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 SYSTEMStotalitarianism (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 SYSTEMStotalitarianism (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 - 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

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 InstitutionalTransitions: 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: 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 country’s underlying political and regulatory structures.