1. Chapter
2
Country Differences in
Political Economy

2. 2-2
Political Systems

System of Government in Nations”

Political systems have two dimensions
 Degree
of collectivism vs. individualism
 Degree of democracy vs. totalitarianism
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3. 2-3
Collectivism



Collective goals are more important than
individual goals
Individual rights are sacrificed for the good of
the majority
In the modern world collectivism is expressed
through socialism
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4. 2-4
Socialism

Socialist ideology is split into 2 broad camps
 Communism
 Communists
believe that socialism can only
be achieved through violent revolution and
totalitarian dictatorship

Social democracy

Marxist roots. State owned enterprises run
for public good rather than private profit
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5. 2-5
Individualism

Is the direct opposite of collectivism

Central tenet is that individual economic
and political freedoms are the ground rules
on which society is based
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6. 2-6
Democracy versus totalitarianism

Democracy and totalitarianism are at
different ends of a continuum with many
shades of gray in between
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7. 2-7
Democracy


Government is by the people, exercised
either directly or through elected
representatives (representative
democracy)
Elected representatives are held
accountable through safeguards
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8. 2-8
Safe guards of representative democracy
1.
Individuals right to freedom of expression, opinion and
organization,
2.Free media,
3. Regular elections
4. Adult suffrage
5. Limited terms for elected representatives
6. A fair court system that is independent from the political
system
7. A non political state bureaucracy
8. Nonpolitical force and armed service
9. Relatively free access to state information
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9. 2-9
Totalitarianism

One person/party exercises absolute
control over all spheres of human life
(competing political parties are banned)




communist totalitarianism
theocratic totalitarianism
tribal totalitarianism
right wing totalitarianism
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10. 2-10
Economic systems

Connection between political ideology
and economic systems


countries where individual goals are given
primacy free market economic systems are
fostered
countries where collective goals are given
primacy there is marked state control of
markets
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11. 2-11
Types of economic systems




Market economy: what is produced & in what
quantity is determined by supply/demand and
signaled to producers through a price system
Command economy: planned by government
Mixed economy: a balance of both of the above
State-directed economy: the state directly
influences the investment activities of private
enterprise through “industrial policy”
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12. 2-12
Legal systems

Rules - laws - that regulate behavior


processes through which laws are enforced
& grievances are redressed
Businesses must observe



home country laws
host country laws
international Laws and Treaties
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13. 2-13
Legal systems

Three main types of legal systems – in use
around the world:



common law
civil law
theocratic law
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14. 2-14
Legal systems

Four issues important to international
business




Contract law
Property rights
Protection of intellectual property
Product safety and liability
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15. 2-15
Contract law


Contract law is the body of law that enforces a
contract
 specifies conditions under which an exchange is
to occur
 details rights and obligations of parties
Differences based on legal tradition




common law system
civil law system
theocratic law
bureaucratic law
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16. 2-16
Contract law

Dispute resolution is often complex

where to arbitrate and whose laws apply?
 host


country or home country
validity of contracts and decisions
Role of United Nations Convention on
Contracts for the International Sale of Goods
(CIGS)
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17. 2-17
Property rights

A bundle of legal rights over the use to which
a resource is put and over the use made of any
income from that resource

Property rights can be violated through


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private action
public action and corruption
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18. 2-18
Country rankings of corruption in 2002
Fig 2.1
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19. 2-19
Foreign Corrupt Practices Act


The act was passed during the 1970s
following revelations that U.S. companies had
bribed government officials in foreign
countries in an attempt to win lucrative
contracts
The act allows facilitating or expediting
payments to secure the performance of a
routine governmental action
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20. 2-20
Protection of intellectual property

Intellectual property refers to property that is
the product of intellectual activity



Patent: inventors’ exclusive rights to
manufacture, use, sale of an invention
Copyright: same for authors, composers, artists,
publishers
Trademarks: unique designs and names, often
officially registered
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21. 2-21
Protection of intellectual property


Intellectual property laws are a very important
stimulus to innovation and creative work
Protection of intellectual property rights differs
greatly from country to country

WTO/GATT

96 countries have signed the Paris Convention
for the Protection of Industrial Property
 Enforcement of regulations is difficult and
often lax
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22. 2-22
Regional piracy rates for software 2001
Fig 2.2
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23. 2-23
Product safety and liability



Product safety laws set safety standards for
products and manufacturing processes
Product liability laws hold the firm and its
officers responsible for product safety standards
Criminal laws/ civil liability laws


Least extensive in lesser developed countries
Raise important ethical issues for firms doing
business abroad
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24. 2-24
Determinants of economic development

GNP measures total value of goods and
services produced annually



Does not account for differences in cost of living
PPP allows for more direct comparison of
living standards
Both GNP and PPP are static measures

They do not reflect development accurately
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25. 2-25
Amartya Sen- Theory of social development



Development should be measured less by
material output measures such as GNP,
per capita and more by the capabilities and
opportunities that people enjoy.
HDI measures quality of life in different
nations
Based on life expectancy, educational
attainment, and PPP based average incomes
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26. 2-26
Innovation and economic progress



Innovation (products, processes, strategies,
organizations, management practices) engine for
growth
Innovation needs:
 Market economy
 Strong property rights
 The “right” political system
Economic progress leads to
adoption of democracy
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27. 2-27
States in transition

Reasons for rise of democratic systems in the
1980s and 1990s



Totalitarian regimes failed to deliver economic
progress
Real time information with modern
telecommunication technologies
Emergence of prosperous middle classes
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28. 2-28
The new world order and global terrorism

Modernization has given rise to a resurgence
of fundamentalist thought in the Middle East
Global terrorism is the product of tensions
between civilizations and the clash of value
systems and ideology.
-Huntington
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29. 2-29
Total international terrorist attacks 1981-2002
Fig: 2.3
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30. 2-30
Spread of market based systems
Centrally
Planned
Economies
Shift
Market –
Based
Economies
Mixed
Economies
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31. 2-31
The nature of economic transformation

Deregulation
 Removal
of legal restriction to the free play
of market systems
 Allowing establishment and operations of
private enterprises

Privatization
 Transfer
of ownership of state owned
enterprise to private individuals

Legal systems
 Laws
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that support a market economy
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32. 2-32
Implications for international business

Country differences influence:




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Attractiveness
Benefits
 First mover
 Late mover advantages
Cost
Risk
 Political risk
 Economic risk
 Legal risk
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33. 2-33
Implications for international business

Country differences influence ethical
practices:
 Ethics and human rights
 Ethics & regulations
 Ethics & corruption
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