1. Understanding Politics, Laws, and Economics
Chapter 2
Understanding Politics, Laws, and Economics

2. After studying this chapter, you should be able to:
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
Explain the concept of institutions and their key role in reducing uncertainty
Articulate the two core propositions underpinning an institution-based view of global business
Identify the basic differences between democracy and totalitarianism
Outline the differences among civil law, common law, and theocratic law
Understand the importance of property rights and intellectual property rights
Appreciate the differences among market economy, command economy, and mixed economy
Participate in three leading debates on politics, laws, and economics
Draw managerial implications

3. 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

4. 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

5. 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

6. 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

10. POLITICAL SYSTEMS
political risk - associated with political changes that may negatively impact domestic and foreign firms

11. 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

12. 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

13. 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

14. 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

16. 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

17. PROPERTY RIGHTS
intellectual property - intangible property that results from intellectual activity (such as books, videos, and websites)
intellectual property rights - rights associated with the ownership of intellectual property
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

18. 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

19. 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?

21. 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?

22. 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.