the US? The case of South Korea allows us to make connections all the way from historical context to the country’s objectives over time, and its strategy and policies, to the vulnerabilities that resulted, and the serious consequences for stakeholders.

Leadership, Institutional Change and Implications > 2.2 South Korea: Institutional Vulnerability and Financial Crisis > Stakeholders and Their Perspectives

  • Naturally, the foreign banks from many countries, that had lent money to South Korea, stood to lose a lot.
  • It could also have a domino effect, transmitting financial problems to developed countries that had lent to South Korea – such as Japan, Germany, France and the US. South Korean companies were obviously important stakeholders.
  • Organized labor in South Korea resisted attempts by the government and companies to extract concessions that would create more flexible labor institutions; for example, change employment rules to make it easier to lay off workers or redeploy them.
  • When it looked like the IMF would step in with support, things seemed to calm down but when it looked like South Korea would try and do without the IMF’s involvement the markets signaled their lack of confidence by pulling capital out, resulting in the won falling.
  • The won fell as institutions rushed to take capital out of South Korea.
  • The capital markets were sensitive to the fact that if the IMF assisted South Korea it would do more than simply provide loans.
  • It would make the South Korean Government agree to changing some of the institutions that were root causes of the problems, such as the governance system, the lack of transparency, and factors that led to unsustainable levels of corporate debt.

Leadership, Institutional Change and Implications > 2.3 Financial Crisis, IMF Intervention and Company Strategy > Financial Crisis

  • Now, let us take a quick look at some of the common factors that exist when countries experience a financial crisis; when they get into an unsustainable situation with the value of their currency falling sharply and foreign exchange reserves disappearing fast; when they face the prospect of failing to service foreign debt and being unable to pay for critical imports.
  • Usually, the root cause is that over many years, government policies have created a situation where the country is living beyond its means.
  • With high inflation, the country’s exports become uncompetitive and the currency tends to fall.
  • The country is unable to pay for critical imports and panic sets in.
  • While in Japan, such loans to meet budget deficits came from local lenders, in many countries they come from foreign lenders.
  • They lose confidence in the country and refuse to provide more loans, or renew existing loans, as they become due.
  • While this problem develops over many years, it comes to a head suddenly, and short-term capital rushes out of the country.
  • The value of the country’s currency falls sharply.
  • This pattern has been experienced by managers in many crisis-affected countries and has caused bankruptcies and severe job losses and hardship.
  • In such a situation, the local government tries to fix the problem of capital leaving, and currency falling, by selling dollars from its foreign exchange reserves to raise the value of its currency.
  • The fall of the currency is only temporarily arrested, and resumes as the country’s central bank begins to see foreign reserves falling at an unsustainable rate, and faces the prospect of running out of reserves, and has to stop selling dollars to prop up its currency.
  • The country facing the crisis can use these loans to replace some of the capital being pulled out of the country.
  • Over the decades, as the IMF helped many countries facing a financial crisis, it developed a set of conditions that it imposed on the country receiving IMF assistance.
  • The IMF usually expects the country to reduce its budget deficits by curbing expenses or raising taxes, in order to eliminate the need to print money, which is fueling inflation.
  • In order to curb expenses, the country may have to stop providing subsidies to state owned enterprises.
  • The country can try to curb the fall in currency by raising interest rates.
  • This controls inflation and also makes it attractive for foreigners to keep the capital in the country as it can earn higher returns.
  • The immediate effect of currency depreciation is to make critical inputs expensive and this can cause severe hardship and even topple the government.
  • So there is no easy way out for a country in financial trouble.
  • Countries have taken the bitter medicine in different degrees and come out strong.

Leadership, Institutional Change and Implications > 2.3 Financial Crisis, IMF Intervention and Company Strategy > Currency and International Competitveness

  • Many of you will say the price of coffee is determined by demand and supply for coffee.
  • As demand and supply change, the price of coffee changes.
  • Well, foreign currency prices are also affected by demand and supply.
  • The price of the won, the South Korean currency, is affected by the demand and supply of won.
  • Samsung sends these dollars to the foreign exchange market to convert them into won.
  • As these dollars are sold in the foreign exchange market, the price of dollars falls and the price of won rises.
  • Let us assume there is a Korean company that sells sneakers to US customers for $100. And that these sneakers compete with US made products sold at the same price.
  • There would be less demand for South Korean products, and less demand for the won, and the price of the won would fall.
  • Let us see what happened to the international competitiveness of companies when the won suddenly fell, or depreciated, during the Asian Financial Crisis of 1997.
  • Institutions rushed to convert won to dollars -the value of the won fell sharply.
  • In July 1997, the won to US dollar exchange rate was 900 won to 1 dollar.
  • In February 1998, after the crisis hit, the rate had fallen to 1,500 won to 1 dollar.
  • In February 1998, a dollar could buy a lot more won than it could in July 1997.
  • Now, let us assume that a South Korean phone priced at 81,000 won in July 1997 was sold in the US. At that time, 900 won equaled one dollar.
  • So the phone’s price of 81,000 won equaled 90 dollars.
  • We arrive at that by dividing 81,000 won by the exchange rate of 900 won per dollar.
  • Now, in February 1998, with the won having depreciated substantially to 1,500 won per dollar, the South Korean company had a range of options.
  • At one extreme, it could hold the price at 81,000 won, which translated into $54, that is 81,000 won divided by 1,500.
  • The South Korean company could increase its market share significantly by pricing at $54, which was much less than the previous dollar price of $90. At the other extreme, the South Korean company could raise the price of its product to 135,000 won, which was $90 at the prevailing exchange rate of 1,500 won per dollar.

Leadership, Institutional Change and Implications > 2.4 Turbulent Environments & Global Strategy: McDonald’s Soviet Venture > Soviet Union in the 1990s

  • The Soviet Union, which broke up in 1991, and of which Russia was the dominant region, was a much stronger power-one that matched US power and influence.
  • The Soviet Union had some interesting environmental features that presented challenges for companies.
  • We can learn a lot from the way that companies that were used to doing business in other countries dealt with the challenges presented by the Soviet Union.
  • We will take a quick look at the Soviet environment around the time that it broke up, and elements of McDonald’s strategy to address the challenges presented by the environment.
  • When Mikhail Gorbachev took charge of the Soviet Union in 1985, as General Secretary of the Communist Party, he inherited an economy slipping toward a crisis.
  • The growth rate, in what the Soviet’s called the net material product, had fallen to 3.2% between 1981 and 1985 from 4.3% between 1976-80, and was declining sharply.
  • The Soviet economic output was difficult to estimate and compare with that of the rest of the world because of unavailability of data, and artificial exchange rates.
  • Standard of living when measured by indicators such as cars or telephones per person put the Soviet Union in the same league as countries with per capita incomes of around $1500, such as Chile and Syria.
  • Unlike capitalist economies where individuals and companies could freely manufacture whatever goods and services they wished, the Soviet economy was centrally planned and controlled, with the state deciding who would produce what.
  • In the Soviet Union they were set by the Government and often bore no relationship to supply and demand, or to cost.
  • In some parts of the Soviet Union farmers fed their cattle bread because it was cheaper than feedstock; while in other places consumers could not find bread on store shelves because bakeries were not producing enough, or because the notoriously inefficient state-run distribution system was unable to deliver it to stores.
  • By late 1990, the Soviet Union was sliding towards chaos.
  • Some of the republics had declared their independence from the Soviet Union, leading to a dangerous confrontation between federal authorities and the republic of Lithuania.
  • In the Soviet Union these entrepreneurs were viewed as speculators and given the sudden removal of controls there were opportunities for abuse.
  • Gorbachev’s glasnost had fueled a spirit of freedom and independence in the Soviet Union’s 15 republics and that combined with economic failure was creating powerful centrifugal forces that threatened to pull the Union apart.
  • Some republics voted to secede from the Soviet Union while others, including Russia, wanted to drastically reduce the center’s control.
  • The president of the Russian republic, Boris Yeltsin, had proposed legislation that would assert supremacy of the Russian constitution over Russian territory and suspend Soviet laws that conflicted with Russian laws.
  • The threatened fragmentation of the Soviet Union spurred conservatives to demand suspension of political freedom and use of the military to crack down on republics trying to secede.

Leadership, Institutional Change and Implications > 2.4 Turbulent Environments & Global Strategy: McDonald’s Soviet Venture > Case Study: McDonald’s Soviet Venture

  • McDonald’s planned to set up at least 19 other restaurants in Moscow, and in considering implementation of those plans it had to take into account the critical political changes that had occurred in the Soviet Union in 1990.
  • The reactions of foreign investors to those political changes had varied; some had cancelled their plans, some had put them on hold and some appeared to be moving ahead. I would like you to carefully read the case study on “McDonald’s in the Soviet Union” given below.
  • I would like you to reflect on the special aspects of the environment and also on the strategies adopted by McDonald’s to address the challenges it faced.
  • Read the case study on “McDonald’s in the Soviet Union”.

Leadership, Institutional Change and Implications > 2.4 Turbulent Environments & Global Strategy: McDonald’s Soviet Venture > Risk and Hedging Strategies

  • I hope you enjoyed reading the McDonald’s case.
  • Now competitors would be deterred from setting up restaurants in Moscow by bureaucratic obstacles, which McDonald’s had managed to overcome over a long time.
  • So McDonald’s could expect to have the market to itself for some time.
  • There was promise of a vast market in the rest of Russia, and the other republics, that McDonald’s could have expanded into and served.
  • Let’s take a look at what McDonald’s did to address these risks.
  • What did McDonald’s do to manage this political risk? McDonald’s had taken on the local government as a partner.
  • Perhaps, if conservative leaders returned to power, the fact that a Russian government agency owned half of the operation, would protect the McDonald’s joint-venture from negative consequences.
  • Restaurant staff in Moscow, at that time, were typically people who made a full-time career in the sector, and seemed to be somewhat jaded, and did not demonstrate much enthusiasm.
  • To address this challenge, McDonald’s worked through its government partner to get permission to hire part time workers who were young and enthusiastic.
  • This helped McDonald’s create a new kind of culture and ambiance.
  • Having the government as a partner, McDonald’s could insulate itself from such pressures from corrupt officials.
  • McDonald’s addressed this risk by setting up its own manufacturing facility to produce buns, patties and other inputs that it normally bought from suppliers when operating in other countries.
  • Having a government partner, McDonald’s could get preferential access to supplies that might be in short supply.
  • The government was running deficits, and there was the risk that there might be high inflation, accompanied by steep fall in the ruble.
  • Since McDonald’s was not repatriating its profits, the dollar value of the profits it accumulated in rubles, could fall substantially as the ruble fell.
  • McDonald’s could have eliminated this risk by repatriating the profits by adopting unconventional methods.
  • McDonald’s had said it would set up another 19 restaurants.
  • Over the next five years, if we assume prices were to double in Russia, and the ruble fell by 50%, if McDonald’s had simply held on to cash, the dollar value of its accumulated profits would have become half.
  • If McDonald’s bought real estate, and the value of this real estate also doubled as prices rose, the net outcome would be that the dollar value of McDonald’s assets would remain the same.
  • This was, of course, difficult to ensure, and so even though McDonald’s ended up following this strategy, it could not hope to fully eliminate the risk, but only reduce it somewhat.
  • Now we will turn to some general strategies that companies rely on when they are in environments where they fear the host government may turn hostile and acquire their assets, as, for example, could have happened if conservatives had toppled Gorbachev, and the attitude toward the US had turned hostile.
  • Multinationals can adopt strategies for reducing risk of expropriation, by creating incentives for the host government, to allow the multinational to continue managing its operations in the host country.
  • If the host government acquires the multinational’s local operation, the multinational can refuse to pay back the loans it took from local banks.

Leadership, Institutional Change and Implications > 2.5 Institutional Environments of Singapore, Turkey and Chile > Institutional Environment of Singapore

  • The most important factor behind the rise of Singapore is its first Prime Minister, the late Lee Kuan Yew, who governed Singapore for over thirty year, and transformed it.
  • Singapore is fortunate to be located in the middle of major shipping lanes connecting east and west Asia.
  • After Singapore became independent in 1965, Lee made the country very attractive for western multinationals to locate their Asian headquarters and set up manufacturing operations there.
  • They don’t like the American model because it is too dissipated, it involves lots of debates and it is not fast enough and they admire the Singapore model because they will get things done more quickly while at the same time not sacrificing too much human rights and the ability to run an efficient government.
  • Singapore’s own national airline is one of the world’s best and the city is a very comfortable, secure and efficient location to work from, for companies doing business in Asia.
  • Singapore also attracted foreigners to come and work there.
  • Singapore’s open, outward-looking development strategy, which welcomed foreign capital and promoted trade, combined with the world-class infrastructure and institutions that promote growth, was very successful.
  • A large amount of foreign capital and labor came to Singapore, and added value to the country’s economy and benefited its citizens.
  • GDP growth in 2015 is estimated to be around 2%. As a major trading hub, Singapore is one of the few countries where annual exports and imports exceed GDP. Singapore port is the world’s second-busiest, after Shanghai.
  • Singapore’ Economic Development Board guides industrial development into areas that it sees as having potential for adding greater value locally, and providing better opportunities for the people of Singapore.
  • Singapore has built suitable infrastructure, attracted major players, and upgraded the skills of its manpower to serve in such high-value sectors; for example, by supporting students for higher studies.
  • About three-quarters of Singapore’s citizens are ethnic Chinese, 15% are Malay and 7% Indian.
  • Lee Kuan Yew ruled Singapore with a firm hand, with a singular focus on ensuring economic growth in a stable, safe and secure environment.
  • ” In summary, Singapore shows us how a determined and committed leader can create institutions to promote an environment for rapid economic growth, how foreign capital and foreign labor can be leveraged to create value domestically, and benefit the citizens of a country.

Leadership, Institutional Change and Implications > 2.5 Institutional Environments of Singapore, Turkey and Chile > Institutional Environment of Turkey

  • Turkey is another example of a country where a strong leader, Mustafa Kemal Ataturk, played a significant role in changing institutions to mold the country’s environment.
  • Historically, Turkey acted as a bridge between the East and the West, and, symbolically, it does that even today, providing the opportunity for connections between the Mid-East and Europe, and between Christian and Muslim nations.
  • Turkey has had strong connections with Europe for centuries.
  • At the height of its power in the 15th and 16th centuries, its control extended all the way to Eastern Europe, for example, Hungary and also included parts of Greece, Syria, Israel, Egypt, and Algeria.
  • Islam was well-entrenched in Turkey, and is the main religion today.
  • He was convinced that in order to be modern, Turkey must be exposed to western influence.
  • To reduce the authority of traditional religious leaders, the Quran was translated into Turkish from Arabic, and the call for prayers also had to be in Turkish instead of Arabic.
  • So we see how institutions in Turkey were influenced by a mix of historical factors having to do with European influence, changes in religion as rulers changed, and a powerful leader determined to change institutions.
  • Ataturk died in 1938, and Turkey developed into a multiparty democracy.
  • Like many other newly independent nations, Turkey started out with an inward-looking, import-substitution strategy.
  • In the early 1980s, the military, with advice from the IMF, implemented economic liberalization, reducing the government’s economic controls and encouraging trade and foreign direct investment.
  • Given its strategic location at the crossroads of continents and religions, modern Turkey presented the west with an opportunity to bridge the gap between Europe and the Middle East, and Islamic and Christian nations.
  • At one time, Turkey was very interested in joining the European Union, but despite its alliance with the west, for example, as a member of NATO, Turkey was not admitted to the European Union.
  • Since 2003, Turkey has been governed by the democratically-elected, conservative party called the Justice and Development Party.
  • There has been a certain amount of political instability in Turkey in recent years, with protests against the leadership, and terrorist acts by insurgents.
  • Turkey’s economy did quite well from 2010 to 2013, growing at about 6% per year.
  • Turkey has got into a confrontation with Russia and that might hurt its economy.
  • What did Turkey’s social, political, economic and institutional environment mean for foreign investors? Naturally, during the time when the country was closed to foreign investment opportunities were limited, though in closed environments some enterprising investors who are able to overcome barriers and collaborate with partners who enjoy privileged access can do very well.

Leadership, Institutional Change and Implications > 2.5 Institutional Environments of Singapore, Turkey and Chile > Institutional Environment of Chile

  • What I have found most remarkable about Chile is its embrace of democracy and the free market.
  • Chile has a rich endowment of natural resources, which formed the basis of large exports a long time ago, giving Chile an outward orientation.
  • In the decades after the Second World War, there was a rise in government intervention in the economy, and Chile adopted an inward looking, closed posture, with high tariffs on imports.
  • All that changed drastically and Chile eventually became a supporter of free market policies.
  • In comparison, FDI inflow into China was 128 billion dollars, which is five and a half times the amount that flowed into Chile.
  • While that is a large amount, when you consider that China’s economy was 40 times larger than that of Chile, and its population was 76 times larger, you realize that China did not do well as Chile in attracting FDI that is only five and a half times larger.
  • By making itself attractive to FDI, Chile has benefited by getting foreign capital to create value on its soil and contribute to the welfare of its citizens.
  • How did Chile’s attitude change from inward-looking to outward-looking? Unfortunately, the force that enshrined free market principles in Chile was the harsh regime of the dictator, General Augusto Pinochet, who overthrew the democratically elected communist leader, Salvador Allende, in 1973, when the economy was suffering high inflation, food shortages and severe labor unrest.
  • Democracy, which was rejected by Pinochet, returned to Chile and has survived along with the free market orientation.
  • Now what are the business implications of Chile’s free market posture? Chile’s free market orientation has translated into bilateral investment treaties and free-trade agreements with a large number of countries around the world.
  • Chile’s wide range of FTAs has served to assure potential partners that Chile is committed to providing a reliable and supportive business environment.
  • Let us say there is a manufacturer located in a country such as Brazil that does not have a free trade agreement with the US, and it sets up a manufacturing base in Chile.
  • Of course, the company would have to consider the overall cost of producing in Chile versus Brazil when deciding where to produce and export from.
  • Chile looks beyond South America, to North America and the rest of the world, when forging international relationships.
  • Chile decided it was important for it to forgo the opportunity to get closer to its big South American neighbors, like Brazil and Argentina so that it could forge stronger economic relations with the rest of the world.
  • With the global recession, and China’s falling appetite for commodities, Chile has been hurt.

Leadership, Institutional Change and Implications > 2.6 Conclusion and Weekly Assessment II > Week 2: Concluding Remarks

  • We saw how the institutional context emerged with the concentrated governance structure, close connections between the military and business groups and the cross holding of ownership among companies and how all this contributed to lack of transparency.
  • Our examination of South Korea allowed us to make connections all the way from historical context, to the country’s changing objectives over time, to its strategy and policies, the resulting vulnerabilities that resulted and the serious consequences for stakeholders when the Asian Financial crisis hit the region.
  • How countries get into trouble with deficits, inflation and falling currencies and the role of the IMF in helping countries in distress.
  • As we noted, the IMF has developed a set of conditions that it imposes on countries when it provides assistance and in doing so affects the institutions or rules of the games in the country.
  • We went further and looked at a company’s strategy in an unfamiliar country in more detail in the case of McDonald’s in the former Soviet Union.
  • In order to broaden and enrich our understanding of country environments, we took brief glimpses of three very interesting countries – Singapore, Turkey and Chile.
  • Turkey given its strategic location at the crossroads of continents and religions presented the west with an opportunity to bring Europe and the Middle East closer and to bring Islamic and Christian nations closer.
  • Chile developed institutions and aggressively set up free trade agreements with countries across the globe making itself attractive to FDI and using it to create value on its soil and enhance the welfare of its own citizens.
  • We will look at the case of pricing of AIDS drugs in South Africa to learn about the complex issues and the role played by different stakeholders in changing institutions and the implications for human welfare.

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