Chapter 3: Terms

Question 1

Institution

Answer 1

Formal and informal rules of the game.

Question 2

Institutional frameworks

Answer 2

Formal and informal institutions governing individual and firm behaviour.

Question 3

Institution-based view

Answer 3

A theoretical perspective suggesting that firm performance is, at least in part, determined by the institutional frameworks governing firms.

Question 4

Transaction costs

Answer 4

The costs of organizing economic transactions.

Question 5

Formal institutions

Answer 5

Institutions represented by laws, regulations and rules.

Question 6

Informal institutions

Answer 6

Rules that are not formalized but exist in for example norms, values and ethics.

Question 7

Regulatory pillar

Answer 7

The coercive power of governments.

Question 8

Normative pillar

Answer 8

The mechanism through which norms influence individual and firm behaviour.

Question 9

Cognitive pillar

Answer 9

The internalized, taken-for-granted values and beliefs that guide individual and firm behaviour.

Question 10

Opportunistic behaviour

Answer 10

Seeking self-interest with guile.

Question 11

Institutional transition

Answer 11

Fundamental and comprehensive changes introduced to the formal and informal rules of the game that affect organizations as players.

Question 12

Two core propositions of the institution-based view

Answer 12

Proposition 1: Managers and firms rationally pursue their interests and make choices within the formal and informal constraints in a given institutional framework.
Proposition 2: Although formal and informal institutions combine to govern firm behaviour, in situations where formal constraints are unclear or fail, informal constraints will play a larger role in reducing uncertainty and providing constancy to managers and firms.

Question 13

Political system

Answer 13

A system of the rules of the game on how a country is governed politically.

Question 14

Democracy

Answer 14

A political system in which citizens elect representatives to govern the country on their behalf.

Question 15

Proportional representation

Answer 15

Election system that allocates seats in parliament in proportion to the votes received by each party (usually subject to minimum threshold).

Question 16

First-past-the-post system

Answer 16

Election system by which in each constituency the candidate with the relative majority of votes gets the seat.

Question 17

Crucial variations among democracies

Answer 17

1. Proportional representation versus first-past-the-post
2. Direct versus indirect elections of government
3. Representative versus direct democracy
4. Centralisation of power

Question 18

Authoritarianism

Answer 18

A political system in which power is concentrated in the hands of one person or a small elite.

Question 19

Lobbying

Answer 19

Making your views known to decision makers with the aim of influencing political processes.

Question 20

Corruption

Answer 20

The abuse of public power for private benefits.

Question 21

Political risk

Answer 21

Risk associated with political changes that may negatively impact on domestic and foreign firms.

Question 22

Economic system

Answer 22

Rules of the game on how a country is governed economically.

Question 23

Market economy

Answer 23

An economy that is characterised by the ‘invisible hand’ of market forces.

Laissez-faire and total control by market forces

Question 24

Command economy

Answer 24

factors of production are government- or state-owned and controlled, and all supply, demand and pricing are planned by the government.

Question 25

Varieties of capitalism

Answer 25

A scholarly view suggesting that economies have different inherent logics on how markets and other mechanisms coordinate economic activity.

Question 26

Liberal market economy (LME)

Answer 26

A system of coordination primarily through market signals. Financed through the stock market, while labour markets are highly flexible.

Question 27

Coordinated market economy (CME)

Answer 27

A system of coordinating through a variety of other means in addition to market signals.

Question 28

Apprenticeship system

Answer 28

Vocational training system for crafts and professions.

Question 29

Legal system

Answer 29

The rules of the game on how a country’s laws are enacted and enforced.

Question 30

Civil law

Answer 30

A legal tradition that uses comprehensive statutes and codes as a primary means to form legal judgments.

Question 31

Common law

Answer 31

A legal tradition that is shaped by precedents and traditions from previous judicial decisions.

Question 32

Case law

Answer 32

Rules of law that have been created by precedents of cases in court.

Question 33

Legal certainty

Answer 33

Clarity over the relevant rules applying to a particular situation.

Question 34

Property rights

Answer 34

The legal rights to use an economic property (resource) and to derive income and benefits from it.

Question 35

Intellectual property rights

Answer 35

Rights associated with the ownership of intellectual property.

Question 36

Patents

Answer 36

Legal rights awarded by government authorities to inventors of new technological ideas, who are given exclusive (monopoly) rights to derive income from such inventions.

Question 37

Copyrights

Answer 37

Exclusive legal rights of authors and publishers to publish and disseminate their work.

Question 38

Trademarks

Answer 38

Exclusive legal rights of firms to use specific names, brands and designs to differentiate their products from others.

Question 39

Corporate governance

Answer 39

Rules by which shareholders and other interested parties control corporate decision-makers.

Question 40

Political risk

Answer 40

Risk associated with political changes that may negatively impact on domestic and foreign firms.

Question 41

Implications for action globalisation

Answer 41

1. When entering a new country, do your homework by developing a thorough understanding of the formal institutions governing firm behaviour.
2. Beware of small institutional differences among superficially similar countries, not recognising such differences can costs your business a lot of money. 3. Changes in formal institutions can be anticipated, or even influenced, by engaging in processes in the economic, political and legal systems.

Question 42

Three debates on institutions

Answer 42

1. Property rights are legal rights to use an economic resource and to derive income and benefits from it. 2. Corporate governance systems specify how managers are controlled by other interested parties of the firm.
2. Political risk takes many forms and is hard to capture using formal indices.