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CHAPTER 2
GLOBAL2 t PENG
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2. CHAPTER 2 LEARNING OBJECTIVES
After studying this chapter, you should be able to:
Identify two types of institutions.
Explain how institutions reduce uncertainty.
Identify the two core propositions underpinning an institution-based view of global business.
List the differences between democracy and totalitarianism.
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3. CHAPTER 2 LEARNING OBJECTIVES
After studying this chapter, you should be able to:
5. List the differences among civil law, common law, and theocratic law.
6. Articulate the importance of property rights and intellectual property rights.
7. List the differences among market economy, command economy, and mixed economy.
8. Explain why it is important to understand the different institutions when doing business abroad.
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LO1: INSTITUTIONS
Formal and informal policies popularly known as “the rules of the game.”
Institution-based view on global business - leading perspective in which firms’ success is correlated to monitoring, decoding, and adapting to changing the rules of the game.
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5. LO1: TWO TYPES OF INSTITUTIONS
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6. LO1: TWO TYPES OF INSTITUTIONS
Formal institutions:
laws, regulations, and rules.
Formal institutions, which include laws, regulations, and rules, are supported by a regulative pillar, the coercive power of governments.
Regulatory pillar:
coercive power
of governments
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7. LO1: TWO TYPES OF INSTITUTIONS
Informal institutions:
norms, culture, and ethics.
Normative pillar - how the values, beliefs, and actions of other relevant players influence the behavior of focal individuals
and firms.
Cognitive pillar – internalized values and beliefs that guide individual and firm behavior.
Informal institutions, which include norms, cultures, and ethics, are supported by the normative pillar and the cognitive pillar. The normative pillar refers to how the values, beliefs, and actions (collectively known as norms) of other relevant players influence the behavior of focal individuals and firms. The cognitive pillar refers to the internalized, taken-for-granted values and beliefs that guide individual and firm behavior.
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8. LO2: WHAT DO INSTITUTIONS DO?
The key role of institutions is to reduce uncertainty by constraining the range of acceptable actions.
Political or economic uncertainty can be potentially devastating to firms because uncertainty surrounding economic transactions can lead to transaction costs, the costs of doing business. Transaction costs also rise from opportunism, the act of seeking self-interest with guile. Institutions spell out the rules of the game, mitigating violations and keeping transaction costs minimal.
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9. LO3: INSTITUTION-BASED VIEW OF GLOBAL BUSINESS
The institution-based view of global business focuses on the dynamic interaction between institutions and firms and considers firm behaviors as the outcome of that interaction. Firm behaviors are often a reflection of the formal and informal constraints of a particular institutional framework.
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LO3: TWO PROPOSITIONS
As an example of the first proposition, compare the market responsiveness of railway and IT industries in China and India. Because of an absence of competition, managers of the state-owned railways are eager to ask for government intervention and reluctant to improve service. In contrast, mangers in the IT industries have to excel in the game of market responsiveness because the rules of the game are defined by heavy international competition.
As an example of the second proposition, consider the growth of entrepreneurial firms after the collapse of the Soviet Union. In the absence of any formal institutional structure, the growth of many entrepreneurial firms was facilitated by informal constraints based on personal relationships and connections among managers and officials.
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LO4: POLITICAL SYSTEMS
A political system refers to the rules of the game on how a country is governed politically.
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12. LO4: POLITICAL SYSTEMS - DEMOCRACY
Democracy - political system in which citizens elect representatives to govern the country on their behalf.
Supports global business by preserving individual’s right to freedom of expression and organization.
A fundamental aspect of democracy relevant to the effective conduct of global business is an individual’s right to freedom of expression and organization. In most modern democracies, the right to organize economically is extended not only to domestic individuals and firms, but also to foreign individuals and firms.
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13. LO4: POLITICAL SYSTEMS - TOTALITARIANISM
Totalitarianism (or dictatorship) - system in which one person or party exercises absolute political control.
Communist totalitarianism
Right-wing totalitarianism
Theocratic totalitarianism
Tribal totalitarianism
There are four major types of totalitarianism:
Communist – centers on a communist party.
Right-wing – characterized by intense hatred of communism. One party, typically backed by the military, restricts freedoms in order to prevent the growth of communism.
Theocratic – control of political power by one religious party.
Tribal – control of political power by one tribal or ethnic party.
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14. LO4: POLITICAL SYSTEMS AND BUSINESS
In general, totalitarianism is not as good for business as democracy.
Totalitarian nations often entail higher political risk due to wars, riots, protests, chaos, and breakdowns, which can negatively impact firms.
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LO5: LEGAL SYSTEMS
A legal system refers to the rules of the game on how a country’s laws are enacted and enforced. The first, regulatory pillar that supports institutions.
Theocratic
Law
Civil Law
Civil Law – derived from Roman law and strengthened by Napoleon’s France. It uses comprehensive statutes and codes as a primary means to form legal judgments. Relative to common law, civil law has less flexibility, because judges only have the power to apply the law.
Common Law – English in origin; shaped by precedents and traditions, as well as judicial interpretation. Relative to civil law, common law has more flexibility, because judges have to resolve specific disputes based on their interpretation of the law, and such interpretation may give new meaning to the law, which will in turn shape future cases.
Theocratic Law – based on religious teachings. Islamic law is the only surviving example of a theocratic legal system that is formally practiced by any governments.
Common
Law
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LO6: PROPERTY RIGHTS
Legal rights to use an economic property (resource) and to derive benefit from it.
In developed economies, every parcel of land, every building, and every trademark is represented in a property document that entitles the owner to derive income and benefits from it. Within such a system, tangible property makes other, less tangible economic activities possible. For example, property can be used as collateral for credit, which represents the single most important source of funds for new businesses in the United States.
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17. LO6: INTELLECTUAL PROPERTY RIGHTS
Rights associated with the ownership of intellectual property, intangible property that results from intellectual activity, such as books, videos, and websites.
Patents
IPR primarily includes rights associated with:
Patents: legal rights awarded by government authorities to inventors of new products or processes.
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.
IPR needs to be asserted and enforced through a formal system that is designed to provide an incentive for people and firms to innovate. To be effective, the system must also punish violators, but this is difficult because of the intangible nature of IPR. The unauthorized use of IP is referred to as piracy.
Copyrights
Trademarks
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18. Rules of the game on how a country is governed economically.
LO7: ECONOMIC SYSTEMS
Rules of the game on how a country is governed economically.
Mixed
Economy
Market economy – characterized by the “invisible hand” of market forces and a laissez faire approach from the government.
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. It boils down to the relative distribution of market forces versus command forces. In practice, no country has adopted either a pure market or pure command system. Nearly all economic systems involve some mix of market and command forces. So, when we say that a certain country has a market economy, we mean that the system is controlled by mostly market forces.
Market
Economy
Command
Economy
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19. LO7: WHAT DRIVES ECONOMIC DEVELOPMENT
Why are some countries highly developed while others are so underdeveloped? There are three major positions:
Rich countries tend to have a smarter, harder working population.
Rich countries have abundant natural resources.
Rich countries have developed better market-supporting institutional frameworks.
In response to the first position, it is difficult to imagine that Norwegians are, on average, nearly 770 times smarter and harder working than Burundians.
In response to the second, some rich countries, like Japan, lack significant resources, whereas some poor countries, like the Democratic Republic of the Congo, have abundant resources.
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20. LO8: UNDERSTANDING DIFFERENT INSTITUTIONS
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21. DEBATE: PRIVATE OWNERSHIP VS. STATE OWNERSHIP
State Owned Businesses
PRO
CON
Developed in response to failure of private firms during Great Depression.
Lack of accountability
Lack of concern for economic efficiency
Privately Owned Businesses
PRO
CON
Performance incentives for workers (the better you work, the better your pay).
Risky business practices lead to financial crisis and recession.
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