Urgent 5 questions- answers needed

rqp

GLOBAL4_Peng_Ch02.pptx

Home >Business & Finance homework help >Operations Management homework help >Urgent 5 questions- answers needed

Chapter 2 Understanding Politics, Laws, and economics

Understanding Politics, Laws, and Economics

Learning Outcomes

Identify two types of institutions

Explain how institutions reduce uncertainty

Identify the two core propositions underpinning an institution-based view of global business

List the differences between democracy and totalitarianism

LEARNING OUTCOMES

‹#›

GLOBAL4 | CH2

Learning Outcomes (Continued)

List the differences among civil law, common law, and theocratic law

Articulate the importance of property rights and intellectual property rights

List the differences among market economy, command economy, and mixed economy

Explain why it is important to understand the different institutions when doing business abroad

LEARNING OUTCOMES (continued)

‹#›

GLOBAL4 | CH2

Institutions: Rules of the Game

Not static

Institutional transaction: Fundamental and comprehensive changes introduced to the formal and informal rules of the game

Affects firms as players

LO 1

‹#›

GLOBAL4 | CH2

Institutions: Rules of the Game (continued)

Success and failure of firms are determined by how firms play the game

Depends on how the rules are made, enforced, and changed

Institution-based view

For survival, firms must monitor, decode, and adapt to the changing rules of the game

LO 1

‹#›

GLOBAL4 | CH2

2.1 - Dimensions of Institutions

LO 1

‹#›

GLOBAL4 | CH2

Exhibit

Supportive Pillars

Coercive power of governments exercised through laws, regulations, and rules

Regulatory pillar

Mechanisms through which norms influence individual and firm behavior

Normative pillar

Internalized values and beliefs that guide individual and firm behavior

Cognitive pillar

LO 1

‹#›

GLOBAL4 | CH2

Formal institutions, which include laws, regulations, and rules, are supported by a regulatory pillar, the coercive power of governments.

Informal institutions, which include norms, cultures, and ethics, are supported by the normative pillar and the cognitive pillar. The normative pillar refers to how the values, beliefs, and actions (collectively known as norms) of other relevant players influence the behavior of focal individuals and firms. The cognitive pillar refers to the internalized, taken-for-granted values and beliefs that guide individual and firm behavior.

Role of Institutions in Reducing Uncertainty

Institutions influence decision-making process of individuals and firms by constraining the range of acceptable actions

Economic uncertainty leads to transaction costs

Opportunism is an important source of transaction costs

Opportunism: Act of seeking self-interest with guile

LO 2

‹#›

GLOBAL4 | CH2

Political or economic uncertainty can be potentially devastating to firms because the uncertainty surrounding economic transactions can lead to transaction costs, which are the costs of doing business. An important source of transaction costs is opportunism, which is the act of seeking self-interest with guile. Institutions spell out the rules of the game, thus mitigating violations and keeping transaction costs minimal.

Role of Institutions in Reducing Uncertainty (continued)

Unstable and unreliable institutional frameworks:

Increase transaction costs

Decrease transactions

Transition economies

Emerging economies in which institutional transitions are pervasive

LO 2

‹#›

GLOBAL4 | CH2

2.2 - Institutions, Firms, and Firm Behaviors

LO 3

‹#›

GLOBAL4 | CH2

Exhibit

The institution-based view of global business focuses on the dynamic interaction between institutions and firms and considers firm behaviors as the outcome of that interaction. Firm behaviors are often a reflection of the formal and informal constraints of a particular institutional framework.

2.3 - Two Core Propositions of the Institution-Based View

LO 3

‹#›

GLOBAL4 | CH2

Exhibit

As an example of the first proposition, consider the government tax revenues in Brazil. In Brazil, the government tax revenues at all levels reach 35 percent of GDP, which is higher than Mexico’s 18 percent and China’s 16 percent. Therefore, the gray market in Brazil accounts for a higher percentage of the economy than in Mexico and China.

As an example of the second proposition, consider the growth of entrepreneurial firms after the collapse of the Soviet Union. In the absence of any formal institutional structure, the growth of many entrepreneurial firms was facilitated by informal constraints based on personal relationships and connections among managers and officials.

Political Systems

Rules of the game on how a country is governed politically

Types

Democracy

Totalitarianism

LO 4

‹#›

GLOBAL4 | CH2

Democracy

Political system in which citizens elect representatives to govern the country on their behalf

Allows an individual the right to freedom of expression and organization

LO 4

‹#›

GLOBAL4 | CH2

A fundamental aspect of democracy relevant to global business is an individual’s right to freedom of expression and organization. In most modern democracies, the right to organize economically is extended not only to domestic individuals and firms, but also to foreign individuals and firms.

Totalitarianism

Political system in which one person or party exercises absolute political control over the population

Not suitable for business

Suffers from high political risk

Political risk: Risk associated with political changes that may negatively impact domestic and foreign firms

Extreme political risk may lead to nationalization (expropriation) of foreign assets

LO 4

‹#›

GLOBAL4 | CH2

Types of Totalitarianism

Communist totalitarianism

Right-wing totalitarianism

Theocratic totalitarianism

Tribal totalitarianism

LO 4

‹#›

GLOBAL4 | CH2

There are four major types of totalitarianism.

Communist - Centers on a communist party

Right-wing - Characterized by its intense hatred of communism

One party, typically backed by the military, restricts political freedom to prevent the growth of communism.

Theocratic - Monopolization of political power by one religious party or group

Tribal - Control of political power by one tribal or ethnic party; they oppress other tribes and groups

Legal Systems

Rules of the game on how a country’s laws are enacted and enforced

Reduce transaction costs by:

Minimizing uncertainty

Combating opportunism

LO 5

‹#›

GLOBAL4 | CH2

Legal Systems (continued)

Laws are transplanted from the following legal traditions

Civil law: Uses comprehensive statutes and codes to form legal judgments

Common law: Shaped by precedents from previous judicial decisions

Flexible - Resolves disputes based on judges’ interpretation of the law

Theocratic law: Based on religious teachings

LO 5

‹#›

GLOBAL4 | CH2

Civil law: Derived from Roman law and strengthened by Napoleon’s France

It uses comprehensive statutes and codes as a primary means to form legal judgments. Relative to common law, civil law has less flexibility because judges only have the power to apply the law.

Common law: English in origin and is shaped by precedents and traditions from previous judicial decisions

Relative to civil law, common law has more flexibility because judges have to resolve specific disputes based on their interpretation of the law, and such interpretation may give new meaning to the law, which will in turn shape future cases.

Theocratic law: Based on religious teachings

Islamic law is the only surviving example of a theocratic legal system that is formally practiced by any government.

Property Rights

Legal rights to use an economic property (resource) and to derive income and benefits from it

Property document is required to prosecute violators through legal means

LO 6

‹#›

GLOBAL4 | CH2

In developed economies, every parcel of land, every building, and every trademark is represented in a property document that entitles the owner to derive income and benefits from it. Within such a system, tangible property makes other, less tangible economic activities possible. For example, property can be used as collateral for credit. The single most important source of funds for new businesses in the United States is the mortgage of entrepreneurs’ houses.

Property Rights (continued)

Facilitate economic growth

Insecure property rights in developing countries:

Reduce the average firm size

Result in the use of technologies that employ less fixed capital

Do not entail long-term investment

LO 6

‹#›

GLOBAL4 | CH2

Intellectual Property (IP)

Intangible property that results from intellectual activity

Intellectual property right (IPR): Legal right associated with the ownership of intellectual property

Consists of:

Patents

Copyrights

Trademarks

LO 6

‹#›

GLOBAL4 | CH2

IPR primarily includes rights associated with:

Patents: Legal rights awarded by government authorities to inventors of new products or processes

Copyrights: Exclusive legal rights of authors and publishers to publish and disseminate their work

Trademarks: Exclusive legal rights of firms to use specific names, brands, and designs to differentiate their products from others

Intellectual Property (IP) (continued)

Intangible nature of IPR makes enforcement difficult

Piracy: Unauthorized use of intellectual property rights

Example - Unauthorized sharing of music files and deliberate counterfeiting of branded products

LO 6

‹#›

GLOBAL4 | CH2

IPR needs to be asserted and enforced through a formal system that is designed to provide an incentive for people and firms to innovate. To be effective, the system must also punish violators, but this is difficult because of the intangible nature of IPR. The unauthorized use of IP is referred to as piracy.

Economic Systems

Rules of the game on how a country is governed economically

Market economy: Characterized by the invisible hand of market forces

Functions that cannot be performed by the private sector is performed by the government

LO 7

‹#›

GLOBAL4 | CH2

Market economy: Characterized by the invisible hand of market forces; the government takes a laissez faire approach.

Economic Systems (continued)

Command economy: All factors of production are state-owned and state-controlled

All supply, demand, and pricing are planned by the government

Mixed economy: Includes elements of both market economy and command economy

LO 7

‹#›

GLOBAL4 | CH2

Command economy: All factors of production are government- or state-owned and controlled, and all supply, demand, and pricing are planned by the government.

Mixed economy: Characterized by elements of both market economy and command economy

It boils down to the relative distribution of market forces versus command forces. In practice, no country has adopted either a pure market or pure command system. Nearly all economic systems involve some mix of market and command forces. So, when it is said that a certain country has a market economy, it means that the system is controlled mostly by market forces.

What Drives Economic Development?

Culture

Geography

Institutions

LO 7

‹#›

GLOBAL4 | CH2

The highest and lowest per capita income countries in the world are Norway ($76,450) and Burundi ($110).

The culture side argues that rich countries tend to have a smarter and harder working population driven by a stronger motivation for success. The geography school of thought suggests that rich countries tend to be well endowed with natural resources.

In response to the first position, it is difficult to imagine that Norwegians are, on average, nearly 700 times smarter and harder working than Burundians.

In response to the second, some rich countries, such as Japan, lack significant resources, whereas some poor countries, such as the Democratic Republic of the Congo, have abundant resources.

A third side of the debate argues that institutions are the basic determinants of the performance of an economy.

Importance of the Role of Institutions in International Business

Formal, market-supporting institutions

Encourage individuals to specialize and firms to grow in size

Protect property rights and fuel innovation, entrepreneurship, and economic growth

Lack of strong institutions

Forces individuals to trade on an informal basis with a small neighboring group

LO 7

‹#›

GLOBAL4 | CH2

2.4 - Implications for Action

LO 8

‹#›

GLOBAL4 | CH2

Exhibit

Key Terms

Institutional transition

Regulatory pillar

Normative pillar

Cognitive pillar

Transaction cost

Opportunism

Political system

Democracy

Totalitarianism (dictatorship)

Political risk

Legal system

Civil law

Common law

Theocratic law

Property right

Intellectual property (IP)

‹#›

GLOBAL4 | CH2

‹#›

GLOBAL4 | CH2

KEY TERMS

GLOBAL4 | CH2

Key Terms (Continued)

Intellectual property right (IPR)

Patent

Trademark

Piracy

Economic system

Market economy

Command economy

Mixed economy

‹#›

GLOBAL4 | CH2

‹#›

GLOBAL4 | CH2

‹#›

GLOBAL4 | CH2

KEY TERMS (continued)

GLOBAL4 | CH2

Summary (Continued)

Types of institutions - Formal and informal

Institution-based view of global business

Considers firm behavior as the outcome of the dynamic interaction between institutions and firms

Democracy and totalitarianism are primary political systems

Legal traditions include civil law, common law, and theocratic law

‹#›

GLOBAL4 | CH2

‹#›

GLOBAL4 | CH2

SUMMARY

GLOBAL4 | CH2

Summary (Continued 1)

Property rights are the legal right to use an economic property and derive income and benefits from it

Intellectual property rights include patents, copyrights, and trademarks

Economic systems consist of market, command, and mixed economies

Before entering a new country, managers must be aware of the formal institutions that affect their business

‹#›

GLOBAL4 | CH2

‹#›

GLOBAL4 | CH2

SUMMARY

GLOBAL4 | CH2

‹#›

GLOBAL4 | CH2