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
What are the 3 legal traditions
Civil law, common law, and theocratic law
Civil law
France, Brazil, China
Derived from Roman law
Oldest most influential and most widely used
Common law
US Canada and Australia
Shaped by precedents and traditions from previous judicial decisions.
English speaking countries
Theocratic laws
Iran, Saudi Arabia, UAE
Based on religious teachings
Jewish law and Islamic law
Property rights
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
Intellectual property rights
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
Economic systems
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
Market economy
Open- Invisible hand Laissez faire (hands off approach) Factors of production privately owned Government intervention limited
Command economy
Closed
Govt takes commanding height
Factors of production govt owned
Supply, demand, and price planned by govt
Mixed economy
Elements of both market and command economy
Relative distribution of market forces vs command forces
What economic system does the majority of the world see themselves as?
Market economy
What drives economic development?
Culture (1600s to 1960s)
Geography (1960s to now)
Institutions (1970s to current)
Culture economic development perspective
Rich countries have a smarter and harder working populations drive by a stronger motivation for economic success.
-Protestant work ethic
Geography economic development perspective
Rich countries have natural resources
Landlocked? Tropical diseases?
North/ south argument
Institutions economic development perspective
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?
Is a democracy Conducive to economic growth?
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
