Political and Economic Forces

Question 1

How do institutions reduce uncertainty?

Answer 1

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.

Question 2

Discuss and compare the three pillars (regulatory, normative, and cognitive)

Answer 2

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).

Question 3

Compare formal and informal institutions.

Answer 3

Formal instiution- One that include laws, regulations and rules. Informal instiution- One that includes norms, cultures and ethics

Question 4

On what is the institution based view of global business grounded? What core propositions lie at the root of this view?

Answer 4

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)

Question 5

How is global business affected by democracy?

Answer 5

An individual’s right to freedom of expression and organization. For example, starting up a firm is an act of economic expression.

Question 6

How is global business affected by totalitarianism?

Answer 6

These countries often experience wars, riots, protests, chaos, and breakdowns, which result in higher political risk.

Question 7

What are the differences between democracy and totalitarianism?

Answer 7

Democracy- Citizens elect representatives to govern the country on their behalf. Totalitarianism- One person or party exercises absolute political control over the population.

Question 8

Explain the core features of civil, common and theocratic law? How do they compare?

Answer 8

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.

Question 9

What is a property right? In what way are property rights essential?

Answer 9

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.

Question 10

What is an intellectual property right?

Answer 10

Rights associated with the ownership. They primarily include rights associated with patents, copyrights, and trademarks.

Question 11

Contrast the market, command, and mixed economy types.

Answer 11

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.

Question 12

What is an institution

Answer 12

The humanly devised constraints that structure human interaction

A social way of doing something

Question 13

Institutional framework

Answer 13

Formal and informal institutions governing individual/ firm behavior supported by 3 pillars

• regulatory (formal)
• normative (informal)
• cognitive (informal)

Question 14

Regulatory pillar

Answer 14

Formal

• coercive power of governments
• laws, regulations, rules

Question 15

Normative pillar

Answer 15

Informal

- the values, beliefs and actions of a group (emotions)

Question 16

Cognitive pillar

Answer 16

Informal

- internalized values and beliefs that guide behavior

Question 17

What is the key role of an institution

Answer 17

Reduce uncertainty
- institutions constrain the range of acceptable actions
- uncertainty surrounding economic transactions can lead to transactions costs
~misunderstanding and conflicts

Question 18

Institutions are not static

Answer 18

The “rules of the game” are constantly in flux in all societies

Question 19

1st view of core propositions of the institution based view

Answer 19

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)

Question 20

2nd view of core propositions of the institution based view

Answer 20

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

Question 21

Political systems

Answer 21

The rules of the game on how a country is governed politically
2 extremes: democracy and totalitarian

Question 22

Democracy

Answer 22

A political system in which citizens elect representatives to govern The country in their behalf

Question 23

Totalitarianism

Answer 23

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.

Question 24

Legal systems

Answer 24

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

Question 25

What are the 3 legal traditions

Answer 25

Civil law, common law, and theocratic law

Question 26

Civil law

Answer 26

France, Brazil, China
Derived from Roman law
Oldest most influential and most widely used

Question 27

Common law

Answer 27

US Canada and Australia
Shaped by precedents and traditions from previous judicial decisions.
English speaking countries

Question 28

Theocratic laws

Answer 28

Iran, Saudi Arabia, UAE
Based on religious teachings
Jewish law and Islamic law

Question 29

Property rights

Answer 29

The most fundamental economic function that a legal system serves to protect is property rights
The legal right to use an economic property (resource) and to derive income and other benefits from it

Question 30

Intellectual property rights

Answer 30

Refers to the intangible property that is the result of intellectual activity (books, videos, websites)

Patents - legal rights to investors
Copyrights- legal rights to authors/ publishers
Trademarks- legal rights to use names, brands, and designs

Question 31

Economic systems

Answer 31

The rules of the game on how a country is governed economically

Economic systems: market economy (open economy), command economy (closed/ centrally planned), mixed economy

Question 32

Market economy

Answer 32

Open- 
Invisible hand
Laissez faire (hands off approach)
Factors of production privately owned
Government intervention limited

Question 33

Command economy

Answer 33

Closed

Govt takes commanding height
Factors of production govt owned
Supply, demand, and price planned by govt

Question 34

Mixed economy

Answer 34

Elements of both market and command economy

Relative distribution of market forces vs command forces

Question 35

What economic system does the majority of the world see themselves as?

Answer 35

Market economy

Question 36

What drives economic development?

Answer 36

Culture (1600s to 1960s)
Geography (1960s to now)
Institutions (1970s to current)

Question 37

Culture economic development perspective

Answer 37

Rich countries have a smarter and harder working populations drive by a stronger motivation for economic success.
-Protestant work ethic

Question 38

Geography economic development perspective

Answer 38

Rich countries have natural resources
Landlocked? Tropical diseases?
North/ south argument

Question 39

Institutions economic development perspective

Answer 39

Institutions provide the incentive structure of a society
Political, legal and economic systems impact development by affecting incentives and the costs of doing business
-gains from trade? Specialization? Property rights?

Question 40

Is a democracy Conducive to economic growth?

Answer 40

Yes! The fastest growing major economy in the last 3 decades remains totalitarian (China)

Indias (worlds largest democracy) growth rate is about half of chinas

• 1980s: 60 countries practicing democracy
• 2000s: 117 countries practicing democracy