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Chapter 2: Understanding Politics, Laws, and Economics
Chapter 2
Understanding Politics, Laws, and Economics
Learning Objectives
After studying this chapter, students will be able to accomplish the following objectives:
1. Identify two types of institutions.
2. Explain how institutions reduce uncertainty.
3. Identify the two core propositions underpinning an institution-based view of global
business.
4. List the differences between democracy and totalitarianism.
5. List the differences among civil law, common law, and theocratic law.
6. Articulate the importance of property rights and intellectual property rights.
7. List the differences among market economy, command economy, and mixed economy.
8. Explain why it is important to understand the different institutions when doing business
abroad.
Chapter Summary
Chapter 2, Understanding Politics, Laws, and Economics, takes an in-depth look at the
institution-based view. Recall from Chapter 1 that this leading perspective in global business
suggests that firm performance is determined in part by the institutional frameworks governing
firm behavior around the world. After discussing what institutions do and how they influence
global business, the chapter describes three types of formal institutions: political systems, legal
systems, and economic systems. In the section that discusses political systems, the differences
between democracy and totalitarianism are outlined, and each system is assessed in terms of its
political risk, which can negatively impact domestic and foreign firms. In the section on legal
systems, the differences between civil, common, and theocratic law are explained through
numerous examples. The chapter then discusses property rights, including intellectual property
rights. The chapter concludes with an explanation of market, command, and mixed economies
and a discussion of what drives economic development.
Opening Case Discussion Guide
The Newest Transition Economy
The term “transition economy” was coined in the mid-1990s to refer to former Soviet Union and
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Chapter 2: Understanding Politics, Laws, and Economics
Central and Eastern European countries (such as Hungary, Poland, and Russia) as well as Asian
countries (such as China and Vietnam), which were undergoing major transitions from state
socialism toward market capitalism. How firms—both domestic and foreign, established and
newly founded—navigate the uncertain waters of such transitions has been a major theme in the
global business field since the 1990s. Fast forward to 2017. The United States has emerged to
become the newest “transition economy,” with numerous rules of the game being significantly
changed by the Trump administration. The peaceful transition of power in January 2017, despite
a divisive campaign, continues the country’s admirable tradition that started during President
George Washington’s time.
Economically, the changes unleashed by the Trump administration are numerous and wide-
ranging. Turning inward, the United States would shy away from embracing the long-cherished
principles of globalization and free trade. Politically, Trump’s rapid-fire executive orders banning
refugees from seven Muslim-majority countries, erecting a wall along the border with Mexico,
and emphasizing “extreme vetting” touched off a storm of protests. Trump’s actions also
generated a series of lawsuits from various groups, alleging that the presidential actions were
unconstitutional and disrespecting the rule of law.
Affecting politics, laws, and economics, uncertainties are a hallmark of all transition economies,
whose future direction by definition is unpredictable. Will the future of the United States as the
newest transition economy be “great again” as promised by President Trump, or join the ranks of
“failed states” as prophesized by a leading American political scientist Francis Fukuyama (whose
most famous earlier work is his 1992 book The End of History and the Last Man)?
Lesson Plan for Lecture
Brief Outline and Suggested PowerPoint Slides
Learning Objectives PowerPoint Slides
Learning Objectives Overview 2–3: Learning Outcomes
LO1
Identify two types of institutions.
4–5: Institutions: Rules of the Game
6: Exhibit 2.1: Dimensions of Institutions
7: Supportive Pillars
LO2
Explain how institutions reduce
uncertainty.
8–9: Role of Institutions in Reducing
Uncertainty
LO3
Identify the two core propositions
10: Exhibit 2.2: Institutions, Firms, and
Firm Behaviors
© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Chapter 2: Understanding Politics, Laws, and Economics
underpinning an institution-based view of
global business.
11: Exhibit 2.3: Two Core Propositions of
the Institution-Based View
LO4
List the differences between democracy
and totalitarianism.
12: Political Systems
13: Democracy
14: Totalitarianism
15: Types of Totalitarianism
LO5
List the differences among civil law,
common law, and theocratic law.
16–17: Legal Systems
LO6
Articulate the importance of property rights
and intellectual property rights.
18–19: Property Rights
20–21: Intellectual Property (IP)
LO7
List the differences among market
economy, command economy, and mixed
economy.
22–23: Economic Systems
24: What Drives Economic Development
25: Importance of the Role of Institutions
in International Business
LO8
Explain why it is important to understand
the different institutions when doing
business abroad.
26: Exhibit 2.4: Implications for Action
Key Terms 27–28: Key Terms
Summary 29–30: Summary
© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.