Institutions and Political Systems

Institutions and Political Systems

What makes countries distinctive and unique goes beyond geographic conditions.

Cultural Differences

Traveling abroad often reveals differences from one's home country:

• Smoking in public areas may be allowed in some countries but not in others.
• People express emotions differently.

These variations highlight the challenges that firms face when starting businesses in different countries.

Institutions: The Rules of the Game

Institutions are rules that structure human behavior and differentiate countries. They govern political, legal, economic, and social aspects of life.

Formal Institutions

Formal institutions are formalized notions of behavior documented in laws, policies, and regulations.

Informal Institutions

Informal institutions include cultural values and ethics not formally documented but still guide human behavior and determine the structure of society.

Political Systems: Formal Institutions

Political systems set rules for selecting and monitoring governments, forming political requirements.

Variety of Political Systems

The way countries govern themselves has roots in history, creating a spectrum of political systems:

• Democratic governments: Elected by wider participation of citizens.
• Autocratic or totalitarian systems: Power concentrated in an individual or small group.

Ideologies

Political systems are underpinned by ideologies, which are general approaches to governing based on principles and beliefs.

Why Businesses Should Care About Political Systems

Businesses should care about political systems for several reasons:

1. Rule Determination: Political systems determine the rules and prioritize whose interests are reflected in those rules.
2. Influence on Legislation: They decide whether and how businesses may influence legislation through legal channels like lobbying or other means, possibly involving corruption.
3. Dynamic Nature: Political systems are not static and may change over time, presenting businesses with opportunities and risks. Monitoring these changes helps businesses plan ahead.
4. Context Setting: Political systems set the context for other formal institutions, including economic and legal ones.