Key Terms Opportunism is the act of seeking self-interest with guile. Transaction cost is the cost associated with economic transactions or, more broadly, the costs of doing business. Transition economies are a subset of emerging economies, particularly those moving from central planning to market competition such as China, Poland, Russia, and Vietnam.
Key Concepts Proposition 1: Managers and firms rationally pursue their interests and make choices within the formal and informal institutional constraints in a given institutional framework. Key Terms Bounded rationality is the necessity of making rational decisions in the absence of complete information. Key Concepts Democracy is a political system in which citizens elect representatives to govern the country.
Totalitarianism is a political system in which one person or party exercises absolute political control over the population. Key Terms Communist totalitarianism is a type of totalitarianism that centers on a communist party. Democracy is a political system in which citizens elect representatives to govern the country on their behalf.
Political risk is risk associated with political changes that may negatively impact domestic and foreign firms. Political system is the rules of the game on how a country is governed politically. Right-wing totalitarianism is a type of totalitarianism that is characterized by its intense hatred of communism. Theocratic totalitarianism is a type of totalitarianism that monopolizes political power in the hands of one religious party or group.
Totalitarianism dictatorship is a political system in which one person or party exercises absolute political control over the population. Tribal totalitarianism is a type of totalitarianism in which one tribe or ethnic group which may or may not be the majority of the population is monopolizing political power and oppressing other tribes or ethnic groups. Key Concept Laws in different countries are transplanted from three legal traditions. Civil law uses comprehensive statutes and codes as a primary means to form legal judgments.
Common law is shaped by precedents and traditions from previous judicial decisions. Theocratic law is a legal system based on religious teachings.
Key Terms Civil law is a legal tradition that uses comprehensive statutes and codes as a primary means to form legal judgments. Common law is a legal tradition that is shaped by precedents and traditions from previous judicial decisions.
Copyrights are the exclusive legal rights of authors and publishers to publish and disseminate their work. Intellectual property IP is intangible property that is the result of intellectual activity.
IPRs primarily include rights associated with 1 patents, 2 copyrights, and 3 trademarks. Patents are exclusive legal rights of inventors of new products or processes to derive income from such inventions. Piracy is the unauthorized use of intellectual property. Property right is the legal right to use an economic property resource and to derive income and benefits from it. Trademarks are the exclusive legal rights of firms to use specific names, brands, and designs to differentiate their products from others.
Key Concept An economic system refers to the rules of the game on how a country is governed economically. A pure market economy is characterized by laissez faire and total control by market forces.
A pure command economy is defined by government ownership and control of all means of production. Most countries operate mixed economies with a different emphasis on market versus command forces. Key Terms Command economy is an economy characterized by government ownership and control of factors of production.
Economic system is the rules of the game on how a country is governed economically. The government takes a hands-off approach known as laissez faire. Mixed economy is an economy that has elements of both a market economy and a command economy. State-owned enterprises SOEs are firms that are owned and controlled by the state. Key Concept Two leading debates are 1 drivers of economic development and 2 private ownership versus state ownership. Moral hazard is recklessness when people and organizations including firms and governments do not have to face the full consequences of their actions.
Chapter 2: Understanding Formal Institutions: Politics, Laws, and Economics Washington Consensus is a view centered on the unquestioned belief in the superiority of private ownership over state ownership in economic policymaking, which is often spearheaded by the US government and two Washington-based international organizations: the International Monetary Fund and the World Bank.
Key Concept Managers considering working abroad should have a thorough understanding of the formal institutions before entering a country. In situations where formal constraints are unclear, managers can reduce uncertainty by relying on informal constraints, such as relationship norms.
Are there cultures that would be more likely to limit economic growth and even result in poverty? Defend your answer. Usually, multiple forces affect a given economy during a given period of time. Some will disagree and may point out that even if culture affects the economy, economic impact is not the only issue in life.
Compare PengAtlas Maps 1. To what extent do developed economies tend to have a high level of political freedom—or is there any relationship? If there is any relationship, is it causal or coincidental? Map 1. Of the 33 developed nations, 32 are on the Free list and the remaining nation Singapore is on the Partly Free list. Most students will find it difficult to believe that there in no relationship between being free and being developed. However, China is listed as Not Free but is likely to eventually be listed as developed — whether it will also eventually be on the Free or Partly Free list remains to be seen.
Compare PengAtlas Map 1. In your opinion, what stands out to you regarding each category of legal system? Are there any relationships? If so, are they causal or coincidental? The three countries with theocratic law are not listed as developed.
Since there were far fewer theocratic law countries as compared to the other two categories, it cannot be stated with certainty that there is or is not a relationship between development and theocratic law. Furthermore, the numbers 20 and 16 are not large numbers. However, it does appear that a larger listing of countries might indicate a relationship. When there is nothing involving formal or informal rules to serve as a guideline, there is obviously going to be uncertainty.
Students will probably argue that much depends on the rules. Do you agree that managers and firms really pursue their interests? Why or why not? It probably could be argued that they pursue their interests but their idea of what constitutes their interest may not be in agreement with what others would regard as their interest. However, that might involve not taking advantage of an opportunity for increased profits or a raise in compensation.
What are examples of informal constraints that affect global business firms? Students should be able to list a variety of constraints such as the negative reactions of various stakeholders to actions that may be legal but viewed as unacceptable. What are the pros and cons of expanding into a democratic country? Various responses may include less threat from an arbitrary dictator but there is the risk that if the democracy does not have any constraints on what the majority can do, a minority could be exploited by the majority — e.
What are the pros and cons of expanding into a totalitarian country? At first such a country might seem to offer stability. However, the pros or cons of such an expansion could be affected by opposition to the government in that nation and whether that could lead to an overthrow of the government and confiscation of your property.
Another factor is groups who might boycott your products if you do business in that country. Would you rather do business in a country that uses civil law or common law? Opinions may vary depending on the extent to which one prefers flexibility versus certainty. Some may prefer the type of law used in the country in which they live. What are some of the issues to consider before doing business in a theocracy?
Cultural sensitivity would be especially important in such a country. Familiarization with beliefs and the application of those beliefs to all aspects of business would be essential. What is the relationship between property rights and economic development? According to de Soto, there is a significant relationship between the two: The legal protection of property rights allows economic growth. For example, when property rights are in place, an entrepreneur can use his or her title to a piece of land as collateral for a small business loan.
Why is it important to protect IPR? IP is normally intangible and can thus be easily duplicated. The incentive to invent or create music, for example, could be reduced if innovators had no assurance of reaping rewards from their efforts. Under what circumstances would it be easier to do business in a command economy than a market economy?
In a market economy, one may need to convince many buyers but in a command economy in which the government is the buyer, the persuasion needs to be directed toward only those in control of the government.
Also, buyers in a market economy may be fickle and change their mind over time but in a command economy, there is stability unless those in the government change what they want.
Many view the United States as a mixed economy. In your opinion, is the mix changing? If so, how? Is it shifting more to a command economy or a market economy? The U. Those who want more government involvement may not feel that a specific increase in government is sufficient and may take a much different view of the direction of the economy than those who feel that the country is moving toward a command economy.
In your opinion, which is most important to economic development—culture, geography, or institutions? This is a question in which the answer is not as important as the reasoning and the ability to defend that reasoning.
Given whatever plans you have for the future, do you feel you would have the greatest likelihood of success under private ownership or under state ownership?
Why is it important to understand formal institutions before entering a country? Explain by using an example. This is true for both firms and individuals who wish to avoid being fined or imprisoned. Students should be able to use their own country to create examples that could get a person or firm into trouble if there was no awareness of formal institutional requirements. In some societies there will be no need for legal expertise for example, to prepare a contract until the relationship has been established so that one is trusted.
Encourage students to answer this question by focusing on concepts brought forth in this chapter political, legal, and economic systems and avoid using the question to expound favor or opposition to a politician or ideology. However, this is a question in which the answer is not as important as the thought process and the ability to clearly articulate.
What is your view on the debate between private ownership and state ownership? Visit our Cengage Unlimited page for more information. Free eBook access while your book ships, if available Contract starts on the date of product shipment, not on date of purchase. Discover success in global business today with the most strategic approach to international business topics and unique.
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