International Business_Chapter 2_Country Differences in Political Economy_Charles W. Hill

Chapter

Country Differences in

Political Economy

2

McGraw-Hill/Irwin

International Business, 5/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

2-2

Political Systems

System of Government in Nations”

Political systems have two dimensions

Degree of collectivism vs. individualism

Degree of democracy vs. totalitarianism

McGraw-Hill/Irwin


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

McGraw-Hill/Irwin


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

McGraw-Hill/Irwin


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

McGraw-Hill/Irwin


2-6

Democracy versus totalitarianism

Democracy and totalitarianism are at

different ends of a continuum with many

shades of gray in between

McGraw-Hill/Irwin


2-7

Democracy

Government is by the people, exercised

either directly or through elected

representatives (representative

democracy)

Elected representatives are held

accountable through safeguards

McGraw-Hill/Irwin


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

McGraw-Hill/Irwin


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

McGraw-Hill/Irwin


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

McGraw-Hill/Irwin


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”

McGraw-Hill/Irwin


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

McGraw-Hill/Irwin


2-13

Legal systems

Three main types of legal systems – in use

around the world:

common law

civil law

theocratic law

McGraw-Hill/Irwin


2-14

Legal systems

Four issues important to international

business

Contract law

Property rights

Protection of intellectual property

Product safety and liability

McGraw-Hill/Irwin


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

McGraw-Hill/Irwin


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)

McGraw-Hill/Irwin


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

private action

public action and corruption

McGraw-Hill/Irwin


2-18

Country rankings of corruption in 2002

Fig 2.1

McGraw-Hill/Irwin


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

McGraw-Hill/Irwin


2-20


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

McGraw-Hill/Irwin


2-21


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

McGraw-Hill/Irwin


2-22

Regional piracy rates for software 2001

Fig 2.2

McGraw-Hill/Irwin


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

McGraw-Hill/Irwin


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

McGraw-Hill/Irwin


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

McGraw-Hill/Irwin


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

McGraw-Hill/Irwin


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

McGraw-Hill/Irwin


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

McGraw-Hill/Irwin


2-29

Total international terrorist attacks 1981-2002

Fig: 2.3

McGraw-Hill/Irwin


2-30

Spread of market based systems

Shift

Centrally Planned

Economies

Mixed Economies

Market – Based

Economies

McGraw-Hill/Irwin


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 that support a market economy

McGraw-Hill/Irwin


2-32

Implications for international business

Country differences influence:

Attractiveness

Benefits

First mover

Late mover advantages

Cost

Risk

Political risk

Economic risk

Legal risk

McGraw-Hill/Irwin


2-33

Implications for international business

Country differences influence ethical

practices:

Ethics and human rights

Ethics & regulations

Ethics & corruption

International Business_Chapter 2_Country Differences in Political Economy_Charles W. Hill

Business

mcgrawhill companies

details rights

bundle of legal rights

contract law contract

nations political systems

political economy

legal systems rules

economic systems countries