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Trimester 3 > Institutional Context Supplement 3 > Flashcards

Institutional Context Supplement 3 Flashcards

slides and supplement combined

1
Q

Gradual Change

A

change within the broader boundaries of an established institutional frame

harder to observe, because incremental

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2
Q

Radical institutional change

A

brings the institutions to the forefront of attention

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3
Q

Stages of institutional development from local autarky to modern society

A
  1. Trade within the tribe/village
  2. Trade beyond the village
  3. Long distance trade
  4. Further expansion of trade
  5. Modern trade
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4
Q

What happen during the different stages of institutional development?

A

increasing reliance on specialization and division of labor, which makes trade more dependent on a wide range of institutions

  • increasing levels of transaction costs
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5
Q

What are transaction costs related to?

A

a) search and information costs
b) bargaining costs
c) monitoring and enforcement costs

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6
Q

1) trade within the village

A

trade exists in a dense network.

There may be quite high social costs to a tribal organization. People stick to the family order.

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7
Q

2) trade beyond the village

A
  • trade in regional markets or bazaars.
  • people start to specialize
  • transaction costs rise sharply while production costs go down
  • religious precepts (rules) determine the standards and rule-compliance of the players.
  • effectiveness of the informal institutions depends largely on the extent that these religious precepts are held to be binding.
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8
Q

3) long distance trade

A
  • like caravans on the Silk Road
  • economies of scale arise through geographic specialization (Silk in China)
  • occupational specialization (farming, trading, transporting)
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9
Q

two transaction problems

A
  • agency problem

- contract problem

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10
Q

agency problem in long distance trade

A 
principal = owner of the goods
agent = subordinate who performs activities like transporting goods

trustworthy agents are family members:
–> Success of trade depends on the strength of family ties and the price of defection (Treuebruch)

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11
Q

contract problem

A
  • problem from having to negotiate and enforce contracts over long distances
  • enforcement is the agreement of buying and selling and the protection of the goods en route
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12
Q

What institutional development is needed for trade beyond the village?

A

Trading centers

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13
Q
  1. Further expansion of trade; urbanization
A
  • towns become more important centers of exchange
  • need for effective, impersonal contract enforcement in necessary
  • capital markets required that property rights were secured over time
  • credible commitment for property rights
  • technology enabled manufacturing to advance
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14
Q

How can property rights be secured over time

A

through credible commitment

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15
Q

How can credible commitment of property rights be accomplished?

A

If the ruler restrains itself in using coercive force but more often in society constrains the power of rulers

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16
Q

What does the effective use of technology require?

A
  • large investment in factories and machines which is an increase in fixed costs
  • uninterrupted production, a disciplined workforce, and transportation networks
  • secure property rights
  • a political and judicial system that permits low cost contracting
  • flexible laws permitting a wide range of organizational structures
  • complex government structures to limit agency problems hierarchical organizations
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17
Q
  1. Modern trade
A
  • specialization is optimized
  • everyone has a specialized function
  • worldwide network of interconnected players
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18
Q

indicator for institutional devleopment

A

agriculture requires a small part of labour force

19
Q

Why do institutions not develop?

A
  • when deviance and innovation are viewed as a threat to group survival
  • dominant players have little incentive to change the rules
  • path dependency
20
Q

What are the underlying mechanisms that explain the path dependency?

A
  • Institutions come with high switching costs
  • Institutions come with high sunk costs (people become committed because of the sense that they already have invested so much)
21
Q

Base of the Pyramid

A
  • 4 billion people live in survival markets; income <3K; this is the base of the pyramid
  • 2 billion in emerging markets
  • 0.1 billion in mature markets
22
Q

What was developed to reduce poverty of the base?

A

“business case”

  • calls for MNCs to focus on the Base of the Pyramid
  • jobs should be created for the Base of the Pyramid
23
Q

Opportunities for the MNC in the “business case”

A
  1. improve profits by exploring new growth markets when home markets are saturated
  2. aggregate demand (internet or mobile phones)
  3. low-cost strategies by outsourcing activities to the base
  4. boost innovation, because decision-makers have to think more efficiently, less costly, and more sustainable
24
Q

arm’s length transaction

A

buyers and sellers act independently and have no relationship to each other

  • increases as institutions develop
25
Q

World Bank Institutional Quality Indicators

A

Selecting and Replacing Governments
Formulating and Implementing Policies
Respecting and Abiding Institutions

26
Q

Selecting and Replacing Governments

A

Voice and Accountability

Political Stability

27
Q

Formulating and Implementing Policies

A 
Government Effectiveness (reliable public service and strong civil service)
Regulatory Quality (ability of government to implement sound policies to promote private sector development)
28
Q

Respecting and Abiding Institutions

A

Rule of Law

Corruption Control

29
Q

institutional transition

A

changing the system from one type to another

from centrally planned to free market

30
Q

what does the extent and success of transitions depend on?

A 
Pre-conditions:
- institutional embeddedness
- institutional permeability
Transitition approach
Internal and External forces
31
Q

institutional embeddedness

A

refers to the extent to which the pre-transition institutional context is entrenched in the old system

32
Q

institutional permeability

A

extent to which the country’s institutional system already showed holes through which external forces could influence the country

33
Q

Transitional approach

A

gradual or abrupt change
“shock therapy” in Poland
–> for Poland tremendous short-term social and transitional costs, but many viewed Poland as most successful transitional economy

34
Q

Internal and external forces

A
  • common complexity is the divide between adherents and successful users of the new economic reforms (generational divide)
35
Q

emerging markets

A

countries that are rapidly growing economically and industrially
BRIC are included for example

36
Q

MNCs choice of an emerging market is often a result of

A

herding or mimetic isomorphism where firms mimic the entry decisions of competitors or follow key customers

37
Q

composites

A

aggregate data that combines information on a large number of items

38
Q

Path dependency of transitional economies (from Communism to Capitalism)

A

Shared History:

  • Industry structure
  • Dominated by big industrial companies
  • Lack of property rights
  • Dictatorship
39
Q

institutional voids

A

absence of institutions that facilitate exchanges between buyers and sellers (lack of intermediary firms…)

40
Q

What should executives look at rather than composites?

A

Institutional voids (called the idiosyncratic approach)

41
Q

In which ways does the market reveal institutional voids?

A
  • can be related to expectations and information about consumers and suppliers of PRODUCT MARKETS
  • LABOR MARKETS tend to have institutional voids (difficult to find good people)
  • CAPITAL MARKETS are still developing (effectiveness of banks and insurance companies may vary considerably; no clear expectations regarding corporate governance so it is difficult to trust local partners)
42
Q

What does a lack of openness create

A

it creates trade, social, and administrative barriers

43
Q

What can MNCs do when there are institutional voids but they still want to be successful?

A

They can fill the institutional voids

44
Q

Shakti

A

empowerment. building and supporting a network of female entrepreneurs in India by Unilever.

Trimester 3 (24 decks)

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