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Chapter 2

National Differences in Political Economy

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Political Economy

The political, economic, and legal systems of a country

Three systems interact and influence each other

Change in one system often impacts the other systems

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Political Economy

Political System

Economic System Legal System

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Political Systems

The system of government in a nation

Economic and legal systems of a country are

shaped by its political system

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Collectivism

Stresses the primacy of collective goals over

individual goals

Needs of society are viewed as more important than

individual freedoms

In the modern times, collectivism has been accepted

by socialists

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Socialism

Advocates substantial public involvement, through

government ownership, in the means of production

and distribution

State-owned enterprises should benefit society as a

whole, rather than individual capitalists

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Socialism

Socialist ideology is split into 2 broad camps

Communism

Communists believe that socialism can only beachieved through violent revolution and

totalitarian dictatorship

Social Democracy

Socialist democrats believe that socialism

should be achieved by democratic means

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Individualism

Philosophy that the individual should have freedom in theireconomic and political pursuits

Stresses the interests of the individual should takeprecedence over the interests of the state

Emphasizes the importance of guaranteeing individualfreedom and self-expression

Society is best served by letting people pursue their owneconomic self-interest vs. government deciding

Translates into an advocacy for democratic political systemsand free market economies

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Democracy vs. Totalitarianism

Democracy and totalitarianism are at different endsof a continuum with many shades of gray in between

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Democracy

Political system in which government is by the

people, exercised either directly or through elected

representatives (representative democracy)

Elected representatives form government that

makes decision on behalf of the electorate

Elected representatives are held accountable

through safeguards

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Safeguards to Protect a Democracy

1. Freedom of expression, opinion and organization

2. Free media

3. Regular elections

4. Universal adult suffrage5. Limited terms for elected representatives

6. Fair court system that is independent from thepolitical system

7. Nonpolitical state bureaucracy8. Nonpolitical police force and armed service

9. Relatively free access to state information

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Totalitarianism

Form of government where one person or politicalparty exercises absolute control over all spheres ofhuman life

Opposing political parties are prohibited andgovernment critics are not tolerated

Major forms:

Communist Totalitarianism Theocratic Totalitarianism

Tribal Totalitarianism

Right-Wing Totalitarianism

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Political Economy

Political System


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Economic Systems

Political ideology and economic systems areinterrelated

countries where individual goals are givenprimacy over collective goals, it is more likely tofind free market economic systems

countries where collective goals are givenprimacy over individual goals, it is more likelyto find state control of economic markets andenterprises

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Types of Economic Systems

Market Economy

Command Economy

Mixed Economy

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Market Economy

All productive activities are privately owned

What is produced (and quantity) is determined bythe interaction of supply and demand and signaledto producers through a price system

Consumers are sovereign

Government encourages vigorous competition

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Command Economy

All businesses are state owned

What is produced, the quantity and price of all goods

and services is planned by the government

Economic resources are mobilized for the publicgood

History shows that command economies have notbeen successful

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Mixed Economy

Mix of market and command economies

Some economic sectors are privately owned and

left to free market mechanisms

Some economic sectors are state-owned and

planned by government

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Political Economy

Political System


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Legal Systems

Rules, or laws, that regulate behavior and the

processes through which laws are enforced and

grievances are redressed

Regulates business practice

Defines the manner in which business transactions

are executed

Sets down the rights and obligations of those

involved in business transactions

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Legal Systems

Can affect the attractiveness of country as aninvestment site or market

Businesses must observe and balance between home and host country laws

international laws and treaties

Legal environment varies by country

US has one lawyer per 270 people

China has one lawyer per 10,650 people

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Legal Systems

Three main types of legal systems

Common Law

Civil Law

Theocratic Law

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Legal Systems

Four key issues for international business:

Contract law

Property rights

Protection of intellectual property

Product safety and liability

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Contract Law

Body of law that governs contract enforcement

Contract is a document that

specifies conditions under which an exchange is

to occur

details rights and obligations of parties

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Contract Law

Dispute resolution is often complex

where to arbitrate and whose laws apply?

host country or home country?

validity of contracts and decisions

United Nations Convention on Contracts for the

International Sale of Goods (CIGS) attempts toresolve these issues

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Product Safety and Liability

Product safety laws set safety standards for productsand manufacturing processes

Product liability laws hold the firm and its officers

responsible for product safety standards

Product safety and civil liability laws vary bycountry:

Least extensive in lesser developed countries Raises important ethical issues for international

businesses

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Intellectual Property

Property that is the product of intellectual activity

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Protection of Intellectual Property

Ownership rights of intellectual property areestablished through a:

Patent

Exclusive use rights, it protects the inventor of a product for

a certain period of time

Copyright

Exclusive rights to authors, composers, playwrights and

artists to publish and dispense their work

Trademark

Officially registered designs and names that protect ownersproduct designations

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Dates back to the 17th century

Takes place in both rich and poor countries

7-9% of all world trade is counterfeits

(International Chamber of Commerce Estimate)

5-7% of pharmaceuticals worldwide(World Health Organization Estimate)

Intellectual Property Theft

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Intellectual property laws are a very important

stimulus to innovation and creative work

Innovation is an engine for economic growth

Innovation generally prospers where economic

incentives exist

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Protection of intellectual property rights differs greatly fromcountry to country and many treaties have been signed

WTO 1994 agreement

Trade Related Aspects of Intellectual Property Rights

Extends GATT to cover intellectual property

Established council to oversee stricter enforcement

World Intellectual Property Organization (183 nations)

Paris Convention for the Protection of Industrial Property (169nations signed)

Enforcement of regulations is difficult and often lax

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New technology has:

broadened the range of goods that are

vulnerable to copying (counterfeit)

dramatically improved their quality

lowered their cost of production

created indistinguishable packaging

made it harder to detect counterfeits

Intellectual Property Theft

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Broad Range of Counterfeit Products

Currency

Designer Clothes and Jewelry

Software

CDs

Medicines

Cell Phones

Food and Drink

Car and Airplane Parts

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Wide Range of Counterfeiters

Goods are made in back-street sweatshops to full-scale factories

Goods are sold in street stalls to complexdistribution networks

Global and local brands are impacted

Enforcement of property rights is uneven

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Firms are Fighting Back

Adding anti-counterfeiting devices

Adding covert features and molecular tags

Hiring authenticating technology firms

Developing their own investigation and

enforcement teams

Educating their consumers

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Human Development Index

United Nations index that measures the quality of

life in different nations

Based on three measures:

life expectancy at birth

educational attainment

PPP based average incomes are sufficient tomeet the basic needs of life

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Political Economy and Economic Progress

A countrys economic development is a function of itseconomic and political systems

Innovation and entrepreneurship are the engines ofeconomic growth

Innovation and entrepreneurship needs:

market economy

strong property rights the appropriate political system

Economic progress leads to democracy

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States in Transition

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States in Transition

Wave of democratic revolutions in the 1980s and

1990s swept the world due to:

Totalitarian regimes failed to deliver economic

progress and were replaced

New information and communication technologies

have reduced the states ability to control

information

Emergence of prosperous middle and working

classes that pushed for democratic reforms

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But the Global Spread of Democracy

will Not Continue Unchallenged

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The New World Order and Global Terrorism

Intense speculation about the future of globalgeopolitics

Rise of Islamic fundamentalism is portrayed as aresponse to the alienation produced bymodernization

Global terrorism is the product of tensionsbetween

civilizations and the clash of value systems andideology

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Nature of Economic Transformation

The shift to market-based economies entails:

Deregulation Remove legal restrictions

Encourage the free play of market systems

Allow establishment and operations of private firms

Privatization Transfer of ownership of state owned enterprise to

private individuals

Provide new private owners with profit incentive

Legal Systems Laws that protect property rights and contracts

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Political Systems:

Implications for International Business

Political systems raise important ethical issues

human rights

government regulations

product safety

worker safety

environmental protection

corruption and bribes

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Political Systems:

Implications for International Business

Political systems influence the attractiveness of a

country as a market and/or investment site

Requires firms to balance the long-term benefits

against the costs and risks

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