The importance of knowledge when dealing with political and ...

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« The Internationalization Dilemma »

Julio 2019 - ISSN: 0122-0799 - Bogotá, Colombia - pp. 259 - 281

The Internationalization Dilemma: The importance of knowledge when dealing with

political and institutional uncertainty

El dilema de la internacionalización: la importancia del conocimiento al lidiar con la

incertidumbre política e institucional.

O dilema da internacionalização: a importância do conhecimento ao lidar com a incerteza política e institucional

Luciana carLa Manfredi1

david Biojó fajardo2

Para citar este artículo / To reference this articleManfredi, Luciana Carla & Biojó Fajardo, David. The Internationalization Dilemma:

The importance of knowledge when dealing with political and institutional uncertainty. Revista Instituto Colombiano de Derecho Tributario 80. Julio de 2019. At. 259

Recibido: 14 de marzo de 2019Aprobado: 31 de mayo de 2019

Página inicial: 259Página final: 281

AbstractFor the last decades, firms have increasingly tried to grow through expanding themselves to global markets. Globalization allows the firms to access foreign markets and different kind of resources. For the last twenty years, several firms internationalized to countries that offered different types of resources. Thus, the internationalization environment turned out to be more dynamic and complex.

1 Luciana Carla Manfredi Ph.D. is a professor in the Department of Marketing and International Business at Icesi University. She is currently teaching Political Marketing and International Political Relations. Corre-spondence concerning this article should be addressed to Luciana Carla Manfredi, Department of Market-ing and International Business, Universidad Icesi. E-mail: [email protected]

2 David Biojó Fajardo is a Political Science and International Affairs senior student at Icesi University. Current intern at Kratos Consultores.

« Luciana Carla Manfredi | David Biojó Fajardo »

[ 260 ] Revista Instituto Colombiano de Derecho Tributario - Núm. 80 - Año 56

Moreover, the growth of some firm’s internationalization can be observed. This paper aims to contribute to the internationalization theory through the analysis of the firm’s decision of internationalization in an uncertain context. From the knowl-edge-based view perspective, the present research intends to show how knowl-edge is the main resource the firm needs for dealing with political and institutional uncertainty of the target country when internationalizing. Based on a case study of Colombia’s historical, political and institutional development, this research seeks to answer the question of how do firms use knowledge to deal with political and institutional uncertainty when going international?

Keywords: internationalization, uncertainty, political and institutional uncertainty, knowledge

ResumenDurante las últimas décadas, las empresas han tratado cada vez más de crecer por medio de la expansión a los mercados globales. La globalización permite a las empresas acceder a mercados extranjeros y a diferentes tipos de recursos. En los últimos veinte años, varias empresas se han internacionalizado a países que ofrecían diferentes tipos de recursos y capitales. Así, el entorno de interna-cionalización se volvió más dinámico y complejo, mostrando un crecimiento de la internacionalización de la empresa. Este documento pretende contribuir a la teoría de la internacionalización a través del análisis de la decisión de interna-cionalización de la empresa en un contexto incierto. Desde la perspectiva de la visión basada en el conocimiento, la presente investigación pretende mostrar cómo el conocimiento es el principal recurso que las empresas necesitan para enfrentar la incertidumbre política e institucional del país objetivo cuando van a internacionalizarse. Con base en un estudio de caso sobre el desarrollo histó-rico, político e institucional de Colombia, esta investigación busca responder la pregunta de ¿cómo las empresas utilizan el conocimiento para lidiar con la incer-tidumbre política e institucional cuando se internacionalizan?

Palabras clave: internacionalización, incertidumbre, incertidumbre política e institucional, conocimiento

ResumoDurante as últimas décadas, as empresas têm tentado cada vez mais de cres-cer através da expansão aos mercados globais. A globalização permite às empre-sas aceder a mercados estrangeiros e a diferentes tipos de recursos. Nos últimos vinte anos, várias empresas se têm internacionalizado a países que ofereciam

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diferentes tipos de recursos e capitais. Assim, o entorno de internacionalização tornou-se mais dinâmico e complexo, mostrando um crescimento da internacio-nalização da empresa. este documento pretende contribuir à teoria da interna-cionalização através da análise da decisão de internacionalização da empresa em um contexto incerto. Desde a perspectiva da visão baseada no conheci-mento, a presente pesquisa pretende mostrar como o conhecimento é o prin-cipal recurso que as empresas precisam para enfrentar a incerteza política e institucional do país objetivo quando vão a internacionalizar-se. Com base em um estudo de caso sobre o desenvolvimento histórico, político e institucional da Colômbia, esta pesquisa busca responder a pergunta de como as empresas utili-zam o conhecimento para lidar com a incerteza política e institucional quando se internacionalizam?

Palavras-chave: internacionalização, incerteza, incerteza política e institucional, conhecimento.

IntroductionFor the last decades, firms have increasingly tried to grow through expanding themselves to global markets. Globalization gives access to foreign markets and different kind of resources. However, foreign internationalization —defined as the process in which firms increasingly move farther from the home country—3 has several hazards too. When a firm decides to penetrate international markets, it has to deal with uncertainty. This means, going beyond national borders implies dealing with different kinds of uncertainty and risk. The first question that the firm has to face is: which is the target country for internationalization?

Internationalization literature states that there are several relevant factors when deciding to internationalize. These can be distinguished between external and internal factors4, can be summarized in: the market and the demand, the foreign national culture, the production, the possibility of growth and achieve econ-omies of scale, the geographical distance and the environment, among others. Furthermore, there are other factors that can be included in the environmental factors called political and institutional factors, that are relevant at the moment to choose the target country for internationalization. These factors are the political system, the political parties, the institutionalization of democracy –which includes the respect of human and labor rights-, the institutions and rules of the game, the

3 Barkema, Harry; Bell, John & Pennings, Johannes, Foreign entry, cultural barriers, and learning, 17 Stra-tegic Management Journal, 151-166 (1996).

4 Root, Franklin, Entry Strategies for International Markets (Jossey-Bass, 1998).



respect for private property, and the political and institutional stability of the target country. All these previous factors are considered to be necessary in order to decide on internationalization.

In general terms, most firms experience vast uncertainty when deciding to internationalize. Thus, political and institutional uncertainty is one of the main kinds of uncertainty that firms have to face when internationalizing. In order to reduce that uncertainty, firms need to accumulate knowledge –consisting of both information and know how–5 about the target country. Specifically, from the knowl-edge-based view perspective, the present research aims to demonstrate how the firm uses knowledge as a critical resource to reduce political and institutional uncertainty when deciding to go international.

State of the Art

Internationalization and mode of entry. A transaction-cost economic approach.

The firm’s choice of expanding to foreign markets has received much attention from international business research in the past decades. Expansion into foreign markets requires two decisions: the target country market of internationalization and the mode of entry. The present research is focused on the first decision, the one about the target country market of internationalization.

There are a considerable number of studies investigating the factors that might influence the decision of going international. Most of these studies are based on the Transaction Cost Economic framework, which has been the domi-nant paradigm to explain the choice of entry mode6. According to the Transaction Cost perspective, firms select the international mode of entry that provides the most effective form of governance. Thus, there is ample agreement on the factors that have an impact on the decision on internationalization.

The first question that the firm faces when deciding to go international is about the target market, this is, the target country for internationalization. A firm’s decision of entering a target country depends on several, and sometimes conflic-ting factors. The decision is a complex process with many trade-offs among the

5 Kogut, Bruce & Zander, Udo, Knowledge of the firm, combinative capabilities, and the replication of tech-nology, 3 Organization Science, 3, 383-397 (1992).

6 Lin, Huang, Choice of market entry mode in Emerging markets: influences on entry strategy in China, 14 Journal of Global Marketing, 1-2, 83-19 (2008).

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alternatives of entry. The factors that affect the decision of internationalization to a determinate target country can be distinguished between external and inter-nal factors. Previous research made emphasis on the following external factors: target country market, target country production, and target country environmen-tal factors that encourage or discourage the internationalization decision. In terms of internal factors, the product and the resource commitment factors are included.

In this specific case, it will be emphasised in the target country environmental factors, which includes the political, historical, economic and socio-cultural charac-ters of the target country, which have determinant influence in the internationali-zation decision. Specifically, political and institutional factors can be remarkable in terms of government policies and regulations affecting international business.

As there is plenty of literature with empirical support on the importance of these previous stated external factors, this research is focusing only on the political and institutional environmental factors that influence the internationalization decision.

A path to theories about uncertainty

Even though many firms have been going international since the past deca-des, the internationalization decision is still a risky one7. Thus, there is a need to understand the factors that make internationalization successful or a failure in order to deal with them. The environmental changes make the international arena one full of uncertainty —understood as a lack of information and knowledge—8 and risk. In fact, as it was said before, firms experience a large amount of uncer-tainty when going international. “Environmental uncertainty is among the fore-most challenges with which an organization’s management must contend”9. From a transaction-cost perspective, this uncertainty includes the potential or environ-mental change10.

Most firms experience a large amount of uncertainty when operating interna-tionally. In order to reduce uncertainty, firms use different strategies. In the present research, it is proposed that uncertainty can be reduced by knowledge of the poli-tical and institutional system in the target country.

7 Barkema, Harry; Bell, John & Pennings, Op cit.8 Liesch, Peter; Steen, John; Knight, Gary & Czinkota, Michael, Problemazing the dinternationalization deci-

sion: Terrorism-induced risk, 44 Management Decision, 6, 809-823 (2006).9 Henisz, Witold & Delios, Andrew, Information or influence? The benefits of experience for managing polit-

ical uncertainty, 2 Strategic Organization, 4, 389-421 (2004).10 Parmigiani, Anne, Why do firms both make and buy? An investigation of concurrent Sourcing, 28 Strategic

Management Journal, 1, 285-311 (2007).



The role of institutions from the Institutionalist perspective

Recently, several studies have recommended an institutional perspective to analyze internationalization11. Institutional theorists focus on the impact of insti-tutions on organizations. An important external institution is the State and its political system. Hence, the target country’s institutions and the level of insti-tutionalization influence the firm’s decision of internationalization to that target. From the institutional perspective, institutions are defined as “the rules of the game in a society or, more formally, are the human-devised constraints that shape human interaction. In consequence, they structure incentives in human exchange, whether political, social or economic. Institutional change shapes the way societies evolve through time and hence is the key to understanding histo-rical change.”12. Those institutions include not only the system of government, but also “formal laws and regulations, codes of good governance, and other informal norms of behavior sanctioned by tradition or practice”13. Furthermore, institutions contribute to preserving roles, rights and obligations over time. This means, making internationalization decisions ignoring the implication of political institutions can lead firms to severe astray.

The home country factors influence the decision of internationalization: the cultural, political, legal and economic environment influence the decision of inter-nationalization14. Furthermore, the “uncertainty of future demand conditions is likely to be greater in emerging markets and embryonic industries in the host country”15. Weaknesses in the institutional environment refer to conditions that undermine property rights and increase risk in exchange16. This means, if firms have to deal with uncertainty, this uncertainty, in political and institutional terms, is more evident in emerging markets that appear to be more volatile. In this manner, the nature of the institutional environment influences the internationalization deci-sion. This previous statement can be explained by the institutional premise that in emerging markets there is an imbalance between formal and informal institutions —understood as the rules of the game in a society—, which leads to an unpre-dictable change of these rules of the game and therefore, increases the level of uncertainty. Moreover, institutional uncertainty —the lack of information and

11 Capron, Laurence & Guillen, Mauro, National corporate governance institutions and post-acquisition target reorganization, 30 Strategic Management Journal, 8, 803-833 (2009).

12 North, Douglass, Institutions, Institutional change and Economic Performance (Cambridge University Press, London, 1990, p. 3).

13 Capron, Laurence & Guillen, Mauro, Op. cit., p. 809.14 Lin, Huang, Op. cit.15 Ibid., p. 8816 Delios, Andrew & Beamish, Paul, Ownership strategy of Japanese firms: transactional, institutional, and

experience influences, 20 Strategic Management Journal, 10, 915-933 (1999).

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knowledge of the target country’s political institutions—, legal factors, and change in government policies toward foreign investment discourage the firm’s internatio-nalization decision. This is the reason why, in order to reduce institutional uncer-tainty, firms need to accumulate and use knowledge.

The knowledge-based view of the firm

Conceptualization of knowledge

“Knowledge is at the core of received wisdom on internationalization”17. As said before, firms are increasingly entering foreign markets looking for advantages. Internationalization involves decisions that face a diversity of uncertainties that can be lessened through knowledge. The growing foreign presence can be attributed to the firm’s accumulation of knowledge about the specific target country where to internationalize. This knowledge is a critical resource since the knowledge needed to operate in any country cannot be easily acquired18.

Furthermore, the knowledge-based view of the firm focuses on knowledge as the most strategically important firm’s resource, which is used within the firm to create value19. The firm needs this knowledge to learn about the local political and institutional conditions in order to reduce uncertainty in the internationaliza-tion decision. As it was said before, even though there are different kinds of uncer-tainty, the present research focuses on political and institutional uncertainty. This is, as internationalization decisions are constrained by the country political and institutional environmental factors. In order to reduce these factors and deal with uncertainty, firms should accumulate knowledge. Thus, the international environ-ment of the host country is an important influence on the decision20.

According to Kogut and Zander21, knowledge consists in both information (who knows what) and know-how (how to organize a research team). Besides, the authors state that knowledge is held by individuals but is also expressed in regulari-ties by which members cooperate in a social community. Moreover, the knowledge of the firm is socially constructed and rests in the organizing of human resource.

17 Prashantham, Shameen, Toward a knowledge-based conceptualization of Internationalization, 3 Journal of International Entrepreneurship, 1, 37-52 (2005), p. 37

18 Barkema, Harry; Bell, John & Pennings. Op cit.19 Grant, Robert M, Toward a knowledge-based theory of the firm, 17 Strategic Management Journal, S2,

109-122 (1996).20 Delios, Andrew & Beamish, Paul, Op. cit.21 Kogut, Bruce & Zander, Udo, Op. cit.



As said, Kogut and Zander22 state that there are two categories of knowledge: (1) information, which is the knowledge that can be transmitted without loss of inte-grity once the syntactical rules required for deciphering it are known. Includes facts, axiomatic propositions and symbols, and (2) know-how, which is “the accu-mulated practical skill or expertise that allows one to do something smoothly and efficiently” (Von Hippel, 1988, p. 7). The authors also introduce the idea that “a firm’s knowledge consists also of the information of other actors in the network, as well as the procedures by which resources are gained and transactions and cooperation are conducted”23. Moreover, as the growth of knowledge is experien-tial, firms with internationalization experience are more prone to have the neces-sary knowledge to deal with political and institutional uncertainty.

Lin24 states that the market knowledge and international experience of firms influence their ability and willingness to invest resources. Besides, as firms accu-mulate knowledge of the foreign market, they improve their perceptions of the country’s institutional uncertainty, learning how to deal with government policies and institutional changes, and consequently, becoming more confident in the target country, which is evident it in the internationalization decision.

Therefore, the firm’s internationalization decision can be understood in a constantly changing and uncertain environment through the firm’s knowledge about foreign markets, operations and the target country. Market (country) knowledge relates to market environmental factors, such as political and institutio-nal factors among others. As Lin25 states, the foremost is experiential knowledge, which not only provides a framework for perceiving possible risks and returns, but it also allows the formulation of market opportunities. Hence, the internationaliza-tion decision to a target country requires both general knowledge and experiential knowledge —accumulated knowledge about country-specific markets—26. Lack of country knowledge has a substantial impact on the internationalization decision due to uncertainty.

Target country knowledge includes an understanding of host country charac-teristics —political and legal rules and the social norms for business transactions. All of these constitute the target country’s institutional environment, which defines

22 Ibid.23 Ibid., p. 39024 Lin, Huang, Op. cit.25 Ibid.26 Barkema, Harry; Bell, John & Pennings, Op cit.

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the internationalization conditions. Institutional environment affects the internatio-nalization decision27.

Finally, it can be stated that in order to deal with the country’s political and institutional uncertainty, a firm can develop the capabilities to absorb the uncer-tainty through the accumulation of knowledge of the target country political institu-tions. Therefore, the accumulation of knowledge of the target country is a significant influence on the internationalization decision. The previous statement can only be explained through the knowledge-based view of the firm, which contemplates knowledge as the main basis for competitive advantage, a central motive for inter-nationalization, and a crucial element in international strategy design28. Moreo-ver, stating that a successful internationalization of a firm is only achieved with knowledge, becomes apparent considering the notion that internationalization constitutes a form of innovation of which knowledge is a vital source29. Hence, knowledge is vital in dealing with environmental uncertainties that characterize internationalization30.

Taking into account that the majority of the literature on internationaliza-tion is based on the transaction-cost economic perspective, the present research theoretical contribution is to explore the internationalization decision through the knowledge-based view of the firm. In an uncertain and volatile international scena-rio, integrating consideration of uncertainty into the firm’s decision remains an exercise for the firm’s judgement31. This means the internationalization decision enables firms to frame decisions in the vent of information inadequacies under conditions of uncertainty.

In this sense, it is vital to analyze how political and institutional uncertainty influences the internationalization decision. For this reason, the institutiona-list perspective, which defines institutions as rules of the game, is introduced. However, the knowledge-based view of the firm provides the main contribution of the present research. Exploring how the firm can reduce political and institutio-nal uncertainty through the use of knowledge in order to make the internationa-lization decision, provides a better understanding of the political and institutional uncertainty and how a firm makes the internationalization decision to minimize the uncertainty that it encounters in the target country.

27 Delios, Andrew & Beamish, Paul, Op. cit.28 Meyer, Klaus; Wright, Mike & Pruthi, Sarika, Research notes and commentaries. Managing knowledge in

foreign entry strategies: a resource-based analysis, 30 Strategic Management Journal, 5, 557-574 (2009).29 Prashantham, Shameen, Op. cit.30 Liesch, Peter; Steen, John; Knight, Gary & Czinkota, Michael, Op cit.31 Liesch, Peter; Steen, John; Knight, Gary & Czinkota, Michael, Op cit.



Research Question and Propositions

Most firms experience a large amount of uncertainty when internationalizing32. Thus, this uncertainty makes internationalization a hazardousmove for the firm. Besides, when making the internationalization decision, firms are influenced by the target country’s political and institutional environment. Therefore, being the firm the unit of analysis of the present research, the main question the present research aims to answer is: How do firms use knowledge to deal with political and institutional uncertainty when going international?

Proposition 1: Political and institutional environmental uncertainty negatively affects the firm’s internationalization decision.

Taking into consideration that uncertainty in a country’s institutional environ-ment impacts the internationalization decision, then knowledge appears to be a critical resource to reduce uncertainty33. Hence, knowledge is a central motive for internationalization and a pivotal element in international strategy design34. There-fore, through the knowledge-based view perspective of the firm:

Proposition 2: The firm’s knowledge of the target country’s political and insti-tutional environment has a positive relationship in dealing with uncertainty.

Finally, it can be said that knowledge gives the firm a deep understanding of political and economic institutions, which is a relevant fact when making inter-nationalization decisions. This is, reducing political and institutional uncertainty through knowledge of the target country is an asset when making the internatio-nalization decision.

Method This research follows a qualitative method, and it is going to be based on a case study of Colombia’s historical, political and institutional development. Regarding a long-term historical perspective of Colombia’s political institutions, several real factors that are constitutive of Colombia’s political and institutional environment are going to be taken into account. Moreover, a historical perspective can achieve a close approach to changes and continuities of Colombia’s political and institu-tional system.

32 Barkema, Harry; Bell, John & Pennings, Op cit.33 Prashantham, Shameen, Op. cit.34 Meyer, Klaus; Wright, Mike & Pruthi, Sarika,Op cit.

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Considering North’s35 statement on institutions as the rules of the game in society, and Liesch, Steen, Knight ans Czinkota’s36 statement on uncertainty as the lack of information and knowledge, political and institutional uncertainty is going to be understood through the analysis of the Global Competitiveness Report from the World Economic Forum (2017-2018)37, Country Risk Classifications and Country Risk Indicators. These reports work as a compass for stakeholders, poli-cymakers and firms to better comprehend the macroeconomic, microeconomic and institutional environment in which they are planning to internationalize or expand. Thus, gathering information from different international and certified orga-nizations such as the World Economic Forum contributes to the process of deci-sion making developed by firms and their stakeholders. Once enough information is gathered, scrutinized and evaluated by each firm’s risk analysts, they have a broader scope to deal with uncertainty.

Case of Colombia, a bit of history and politicsWe intend to contextualize the historical and political development of Colombia, taking into account that analysis from a historical perspective leads to unders-tanding the changes and continuities of the political and institutional system, and its present state of affairs related to institutional uncertainty. Comprehen-ding the political and institutional history of a determined country may lead to a better understanding of a firm’s decision to internationalize or not in that specific country. Political turmoil and complex social problems may also be factors that contribute to environmental uncertainty, which is why knowing these issues is central for a firm when making the internationalization decision. Colombian political history has been marked by a difficult to penetrate oligarchy under the command of the liberal and conservative parties rooted as political elite. Since 1958, when a democratic regime called the National Front was re-esta-blished after Gustavo Rojas Pinilla military dictatorship, a bipartisan system was adopted based on the principles of parity and alternation which led to the process of selecting presidential candidates during the following four governments.

When the National Front came into force, the first president was the libe-ral Alberto Lleras Camargo. He was followed by the conservative Guillermo León Valencia, followed in 1966 by the liberal Carlos Lleras Camargo, and in 1970, after

35 North, Douglass, Op cit.36 Liesch, Peter; Steen, John; Knight, Gary & Czinkota, Michael, Op cit.37 World Economic Forum, Global Competitiveness Report 2017-2018 (2017). Available at: http://www3.wefo-

rum.org/docs/GCR2017-2018/05FullReport/TheGlobalCompetitivenessReport2017%E2%80%932018.pdf



a division of the conservative leadership among “laureanistas” and “ospinistas”38, with a narrow margin in votes, dubious manipulations and political calculations of the front elites, Misael Pastrana Borrero was elected president of Colombia.

After finishing the National Front with the mandate of Misael Pastrana Borrero in 1974, Colombia´s democratic institutionality became visible through the existence of a party system in which an electoral competition gave rise to the process of selection of candidates. Alfonso López Michelsen was the president in the following four years (1974-1978). Later, Julio Cesar Turbay (1978-1982) took over the presidency after a controversial election defeating the conservative Beli-sario Betancur, who four years later was elected president and was the only one who could interrupt the liberal hegemony (1974-1998).

In 1990 César Gaviria Trujillo was elected after Luis Carlos Galán (the favorite liberal candidate for the presidency) assassination in August 1989. His presidency opened the economy by lowering trade barriers, encouraging foreign investment and free-market policies. In 1994, Ernesto Samper Pizano was elected presi-dent after a narrow victory in both the first and second turns. President Samper’s mandate recordings would be released due to the evidence of drug cartels finan-cing his campaign. After four years of opposing president Ernesto Samper, Andrés Pastrana Arango won the second turn in the 1998 presidential elections by defea-ting Horacio Serpa Uribe. After being elected, he began a process of dialogue with the FARC guerrilla in the demilitarized zone of San Vicente del Caguán, which was used and undermined by the guerrilla to reorganize and increase their mili-tary power. In addition, the Plan Colombia was agreed with strong support from the United States, which aimed to end the armed conflict in Colombia and build an anti-drug strategy, which would promote the ’country’s social and economic well-being, and in doing so, reducing the risk for foreign investors.

In 2002 Álvaro Uribe Vélez won the presidency proposing the Democratic Security Policy, whose main objective was to end by military means the FARC guerrilla. Even though President Uribe did not achieve his goal of ending the FARC guerrilla by using the armed forces, he accomplished it in part by minimi-zing FARC guerrilla´s power and territorial strength.

In 2005 the Social Party of National Unity was created mainly by politicians who belonged to the Liberal Party who moved away from it in order to help Álvaro Uribe in his re-election (2006-2010). In 2010, Juan Manuel Santos, also a member of the Social Party of National Unity, was elected president. It is important to

38 Leading factions of the Colombian Conservative Party during the 50s and 60s, following the opposed former presidents Laureano Gómez and Mariano Ospina Pérez.

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highlight Santos government efforts to re-establish diplomatic relations with neigh-boring countries (Venezuela and Ecuador), which improved ostensibly compared to past international affairs during Álvaro Uribe’s mandate. Throughout the two presidencies of Juan Manuel Santos, the Peace Process was held in Havana, Cuba, the most significant attempt to achieve peace in Colombia. After several years of negotiations, an agreement was reached between the national gover-nment and the FARC guerrilla. This agreement was submitted to popular endor-sement. Then, in the 2016 plebiscite, the NO alternative won the referendum with 50.2% of total votes according to the data of the Registraduría Nacional del Estado Civil.

Although the Peace Process did not reach the desired end for the president Juan Manuel Santos, it helped him win the Nobel Peace Prize in 2016. Additiona-lly, during his presidency, relations with Venezuela improved, several agreements of Free Trade were signed with different countries of the world (European Union, South Korea, Costa Rica, among others) and the Pacific Alliance was created, a regional integration initiative formed by Chile, Colombia, Mexico and Peru. Fina-lly, it should be noted that during 2018, Colombia joined both the OECD as the 37th member and NATO as one of the organization’s global partner. These are clear examples of how Colombia’s recent history, turning from the war against FARC guerrilla to an internationally legitimized Peace Process has considerably reduced its institutional uncertainty, promoting international cooperation, regional commerce and trade agreements.

Lastly, since August 2018, when Iván Duque Márquez won the presidency, he has had a vehement position on the Venezuelan crisis and an active role in the recognition of the Acting President of Venezuela, Juan Guaidó. Furthermore, Duque’s efforts to attract foreign investment to bolster Colombia’s economy has been pivotal in his speech and part of his international public policy.

Political and Institutional UncertaintyThis section intends to analyze several indicators of political and institutional stability and uncertainty in Colombia that can be found in the Global Competiti-veness Report 2017-2018 published by the World Economic Forum and Country Risk Indicators. These reports can be highly instructive in order to establish crite-ria for the analysis of the internationalization dilemma and to better comprehend the knowledge a firm can obtain before going international.



1. Global Competitiveness Report. Institutions

For this study, the World Economic Forum Global Competitiveness Report 2017-2018 (GCR), conducted by the World Economic Forum, was examined. This report, which bases its analysis on the Global Competitiveness Index (GCI), aims to capture the microeconomic and macroeconomic foundations of national compe-titiveness39 to provide a reliable measure on it.

The GCI is obtained from the analysis of 12 components or pillars, where each one measures a different aspect of competitiveness. The analysis of each of these components is important because makes it possible for us to identify the shortcomings of each country. From a total of 137 countries, the results of the ranking for Colombia (GCI, 2017, p. 92) for each of the 12 pillars are shown below in Figure 1.

Figure 1. Global Competitiveness Index

PillarsIndex Component Colombia

Rank/137 Score (1-7)

1 Institutions 117 3.2

2 Infrastructure 87 3.8

3 Macroeconomic environment 62 4.8

4 Health and primary education 88 5.5

5 Higher education and training 66 4.5

6 Goods market efficiency 102 4.0

7 Labor market efficiency 88 4.0

8 Financial market development 27 4.6

9 Technological readiness 65 4.3

10 Market size 37 4.8

11 Business sophistication 64 4.1

12 Innovation 73 3.3

Source: World Economic Forum – Global Competitiveness Report 2017-2018

39 Understanding competitiveness as “a set of institutions, policies and factors that determine the level of productivity of a country”. World Economic Forum (WEF)

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According to what was found in the GCR, Colombia is ranked 66 out of 139 countries worldwide, which puts the country’s economy in an unattractive position for potential investors and international firms.

In the case of the institution’s pillar, which is relevant to analyze as it partly explains a firm’s decision to internationalize40,41, it is divided into public institutions and private institutions. It analyzes aspects such as property rights, ethical beha-vior of firms, public trust in politicians, reliability of police services, the efficiency of government spending, judicial independence, transparency of government poli-cymaking, diversion of public funds, organized crime, etc. Figure 2 shows the 21 components of the institutions’ pillar, Colombia’s rank, value and trend in the GCI.

Assuming that the variable is at a critical point if it is outside the top 100, it can be said that Colombia has institutional flaws in aspects such as diversion of public funds, public trust in politicians, favoritism in decisions of government offi-cials, efficiency of government spending, burden of government regulation, busi-ness costs of terrorism, among others.

Figure 2. Global Competitive Index-Institutions pillar components


40 Root, Franklin, Op. cit.41 Lin, Huang, Op. cit.



2. Macroeconomic analysis based on the Global Competitiveness Report

For the current investigation, it is also pertinent to analyze in detail the pillar corresponding to the macroeconomic environment, where notions such as: fiscal balance, savings rate, inflation, interest rate, government debt and credit are ranked. These may well be some of the environmental factors that firms consider reducing uncertainty before making internationalization decisions.

Figure 3. Macroeconomic environment pillar components

Colombia

Rank/137 Value

Government budget balance (%GDP) 79 -3,4

Gross national savings (%GDP) 68 21,0

Inflation (annual % change) 115 7,5

Government debt (%GDP) 65 47,6

Country credit rating (0-100 best) 43 65,2


In general, Colombia falls five positions in the World Economic Forum Current Global Competitiveness Index. This plummeting is explained by a deteriorating macroeconomic environment primarily due to rising inflation and budget defi-cit. Furthermore, the country has experienced a deterioration in the labor market efficiency pillar, which contemplates hiring and firing practices, country capacity to retain talent, pay and productivity, female participation in the labor force, and effect of taxation on incentives to work. Besides, the efficiency of the country’s institutions is assessed more negatively, falling to the 117th place, which may be explained by various news of alleged corruption cases currently under investiga-tion42. All these factors have negatively influenced the country’s competitive inter-national perception (see Figure 4), a phenomenon that impacts its political and institutional uncertainty internationally.

42 World Economic Forum, Global Competitiveness Report 2017-2018 (2017).

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Figure 4. Most problematic factors for doing business in Colombia


3. Country Risk Classification

This classification seeks to externalize the evolution of the risk implied by inves-tment in assets representing foreign debt issued by governments in different deve-loping countries. This risk is that of non-payment by the issuing governments of the amounts committed (capital and interest). The risk index for a country by itself does not say anything, it only acquires relevance when compared to that corres-ponding to another country, or to observe its evolution over time.

The country risk index is an indicator that is calculated by different financial entities, generally international risk rating agencies. The best known are Moody’s, Standard & Poor’s, and J.P. Morgan43. However, there are also companies that calculate country risks, such as Euromoney or Institutional Investor. Each of them has its own method, but usually, they reach similar results. These results are a valuable input for investors as they seek for assets considered safe and withdraw from countries with a higher risk spread.

An example can be seen in the following table (Figure 5), which shows how companies such as Euromoney calculate the country risk and what are their weights for each of the variables.

43 Bankers Almanac. Standard & Poor’s definitions. https://www.bankersalmanac.com/addcon/infobank/credit_ratings/standardandpoors.s



Figure 5. Weighting risk factors (%)

Source: Euromoney

It is worth clarifying that the lower the index is better for the country studied. Therefore, when analyzing the risk index of emerging countries for Colom-bia 2016-2018 (see Figure 6), it can be observed that the spreads of the Credit Default Swaps (CDS) and the Emerging Markets Bond Indicator (EMBI) —which measures the level of default risk of Colombia’s sovereign debt and the country risk perceived by the financial market—, continue to fall systematically44.

44 FEDESARROLLO, Tendencia Económica- Informe Mensual 184. Centro de Investigación Económica y Social (16 de febrero, 2018, p. 4).

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Figure 6. Country Risk Indicators 2016-2018

Source: Fedesarrollo with Bloomberg data

Figure 7. EMBI (essential points) with other countries in the region 2016-2018

Source: Fedesarrollo with Bloomberg data

Figure 7, which compares Colombia with other economies in the region that have investment grade, shows how in general and since 2016, both the EMBI and the spreads of the CDS have been reduced significantly, evidencing a continuous reduction of the market perception of the risk of public debt in all these coun-tries. Given the economic and political differences of this group of countries, the



dynamics of the CDS and the EMBI suggest that the favorable external conditions: high financial liquidity and low interest rates have allowed the perception of risk to continue to be reduced for Colombia45(Fedesarrollo, 2018, p. 4.).

Figure 8. Rating of the Colombian debt on June 1, 2018

Source: Moody’s and Standard & Poor’s rating, taken from La República.

Based on Standard & Poor’s bond credit rating (Figure 8) in order from very good to very bad: AAA, AA, A, BBB, BB, B, CCC, CC, C, D, PR, SD, NR, it is evident that Colombia has a BBB- rating since 2017, which explains it is in the lower medium investment-grade. This means, by Standard and Poor’s definition, that the creditworthiness of the country as an obligor has ADEQUATE capacity to meet its financial commitments. However, adverse economic conditions or chan-ging circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitments.

45 Ibid.

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ConclusionsThis paper has explored the factors leading to a firm’s decision to internationalize or not, the importance of knowledge and know-how in this decision and a speci-fic case (Colombia) to illustrate this process. As explained before, a firm’s interna-tionalization decision can be understood in a constantly changing and uncertain environment through the firm’s knowledge about foreign markets, operations and the target country.

It is paramount for firms to obtain factual knowledge about the country’s market and demand, the foreign national culture, the production, the possibility of growth and achieve economies of scale, the country’s institutions, its politi-cal stability, among others. International recognized organizations such as the World Economic Forum and financial entities (JP Morgan, Standard and Poor’s)46 could produce the knowledge that a firm needs in order to go international. Indi-cators such as the Global Competitiveness Report and the Country Risk Indexes are valuable assets for firms to take into account, as they thoroughly explain both internal and external factors for doing businesses in a specific country. Besides, this factual and analised information describe profoundly the political, institutional and economic environment of a country, which is a principal resource for solving the internationalization dilemma among firms. Through these processes of infor-mation gathering from different sources, firms develop the know-how for reducing uncertainty before making the internationalization decision.

For the case of Colombia, it’s political, economic and institutional history has strongly affected investor confidence. Corruption, tax rates and inefficient gover-nment bureaucracy are some of the historical factors leading to uncertainty and may be perceived as a difficulty for firms to internationalize in this country. Howe-ver, recent history (see Figure 6, 7 and 8) has proven a continuous reduction of the perception of risk in Colombia, which makes easier for firms to gather information and know-how about the country’s market, institutions and financial commitments; thus reducing uncertainty.

Although firms with internationalization experience are more prone to have the necessary knowledge to deal with political and institutional uncertainty, lear-ning from the foreign market leads to a wiser decision, reducing institutional uncertainty, learning from a country’s debt rating, it’s risk index, social and politi-cal conflicts.

46 Bankers Almanac. Standard & Poor’s definitions. https://www.bankersalmanac.com/addcon/infobank/credit_ratings/standardandpoors.s



Limitations and future research

Foreign market entry strategies involve decisions of the choice of the target country. As stated before, in order to make the right decision, the firm needs the knowledge to reduce political and institutional uncertainty. The present research contributes to the understanding of the internationalization decision from the knowledge-based view perspective. Hence, since the decision of internationali-zation involves the firm’s resources commitment, reducing uncertainty through knowledge is mandatory. Analyzing this previous statement through a case on Colombia is innovative.

However, some limitations need to be considered. To begin with, it can be said that knowledge has a considerable impact on the decision of internationaliza-tion. Other perspectives should focus on this previous idea. Second, even though uncertainty is likely to be higher in emerging markets, future research should focus on analyzing political and institutional uncertainty in other developing coun-tries. Third, taking into account Colombia’s government strategic policy oriented to the internationalization of Colombia’s economy through the increase of exports and foreign direct investment, future research should focus in the way that coun-tries public policies are designed to reduce political and institutional uncertainty in order to attract foreign investment, for example, organizations such as ProCo-lombia and InvestPacific. Finally, the present research focuses in the relationship between political and institutional uncertainty, knowledge and the internationaliza-tion decision. Future research should go ahead of the internationalization decision and focus on the choice of entry mode.

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