C HAPTER 2: N ATIONAL D IFFERENCES IN P OLITICAL E CONOMY MGT 372 Lecture By: Ms. Adina Malik (ALK) 1.

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CHAPTER 2:NATIONAL DIFFERENCES IN POLITICAL ECONOMY

MGT 372 Lecture

By: Ms. Adina Malik (ALK)

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POLITICAL SYSTEM Political system refers to the system of government in a nation.

The political system of a country shapes its economic and legal system.

The political economy of a nation refers to how the political, economic, and legal systems of a country are interdependent they interact and influence each other they affect the level of economic well-being in the nation

It differs in 2 degrees:1. degree to which they emphasize collectivism as oppose to

individualism 2. degree to which a nation is democratic as oppose to totalitarian

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POLITICAL SYSTEM: COLLECTIVISM

Collectivism: refers to an ideology that stresses the importance of collective goals over individual goals. The system values ‘the needs of the society’ as a whole rather than ‘individual freedoms’. Emphasize on ‘the good of the society’ or to ‘the common good’. Individual rights should be sacrificed for the good of the majority and property should be owned in common. Examples: Japan, China.

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POLITICAL SYSTEM: INDIVIDUALISM

Individualism: refers to an ideology that stresses the interest of the individual more than the interest of the state or the society. It emphasizes that an individual should have freedom in his or her economic and political pursuit. Private property is more highly productive than communal property and will thus stimulate progress.

Individualism has two central principles:1. Guaranteeing individual freedom and self-expression2. Letting individual pursue their own economic self-interest

Examples: Great Britain and Sweden formerly believed in collectivism but now they are valuing individualism in their political system.

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POLITICAL SYSTEM: DEMOCRACY

Democracy: refers to a political system in which government is by the people, exercised either directly or through elected representatives usually associated with individualism. This system allows both

economic and political freedom. pure democracy is based on the belief that citizens should be

directly involved in decision making most modern democratic states practice representative

democracy where citizens periodically elect individuals to represent them. These representatives function on behalf of the people

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POLITICAL SYSTEM: DEMOCRACY

Some characteristics of a democratic nation are: 1. Freedom of rights to express2. Freedom of media3. Regular elections in which all eligible citizens are allowed to

vote4. Universal adult suffrage (right to vote)5. Limited terms for elected representatives6. A fair court system that is independent from the political

system7. A non political state bureaucracy (administrative policy-

making group)8. Relatively free access to information9. Non political police and armed force

Example: USA, Germany, Japan, Australia, Finland, France, India.

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POLITICAL SYSTEM: TOTALITARIANISM

Totalitarianism: This is a form of government in which one person or political party exercises absolute control over all spheres of human life and opposition party is prohibited. This system is inspired by the philosophy of collectivism. The characteristics of democracy are absent.

There are 4 forms of Totalitarianism

Theocratic Totalitarianism: when a group or individual governs as per religious principles monopolizes power. Example: Saudi Arabia, Iran. These states limit freedom of political and religious expression

with laws based on Islamic principles.

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POLITICAL SYSTEM: TOTALITARIANISM

Communist Totalitarianism: This system believes that totalitarianism can be achieved through dictatorship.

Communist parties monopolizes power. Totalitarian states deny many basic civil liberties to their population. Communism is in decline worldwide.

Example: North Korea, Cuba, China, Laos, Vietnam; Venezuela under the government of Hugo Chavez

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POLITICAL SYSTEM: TOTALITARIANISM

Tribal Totalitarianism: when a political party represents the interests of a particular tribe monopolizes powered.

Example: This has arisen from time to time in African countries such as Zimbabwe, Tanzania, Uganda & Kenya.

Right-wing Totalitarianism: it permits some individual economic freedoms but restricts individual political freedom. They are against communism and is mainly backed by militaries.

Example: Before 80s South Korea, Taiwan, Singapore, Indonesia and the Philippines were right-wing totalitarianism. These are mostly military governments. Recent example could be Pakistan.

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ECONOMIC SYSTEMThere are 3 types of Economic System:

Market Economy: all productions are privately owned, the goods/services are not planned by anybody but by the supply-demand theory. Monopoly must not exists in this economic system. Government encourages free and fair competition between private producers. (Anti trust laws in the USA) Example: Japan, USA, Sweden, Colombia, Mexico

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ECONOMIC SYSTEM Command Economy: Govt plans the quantity and price of

good/services to produce within. All business are state owned. The objective is to mobilize economic recourses for public good. But the scope of efficiency is very low under this system. Example: Cuba, Venezuela, People's Republic of China,

Vietnam.

Mixed Economy: when some sectors of economy are privately owned and some are publicly depending on the nature of the sector and govt takes over companies when they run into severe financial problems to save them from being bankrupt. (Renault in France & AIG of America) Example: Australia, USA, Great Britain, France, Spain, Italy,

etc.

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LEGAL SYSTEM The Legal system of a country refers to the rules or laws that regulate behavior along with the processes by which the laws are enforced and through which remedy for injustices are obtained.

The legal system of a country is of immense importance to international business. Legal system determines the business practice and also the method of transaction.

It should also be consistent with the political system. Like, collectivist states will develop laws that will restrict private ownership of property and business. Contrarily, individualist states will encourage private business through their laws.

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LEGAL SYSTEM Common Law: The Common Law system evolved in England

over hundreds of years ago. It is based on traditions (a country’s legal history), precedents (cases in the past) and customs (how laws are applied in specific situations).

Judges in a common law system have the power to interpret the law so that it applies to the unique circumstance of a case (flexibility). As new precedent arises, law might be altered, clarified or amended to deal with new situations.

Example: USA, UK, Australia, etc.

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LEGAL SYSTEM Civil Law: Law is based on detailed set of

rules organized into codes. The judges under this law system don't have the right to interpret but to apply only (less flexibility compared to Common Law). Example: Germany, France, Russia, Japan, etc.

Theocratic Law: here law is based on religious teachings. Example: Saudi Arabia, Pakistan (Islamic Law). Islamic Financial Institutions are found in Pakistan, Bangladesh, Egypt, Malaysia, etc.

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DIFFERENCES IN CONTRACT LAW

A contract is a document that specifies the conditions under which an exchange is to occur and details the rights and obligations of the parties involved

Contract law is the body of law that governs contract enforcement. Under a common law system, contracts tend to be very detailed with

all contingencies spelled out Under a civil law system, contracts tend to be much shorter and less

specific because many issues are already covered in the civil code

Many countries have ratified the United Nations Convention on Contracts for the International Sale of Goods (CIGS) which establishes a uniform set of rules governing certain aspects of the making and performance of everyday commercial contracts between buyers and sellers who have their places of business in different nations

PROPERTY RIGHTS & CORRUPTION Property rights refer to the legal rights over the use to

which a resource is put and over the use made of any income that may be derived from that resource

Can be violated through1. Private action-theft, piracy, blackmail 2. Public action- public officials pressurize for income or

resources from private such as excessive taxes, expensive license, bribes, blackmailing, etc.

High levels of corruption reduce foreign direct investment, the level of international trade, and the economic growth rate in a country

The Foreign Corrupt Practices Act was passed in USA which prevents all US MNCs to bribe local government to win lucrative contracts. However, the law allows facilitating or expatiating payments to secure the performance of routine governmental action.

THE PROTECTION OF INTELLECTUAL PROPERTY Intellectual property refers to property that is the

product of intellectual activity, such as a computer software, a chemical formula for a new drug, etc. It is established through patents, copyrights and trademarks.

In today’s high-tech ‘knowledge’ economy, intellectual property has become one of the key sources of competitive advantage. So both domestic and foreign firms should be given appropriate protection to their IP.

IP protection rewards people or business for their creativity.

World Intellectual Property Organization (183 member countries)

Paris Convention for the Protection of Industrial Property (170 nations as of 2007)

PRODUCT SAFETY & PRODUCT LIABILITY

Product safety laws set certain safety standards to which a product must follow.

Product liability involves holding a firm and its officers responsible when a product causes death, injury or damage.

These liability laws are stronger and more expensive in western countries than in LDCs. For example, in USA, business is expensive due to high expense of liability insurance.

The ethical dilemma for MNCs is whether to follow home country liability rules and standards or to exploit the relaxed laws of LDCs.