FUNCTION OF INSTITUTIONS
reduce uncertainty and
opportunism, keeping transaction costs low
FUNCTION OF INSTITUTIONS
Institutions provide incentive structures for behavior(rewards for compliance as well as sanctions for violations)
Liability of foreignness
you face the disadvantage(higher transaction costs) that comes from not knowing THE RULES
formal INSTITUTIONS
regulatory pillar. regulations, laws, rules
informal INSTITUTIONS
normative and cognitive pillar. norm, culture
normative
peer pressure / social expectations
cognitive
deep-seated assumptions and often
hard to explain “Polygamy is wrong”
Institutional weakness
incentive structures are absent, arbitrary, or at least non-transparent
society is rule-based
institutions are more transparent and predictable (to outsiders) than in relationship-based settings
INSTITUTIONAL WEAKNESS =
risk
AMBIGUOUS INSTITUTIONS =
uncertainty
UNENFORCED INSTITUTIONS =
UNCERTAINTY
INSTITUTIONAL DIFFERENCES =
risk (Corruption and bribery)
US has laws against bribery
abroad
Foreign Corrupt Practices Act
Judgment based on application of statutes
civil law
Based on precedents and traditions
common law
Based on religious teachings
Theocratic law
SOURCES OF POLITICAL RISKS in cuba and North Korea:
Embargoes禁止貿易 and sanctions
SOURCES OF POLITICAL RISKS in Shell / Nigeria:
Boycotts 對某事物的抵制
SOURCES OF POLITICAL RISKS in India,
Pakistan, Iraq
•Terrorism
SOURCES OF POLITICAL RISKS in Colombia
Hostage人質 taking
SOURCES OF POLITICAL RISKS
Expropriation (seizure of assets by government)
POLITICAL STRATEGIES FOR
REDUCING RISK:
firms can Voice and Exit
voice
lobbying, but can
also be collective bargaining
exit
relocating value-adding
activities offshore
FIRMS’ POLITICAL STRATEGY
Business-gov’t dynamics differ across countries
‘Pluralist’ countries def
government relatively neutral
‘Corporatist’ countries def
Close ties between government and corporate elite
aimed at long-term growth; greater govt intervention
‘Command’ countries def
Policies devised by government with few interests
heard or represented
‘Pluralist’ countries:
us uk canada
‘Corporatist’ countries
Argentina Brazil Japan Korea Germany
‘Command’ countries
North Korea Kazakhstan Cuba Moldova Tajikistan