Understanding Politics, Laws, & Economics 2 Copyright ©2016 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 OUTCOMES 2 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GLOBAL3 | CH2 1Identify two types of institutions 2Explain how institutions reduce uncertainty 3Identify the two core propositions underpinning an institution-based view of global business 4List the differences between democracy and totalitarianism

LEARNING OUTCOMES 3 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GLOBAL3 | CH2 5List the differences among civil law, common law, and theocratic law 6Articulate the importance of property rights and intellectual property rights 7List the differences among market economy, command economy, and mixed economy 8Explain why it is important to understand the different institutions when doing business abroad

4 GLOBAL3 | CH2 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Institutions: Rules of the Game Not static Institutional transaction: Fundamental and comprehensive changes introduced to the formal and informal rules of the game Affect firms as players

5 GLOBAL3 | CH2 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Institutions: Rules of the Game (continued) Success and failure of firms are determined by how firms play the game Depends on how the rules are made, enforced, and changed Institution-based view For survival, firms must monitor, decode, and adapt to the changing rules of the game

6 Exhibit Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GLOBAL3 | CH2 2.1 Dimensions of Institutions

7 GLOBAL3 | CH2 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Formal Institutions Laws, regulations, and rules Primary supportive pillar Regulatory pillar: Coercive power of governments exercised through laws, regulations, and rules

8 GLOBAL3 | CH2 Copyright ©2016 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 Norms, cultures, and ethics Supported by: Normative pillar: Mechanisms through which norms influence individual and firm behavior Cognitive pillar: Internalized values and beliefs that guide individual and firm behavior

9 GLOBAL3 | CH2 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Role of Institutions in Reducing Uncertainty Institutions influence decision-making process of individuals and firms By constraining the range of acceptable actions Economic uncertainty leads to transaction costs Source is opportunism

10 GLOBAL3 | CH2 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Role of Institutions in Reducing Uncertainty (continued) Unstable and unreliable institutional frameworks: Increase transaction costs Decrease transactions Transaction economies Emerging economies in which institutional transactions are pervasive

11 Exhibit Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GLOBAL3 | CH2 2.2 Institutions, Firms, and Firm Behaviors

12 Exhibit Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GLOBAL3 | CH2 2.3Two Core Propositions of the Institution- Based View

13 GLOBAL3 | CH2 Copyright ©2016 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 Rules of the game on how a country is governed politically Types Democracy Totalitarianism

14 GLOBAL3 | CH2 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Democracy Political system in which citizens elect representatives to govern the country on their behalf Allows an individual the right to freedom of expression and organization

15 GLOBAL3 | CH2 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Totalitarianism Political system in which one person or party exercises absolute political control over the population Not suitable for business Political risk: Risk associated with political changes that may negatively impact domestic and foreign firms -Nationalization - Expropriation of foreign assets

16 GLOBAL3 | CH2 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Major Types of Totalitarianism Communist totalitarianism Right-wing totalitarianism Theocratic totalitarianism Tribal totalitarianism

17 GLOBAL3 | CH2 Copyright ©2016 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 Rules of the game on how a country’s laws are enacted and enforced Reduce transaction costs by: Minimizing uncertainty Combating opportunism Form the primary regulatory pillar that supports institutions

18 GLOBAL3 | CH2 Copyright ©2016 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 (continued) Civil law: Uses comprehensive statues and codes to form legal judgments Less flexible - Judges apply the law Common law: Shaped by precedents from previous judicial decisions Flexible - Resolves disputes based on judges’ interpretation of the law Theocratic law: Based on religious teachings

19 GLOBAL3 | CH2 Copyright ©2016 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 Legal rights to use an economic property (resource) and to derive income and benefits from it Property document is required to prosecute violators through legal means

20 GLOBAL3 | CH2 Copyright ©2016 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 (continued) Facilitates economic growth Insecure property rights in developing countries: Reduce firm size Result in the use of technologies that employ less fixed capital Do not entail long-term investment

21 GLOBAL3 | CH2 Copyright ©2016 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 (IP) Intangible property that results from intellectual activity Intellectual property right (IPR): Legal right associated with the ownership of intellectual property Consists of: -Patents -Copyrights -Trademarks

22 GLOBAL3 | CH2 Copyright ©2016 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 (IP) (continued) IPR enforcement is difficult Piracy: Unauthorized use of intellectual property rights Widespread around the world

23 GLOBAL3 | CH2 Copyright ©2016 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 Rules of the game on how a country is governed economically Market economy: Characterized by the invisible hand of the market forces Government performs only functions the private sector cannot perform

24 GLOBAL3 | CH2 Copyright ©2016 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 (continued) Command economy: All factors of production are state-owned and state- controlled All supply, demand, and pricing are planned by the government Mixed economy: Includes elements of both market economy and command economy

25 GLOBAL3 | CH2 Copyright ©2016 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 Drives Economic Development? Culture Geography Institutions

26 GLOBAL3 | CH2 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Importance of the Role of Institutions in International Business Formal, market-supporting institutions Encourage individuals to specialize and firms to grow in size Protect property rights and fuel innovation, entrepreneurship, and economic growth Lack of strong institutions Forces individuals to trade on informal basis with smaller neighboring groups

27 GLOBAL3 | CH2 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Private Ownership Versus State Ownership Washington Consensus: Unquestioned belief in superiority of private ownership over state ownership in economic policy making Led by the U.S. government, International Monetary Fund, and the World Bank Moral hazard: Recklessness when people and organizations do not have to face full consequence of their actions

28 GLOBAL3 | CH2 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Private Ownership Versus State Ownership (continued) Beijing Consensus: View that questions Washington Consensus’s belief Associated with the position held by the Chinese government

29 Exhibit Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GLOBAL3 | CH2 2.4 Implications for Action

30 GLOBAL3 | CH2 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Debate: Private Ownership Versus State Ownership State-owned businesses Developed in response to failure of private firms during the Great Depression Lack accountability Lack concern for economic efficiency Privately owned businesses Performance incentives for workers Risky business practices lead to financial crisis and recession

KEY TERMS 31 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GLOBAL3 | CH2 Institutional transactions Regulatory pillar Normative pillar Cognitive pillar Transaction cost Opportunism Political system Democracy Totalitarianism (dictatorship) Political risk Legal system Civil law Common law Theocratic law Property right Intellectual property

KEY TERMS 32 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GLOBAL3 | CH2 Intellectual property right Patent Copyright Trademark Piracy Economic system Market economy Command economy Mixed economy Washington Consensus Moral hazard Beijing Consensus

SUMMARY 33 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GLOBAL3 | CH2 Types of institutions - Formal and informal Key role of institutions - To reduce uncertainty Propositions of institution-based view Managers and firms rationally pursue interests and make choices within institutional constraints When formal constraints are unclear, informal constraints play a larger role

SUMMARY 34 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GLOBAL3 | CH2 Political systems Democracy - Citizens elect representatives to govern the country on their behalf Totalitarianism - One person or party exercises absolute political control over the population Legal traditions - Civil law, common law, and theocratic law

SUMMARY 35 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GLOBAL3 | CH2 Property rights is the legal right to use an economic property and derive income and benefits from it Intellectual property rights include patents, copyrights, and trademarks Economic systems consist of market, command, and mixed economies Before entering a new country, managers have to know about the formal institutions that affect their business

36 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GLOBAL3 | CH2