Einheit 2

• Institutions

  Provide framework for economic activity and human interaction
• Types of Institutions


  • Formal (explicit and codified rules, laws, regulations, organizational structures, tax regulations, curfews)
  • Informal (unwritten, norms, traditions, social practices)
• Types of Formal Institutions

  • Regulatory (formal rules, laws, regulations based on legal mechanisms)
  • Normative (social norms, values, beliefs)
  • Cognitive (shared beliefs, assumptions, mental models shaping individual's perception of world)
• Formal Environments

  • Defined by Countries' Political, Legal, and Economic Systems
  • There are strong interdependencies between these systems
• Formal Institutions


  1. Design, vote on and propose legislation

  2. Propose, adapt, and change rules (constitution)

  3. Engage in transactions within laws and rules that define what is allowed (tend to follow political systems)
• CAGE Framework

  • Improves firm's understanding of new markets
  • Identifies cultural, administrative, geographic and economic differences or distances between firms' host and home markets
• Civil Society Organizations

  • Independent from state
  • Follow their primary agenda of influencing governmental and corporate agendas
  • Transcend borders and both collaborate and monitor in International Business
  • Are better connected with governments than they used to be
  • Gather information, shape public opinion and raise awareness
  • Follow a standard setting: Fair Trade / Forest stewardship
• Civil Society Organizations


  • Greenpeace
  • BMA
• IMF

  • International Monetary Fund
  • Established in 1944
  • Aim: Provide a forum for cooperation on global monetary issues, facilitate the growth of international trade and contribute to the stability of the international monetary system
  • Structure: 190 Countries, each member's financial contribution (or quota) determines its voting power and access to financial resources
  • Exchange Rate Stability: By providing a forum for member countries to discuss and coordinate policies related to their currencies
  • Financial Assistance: to members facing payment problems, helping them stabilize their economies and restore confidence in their currencies
  • Policy Advice: regarding economic policies, fiscal responsibility and financial stability by conducting regular economic assessments of member countries
• World Bank

  • International financial institution
  • Established in 1944
  • Aim: Reduce poverty and support sustainable development by providing financial resources, technical expertise and policy advice to developing countries
  • Structure: Two main institutions: International Bank for Reconstruction and Development (IBRD) & International Development Association (IDA)
  • Financial Assistance: Provides loans, grants and guarantees to support a wide range of development projects
  • Technical Assistance: Offers technical assistance and knowledge sharing to help countries design and implement effective development strategies
• Barrick Gold in Tanzania

  • Disputes arose over tax claims, export regulations, and a significant fine for alleged environmental breaches and unpaid taxes
  • Tanzanian government banned the export of gold and copper concentrates, impacting Barrick Gold's operations
  • Tanzanian government demanded $190 billion, accusing Barrick's subsidiary of underreporting export revenues
  • Barrick Gold reached a settlement in 2019, agreeing to pay $300 million to resolve tax claims and share future economic benefits
  • Barrick Gold implemented initiatives for environmental conservation, community development, and responsible resource extraction in Tanzania
• Central Questions to ask when Analyzing a Political System

  • Who are the relevant actors? (President, bureaucrats, interest groups, voters)
  • How is power distributed? (Centralized vs. federal)
  • How much power do regional governments have? ("Heaven is high, the emperor is far away")
  • How stable is a state? (Particularly in developing countries)
  • How stable is policy? (Again, think about POLCON)
  • What is the capacity of government to create and execute policy? (This question helps in detecting corruption)
  • Does the legal system function?
  • Is there an independent judiciary?
• Types of political risks

  • Macropolitical risks (affecting all firms in a country)
  • Micropolitical risks (affecting only specific firms, industries or venture types)
• Macropolitical risks

  • Government stability
  • Policy changes
  • Geopolitical tensions
  • Changes in the "rules of the game"
• Measurements of political risks

  • POLCON: Likelihood of changes in the policy regime
  • CRG (International Country Risk Guide): Rating comprises 22 variables in three subcategories of risk: political, financial, and economic
• Legal Systems

  • The national legal system has significant direct and indirect effects on firms' activities in a market as home-country laws do not apply abroad
• Types of Legal Systems

  • Civil law systems (based on written law approved by political authorities)
  • Common law systems (developed through judicial decisions and precedents over centuries)
• Civil Law Systems


  • Codified Statutes: Unlike common law, civil law relies on codified statutes and comprehensive legal codes established by legislatures
  • Judicial Role: In civil law systems, judges have a more restricted role in creating law, emphasizing interpretation and application of statutes rather than creating legal precedents
  • Stare Decisis: The principle of stare decisis, or binding precedent, is not as central in civil law systems as it is in common law
  • International Business Influence: Civil law's structured approach influences international business by providing a comprehensive framework for legal codes
  • Multinational Corporations: Multinational corporations from civil law jurisdictions adhere to codified laws when conducting business in foreign countries with similar legal systems
  • Contracts and Legal Codes: Contracts and agreements drafted by multinational corporations in foreign civil law jurisdictions are often based on specific provisions outlined in the legal codes of those countries
  • Contractual Principles: Civil law principles governing contracts, such as offer and acceptance, form, interpretation, and performance, heavily influence the structure of agreements
  • Predictability in Business Dealings: The structured nature of civil law provides predictability and clarity in international business dealings, allowing companies to navigate legal requirements and resolve disputes using explicit provisions in legal codes
• Common Law Systems


  • Common Law Origin: Originating in England, common law has spread to various countries, especially those in the British Commonwealth and the United States
  • Principles and Precedents: Common law relies on the development of legal principles and precedents through judicial decisions, rather than codified statutes or legislative enactments
  • Doctrine of Stare Decisis: The doctrine of stare decisis emphasizes that courts must follow precedents set by previous judicial decisions, ensuring consistency and predictability
  • Judicial Authority: Judges have the authority to interpret laws and apply legal principles based on past rulings, contributing to the consistency of the legal system
  • Adaptability and Flexibility: Common law evolves over time, adapting to societal changes, technological advancements, and shifting moral values, ensuring relevance in addressing new legal challenges
  • Contract Law Influence: Common law principles significantly impact contract law, providing a comprehensive framework for business dealings globally
  • Elements of Contracts: Common law principles guide essential elements of contracts, including offer, acceptance, consideration, and implied terms, ensuring clarity and enforceability
  • Contractual Obligations: Common law principles influence contractual obligations, including implied terms and the doctrine of good faith and fair dealing, shaping fair and equitable business dealings
  • Resolution of Disputes: In cases of contractual disputes in foreign legal systems, common law principles may influence how courts resolve conflicts, especially when local statutes are ambiguous
  • International Business Impact: Common law's adaptability allows businesses to navigate diverse legal landscapes, utilizing established principles for agreements, risk mitigation, and dispute resolution, contributing to legal predictability in various jurisdictions
• Types of Economic Systems


  • Communism (State owns all property and directs economic activity)
  • Capitalism (Economic and political system in which a country's trade and industry are controlled by private owners for profit)
  • Spectrum (Few or no states fully capitalist or communist, most have a mix of intervention and private ownership)
• Common law


  Adaptable legal system that allows businesses to navigate diverse legal landscapes, utilizing established principles for agreements, risk mitigation, and dispute resolution, contributing to legal predictability in various jurisdictions
• Types of Economic Systems

  • Communism: State owns all property and directs economic activity (Cuba and North Korea only remaining Communist states)
  • Capitalism: Economic and political system in which a country's trade and industry are controlled by private owners for profit (Western Europe, US, etc.)
  • Spectrum: In reality, few or no states fully capitalist or communist
• Even the US spends a very large percentage of GDP on defense, healthcare, and education
• Even North Korea and Cuba are experimenting with capitalism
• Free Market, Neoliberal or Anglo-Saxon Capitalism

  Governments play less of a role in the economy (exceptions of defence, health care and education)
• Role of the state in Free Market, Neoliberal or Anglo-Saxon Capitalism

  The goal of the state is seen as maximizing economic efficiency (producing economic growth), not picking industries or favoured firms
• Unions are weaker, taxes are lower, and inequality is higher in Free Market, Neoliberal or Anglo-Saxon Capitalism
• Examples of Free Market, Neoliberal or Anglo-Saxon Capitalism


  • US, Britain, Canada, Australia and Hong Kong
• Chile is the freest market economy in Latin America, Peru further behind
• Laffer Curve


  Proposes the Existence of an Optimal Tax Rate that Maximizes Government Revenue

  
• Tax Rate and Revenue Relationship

  1. At low tax rates, increasing taxes can proportionally increase revenue as people earn more, and the government takes a smaller cut

  2. Rising tax rates may prompt individuals to alter behavior, such as working less, investing less, or seeking legal/illegal tax evasion, potentially reducing overall taxable income

  3. Excessively high tax rates can disincentivize work, investment, and entrepreneurship, leading to diminished economic activity and lower tax revenues despite higher rates

  4. Lowering tax rates from excessively high levels can stimulate economic growth by incentivizing increased work, investment, and business expansion, potentially offsetting the revenue loss

  
• Optimization and Policymaking


  The Laffer Curve underscores the trade-off between tax rates and revenue, suggesting policymakers need to find a balance that fosters economic growth while generating sufficient funds for government operations

  
• State-Led / Directed Economies

  Investment, production and the allocation of capital goods takes place according to economic plans
• Role of the state in State-Led / Directed Economies

  Governments traditionally play a greater role directing money and protection to favored firms and industries
• Unions are weak or even prohibited in State-Led / Directed Economies
• Examples of State-Led / Directed Economies


  • Japan, France, Korea, Singapore and many developing countries in general
  • China's government direct large parts of its economy, controls most of the financial system and explicitly picks industries and firms to favour
  • China's economy is also dominated by State Owned Enterprises in many industries
• European Social Democracy/Socialism


  • Societies show greater concern for equality and eliminating poverty and have less faith in market efficiency (especially in Scandinavia)
  • Governments play less of a role in the economy (exceptions of defense, health care, and education)
  • Governments spend a larger share of GDP on social services, pensions, healthcare, and education
  • Unions are strong
• Example of European Social Democracy/Socialism

  • Portugal has especially restrictive labor rules
• 11 Key Aspects of Economic Systems that affect Firms

  • Market Dynamics
  • Regulatory Environment
  • Labor Dynamics
  • Financial and Investment Landscape
  • Corporate Social Responsibility (CSR) and Ethics
  • Supply Chain Management
  • Access to Resources
  • Technology and Innovation
  • Trade Policies and Tariffs
  • Intellectual Property (IP) Rights
  • Government Expenditure and State Control
• Understanding the type of nation and its economic development stage is highly crucial for a companies' strategic decision-making and day-to-day operations