Module 3 Flashcards
Describe Institution-Based view
A theoretical perspective suggesting that firm performance is (at least partially) determined by the institutional framework governing the frim
Define Formal Institutions
Institutions represented by laws, regulations, and rules
What are the 3 Pillars of institutions?
- Regulatory Pillar
the coercive power of governments - Normative Pillar
the mechanism through which norms influence individual and firm behavior - Cognitive Pillar
the internalized taken-for-granted values and beliefs that guide individual and firm behavior
What institutions do?
Key Role –> Reduce Uncertainty
Institutional frameworks can reduce the potential for OPPORTUNISTIC BEHAVIOR by setting rules such that their violations can be mitigated
What are the 2 core propositions of the Institution-Based view
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 behavior , in situations where formal contraints are unclear of fail, informal constraints will play a larger role in reducing uncertainty and providing consistency to managers and firms
What are the 3 Spheres of Institutional Frameworks
1- Political Systems
2- Economic Systems
3- Legal Systems
Define the Sphere of political systems and state its types
A system of the rules of the game on how a country is governed politically
Types:
-Democracy
-Authoritatianism
Define Democracy and its different types
A political system in which citizens elect representatives to govern the country on their behalf
PROPORTIONAL REPRESENTATION
Election system that allocates seats in parliament in proportion to the votes received by each party
FIRST-PAST-THE-POST SYSTEM
Election system in which in each constituency the candidate with the relative majority of votes gets a seat
Define Authoritatianism
A political system in which power is concentrated in the hands of one person or a small elite
Describe the Relationship betweeen Business and Politics
Political systems determine who sets the rules and whose interests may be reflected in the rules
Links:
- Lobbying
Making your views known to policy makers with the aim of influencing the political process
-Corruption
The abuse of public power for private benefits
-Political Risks
Risk associated with political changes that may negatively impact domestic and foreign firms
Define the Sphere of Economic systems and its types
The rules on how a country is governed economically
Types:
- Pure market economy
-Command Economy
Define Pure Market Economy
(A. Smith)
No government intervention in the market instead the market self regulates and adjusts following the concept of the “invisible hand”
Define Command Economy
An economy in which all the factors of production are owned by the government/state and supply, demand and pricing are set by the government
Define the view of Variety of Capitalism
This view suggests that different market economies have different inherent logistics of how markets and other mechanism coordinate market activities
Liberal Market Economy (LME)
- system of coordination primarily through market signals (eg. USA, UK …)
Coordinated Market Economy (CME)
- system of coordinating through a set of other means in addition to market signals (eg. Italy, Germany,…)
Define the Sphere of Legal systems
The rules that govern how a country’s law are enacted and enforced
