National Differences in Political Economy. How do political, economic, legal systems of a country: – Differ among countries? – Influence economic progress?

National Differences in Political EconomyNational Differences in Political Economy

National Differences in Political National Differences in Political EconomyEconomy

How do political, economic, legal systems of a country:– Differ among countries?– Influence economic progress?– Change during our times?– Influence benefits, costs, risks of business?

What are ethical issues that arise from doing business internationally?

National Differences in Political National Differences in Political EconomyEconomy

Political System:

– System of National Government– Varies by country on the basis of

values and beliefs about Collectivism and Individualism Democracy and Totalitarianism

CollectivismCollectivismPrimacy of collectivist over individual

goalsEmphasis: “good of society”, “common

good”Plato,427-347 BC, to Socialists, Marx,

1818 - 83Communists-revolution,

Social Democrats-democratic outlook

IndividualismIndividualism

Individual freedom over economic

and political action

– Individual diversity and private

ownership are desirable

– Private property is more productive

whereas communal property receives

little care

Without private property, no man will be seen to be liberal and no man will ever do any act of liberality; for only in the use of money is liberality made effective

-- Aristotle, 384-322 BC

– An individual who intends his own gain is “led by an invisible hand to promote an end which was no part of his intention. Nor is it always worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who effect to trade for the public good”

-- Adam Smith, 1723-1790

Democracy:

- Government is by the people, exercised either directly or through elected representatives

- Safeguards hold elected representatives accountableTotalitarianism:

One person/party exercises absolute control over all spheres of human life

– Communist totalitarianism (PRC, Vietnam, Laos, N. Korea,Cuba)

– Theocratic totalitarianism (Iran, S. Arabia)– Tribal totalitarianism (Zimbabwe, Tanzania)– Right wing totalitarianism

Economic SystemsEconomic Systems Market economy: what is produced in what quantity

determined by supply/demand and through a price

system

Command economy: planned by government

Mixed economy: a balance of both of the above

State-Directed economy: state directly influences

investment activities of private enterprise through

“industrial policy.”

National Differences in National Differences in Political EconomyPolitical Economy

A Legal System is:– rules - laws - that regulate

behavior– process through which

laws are enforced grievances are redressed

Businesses must observe

– Home country laws– Host country laws– International Laws and Treaties

Different Legal Systems– Common Law– Civil Law– Theocratic Law

Dispute resolution– Where to arbitrate?

Mediate?– Validity of contracts

and decisions

Contract Law Contract Law

A contract specifies– conditions under which an exchange will happen

– rights/obligations of parties

It is based on a country’s legal system.

Systems differ based on legal tradition– common law system

– civil law system

Legal Systems Legal Systems

Disputes need to be resolved based on a

particular legal system– Which country’s? Home? Host?

UN Convention on Contracts for the

International Sale of Goods (GIGS)

International Court of Arbitration of the

International Chamber of Commerce in Paris,

France

Legal Systems and Legal Systems and International BusinessInternational Business

Property rightsuse of a resourceuse made of income from resourceenforcement issuesPublic vs private action violations

Legal Systems and Legal Systems and International BusinessInternational Business

Protection of Intellectual Property– patent: inventors’ exclusive rights to manufacture,

use, sell an invention– copyright: same for authors, composers, artists,

publishers– trademark: unique design and name, often

officially registered Paris Convention for the Protection of Industrial

Property (96 countries) WTO/GATT

Public Action and Public Action and CorruptionCorruption

Public Action can violate property rights

– Legal mechanisms

– Illegal means: corruption

Corruption across countries is tracked by

Transparency International

High corruption levels reduce Foreign

Direct Investment and economic growth

Public Action and Public Action and CorruptionCorruption

US foreign corrupt practices act:

– illegal for US managers to bribe government

officials

OECD Convention on Bribery of Foreign

Public Officials in International Business

transactions

Legal Systems and Legal Systems and International BusinessInternational Business

Protection of intellectual property– Patents, copyrights, trademarks– Paris convention for the Protection of

Industrial Property– TRIPS (WTO)Trade Related Aspects of

Intellectual Property Product safety and product liability

– Product safety laws– Criminal / civil liability

GDP per capita: does not factor cost of living differences

Purchasing Power Parity (PPP) index: adjusts per capita GDP by cost-of-living

Human Development Index: life expectancy, literacy, PPP based average incomes

Differences of Economic Differences of Economic DevelopmentDevelopment

Amartya Sen: development– Should be assessed by material output

measures– Is an economic AND a political process that

requires “democratization”Human Development Index (HDI) =

f{life expectancy, educational attainment, PPP based annual incomes sufficient to meet basic needs}

Broader Conceptions of Broader Conceptions of DevelopmentDevelopment

Innovation >> Engine for Growth

(products, processes, strategies, organizations,

management practices)

Innovation requires:

– market economy

– strong property rights

– the “right” political system

Economic progress is related to democracy

Political Economy and Economic Political Economy and Economic ProgressProgress

States in TransitionStates in Transition

Democratic systems spread in the ‘80s and ‘90s

Totalitarian regimes failed to deliver economic progress

Spread of information trough new communication technologies

Emergence of prosperous middle classes

States in Transition: Universal States in Transition: Universal or Clashing Civilizationsor Clashing Civilizations

New realities: Russian reemergence, Zimbabwean racial unrest, China’s resurgence

New world order and terrorism– Fukuyama: “… the end of history…” and

harmonious existence– Huntington: new conflicts, e.g., Islamic

fundamentalism

States in Transition: Spread of States in Transition: Spread of Market-Based SystemsMarket-Based Systems

Nature of economic transformation– Deregulation: legal changes– Privatization: transfer of state

property/industries to private individuals Auctions IPOs

– Evolution of legal systems– The road of transformation is rocky

Implications for International Implications for International BusinessBusiness

Country’s political, economic, and legal environment– influence attractiveness– raise ethical Issues

Country attractiveness– balance long-term risks with short-term benefits for business– benefits depend on: size, wealth, future economic growth

first mover advantages identify “star” future economies

– costs are affected by: economic sophistication (may be more costly to operate in

LDCs, no infrastructure) legal framework impact on costs political payoffs