Chapter 3: International Institutions from an International Business Perspective (MGT 422)

International Monetary Fund (IMF)

Institution that fosters global monetary cooperation, financial stability, international trade, high employment and sustainable economic growth, and reduction of poverty

World Bank

Institution that lends money for development projects

LO3-2 Describe the various types of institutions, drawing on institutional theory.

Institutions are divided into formal and informal, based on how they influence behavior. Formal institutions use laws and regulations, while informal institutions use customs and ideologies. Informal institutions may be either normative or cognitive. Normative institutions work through values and norms, while the cognitive institutions work through schema or shared sets of assumptions that shape our meaning-giving. We have reviewed the United Nations, the World Trade Organization, and the two monetary institutions—the World Bank and the International Monetary Fund—as examples of global institutions. We have also looked at OECD. Many other global institutions exist, of course, at all levels, including firms and nongovernmental organizations. Among these are the economic integration agreements. There are many other bases for regional institutions. Our focus has been on those of broadest significance to the international firm.

LO3-1 Explain the importance of international institutions to business decision makers and their firms.

Institutions exist to limit and direct choices decision makers can make, so they limit the choices open to the firm. Institutions accomplish this constraint by simplifying the external environment. Whether the institution is formal or informal, it establishes rules, ways of acting, and ways of thinking (for- mal, informal normative, and informal cognitive) that achieve compliance through force, social norms, and shared assumptions that have the effect of reducing the number of options open to the firm or establishing the rules of the game. Their importance to business is that they simplify the external environment in ways that can help business understand and operate in their external environment.

formal institutions

Institutions that influence behavior through laws and regulations

informal institutions

Institutions that influence behavior through norms, values, customs and ideologies

complete economic integration

Integration on economic and political levels

Security Council

Main peacekeeping body of the UN, composed of 15 members including 5 permanent members

trade-related intellectual property rights (TRIPS)

Refers to the WTO agreement that protects copyrights, trademarks, trade secrets, and other intellectual property matters

LO3-8 Discuss the EU, its impact, and its challenges going forward.

The EU is a supranational entity with 27 European member- nations, 17 of which share a common currency. Its purpose is to integrate the economies of its member-nations, creating a trading region where goods, services, people, and capital move freely. In recent years, the EU has made major steps toward political union as well. The EU is a regional government and has regulatory power over social and environmental matters, including mergers and business operations, in Europe. The depth and breadth of its market gives the EU de facto influence on businesses worldwide. The EU's success at monetary integration reduces the risk for businesses within the EMU. The EU can be seen as one large market with fewer restrictions than existed among the 27 nations before integration. The recent financial crisis severely challenged the EU, especially when several of its weaker economies approached default on sovereign debt. So far, the EU appears to have weathered these challenges.

Council of the European Union

The EU's primary policy-setting institution

LO3-6 Discuss the resources of the Organisation for Economic Cooperation and Development.

The OECD conducts extensive research on a wide variety of international business and economic subjects, and it produces highly regarded individual country surveys. These resource materials are valuable to researchers and business people as they develop an understanding of markets.

LO3-3 Outline the United Nations as an institution and its relevance to international business.

The United Nations is an informal, normative institution. Governments comply with their UN agreements based on moral principles and social obligation. At the same time, looking at the parts of the UN, the Peacekeeping Force could be seen as a formal institution that uses the regulatory power of coercion to extract compliance. The UN's work is carried out through five main bodies or organs: the General Assembly, the Security Council, the Economic and Social Council, the International Court of Justice, and the Secretariat. The General Assembly is a forum in which every nation has one vote; the Security Council focuses on peace and security and has permanent members and elected members; the Economic and Social Council addresses issues related to trade, education, health, and other economic and social issues; the International Court of Justice hears cases between nations; and the Secretariat, headed by the secretary-general, is the administrative arm of the UN. The UN has a variety of agencies throughout the world that work to promote peace and stability and to facilitate trade and economic activity. Inter- national organizations such as the United Nations can have profound influence on international businesses. By providing a forum for governments to talk to each other, the United Nations contributes toward peace and stability, conditions that stimulate international business. Such dialogue also results in collaborative efforts that support multilateral cooperation in areas of immediate concern to business, such as maritime agreements, communication accords, and other rules and standards. In addition, many of these institutions support development projects, which stimulate business directly, through their contracts and also through their support of the development of markets.

LO3-5 Discuss the purpose of the World Trade Organization and its impact on international business.

The WTO attempts to reduce trade barriers worldwide in order to facilitate trade. Its membership is composed of the world's major trading countries, so it has the potential to significantly influence world trade. The WTO routinely issues decisions on trade disputes between countries. The Doha Development Agenda of the WTO has been stalled and faces difficult negotiations in the areas of agricultural subsidies of developed nations, enforcement of rules and rulings, and intellectual property rights.

LO3-4 Describe the purposes of the two global monetary institutions, the IMF and the World Bank.

The basic idea of the IMF is that a workable monetary system is in the interests of all nations. Its Articles of Agreement outline the purpose of the fund in six points: to promote international monetary cooperation, to facilitate the expansion and balanced growth of international trade, to promote exchange stability and orderly exchange arrangements among members, to assist in the establishment of a multilateral system of payments, to make the fund's resources available for balance-of-payments corrections, and to shorten the duration and lessen the disequilibrium of members' balance of payments. The World Bank, including the IBRD and the IDA, lends money for development projects in middle-income and creditworthy poor countries. In the poorest countries, it provides low-interest loans and grants for projects designed to help them develop infrastructure, health and education, and other areas connected to development.

European Central Bank (ECB)

The central bank for Europe's single currency, the euro

LO3-7 Identify the levels of economic integration and the effectiveness of the major trading blocs.

The four major forms of economic integration are the free trade area (tariffs abolished among members), the customs union (a free trade agreement plus a common external tariff), the common market (a customs union plus mobility of services, people, and capital), and complete integration (a common market plus a common currency and additional economic and political integration). NAFTA has been quite effective, while Mercosur, whose goal is a common market, has faced difficulties recently. African economic integration efforts have faced difficulties, as well, and they endure. The EU has been markedly successful and able to weather the instability of the recent financial crisis and the ensuing fallout in its weaker economies.

European Court of Justice (ECJ)

The highest court of the EU, it interprets EU law

Secretariat

The staff of the UN, headed by the secretary-general

Economic and Social Council (ECOSOC)

UN body concerned with economic and social issues such as trade, development, education, and human rights

International Court of Justice (ICJ)

UN body that makes legal decisions involving disputes between national governments

new institutional theory

Understanding of institutions as social constructs, a collection of norms that structure the relations of individuals to one another

par value

a value assigned to a share of stock and printed on the stock certificate; Started Value

United Nations (UN)

192-member organization dedicated to the promotion of peace and stability of the world

Bretton Woods

1944 conference at which allied nations' treasury and central bank representatives met to establish the International Monetary Fund and the World Bank

Mercosur or Mercosul

A South American customs union of Argentina, Paraguay, Brazil, and Uruguay

European Union (EU)

A body of 27 European countries committed to economic and political integration

Association of Southeast Asian Nations (ASEAN)

Agreement among Southeast Asian nations that began as a security agreement and has developed toward a common market

North American Free Trade Agreement (NAFTA)

Agreement creating a free trade area among Canada, Mexico, and the United States

Doha Development Agenda

An initiative of the World Trade Organization focused on issues of trade and development.

World Trade Organization (WTO)

An international organization that deals with rules of trade between nations

Special Drawing Rights (SDRs)

An international reserve asset established by the IMF

free trade area (FTA)

Area in which tariffs among members have been eliminated, but members keep their external tariffs

European Commission

Body responsible for the EU's day-to-day operations

customs union

Collaboration that adds common external tariffs to an FTA

common market

Customs union that includes mobility of services, people, and capital within the union

General Assembly

Deliberative body of the UN made up of all member-nations, each with one vote regardless of size, wealth, or power

European Monetary Union (EMU) or Economic and Monetary Union

EU group that established use of the euro in the 17-country euro zone

European Parliament

EU legislative body whose members are popularly elected from member-nations

Organization for Economic Cooperation and Development (OECD)

Group of developed countries dedicated to promoting economic expansion in its member-nations