Does New Institutional Economics Helps a Business in Assessing Risk of Assignment - 1

Does New Institutional Economics Helps a Business in Assessing Risk of Foreign Direct Investment - Assignment Example In order to fully understand and analyze the role of new institutional economics (NIE) in risk assessment of foreign direct investment (FDI), we first need to develop a sound understanding of the new institutional economics and various aspects of foreign direct investment. In this paper I will discuss what is New Institutional Economics and its background; and how it is dissimilar from traditional economics. Its various impacts and demands will also be discussed. I will also discuss help of NIE in finding solutions which were previously unresolved. What change in a system is required for its implementation? NIE is not without its shortcomings it also poses some problems. In this paper, we will try to analyze the impact of NIE on foreign direct investment. Does NIE help in any way assessing the risk associated with foreign direct investment? The term new institutional economics was invented by Oliver Williamson in 1990’s. It now refers to various active theoretical currents which belief in the importance of institutions. They also believe 1(Barnard Chavance, 2009) that importance of institutions can also be analyzed with the instruments of standard economic theory with some adjustments. He emphasized on the absence of the existence of the firms in the conventional economics. He uses the cost of using the price mechanism as his basis. The search of appropriate prices and negotiation of separate contracts can be costly for individuals. Hence an individual volunteers himself under the authority of an organization or entrepreneur to sell his services to the market. Hence market transactions are eliminated and firm replaces the market thus economizing the cost of price determination. He developed the concept of transaction cost. Differing cultural values provide an advantage. The nature of the labour force shows that the cost of overcoming the difference in culture is sometimes worth the cost because of other benefits.  Ã‚