LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1.
Explain the concept of institutions and their key role in reducing uncertainty
2.
Articulate the two core propositions underpinning an institution-based view of
global business
3.
Identify the basic differences between democracy and totalitarianism
4.
Outline the differences among civil law, common law, and theocratic law
5.
Understand the importance of property rights and intellectual property rights
6.
Appreciate the differences among market economy, command economy, and
mixed economy
7.
Participate in three leading debates on politics, laws, and economics
8.
Draw managerial implications
FORMAL AND INFORMAL
INSTITUTIONS
institutions - formal and informal policies popularly
known as “the rules of the game”
institution-based view - leading perspective on
global business in which firms constantly monitor,
decode, and adapt to the changing rules of the game to
survive and prosper
FORMAL AND INFORMAL
INSTITUTIONS
institutional framework - formal and informal
institutions governing individual and firm behavior
formal institutions - laws, regulations, and rules
regulatory pillar - coercive power of governments
FORMAL AND INFORMAL
INSTITUTIONS
informal institutions - institutions represented by
norms, cultures, and ethics
normative pillar - how the values, beliefs, and
actions of other relevant players - collectively known as
norms - influence the behavior of focal individuals and
firms
cognitive pillar - internalized, taken-for-granted
values and beliefs that guide individual and firm behavior
WHAT DO INSTITUTIONS DO?
key role is to reduce uncertainty by influencing
individuals’ and firms’ decision making by signaling
which conduct is legitimate and acceptable and
which is not
transaction costs - costs associated with
economic transactions, costs of doing business
opportunism - self-interest seeking with guile
institutional transitions - fundamental and
comprehensive changes introduced to the formal
and informal rules of the game that affect
organizations as players
POLITICAL SYSTEMS
political system – refers to the rules of the game
on how a country is governed politically.
POLITICAL SYSTEMS
Democracy - political system in which citizens elect
representatives to govern the country on their behalf
An individual’s right to freedom of expression and
organization is a fundamental aspect of democracy that is
relevant to the effective conduct of global business
POLITICAL SYSTEMS
totalitarianism (or dictatorship) - political
system in which one person or party exercises absolute
political control over the population
Communist totalitarianism centers on a
communist party
Right-wing totalitarianism characterized by
intense hatred of communism with one party, typically
backed by the military, restricts political freedom, arguing
that such freedom would lead to communism
POLITICAL SYSTEMS
Theocratic totalitarianism - monopolization of
political power in the hands of one religious party or group
Tribal totalitarianism - one tribe or ethnic group
(which may or may not be the majority of the population)
monopolizes political power and oppresses other tribes or
ethnic groups
POLITICAL SYSTEMS
political risk - associated with political changes that
may negatively impact domestic and foreign firms
LEGAL SYSTEMS
legal system
- rules of the game on how a country’s
laws are enacted and enforced
civil law - The oldest, most influential, and most widely
distributed law around the world. It uses comprehensive
statutes and codes as a primary means to form legal
judgments.
common law - shaped by precedents and traditions,
English in origin, based on previous judicial decisions
theocratic law
- based on religious teachings
PROPERTY RIGHTS
property rights -
legal rights to use an economic
property (resource) and to derive income and benefits from it
intellectual property -
intangible property that results
from intellectual activity (such as books, videos, and websites)
intellectual property rights (IPRs) -
rights
associated with the ownership of intellectual property
PROPERTY RIGHTS
patents -
legal rights awarded by government authorities to
inventors of new products or processes, who are given exclusive
(monopoly) rights to derive income from inventions through
activities such as manufacturing, licensing, or selling
copyrights -
exclusive legal rights of authors and publishers
to publish and disseminate their work
trademarks -
exclusive legal rights of firms to use specific
names, brands, and designs to differentiate their products from
others
piracy - unauthorized use of intellectual property rights
ECONOMIC SYSTEMS
economic system - rules of the game on how a
country is governed economically
market economy - characterized by the “invisible
hand” of market forces
command economy - all factors of production are
government- or state-owned and controlled, and all
supply, demand, and pricing are planned by the
government
mixed economy - characterized by elements of
both a market economy and a command economy
ECONOMIC SYSTEMS
factors of production:
natural resources
– things that are useful in their
natural state, such as land, forests, minerals, and water
human resources – anyone (from company presidents
to grocery clerks) who works to produce goods and services
capital – resources (such as money, computers, machines,
tools, and buildings)that a business needs to produce goods and
services
entrepreneurs –
innovative businesspeople who are
willing to take the risks involved in creating and operating new
businesses
knowledge – the collective intelligence of an organization
Drivers of Economic Development:
Culture, Geography, or Institutions?
More generally, what drives economic development in
different countries?
Availability of Natural Resources?
Geographic Location?
Formal Institution?
Speed and Effectiveness of Institutional
Transitions: China versus Russia
Chinese (remain totalitarian) are known for
their “gradualist” approach, whereas the
Russian (move to democracy) transitions are
noted for their fast, radical characteristic.
market transition debate –
The debate about
how to make the transition to a market economy work in the
most effective and least disruptive way.
path dependency –
The present choices of
countries, firms, and individuals are constrained by the
choices made previously.
Measures of Political Risk: Perception
vs. Objective Measures
How to actually measure political risk has led to a significant
debate.
One side suggests that political risk is based on perception
and that the best measures can be found through surveys of
international executives on their perceptions.
However, critics argue that perception can be deceiving and
misleading. (They point out that perception-based rankings
in the 1990s failed to provide warning of political changes in
Indonesia, Malaysia, South Korea, and Thailand.)
Critics advocate objective measures of political risk that
take into account a country’s underlying political and
regulatory structures.
herd mentality – A behavior influenced by the movement of the
crowd or the herd) with little independent judgment.