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international business chap 2

formal and informal rules of the game
institutions
fundamental and comprehensive changes introduced to the formal and informal rules of the game that affect firms as players
institutional transitions
*results of institutional being dynamic
a leading perspective in global business that suggests that the success and failure of firms are enabled and constrained by institutions
*how firm can play the game (understand n take advantage of the rule
institution-based view
formal and informal institutions governing individual and firm behavior
institutional framework
institutional framework’s pillars?
-regulatory
-normative
-cognitive
institutions represented by laws, regulations, rules
formal institutions
coercive power of governments
regulatory pillar –> formal institutions
*people pay tax not only out of patriotic duty, but also in fear of coercive power of gov if they are caught not paying
institutions represented by culture, ethic, norm
informal institutions
-two main supportive pillars: normative and cognitive
the mechanism through which norms influence individual and firm behavior
normative pillar
how the values, beliefs, actions of the relevant players that influence the focal individuals and firms
norm
the internalized (r taken-for-granted) values and beliefs that guide individual and firm behavior
cognitive pillar
*@whistle blower: what do they think is right or wrong, make them report if there’s a crime
what do institutions do?
-reduce uncertainty by signaling which conduct is legitimate and which is not, constraining the range of acceptable actions
the cost associated with economic transactions or, more broadly, the costs of doing business
*may be caused by uncertainty surrounding economic transactions
transaction cost
important source of transaction cost
def= act of seeking self-interest with guile
opportunism
e.g. cause transaction cost -> misleading, cheating
to reduce it–>
to reduce transaction cost–>
spell out the rules of the games (increase certainty) so that violations can be mitigated
institution-based view focuses on..
-dynamic interaction between institutions and firms
-outcome of such interaction = firm behavior (reflection of the formal and informal constraints of a particular institutional framework)
core propositions of the institution-based view 1
managers and firms RATIONALLY pursue their interests and make choices within the formal and informal constraints in a given institutional framework
core propositions of the institution-based view 2
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
proposition one specifically concerns?
*necessity of making rational decisions in the absence of complete information
bounded rationality
chief among formal institutions
1. political systems
2. legal systems
3. economic systems
rules of the game on how a country is governed politically
political system
a political system in which citizens elect representatives to govern the country on their behalf
democracy
a political system in which one person or party exercises absolute political control over the population
totalitarianism (dictatorship)
risk associated with political changes that may negatively impact domestic and foreign firms
political risk
*experienced by totalitarian countries more than in democratic country
rules of the game on how a country’s laws are enacted and enforced
legal system
a legal tradition that uses comprehensive statues and codes as a primary means to form legal judgments
civil law
*from roman law and strengthened by napoleon’s france
*oldest, most influential
*based on applying of law
a legal tradition that is shaped by precedents and traditions from previous judicial decisions
common law
*origin=english
*more flexible
*based on judge’s interpretation of law
a lega system based on religious teachings
theocratic law
e.g. Jewish law and Islamic law
the legal rights to use an economic property (resource) and to derive income and benefits from it
property rights
*property = home, office
*property rights–> property can be used for collateral (make funds)
intangible property that is the result of intellectual activity
intellectual property
rights associated with the ownership of intellectual property
intellectual property (IP) rights
exclusive legal right of investors of new products or processes to derive monopolized income from invention
e.g. manufacturing, licensing, selling
patent
exclusive legal right of author and publishers to publish and disseminate their work
copy right
exclusive legal right of firms to use specific names, brands, and designs to differentiate their products from others
trademark
rules of the game on how a country is governed economically
economic system
an economy that is characterized by the “invisible hand” of market forces
market economy
*first noted by adam smith
*all factors of production should be privately owned
the government takes a hands-off approach
laissez faire
*in market economy
*gov only perform functions that the private sector cannot perform (e.g. providing roads and defense)
an economy that is characterized by government ownership and control of factors of production
command economy
*all factors of production are government-owned/state-owned
*all supply, demand, pricing are planned by gov
an economy that has elements of both a market economy and a command economy
mixed economy
is there any ideal free market economy? or 100% command economy?
none
even HK has some notieable government intervention in the economy
a firm owned and controlled by the state (government)
*at least 10% owend by the state
state-owned enterprise SOE
*e.g. bank –> to bail it out from having share price that is too low
most country has a
mixed economy
a country with “market economy” =
-a country that organizes its economy mostly by market forces and that still has certain elements of a command economy
a view centered on the unquestioned belief in the superiority of private ownership over state ownership in economic policy making
-often spearheaded (led) by two ____ based international organization : IMF and World bank
Washington consensus
*championed the privatization global movement
IMF=
international monetary fund
GSE=
government-sponsored enterprises
*what US have now; only a different term with the same meaning w/ SOEs
recklessness when people and org (firms+gov too) do not have to face the full consequences of their actions
moral hazard
*encouraged by government bailouts
a view that questions Washington Consensus’ belief in the superiority of private ownership over state ownership in economy policy making

*often associated with the position held by the chinese gov (80% of stock is SOEs, which increases china’s GDP 9.5% per year)

beijing consensus
a state-owned invetment fund composed of financial assets such as stocks,bonds,real estate, or other financial instruments funded by foreign exchange assets
sovereign wealth funds (SWFs)
*more in emerging economies

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