Conako is a South Korean MNC in the energy sector seeking to set up a subsidiary in Europe with a strategic goal of developing its capabilities in Research & Development and Product development. This report provides advice to Conako on selection of the country for subsidiary location, overcoming the cultural and institutional differences in the selected country and the best organisational structure and control strategy.
As different geographical markets tend to demand significant products and services that are unique and valuable to the clearly defined target market, the type of internationalisation strategy raises choices on what countries MNCs should compete in, to what extent the organisations range or products or services could be modified and how to manage across borders. Given this complexity, international strategy should be underpinned by a careful diagnosis of the strength and direction of trends in particular markets within macro-environments.
The relative advantages of different entry modes are then considered through a sequence of comparisons of internationally accepted rating bodies on various geographical markets to determine market attractiveness. We proceeded to review the rankings in research as well as wind energy research. A study conducted by Roads2Hy. com sponsored by the EU which ranked IEA and EU countries according to their priority for wind energy research revealed that 6 countries were within the top 7 rankings for the period 1993-2003/2004.
Having considered research capabilities and wind energy research capabilities of European countries, we narrowed down our consideration for the location of the R& D subsidiary of the South Korean company to : The Netherlands, Germany and Denmark. Our objective was then to decide the most suitable of these three countries based on considerations for their cultural distances from South Korea as well as their competitiveness for business.
Using The Globe Study which has been described as the most comprehensive attempt ever at classifying countries cultures (see appendix 3 for classification table) GLOBE is the acronym for “Global Leadership and Organizational Behaviour Effectiveness,” the name of a cross-cultural research effort with the prime objective of developing an observation based theory that describes, understands, and predicts the impacts of specific cultural variables on leadership and organizational processes as well as the effectiveness of these processes.
We then proceeded to estimate the cultural distance between these three countries (Germany, Netherlands and Denmark) with the country of origin (South Korea). The GLOBE rankings grouped countries in culture clusters and Germany and Netherlands were clustered under the ‘Germanic Europe’ culture cluster while Denmark was clustered under the Nordic countries cluster. The tables 3 and 4 below (adapted from the Globe findings) presents the relative cultural distances of these three countries to South Korea. A comparison of the distances shows that the three countries are similarly distant from the South Korea.
While Germany and The Netherlands have 3 similar dimensions, 4 close dimensions and 2 far dimensions from South Korea. Denmark has 2 similar dimensions, 6 close dimensions and 1 far dimension. We then proceeded to finally use the attractiveness of the business environment based on rankings provided by reliable independent organizations to ascertain the competitiveness of these three countries for investment. We used this as a final basis for deciding. The table 5 below shows a breakdown of the ranking bodies/agencies as well highlights of the institutional factors considered in producing the rankings.
Table 6 below summarizes the relative rankings of these three countries to each other as obtained from the world rankings provided by the organizations highlighted in table 5 above. As observed, Denmark is ahead of Germany and Netherlands in all the rankings considered except for the UNCATAD ranking of FDI inflow where it places 2nd behind the Netherlands. In view of these considerations we decided to choose Denmark being the best ranked country for business competitiveness in Europe as per measurements of mainly institutional factors by the independent ranking bodies considered.
The institutional environment constrains firms’ behaviour and strategic choices (Oliver, 1997). The effects of institutional distance between organizational units are instrumentally significant to international business strategies. Institutional distance captures the differences in the regulative, normative and cultural-cognitive aspects of the institutional environments (Scott, 1995). Distinguishing between formal and informal aspects of institutional frameworks is vital and the variables have different implications for businesses. Formal (regulatory) differences are generally transparent and require clearly discernable adjustments.
In contrast, informal differences are harder to understand and require experiential learning processes. Table 9 below presents rankings obtained from Wall Street and Heritage Freedom and The World Bank Group Doing Business. Wall Street / Heritage ratings below are given in a percentage form based on a world average. The Doing Business 2009 data table summarize the key indicators for each topic and benchmark against regional and high-income economy (OECD) averages. Doing business ranks Denmark as 5th in The Ease of Doing Business Rank while South Korea is ranked 23rd.