Global Business 3e Chapter 2 Understanding Politics, Laws, and Economics © 2014 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: 2-1 explain the concept of institutions and their key role in reducing uncertainty. 2-2 articulate the two core propositions underpinning an institution-based view of global business. 2-3 identify the basic differences between democracy and totalitarianism. 2-4 outline the differences among civil law, common law, and theocratic law. 2-5 understand the importance of property rights and intellectual property rights. 2-6 appreciate the differences among market economy, command economy, and mixed economy. 2-7 participate in two leading debates concerning politics, laws, and economics. 2-8 draw implications for action. © 2014 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 © 2014 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 © 2014 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 © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

© 2014 Cengage Learning. All Rights Reserved © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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? © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

What do Institutions do? The key role of Institutions is to reduce uncertainty. Uncertainty increases transaction costs, which are defined as the costs associated with economic transactions. Institutional frameworks can reduce the potential for opportunistic behaviour by explicitly establishing rules. Institutions are not static; they evolve over time. Institutional transition, defined as ‘fundamental and comprehensive change introduced to the formal and informal rules of the game that affect organizations as players’, are common, especially in emerging economies © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

© 2014 Cengage Learning. All Rights Reserved © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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 © 2014 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 © 2014 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 © 2014 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 Common law Theocratic 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 © 2014 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? © 2014 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 © 2014 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 © 2014 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 © 2014 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 © 2014 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 Capitalism An economic system in which individuals own and operate the majority of businesses that provide goods and services Derived from Adam Smith’s laissez-faire capitalism in which a society’s best interests are served by individuals pursuing their own self-interest Creation of wealth is the concern of private individuals Resources used to create wealth must be privately owned Economic freedom ensures the existence of a free market economy Businesses and individuals decide what to produce and buy; the market determines quantities sold and prices Limited role of government © 2014 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 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 © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter Summary Explain the concept of institutions and their key role in reducing uncertainty: Institutions are defined as ‘the rules of the game’. Institutions have formal and informal components, with different supportive pillars. Their key functions are to reduce uncertainty, curtail transaction costs and constrain opportunism. Managers and firms rationally pursue their interests and make choices within formal and informal institutional constraints in a given institutional framework. When formal constraints are unclear or fail, informal constraints will play a larger role. Explain the basic differences among political systems: Totalitarianism is a political system in which one person or political party exercises absolute political control. In democracies, citizens elect representatives to govern the country, yet the institutions governing this selection vary widely © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Explain the systemic differences among economies: A pure market economy is characterized by laissez faire and total control by market forces. In liberal market economies (LMEs), companies are predominantly financed through the stock market, while labour markets are highly flexible. In coordinated market economies (CMEs), businesses, governments, trade unions, industry association and other economic actors coordinate their actions not only through markets. 4. Explain the basic differences between legal systems: Civil law uses comprehensive statutes and codes as a primary means to form legal judgments. Common law is shaped by precedents and traditions from previous judicial decisions. Property rights are legal rights to use an economic resource and to derive income and benefits from it. Corporate governance systems specify how managers are controlled by other interested parties of the firm. © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Critical Discussion Questions © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.