Chapter 2 – Understanding Politics,
Laws, and Economics
Institutions are the formal and informal rules of the game
Institutional transitions are the fundamental changes introduced to the
institutions that affect firms as players
Institution-based view is a leading perspective that suggests that the success
and failure of firms are enabled and constrained by institutions
Institutional framework is formal and informal institutions governing
individual and firm behavior
Formal institutions are represented by laws, regulations, and rules
Regulatory pillar is the coercive power of governments
Informal institutions are institutions represented by cultures, ethics, values,
and norms
Normative pillar is the mechanism through which norms influence individual
and firm behavior
Norms are values, beliefs, and actions of relevant players that influence the
focal individuals and firms
Cognitive pillar is the internalized (or taken-for-granted) values and beliefs
that guide individual and firm behavior
Institutions constrain the range of acceptable actions, and as a result, reduces
uncertainty
Transaction costs are costs associated with economic transactions or the
costs of doing business
Opportunism is defined as the act of seeking self-interest with guile
Bounded rationality is the necessity of making rational decisions in the
absence of complete information
A political system refers to the rules of the game on how a country is
governed politically
Democracy is a political system in which citizens elect representatives to
govern the country on their behalf
Totalitarianism (dictatorship) is a political system in which one person or
party exercises absolute political control over the population
Political risk is risk associated with political changes that may negatively
impact domestic and foreign firms
A legal system is the rules of the game on how a country’s laws are enacted
and enforced
Civil law is a legal tradition that uses comprehensive statutes and codes as a
primary means to form legal judgements
Common law is a legal tradition that is shaped by precedents and traditions
from previous judicial decisions
Theocratic law is a legal system based on religious teachings
Property rights are the legal rights to use an economic property (resource)
and to derive income and benefits from it
Intellectual property is intangible property that is the result of intellectual
activity
Laws, and Economics
Institutions are the formal and informal rules of the game
Institutional transitions are the fundamental changes introduced to the
institutions that affect firms as players
Institution-based view is a leading perspective that suggests that the success
and failure of firms are enabled and constrained by institutions
Institutional framework is formal and informal institutions governing
individual and firm behavior
Formal institutions are represented by laws, regulations, and rules
Regulatory pillar is the coercive power of governments
Informal institutions are institutions represented by cultures, ethics, values,
and norms
Normative pillar is the mechanism through which norms influence individual
and firm behavior
Norms are values, beliefs, and actions of relevant players that influence the
focal individuals and firms
Cognitive pillar is the internalized (or taken-for-granted) values and beliefs
that guide individual and firm behavior
Institutions constrain the range of acceptable actions, and as a result, reduces
uncertainty
Transaction costs are costs associated with economic transactions or the
costs of doing business
Opportunism is defined as the act of seeking self-interest with guile
Bounded rationality is the necessity of making rational decisions in the
absence of complete information
A political system refers to the rules of the game on how a country is
governed politically
Democracy is a political system in which citizens elect representatives to
govern the country on their behalf
Totalitarianism (dictatorship) is a political system in which one person or
party exercises absolute political control over the population
Political risk is risk associated with political changes that may negatively
impact domestic and foreign firms
A legal system is the rules of the game on how a country’s laws are enacted
and enforced
Civil law is a legal tradition that uses comprehensive statutes and codes as a
primary means to form legal judgements
Common law is a legal tradition that is shaped by precedents and traditions
from previous judicial decisions
Theocratic law is a legal system based on religious teachings
Property rights are the legal rights to use an economic property (resource)
and to derive income and benefits from it
Intellectual property is intangible property that is the result of intellectual
activity
