InstructorManualtoMikePeng&KlausMeyer(2011):InternationalBusiness,CengageLearning.
Instructor Manual
Chapter 2: Formal Institutions: Economic, Political and Legal
Systems
to accompany Mike Peng & Klaus Meyer: International Business, Cengage Learning
Prepared by Klaus Meyer
version February 2011
Introduction to the Topic
Learning Objectives
1. Explain the concept of institutions and their key role in reducing uncertainty
2. Explain the basic differences among political systems
3. Explain the systemic differences among economies
General Teaching Suggestions
This chapter introduces the first part of the institution-based view underpinning this book,
namely the formal part of the institution-based view. We do so by reviewing the economic,
political and legal institutions that underpin modern economies, and that explain variations
between them – and in consequence present challenges for those engaging in business across
borders.
InstructorManualtoMikePeng&KlausMeyer(2011):InternationalBusiness,CengageLearning.
Opening Case Discussion Guide
South Africa is in many ways similar to European economies (e.g. the presence of major
businesses), yet in important ways it is not. Changes in a society and an economy can
sometimes occur through natural forces and the use of persuasion but that may take a long
time as opposed to making something happen now by simply passing laws. The South
African government has sought to use laws as a means of achieving what it views as social
Chapter Outline, Section by Section
Section 1: An institution-based view of IB
Key Ideas
This section introduces the key concepts related to the ’institution-based view, which is
mainly grounded in institutional economics (Douglass North) and organizational sociology
(Richard Scott). However, the intellectual underpinnings of this line of thought are closely
related those by European thinkers in the 19th and 20th century – the text mentions Max
Weber and Walter Eucken as examples.
Key Concepts
Institutions
Formal and informal rules of the game.
institution-based view
InstructorManualtoMikePeng&KlausMeyer(2011):InternationalBusiness,CengageLearning.
A leading perspective in international business that suggests that firm performance is, at least in part,
determined by the institutional frameworks governing firm
informal institutions
Rules that are not formalized but exist in for example norms, values, and ethics
regulatory pillar
The coercive power of governments.
transaction costs
The costs associated with economic transactions
opportunistic behaviour
Seeking self-interest with guile.
InstructorManualtoMikePeng&KlausMeyer(2011):InternationalBusiness,CengageLearning.
Section 2: Political Systems
Key Ideas
This section discusses political systems. Rather than simply distinguishing democracies from
the rest (as in US textbooks), we discuss – however briefly – different forms of democratic
decision making.
Key Concepts
political system
A system of the rules of the game on how a country is governed politically.
Section 3: Economic Systems
Key Ideas
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.
Rules of the game on how a country is governed economically.
InstructorManualtoMikePeng&KlausMeyer(2011):InternationalBusiness,CengageLearning.
market economy
An economy that is characterized by the “invisible hand” of market forces.
varieties of capitalisms view
A scholarly view suggesting that economies have different inherent logics how markets and other
mechanisms coordinate economic activity.
Section 4: Legal Systems
Key Ideas
Another key difference among developed economies is the foundation of their legal system.
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. We
Key Concepts
legal system
The rules of the game on how a country’s laws are enacted and enforced.
civil law
InstructorManualtoMikePeng&KlausMeyer(2011):InternationalBusiness,CengageLearning.
© Klaus Meyer (2011)
For use with International Business by Mike Peng and Klaus Meyer
1408019566 Cengage Learning, 2011 Page 6
common law
A legal tradition that is shaped by precedents and traditions from previous judicial decisions.
religious law
A legal system based on religious teachings.
property rights
The legal rights to use an economic property (resource) and to derive income and benefits from it.
copyrights
Exclusive legal rights of authors and publishers to publish and disseminate their work.
trademarks
Section 5: Debates and Extensions
Key Ideas
InstructorManualtoMikePeng&KlausMeyer(2011):InternationalBusiness,CengageLearning.
Section 6: Implications for Practice
Key Ideas
The concluding section emphasizes the need to study and understand the (formal) institutions
of any foreign country where one is considering to do business.
Review Questions
Review questions are provided to students on the website accompanying the book. They
directly ask to summarize the material provided in the text. Instructors may also use the
questions to structure their lectures or review sessions.
Review Questions
(as provided to students on the website) Material in the Book
1. Explain what “institutions” are!
2. What are the differences between formal and
informal institutions?
5. How do institutions alter the potential for
opportunistic behaviour?
6. What is institutional transition?
7. Explain two core propositions of the institution-
based view?
Page 37-39
Page 38
Page 39-40
Page 40
Page 40-41
InstructorManualtoMikePeng&KlausMeyer(2011):InternationalBusiness,CengageLearning.
representation versus first-past-the-post election
systems?
12. Why should businesses be concerned about electoral
systems?
16. Outline the key differences between civil law and
common law countries!
17. What are the historical origins of respectively civil
law and common law?
18. From a business perspective, what are the
advantages and disadvantages of operating under
respectively common law and civil law?
system?
22. Why is the legal protection of minority shareholder
interests important for businesses to function
effectively?
23. Many scholars believe that institutional development
is a major reason why some countries have been
more successful than others in their economic
development. Why?
Page 42-44
Page 47-50
Page 47-48
Page 48-51 (incl. In Focus 2.2
and Table 2.4)
Page 52-54
Page 54-55
Critical Discussion Questions
At the end the chapter, we provide discussion questions that aim to stimulate students
thinking beyond memorizing the material learned in the chapter. They are designed to be
used at a basis for in-class discussions, group work, or individual assignments. Below,
provide some indicative answers of issues that may be raised in response to these questions.
Discussion Questions Indicative Responses
InstructorManualtoMikePeng&KlausMeyer(2011):InternationalBusiness,CengageLearning.
(as provided in the book)
1. What are the relative merits of a coordinated
market economy (CME) and a liberal market
2. What is in your view the most legitimate way to
select student union representatives at your
university?
3. As a manager, you discover that your firm’s
products are counterfeited by small family
4. Your multinational is the largest foreign
investor and enjoys good profits in (1) Sudan,
where government forces are reportedly
cracking down on rebels and killing civilians,
1. Key issues to discuss here are the
freedom for business – and hence
the opportunities – but also the risks
2. This question challenges students to
apply the discussion of electoral
systems (page 42-44) to an
experience very close to their own
life. Most likely, most are going to
defend their own country’s
traditional system, and should be
challenged to appreciate the merits
4. The debate here is whether sanction
are a) legitimate and b) effective as
a means to put pressure on political
regimes deemed hostile to human
rights agendas.
My personal view is that, firstly,
historically economic sanctions
InstructorManualtoMikePeng&KlausMeyer(2011):InternationalBusiness,CengageLearning.
Closing Case
The closing case provides further opportunities to apply ideas and concepts learned in this
chapter in a real world setting. The Closing Case for this Chapter is “INSERT” and focuses
on “INSERT”. Below are some indicative responses to the case discussion questions.
Case Discussion Questions
(as provided in the book) Indicative Responses
1. Although a stable legal framework that protects
property rights reportedly can remove
uncertainty and thus facilitate economic
2. If you were managing the funds of a Russia
oligarch, where would you invest?
3. If you were a board member at one of the major
Western multinational retailers (such as
1. Clearly defined and enforced
property rights are key to economic
efficiency. In Russia, many
problems relate to the enforcement
of property rights rather than their
rights from this time forward.
2. I would diversify my risk and invest
some where I know well how to do
business (i.e. in Russia) and some in
faraway economies where economic
risks are not correlated with the
Russian economy, and where the
Russian authorities can get their
Further Learning Activities
InstructorManualtoMikePeng&KlausMeyer(2011):InternationalBusiness,CengageLearning.
In addition to the cases and discussion questions provided in the book, instructors may want
to use any of the following activities to further engage students with the material.
1. In Focus 2.1 on elections around the globe provide an opportunity to discuss and
interpret any recent election discussed in the media. If the election in – say UK
2010 – had been held by the rules of France, USA, India, Germany, how would the
result have been different? Students will be surprised to find how often the winner by
2. Evaluating political risk is an important element of country risk analysis. In fact, your
personal interest relates to countries in the Middle East and North Africa region that
have a high political risk. Provide a brief overview of the region and the reasoning
behind assessing these countries that have been assessed with high political risk. From
this list, which country has the highest overall country risk?
3. Since you work for a diversified multinational corporation, economic risk across
different sectors of the world economy is an integral part of analysis as it indicates the
future business prospects for specific industries. Evaluate the risk assessment of three
industry sectors that are available to analyze. Prepare a report and provide a
recommendation concerning which industry and region would be most beneficial to
InstructorManualtoMikePeng&KlausMeyer(2011):InternationalBusiness,CengageLearning.
and Pharmaceuticals are chosen, then the evaluation may follow a specific format.
The worldwide evaluation for each sector is: Chemicals (B+), Mass Distribution (B+),
and Pharmaceuticals (A-). In general, this appears positive. In addition, the highest
ranking regions (e.g., regions with low industry risk) for each region are as follows:
Chemicals (Middle East/North Africa and Japan), Mass Distribution (Middle
Errors and Corrections
Apologies to Professor Steve Burgess. We greatly appreciate your helpful discussions with
Mike Peng. Only by accident you were named as the author of the opening case. We did not
intend to suggest that any of the views expressed were yours.
Further Readings
At the end the chapter, suggested further readings are provided. The primary aim is to
provide students a starting point for further work, for example when preparing a class
assignment or dissertation. These references also are recommended for instructors not
familiar with the topic and wishing to ‘get ahead of the students’ before lecturing on a topic.
P.A. Hall & D. Soskice, eds, 2001, Varieties of Capitalism, Oxford: Oxford University Press – an
introduction and discussion of the varieties of capitalisms view.
InstructorManualtoMikePeng&KlausMeyer(2011):InternationalBusiness,CengageLearning.
M. W. Peng, D. Wang & Y. Jiang, 2008, An institution-based view of international business strategy,
Journal of International Business Studies 39: 920-936 – an introduction to institutional perspectives
on international business topics.