MGMT 3P98 - Chapter 2

Institutional Transition

Fundamental and comprehensive changes introduced to the formal and informal rules of the game that affect firms as players. Ex: China gradually opening the economy to non-domestic companies.

Under the formal institution, what is regulatory pillars?

The coercive power of governments

Under informal institutions, what in normative and cognitive pillars?

Normative Pillar: mechanism through which norms influence individual and firm behaviour.

Cognitive Pillar: internalized values and beliefs that guide individual and firm behaviour.

What do Institutions do?

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

What does economic uncertainty lead to?

Increased transaction costs (cost associated with economic transactions or the cost of doing business). Ex: Strait of Hormuz

Transition Economy

Label for a subset of emerging economies, particularly those moving from central planning to market competition (China, Russia, Vietnam)

What is the Proposition 1 under Institution-Based View?

Managers and firms rationally pursue their interests and make choices within the formal and informal constraints in a given institutional framework.

What is Proposition 2 under Institution-Based View?

While formal and informal institutions combine to govern firm behaviour, 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.

Bounded Rationality

The necessity of making rational decisions in the absence of complete information.

Nonmarket (Political) Strategy

A strategy that centers on leveraging political and social relationships (Ex: Iran only letting China, Afghanistan through the Strait of Hormuz)

Institutional Work

Purposive action aimed at creating, maintaining, and disrupting institutions.

What are the three political systems?

1. Democracy

2. Totalitarianism (Dictatorship)

3. Authoritarianism

What is a Democracy?

A political system in which citizens elect representatives to govern the country on their behalf.

What is a Totalitarianism?

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

What is Authoritarianism?

A political system in which political plurality is undermined and complete government power is enforced.

What are the types of Totalitarianism?

1. Communist → centers on a communist party (one party controls government)

2. Right-Wing → Characterized by intense hatred against communism

3. Theocratic → monopolization of political power in the hands of one religious party or group (Taliban)

4. Tribal → one tribe or ethnic group monopolizing political power and oppressing other tribes or ethnic groups (African countries)

Legal System

The rules of the game on how a country’s laws are enacted and enforced. Three types: Civil, Common, Theocratic.

What is Civil Law?

A legal tradition that uses comprehensive statutes and codes as a primary means to form legal judgments. Less flexible, judges can only apply law. Created by Napoleon.

What is Common Law?

A legal tradition that is shaped by precedents from previous judicial decisions. More flexible, judges can interpret law. Canada follows this (King’s Law)

What is Theocratic Law?

A legal system based on religious teachings. There are 7 in the world: Afghanistan, Iran, Saudi Arabia, Vatican, Yemen, Sudan, Mauritania.

Property Right

The legal rights to use an economic property (resource) and to derive income and benefits from it.

Intellectual Property

Intangible property that is the result of intellectual activity.

What are the three types of intellectual property rights?

1. Patent → exclusive legal right if inventors of new products

2. Copyright → exclusive legal right of authors and publishers

3. Trademark → exclusive legal right of firms to use specific names, brands, and designs

Market Economy

An economy that is characterized by the “invisible hand” of market forces (private companies)

Command Economy

An economy that is characterized by government ownership and control of factors of production (public/crown corporations)

Mixed Economy

An economy that has elements of both a market economy and a command economy (Canada is this)