Chapter 2
Understanding Politics, Laws, and
Economics
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 risk - associated with political changes that
may negatively impact domestic and foreign firms
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
totalitarianism (or dictatorship) - political
system in which one person or party exercises absolute
political control over the population
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
LEGAL SYSTEMS
legal system - rules of the game on how a country’s
laws are enacted and enforced
civil law - derived from Roman law and strengthened by
Napoleon’s France, it is the oldest, most influential, and
most widely distributed law around the world
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
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
PROPERTY RIGHTS
intellectual property -
intangible property that results
from intellectual activity (such as books, videos, and websites)
intellectual property rights the ownership of intellectual property
rights associated with
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
Drivers of Economic Development:
Culture, Geography, or Institutions?
Some African countries such as Burundi so
underdeveloped (poor)?
More generally, what drives economic development in
different countries?
Speed and Effectiveness of Institutional
Transitions: China versus Russia
If democracies favor economic growth, how do
you explain the fact that China, a totalitarian
regime, boasts the fastest growing economy in
the last 30 years?
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.