rules that govern behavior

↓ uncertainty & opportunism = ↓ transaction costs

assumes ppl...

want to avoid sanctions

act predictably

act in self-interest

Bases for Institutions

Cognitive

Inate tendencies

"Deep-seeded" differences

Bases for Institutions

Normative

"social pressure" to be like everyone else

...conform to norms to avoid conflict

Bases for Institutions

Regulative

Laws & regulations

The only FORMAL institution

Often formed by norms & cultural values...

...that shape laws

weak institutions lack incentive structures → unpredictability → risk

Risks = Political, Legal, & Financial

ppl will defer to informal institutions

Risk & Formal Institutions

Politics

• Gov. seizure of assets
• Sanctions
• Boycotts
• Wars & revolutions
• Terrorism

Civil Law - Based on codes & application of statutes

Common Law - precedent, traditions, & interpretations of laws

Theocratic Law - religion

Risk & Formal Institutions

Legal

Domestic laws governing foreign practice

- ex. Foreign Corrupt Practices Act

Foreign laws on biz w/in its borders

- ex. green laws, taxation, etc.

Intellectual Property Rights

- ex. trademarks, copyrights, etc.

• Ally w/ local partners in foreign locations
• Keep intellectual property close to home
• Spread out operations
• Continuously monitor environment

• Engage gov. - pluralism vs. collectivism

Gov. & Biz

Pluralism

Large # of interests

Equal access to policymakers

neutral gov.

Gov. & Biz

Corporatist

close ties between gov. & elite biz

aim = L-T growth

↑ gov. intervention

Gov. & Biz

Voice & Exit

Voice- lobbying & collective bargaining

Exit- threat of relocating offshore

exist w/ ↓ developed formal institutions

mkts not as efficient...

↓ tangible

↓ predictable

↓ transparent

Culture

Language

Context

Informal Institutions

Culture

The collective programming of the mind which distinguishes the members of one group from another

Misunderstandings = "liability of foreignness"

Informal Institutions

Language

Words have varied culturally determined meanings

can make translation difficult

Informal Institutions

Context

background of interaction

Low-Context

communication @ face value

emphasis on VERBAL cues

High-Context

communication @ underlying unspoken context

emphasis on NON-VERBAL cues

Individualism

loose ties between self-sufficent individuals

Power Distance

weaker members' acceptance of inequality

Masculinity

men have different values than women

Uncertainty Avoidance

comfort w/ uncertainty

Long-Term Orientation

thrift, persistance, & focus on future vs. present