1. Global Business 2e C ha p t e r 2 Understanding Politics, Laws, and Economics
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2. 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.
© 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.

3. 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
Firms mean companies…Institution based view
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4. 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
Institution based view
© 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.

5. 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
Informal institutions --- go over formal and informal
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6. You have to consider this, because institutions effect success and failure of companies.
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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?
Transaction costs – if you import Abercrombie and Fitch and it costs you 10 dollars per shirt…and you buy 100 shirts it is 1,000 USD. Do you think that is the total amount you have to pay? What else?
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8. Again Firms means companies
Again Firms means companies. So, by having a firm view and a institution view…this is what controls firm behavior. For example – you fell in love with the daughter of Samsung’s CEO. You will have to consider Korean culture, her Chabeol family, and Korean society. That can be similar to an institution based view. Firm or Resource based view, is “who you are” and “who she is” and your individual strengths and weaknesses. After considering your individual self and the Korean society view, it will effect your “behavior” Same with businesses.
© 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.

9. What’s more important? Russia IKEA…do you guys know IKEA?
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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
Would you invest into Russia or North Korea?
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11. 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
What is Democracy? Should gambling be legal or illegal in Korea? It is a Democracy right? Korea use to be a lead by a dictator – how do you view that history? Do you think its okay? Story about Russian boss….
© 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.

12. LEGAL SYSTEMS
Legal system Rules of the game on how a country’s laws are enacted and enforced
Civil law, common law, show Devil’s advocate and A few Good Men…. Clips – STOP HERE
NEXT CLASS – Give out HW, do review questions and VIDEO CASE!
© 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.

13. 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
Theocratic law – woman cannot hang out with any other guys besides their brother and husband in public. Good law?
© 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.

14. ? Which system is used in your home country?
Dubai!
? Which system is used in your home country?
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15. PROPERTY RIGHTS
Property rights Legal rights to use an economic property (resource) and derive income and benefits from it
Without property rights…is it possible to have a good economy? Look at Africa…look at US…Look at South Korea and North Korea…”VALUE” But, its all dirt isn’t it? It should be share shouldn’t it? Its Gods, not yours!
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16. INTELLECTUAL PROPERTY RIGHTS
Intellectual property Intangible property the result of intellectual activity Intellectual property rights (IPR) Rights associated with ownership of intellectual property
Let’s talk about the Samsung, Apple, Korean government, Nortel, Google . How important is it?
© 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.

17. 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
© 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.

18. ECONOMIC SYSTEMS
Economic system Rules of the game on how a country is governed economically
US…Free, mixed, or command? Talk about Russia – you could get shot, back in the 1980’s for starting your own business.
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19. 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
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20. BUT, if you did PPP, Norway would be lower than the USA and the USA is much larger than all of the other countries. Talk about the Goldman Sachs story!
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21. There are advantages to both – Russian boss – what do you think
There are advantages to both – Russian boss – what do you think? Isn’t there something wrong with different social class, materialism and selfishness? School uniforms
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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
IMF and World Bank – very powerful institutions, especially for developing countries. Backed by the USA….If companies KNOW that they will get backed up by the government, then they will take unnecessary risks….to try and gain private profit! So, in effect, PRIVATIZE PROFIT and SOCIALIZE LOSSES! Win Win for businessmen but its Evil!
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23. Next Class – we will discuss critical discussion questions and Video cases…Captains…explain every question and answer and discuss with your group! Lead your group!
© 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.