Chapter Four

International Institutions
from an International
Business Perspective

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
 Learning Objectives
 Explain the importance of international
institutions to business decision makers
 Describe the types of global and regional
international institutions
 Outline the UN as an institution, in light of
institutional theory and in terms of its structure;
explain its relevance to international business
 Describe the purposes of the two global
monetary institutions: the IMF and the World
Bank
 Discuss the World Trade Organization
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 Learning Objectives
 Appreciate the resources of the Organization
for Economic Cooperation and Development
 Describe the major purpose and effectiveness
of OPEC
 Identify the levels of economic integration
agreements and the effectiveness of the
major ones
 Discuss the impact of the EU and its future
challenges

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 What Are Institutions?

 Socially constructed groups

 Have regulative, normative, cultural elements
 Provide stability and meaning to social life
 Organized collections of basic rules and unwritten
codes of conduct
 Set limit to firms’ conduct
 Reduce uncertainty in the firm’s environment

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 New Institutional Theory
 Norms that regulate the relations of individuals to
each other
 Formal Institutions: influence behavior through laws
and regulations
 EU’s Directorate General for Competition
 The International Court of Justice
 Informal Institutions: depend on customs and
ideologies to mold behavior
 Patterns surrounding firm-supplier relationships
in Japan vs. the U.S.
 Chinese Guanxi

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Institutional Theory and International
Business

 Institutions function to influence the range of

actions the firm can take
 Formal institutions
 Informal institutions
 Professional organizations
 Non-governmental organizations
 Doctors without borders

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 Influence of Institutions on
Firms, Managers
and Firm Behavior
Institutions

Formal
Formal and Firms
Informal
Constraints
Firm Behavior
Informal
Normative & Managers
Cognitive
Constraints

© J. McNett, Influenced by W. R. Scott (2008) and M. W. Peng (2002, 2009)

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 Global Level Institutions

 United Nations
 International Monetary Fund
 World Bank
 World Trade Organization

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 Global Level Institutions
The United Nations
 Promotes peace and global stability
 192 member-nations
 Has many functions related to business
 General Assembly
 Deliberative body of the UN
 All member-nations, each with one vote
 Security Council
 Responsible for peace and security
 5 permanent members with veto power(U.S.,
Russia, China, France, UK)
 10 elected members
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 Global Level Institutions
The United Nations
 Economic and Social Council (ECOSOC)
 Trade, development
 Education
 Human rights
 International Court of Justice (ICJ)
 UN body that renders legal decisions
involving disputes between national
governments
 Secretariat
 The staff of the UN, headed by the
secretary-general
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 Global Level Institutions
The United Nations - Role in IB

 Technical Standards and Norms

 UN/CEFACT: Trade facilitation, electronic
business
 UNESCO: UN Educational, Scientific and Cultural
Organization
 Agencies addressing terrorism, crime, drugs, arms
 UNEP: UN environmental program
 Global Compact: partnership with business to
promote education and health issues
 Social justice and labor rights

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 Global Level Institutions

 44 Allied Nations established Monetary Institutions

 International Monetary Fund (IMF)
 World Bank
 Established a Monetary System

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 Global Level Institutions
International Monetary Fund

 Promotes international monetary cooperation

 Coordinates multilateral monetary rules and their
enforcement
 185 members who contribute funds on quota
base
 Quota determines the country’s number of votes
 IMF lends out these funds to members

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 Global Level Institutions
International Monetary Fund

 Facilitates expansion and balanced growth of

international trade
 Promotes exchange stability and orderly
exchange arrangements among members
 Establishes a multilateral system of payments
 Makes funds available for balance of payments
corrections

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 Global Level Institutions
International Monetary Fund
Current Issues
 Convince rising economies to accept multilateral
responsibilities beyond their economies
 Prevent protectionism in U.S. and Europe as Asian
economies grow
 Become action-prone as financial crises become
global and more complex
 Support the process of regionalization of currencies
 Help financial markets spread risk from ecological
issues

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 Global Level Institutions
World Bank’s Major Institutions

 The World Bank funds development projects

 Comprised of two major institutions
 International Bank for Reconstruction and
Development (known as the World Bank)
 Funds development loans to middle income,
credit-worthy countries
 International Development Association
 Funds poorer nations’ development

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 Global Level Institutions
The World Trade Organization
 The World Trade Organization (WTO) provides
and helps implement rules of trade
 151 member nations; began in 1995
 Negotiates core agreements among member
nations
 Establishes rules for trade
 Helps settle trade disputes
 Outgrowth of General Agreement on Tariffs and
Trade (GATT)
 Induced trade liberalization from 1947 to 1995

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 Global Level Institutions
The World Trade Organization
 Uruguay Round
 Established the WTO
 The last extended conference of GATT
negotiations
 WTO Principles
1. Trade without discrimination
2. Freer trade, gradually, through negotiation
3. Predictability, through “binding” and transparency
4. Fair competition
5. Encouragement of development and economic
reform
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 Global Level Institutions
The World Trade Organization
Challenges
 WTO talks in Doha, Qatar (2001): members agreed to
work on implementing present agreements
 Developing nations face unique constraints that limit
their ability to benefit from WTO trading system
 Aid-for-trade initiative (2008)
 Major problem: Agricultural subsidies and tariffs
 Trade-related intellectual property rights (TRIPS):
protection of copyrights, trademarks, trade secrets,
other intellectual property matters
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 Regional Institutions
 Cooperative Military Alliances
 The Organization for Economic Cooperation and
Development (OECD)
 The Organization for Petroleum Exporting Countries
(OPEC)
 The Group of 8
 Economic Integration Agreements
 The European Union (EU)

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 Regional Institutions
Cooperative Military
and Security Agreements
 North Atlantic Treaty Organization (NATO)
 Security alliance of 26 North American and
European nations

 Association of Southeast Asian Nations

(ASEAN)
 Ten-member body formed to promote peace
and cooperation in Southeast Asia

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 Regional Institutions
Cooperative Military
and Security Agreements

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 Regional Institutions
Cooperative Military
and Security Agreements

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 Regional Institutions
Organization For Economic
Cooperation and Development

 Organization for Economic Cooperation and

Development (OECD)
 Group of developed countries dedicated to
promoting economic expansion in its member-
nations
 Provides information on economic and other activities
within its member nations
 Provides setting for discussion of shared economic
policy issues
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 Regional Institutions
Organization For Economic
Cooperation and Development

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 Regional Institutions
Other Economic Institutions
 Organization of Petroleum Exporting Countries
(OPEC)
 Cartel of 12 petroleum exporting countries
 The Group of Eight (G8)
 Group of government leaders from major
industrialized nations that meets regularly
to discuss issues of concern

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 The G8 Members (
www.undp.org)

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 Regional Institutions
Economic Integration
 Free trade area (FTA)
 Area in which tariffs among members have
been eliminated, but members keep their
external tariffs
 Customs union
 Collaboration that adds common external
tariffs to an FTA
 Common market
 Customs union that adds mobility of services,
people, and capital
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 Regional Economic Institutions
 NAFTA
 Established January 1, 1994
 Agreement creating a free trade area among
Canada, Mexico, and the United States
 EFTA
 A free trade area between Norway, Iceland,
Liechtenstein, Switzerland

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 Regional Institutions
The European Union

 A body of 27 European countries dedicated

to economic and political integration
 European Parliament
 Legislative body whose members are
popularly elected from member-nations
 Council of the European Union
 Group that is the EU’s primary policy-
setting institution

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Regional Institutions
The European Union

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 Regional Institutions
The European Union
 European Commission
 Runs day-to-day operations
 European Court of Justice (ECJ)
 Rules on policy issues
 European Monetary Union
 Established use of euro in the 15-country euro
zone
 Three “old EU” countries do not participate:
Denmark, Sweden, and the United Kingdom
 The single currency reduces the cost of doing
business across EMU country borders LO8
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