Understanding Politics, Laws, and Economics

1
Chapter 2

• Understanding Politics, Laws, and Economics

2
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

7
(No Transcript)
8
(No Transcript)
9
(No Transcript)
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 individuals 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
  countrys laws are enacted and enforced
• civil law - derived from Roman law and
  strengthened by Napoleons 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

15
(No Transcript)
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 DevelopmentCulture,
Geography, or Institutions?

• Some African countries such as Burundi so
  underdeveloped (poor)?
• More generally, what drives economic development
  in different countries?

20
(No Transcript)
21
Speed and Effectiveness of InstitutionalTransitio
ns 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 Perceptionvs.
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 countrys
  underlying political and regulatory structures.

23
(No Transcript)
24
(No Transcript)