1. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Global Business 2e C ha p t e r 2 Understanding Formal Institutions: Politics, Laws, and Economics

2. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LEARNING OBJECTIVES After studying this chapter, you should be able to: 1. identify two types of institutions—formal and informal. 2. explain how institutions reduce uncertainty. 3. identify the two core propositions underpinning an institution-based view of global business. 4. understand the differences between democracy and totalitarianism. 5. list the differences among civil law, common law, and theocratic law. 6. articulate the importance of property rights and intellectual property rights. 7. outline the differences among market economy, command economy, and mixed economy. 8. participate in two leading debates on politics, laws, and economics. 9. draw implications for action.

3. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. UNDERSTANDING INSTITUTIONS Institutions “rules of the game” Institutional transitions Fundamental and comprehensive changes introduced to formal and informal rules of the game that affect firms as players Institution-based view success and failure of firms are enabled and constrained by institutions

4. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. UNDERSTANDING INSTITUTIONS Institutional framework Formal and informal institutions governing individual and firm behavior Formal institutions Laws, regulations, and rules - may be imposed by home countries and host countries Norms Values, beliefs, and actions

5. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. INFORMAL INSTITUTIONS Regulatory pillar Coercive power of governments Normative pillar How values, beliefs, and actions of other relevant players influence behavior of focal individuals and firms Cognitive pillar Internalized, or taken for-granted, values and beliefs that guide individual and firm, or group, behavior

6. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

7. WHAT DO INSTITUTIONS DO? Transaction costs Costs associated with economic transactions or, the costs of doing business Opportunism Act of seeking self-interest with guile ? What are some transaction costs involved in starting a home-based business?

8. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

10. POLITICAL SYSTEMS Political system Rules of the game on how a country is governed politically Political risk Risk associated with political changes that may negatively impact domestic and foreign firms

11. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. TYPES OF POLITICAL SYSTEMS Democracy System in which citizens elect representatives to govern the country on their behalf Totalitarianism (dictatorship) System in which one person or party exercises absolute political control over the population

12. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LEGAL SYSTEMS Legal system Rules of the game on how a country’s laws are enacted and enforced

13. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. TYPES OF LEGAL SYSTEMS Civil law Comprehensive statutes and codes as a primary means to form legal judgments Common law English origin, shaped by precedents and traditions from previous judicial decisions Theocratic law Based on religious teachings

14. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ? Which system is used in your home country?

15. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PROPERTY RIGHTS Property rights Legal rights to use an economic property (resource) and derive income and benefits from it

16. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. INTELLECTUAL PROPERTY RIGHTS Intellectual property Intangible property the result of intellectual activity Intellectual property rights (IPR) Rights associated with ownership of intellectual property

17. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. TYPES OF IPR Patent Legal rights awarded by government authorities to inventors of new products or processes Copyright Exclusive legal rights of authors and publishers to publish and disseminate their work Trademark Exclusive legal rights of firms to use specific names, brands, and designs to differentiate their products from others

18. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ECONOMIC SYSTEMS Economic system Rules of the game on how a country is governed economically

19. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. TYPES OF ECONOMIC SYSTEMS Market economy Characterized by the “invisible hand” of market forces; government takes a hands-off, or laissez faire, approach Command economy Government taking the “commanding height” in the 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 Elements of both market economy and command economies

20. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

22. PRIVATE OWNERSHIP VS STATE OWNERSHIP Washington Consensus View centered on unquestioned belief in the superiority of private ownership over state ownership in economic policy making spearheaded by the International Monetary Fund and the World Bank Moral hazard Recklessness when people and organizations (including firms and governments) do not have to face the full consequences of their actions

23. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.