Lecture 2 - Formal institutions Flashcards
Define Institutions
The formal and informal rules of the game
Mention and describe the 3 pillars of institutions
1) Regulatory:
Explicit and formal rules imposed by the government and backed by legal processes.
2) Normative:
The mechanism through which norms, values, beliefs and actions of relevant players affect the behavior of focal individuals and firms. eg. Fairtrade.
3) Cognitive:
Internalized subconscious taken for granted values and beliefs that guide individual and firm behavior as characteristics of the culture.
What is the key role of institutions?
To reduce uncertainty:
Eg. Economic = reduce transaction costs and opportunistic behavior.
Political: Can reduce political risk
What are the 2 Core Propositions of the Institution-Based View?
1) Managers and firms rationally pursue their interests and make choices within the formal and informal constraints in a given institutional framework.
2) 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.
Mention the 3 key spheres of a country´s formal institutions
1) Political system
2) Economic system
3) Legal system
Political system:
Describe it and mentions the two types
=Refers to the rules of the game on how a country is governed politically
1) Democracy
2) Totalitarianism
Define Authoritarianism and mention 4 key characteristics
= A political system in which the power is concentrated in the hands of one person or a small elite
1) Concentrated power, typically backed by military.
2) Lack of constitutional guarantees eg. an independent court.
3) Restricted participation and political freedom
4) Ideology: Communism sometimes combines with nationalism
Democracy:
Define it and mentions 2 characteristics and 2 types
=Political system in which governments derive their legitimacy from elections by their citizens.
1) Rules laid down in the constitution and determine how elections are organized, how the public vote is translated into parliament seats and how much power the elected officials attain.
2) Leaders are elected directly by the wide participation of the people or by their representatives
1) Representative Democracy
2) Direct Democracy
Mention 3 reasons why politics are relevant for business
1) Political systems determine who sets the rules and whose interest will be reflected in the rules.
-Centralized vs. decentralized.
2) Political systems determine where and how businesses can influence legislative processes through:
-Lobbying (mostly legal)
-Corruption (mostly illegal=
-Other non-market strategies eg. connections
3) Political systems vary in how frequently and to what extend the rules of the game change for business
-Political risk
Define Economic Systems and the 3 types
= The rules of the game on how a country is governed economically
1) Market economy:
-The invisible hand of market forces
-Government takes a hands-off approach
-All productive activities are privately owned
-Production is determined by supply and demand
-Role of government is to encourage vigorous free and fair competition
-Individuals and firms are free to engage in all sorts of contracts
2) Command (centrally planned economy)
-Government taking the commanding height in the economy
-All factors of production are state-owned and controlled
-All supply, demand and pricing are planned by the government
-No incentive for individual to look for better ways to serve needs
3) Mixed economy:
-Elements of both
Define Legal Systems with 3 points
Refers to:
1) Rules or laws that regulate behavior
2) Process through which laws are enforced
3) Process through which the right to complain or seek assistance from the government is obtained
*Are influenced by the prevailing political system.
Mention and define the 2 types of Legal Systems
1) Civil law:
A legal tradition that uses comprehensive statues and legal codes as a primary means to form legal judgements.
-Judges leads proceedings, asking questions and making decisions
2) Common law:
A legal tradition that is shaped by traditions and precedents from previous judicial decisions and costumes
-Judges as arbiters, lawyers dominate proceedings and juries as decision makers.
Mention the implications for business for the 2 types of legal system respectively
Civil Law:
-Fairly detailed laws/rules about everything that the company must be aware of.
-Therefore not the same of documentation and length of contracts needed.
-Traditionally more protection of employees and consumers.
Common Law:
-Each corporation has its own rules, large legal departments, activities and contracts need to be documented in greater detail to fill in the gaps for:
- Independent evaluators
- As a protection against possible legal action
- Each party pays its own legal costs which can be very high
Define Property and Property Rights
= A resource that an individual or business owns.
= Legal rights over the use of a resource and over any income that may be derived from that resource
Mention and define the 3 different types of Intellectual Property Rights IPRs
1) Patents:
-Legal rights awarded by government authorities to inventors of new technological ideas, who are given exclusive rights to derive income from the invention.
2) Copyrights:
- The exclusive legal rights of authors and publishers to publish and disseminate their work
3) Trademarks:
-Exclusive legal rights of firms to use specific names, brands and designs to differentiate their products from others
Mention the 2 ways that property rights can be violated
1) Private action:
- Theft, privacy, blackmail by private individuals or groups
2) Public action:
-Public officials extort income, resources or property.
-Violation committed by public officials or government bodies either:
*Legally: By levying excessive taxation, requiring property holders to obtain expensive licenses or permits, taking assets into state ownership without compensation, redistributing assets without compensating owners.
*Illegally: Through corruption, demanding bribes
Mention 8 examples on how MNCs can help with peace and strong institutions (SDG 16)
*Given by the Institute for Human Rights’ Sustainable Development
1) Taking practical steps to implement a zero-tolerance policy toward corruption in the value chain
2) Undertaking cross-sectorial and collaborative efforts to end corruption
3) Addressing the risk of underage workers
4) Mentoring under-represented students
5) Strengthening diversity and inclusion through training
6) Gender-balancing workforce as a measure against sexual harassment
7) Committing to gender equality in senior management
8) Committing to fair wages
Implications for actions:
What 4 points are important to consider when entering a new country as a MNC?
1) Obtain a thorough understanding of the formal institutions governing firm behavior
2) Beware of small institutional differences among superficially similar countries
3) Changes in formal institutions can be anticipated or influenced by engaging in processes in the economic, political and legal systems
4) Should operate by respecting human rights in accordance with the UN Guiding Principles on Business and Human Rights and other responsible business frameworks.
What 2 aspects are varieties of capitalism described by?
1) Employment protection
2) Stock Market Capitalization
