Lecture 2 - Formal Institutions Flashcards
What is the insitutional based view on IB?
- The success and failure of firms is, in part, determined by the institutional governing frameworks.
What is the key role of institutions?
- To reduce uncertainty by signalling what is legitimate behaviour and what is not.
What is the benefit of a country reducing uncertainty?
- Political, economic and legal uncertainty can be devastating because of increases in the cost of doing business (transaction costs).
- By reducing uncertainty, institutions can mitigate opportunistic behaviour (disregard legitimate actions)
How do Formal institutions reduce uncertainty?
- Through arms length contracts. Formal, rule-based, impersonal exchange with third part enforcement.
How do informal institutions reduce uncertainty?
- Through relational agreements. Informal, relationship-based, personalised exchanges.
What are the core proposititions of the Institution based-view?
1) Managers and firms pursue their interests and make choices within the formal and informal constraints.
2) In situations where formal constriaints are unclear or fail, informal constraints will play a larger role in reducing uncertainty and providing constancy to managers and firms.
What are the types of formal institutions?
Political system - how a country is governed (democracy vs authoritarianism)
Legal system - how a country’s laws are enaced and enforced (common vs civil law).
Economic system - how a country is governed economically (market vs command economy).
Property rights - legal rights to use an economic property (resource) and derive income/benefits from it
How do political systems effect international business?
- They determine who sets the rules and whose interests may be influenced within those rules.
- Determine how business can influence those rules.
- Frequent and volatile changes in policies create political risks tha may disadvantage domestic and foreign firms.
What are the actors in an MNE’s political risk?
- Host country risk
- Home country risk
- International risk - how does the host country relate to its neighbors and how does this impact operations.
- Global risk
How do Legal systems impact international business?
- Civil law - what happened in the past does not necessarily influence the future. Based on the scholarly interpretation and application od detailed laws organised into codes.
- Common law - Decision making is based on past cases.
What are the two economic systems?
Market economy - government remains laissez-faire by only engaging in activities the free market cannot perform. (USA and UK).
Command economy - Economic factors of production, such as the supply, demand and pricing, are government owned and controlled.
What are the varieties of capitalism?
Liberal market economy (UK and USA) - decision making is based highly on increasing shareholder value. Makes business relatively easier.
Coordinated market economy (Germany and France) - the managers, governments, trade unions and industry hold significant influence in the decision making process.
What are the types of Intellectual property rights (IPR)?
Patent - grants an inventor of a new product exclusive rights for a defind period to manufacture, use of sell that invention.
Copyright - legal rights for artistic work.
Trademark - design and names of companies.
How can property rights be violated legally and illegally?
Legally - extort income through taxation, expensive licenses and permits nationalise resources without compensation to owners.
Illegally - theft, blackmail, piracy and organised crime.
