Institutional Context Supplement 3

Question 1

Gradual Change

Answer 1

change within the broader boundaries of an established institutional frame

harder to observe, because incremental

Question 2

Radical institutional change

Answer 2

brings the institutions to the forefront of attention

Question 3

Stages of institutional development from local autarky to modern society

Answer 3

1. Trade within the tribe/village
2. Trade beyond the village
3. Long distance trade
4. Further expansion of trade
5. Modern trade

Question 4

What happen during the different stages of institutional development?

Answer 4

increasing reliance on specialization and division of labor, which makes trade more dependent on a wide range of institutions

• increasing levels of transaction costs

Question 5

What are transaction costs related to?

Answer 5

a) search and information costs
b) bargaining costs
c) monitoring and enforcement costs

Question 6

1) trade within the village

Answer 6

trade exists in a dense network.

There may be quite high social costs to a tribal organization. People stick to the family order.

Question 7

2) trade beyond the village

Answer 7

• trade in regional markets or bazaars.
• people start to specialize
• transaction costs rise sharply while production costs go down
• religious precepts (rules) determine the standards and rule-compliance of the players.
• effectiveness of the informal institutions depends largely on the extent that these religious precepts are held to be binding.

Question 8

3) long distance trade

Answer 8

• like caravans on the Silk Road
• economies of scale arise through geographic specialization (Silk in China)
• occupational specialization (farming, trading, transporting)

Question 9

two transaction problems

Answer 9

• agency problem

- contract problem

Question 10

agency problem in long distance trade

Answer 10

principal = owner of the goods
agent = subordinate who performs activities like transporting goods

trustworthy agents are family members:
–> Success of trade depends on the strength of family ties and the price of defection (Treuebruch)

Question 11

contract problem

Answer 11

• problem from having to negotiate and enforce contracts over long distances
• enforcement is the agreement of buying and selling and the protection of the goods en route

Question 12

What institutional development is needed for trade beyond the village?

Answer 12

Trading centers

Question 13

4. Further expansion of trade; urbanization

Answer 13

• towns become more important centers of exchange
• need for effective, impersonal contract enforcement in necessary
• capital markets required that property rights were secured over time
• credible commitment for property rights
• technology enabled manufacturing to advance

Question 14

How can property rights be secured over time

Answer 14

through credible commitment

Question 15

How can credible commitment of property rights be accomplished?

Answer 15

If the ruler restrains itself in using coercive force but more often in society constrains the power of rulers

Question 16

What does the effective use of technology require?

Answer 16

• large investment in factories and machines which is an increase in fixed costs
• uninterrupted production, a disciplined workforce, and transportation networks
• secure property rights
• a political and judicial system that permits low cost contracting
• flexible laws permitting a wide range of organizational structures
• complex government structures to limit agency problems hierarchical organizations

Question 17

5. Modern trade

Answer 17

• specialization is optimized
• everyone has a specialized function
• worldwide network of interconnected players

Question 18

indicator for institutional devleopment

Answer 18

agriculture requires a small part of labour force

Question 19

Why do institutions not develop?

Answer 19

• when deviance and innovation are viewed as a threat to group survival
• dominant players have little incentive to change the rules
• path dependency

Question 20

What are the underlying mechanisms that explain the path dependency?

Answer 20

• Institutions come with high switching costs
• Institutions come with high sunk costs (people become committed because of the sense that they already have invested so much)

Question 21

Base of the Pyramid

Answer 21

• 4 billion people live in survival markets; income <3K; this is the base of the pyramid
• 2 billion in emerging markets
• 0.1 billion in mature markets

Question 22

What was developed to reduce poverty of the base?

Answer 22

“business case”

• calls for MNCs to focus on the Base of the Pyramid
• jobs should be created for the Base of the Pyramid

Question 23

Opportunities for the MNC in the “business case”

Answer 23

1. improve profits by exploring new growth markets when home markets are saturated
2. aggregate demand (internet or mobile phones)
3. low-cost strategies by outsourcing activities to the base
4. boost innovation, because decision-makers have to think more efficiently, less costly, and more sustainable

Question 24

arm’s length transaction

Answer 24

buyers and sellers act independently and have no relationship to each other

• increases as institutions develop

Question 25

World Bank Institutional Quality Indicators

Answer 25

Selecting and Replacing Governments Formulating and Implementing Policies Respecting and Abiding Institutions

Question 26

Selecting and Replacing Governments

Answer 26

Voice and Accountability | Political Stability

Question 27

Formulating and Implementing Policies

Answer 27

``` Government Effectiveness (reliable public service and strong civil service) Regulatory Quality (ability of government to implement sound policies to promote private sector development) ```

Question 28

Respecting and Abiding Institutions

Answer 28

Rule of Law | Corruption Control

Question 29

institutional transition

Answer 29

changing the system from one type to another | from centrally planned to free market

Question 30

what does the extent and success of transitions depend on?

Answer 30

``` Pre-conditions: - institutional embeddedness - institutional permeability Transitition approach Internal and External forces ```

Question 31

institutional embeddedness

Answer 31

refers to the extent to which the pre-transition institutional context is entrenched in the old system

Question 32

institutional permeability

Answer 32

extent to which the country's institutional system already showed holes through which external forces could influence the country

Question 33

Transitional approach

Answer 33

gradual or abrupt change "shock therapy" in Poland --> for Poland tremendous short-term social and transitional costs, but many viewed Poland as most successful transitional economy

Question 34

Internal and external forces

Answer 34

- common complexity is the divide between adherents and successful users of the new economic reforms (generational divide)

Question 35

emerging markets

Answer 35

countries that are rapidly growing economically and industrially BRIC are included for example

Question 36

MNCs choice of an emerging market is often a result of

Answer 36

herding or mimetic isomorphism where firms mimic the entry decisions of competitors or follow key customers

Question 37

composites

Answer 37

aggregate data that combines information on a large number of items

Question 38

Path dependency of transitional economies (from Communism to Capitalism)

Answer 38

Shared History: - Industry structure - Dominated by big industrial companies - Lack of property rights - Dictatorship

Question 39

institutional voids

Answer 39

absence of institutions that facilitate exchanges between buyers and sellers (lack of intermediary firms...)

Question 40

What should executives look at rather than composites?

Answer 40

Institutional voids (called the idiosyncratic approach)

Question 41

In which ways does the market reveal institutional voids?

Answer 41

- can be related to expectations and information about consumers and suppliers of PRODUCT MARKETS - LABOR MARKETS tend to have institutional voids (difficult to find good people) - CAPITAL MARKETS are still developing (effectiveness of banks and insurance companies may vary considerably; no clear expectations regarding corporate governance so it is difficult to trust local partners)

Question 42

What does a lack of openness create

Answer 42

it creates trade, social, and administrative barriers

Question 43

What can MNCs do when there are institutional voids but they still want to be successful?

Answer 43

They can fill the institutional voids

Question 44

Shakti

Answer 44

empowerment. building and supporting a network of female entrepreneurs in India by Unilever.