Political and Economic Forces Flashcards
How do institutions reduce uncertainty?
Establish “rules of the game” that economic players play by. A standard to follow in order to survive and prosper. By signaling which conduct is legitimate and which is not, institutions constrain the range of acceptable actions.
Discuss and compare the three pillars (regulatory, normative, and cognitive)
Regulatory pillar- The coercive power of governments (laws, regs, rules). Normative pillar- Values, beliefs, and actions of other relevant players (norms, cultures, ethics). Cognitive pillar- The internalized, taken-for-granted values and beliefs that guide behavior. (beliefs between right/wrong).
Compare formal and informal institutions.
Formal instiution- One that include laws, regulations and rules. Informal instiution- One that includes norms, cultures and ethics
On what is the institution based view of global business grounded? What core propositions lie at the root of this view?
The dynamic interaction between institutions and firms, and considers firm behaviors as the outcome of such an interaction. (1) managers and firms rationally pursue their interests and make choices within institutional constraints (bounded rationality) (2) in situations where formal constraints are unclear or fail, informal constraints play a larger role in reducing uncertainty and providing constancy to managers and firms (personal relationships and connections)
How is global business affected by democracy?
An individual’s right to freedom of expression and organization. For example, starting up a firm is an act of economic expression.
How is global business affected by totalitarianism?
These countries often experience wars, riots, protests, chaos, and breakdowns, which result in higher political risk.
What are the differences between democracy and totalitarianism?
Democracy- Citizens elect representatives to govern the country on their behalf. Totalitarianism- One person or party exercises absolute political control over the population.
Explain the core features of civil, common and theocratic law? How do they compare?
Civil law- Law that uses comprehensive statutes and codes as a primary means to form legal judgments. Common Law- Law shaped by precedents and traditions from previous judicial decisions. Theocratic law- a legal system bases on religious teachings. Relative to civil law, common law has more flexibility because judges have to resolve specific disputes based on their interpretation of the law. Civil law has less flexibility because judges only have the power to apply the law.
What is a property right? In what way are property rights essential?
Property right- The legal rights to use an economic resource and to derive income and benefits from it. Can be used as collateral for starting a firm; not as common in developing countries, therefore hindering economic growth.
What is an intellectual property right?
Rights associated with the ownership. They primarily include rights associated with patents, copyrights, and trademarks.
Contrast the market, command, and mixed economy types.
Market economy- One that is characterized by the “invisible hand” of market forces-all factors of production should be privately owned. Command economy- One that is defined by a government taking all factors of production to be government-owned or state-owned, and all supply, demand, and pricing are planned by the government. Mixed economy- One has elements of both a market economy and a command economy. It boils down to the relative distribution of market forces versus command forces.
What is an institution
The humanly devised constraints that structure human interaction
A social way of doing something
Institutional framework
Formal and informal institutions governing individual/ firm behavior supported by 3 pillars
- regulatory (formal)
- normative (informal)
- cognitive (informal)
Regulatory pillar
Formal
- coercive power of governments
- laws, regulations, rules
Normative pillar
Informal
- the values, beliefs and actions of a group (emotions)
Cognitive pillar
Informal
- internalized values and beliefs that guide behavior
What is the key role of an institution
Reduce uncertainty
- institutions constrain the range of acceptable actions
- uncertainty surrounding economic transactions can lead to transactions costs
~misunderstanding and conflicts
Institutions are not static
The “rules of the game” are constantly in flux in all societies
1st view of core propositions of the institution based view
Managers and firms rationally pursue their interests and make choices within the formal and informal constraints in a given institutional framework
Making decisions in the absence of complete information (bounded rationality)
2nd view of core propositions of the institution based view
While formal and informal institutions combine to govern firm behavior, 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
Political systems
The rules of the game on how a country is governed politically
2 extremes: democracy and totalitarian
Democracy
A political system in which citizens elect representatives to govern The country in their behalf
Totalitarianism
Dictatorship
One person or party exercises absolute political control over the population
Not as good for business as democracy - wars riots protests etc. there is political risk - risk associated with political changes.
Legal systems
Legal systems involve the formal rules of the game on how a country’s laws are enacted and enforced
The dos and donts are specified, thus reducing uncertainty and combating opportunism
