Global Business 3e Chapter 2 Understanding Politics, Laws, and Economics © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated,

Global Business 3eChapter 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 INSTITUTIONSInstitutions“rules of the game”Institutional transitionsFundamental and comprehensive changes introduced to formal and informal rules ofthe game that affect firms as playersInstitution-based viewSuccess and failure of firms are enabled and constrained by institutions

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UNDERSTANDING INSTITUTIONS

Institutional frameworkFormal and informal institutions governing individual and firm behavior

Formal institutionsLaws, regulations, and rules - may be imposed by home countries and host countries

NormsValues, 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 pillarCoercive power of governments

Normative pillarHow values, beliefs, and actions of

other relevant players influence behavior of focal individuals and firms

Cognitive pillarInternalized, 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. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

WHAT DO INSTITUTIONS DO?

Transaction costsCosts associated with economic transactions

or, the costs of doing business

OpportunismAct of seeking self-interest with guile

? What are some transaction costs involved in starting a home-based business?

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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. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

POLITICAL SYSTEMS

Political systemRules of the game on how a country

is governed politicallyPolitical riskRisk 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

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DemocracySystem 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

LEGAL SYSTEMS

Legal systemRules 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 lawComprehensive statutes and codes as a primary

means to form legal judgments

Common lawEnglish origin, shaped by precedents and traditions

from previous judicial decisions Theocratic lawBased 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.

© 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?

PROPERTY RIGHTS

Property rightsLegal 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 propertyIntangible 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

PatentLegal rights awarded by government

authorities to inventors of new products or processes

CopyrightExclusive legal rights of authors and

publishers to publish and disseminate their work

TrademarkExclusive 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 systemRules of the game on how a country is governed economically

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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 economyGovernment 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 economyElements of both market economy and command

economies

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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

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