Mgnt4670 Ch 2 Differences In Political Economy

National Differences in Political Economy

Chapter 2

POLITICAL ECONOMY

Political Economy: What does it involve?

How political factors influence the functioning of an economic system.

A term that stresses that the political, economic, and legal systems of a country are interdependent; they interact and influence each other, and in doing so they affect the level of economic well-being.

DIFFERENCES: POLITICAL ECONOMY

THE POLITICAL ECONOMY is made up collectively of:

POLITICAL SYSTEMS ECONOMIC SYSTEMS LEGAL SYSTEMS

POLITICAL SYSTEMS

Political system: system of government in a country

Political systems can be assessed according to two dimensions: Collectivism vs. Individualism Democracy vs. Totalitarianism

POLITICAL SYSTEMS

COLLECTIVISM VS. INDIVIDUALISMNeeds of many Interests of individualsoutweigh needs of take precedence overthe few. needs of the State.

POLITICAL SYSTEMS Collectivism:

Roots: Plato, Marx Political system

expressed in: Socialism Communism:(Revolution and

Totalitarian Dictatorship)

Social Democracy(State-owned enterprises

run for public good not profit)

Individualism: Roots: Socrates, Hume,

Adam Smith, Declaration of Independence

Political system expressed in: Democracy

POLITICAL SYSTEMS DEMOCRACY VS. TOTALITARIANISM

A Political Continuum with many degrees in between:

Democracy Totalitarianism

POLITICAL SYSTEMS DEMOCRACY – the People are the

State. Individual freedom of expression Free media Elections Adult Suffrage Limited Terms for Officials Fair and Independent courts Non-Political State Bureaucracy,

Military Relative Access to State

Information

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 totalitarianis

m

ECONOMIC SYSTEMS

Connection between political ideology and economic systems Countries where individual goals are given

priority, free market economic systems are fostered.

Countries where collective goals are given priority, there is a marked state control of markets.

ECONOMIC SYSTEMS MARKET ECONOMY: Production determined by supply/demand.

Who determines production: consumer demand Role of Government: encourage competition, prevent restrictions on

individual achievement What furthers market economy: private ownership, innovation and

entrepreneurship

COMMAND ECONOMY: Production planned by the Government Who determines production: Government (central planners) Role of Government: mobilize economic resources for public good What furthers command economy: state industrial policy

MIXED ECONOMY: Elements of both of the above

LEGAL SYSTEMS LEGAL SYSTEMS: the

rules, laws, etc. which regulate behavior in a country; the process by which laws are enforced; and grievances are addressed.

DIFFERENT SYSTEMS: COMMON LAW CIVIL LAW THEOCRATIC LAW

BUSINESSES COMPETING IN THE GLOBAL MARKETPLACE MUST HONOR:

Home Country Laws

Host Country Laws

International Laws and Treaties

LEGAL SYSTEMSCOMMON LAW

Based on precedent, custom and interpretation

Judge can interpret laws Ownership established by

use Innocent until proven guilty Contracts tend to be longer,

more detailed Contract performance except for Acts of God More adversarial/more

lawsuits

CIVIL LAW Based on written codes and detailed laws. Judge can apply laws Ownership established by

registration Guilty until proven innocent Contracts tend to be shorter Contract performance has

“Acts of God” which include unforeseeable acts

Less adversarial/less lawsuits

IMPORTANT LEGAL ISSUES FOR INTERNATIONAL BUSINESS

Contract Law: contracts describe conditions under which an exchange is to occur and detail rights and obligations of parties.

Multiple Issues in contract law, such as where to arbitrate disputes, which laws apply, validity of contracts, etc.

IMPORTANT LEGAL ISSUES FOR INTERNATIONAL BUSINESS

Property Rights: all legal rights for use of a resource and income from that resource. These rights can be violated through:

Private action: theft, piracy, blackmail by private individuals or groups [e.g. “Mafia”-style groups]

Public action: extortion of income or property/resources by public officials [bribery], various forms of corruption.

Note: There are legal mechanisms by which governments/public officials may extract property from individuals, such as excessive taxation, expensive permit/licensing procedures, seizure of property without compensation.

IMPORTANT LEGAL ISSUES FOR INTERNATIONAL BUSINESS

Intellectual Property: a property that is the product or result of intellectual activity—ideas. Examples: software, chemical formula for a drug, music Ownership rights over intellectual property can be established

through: Patents: rights to the inventor of a new process or product. Copyrights: rights to music, written works, artistic creations. Trademarks: rights to designs and names used to

differentiate products.

VIOLATION OF PROPERTY RIGHTS: PRIVATE ACTION THROUGH PIRACY

Intellectual property laws are a very important stimulus to innovation and creative work

Protection of intellectual property rights differs greatly from country to country, in spite of international conventions, such as World International Property Organization.

Enforcement of Intellectual Property laws varies considerably. M2 Reports: Beware, Piracy!

VIOLATION OF PROPERTY RIGHTS:PUBLIC ACTION THROUGH CORRUPTION

MOST COMMON PRACTICE: BRIBERY, a demand by government officials for payment of bribes (gifts,

money, etc.) in return to secure or conduct business.Source: International Marketing, Philip Cateora, John L. Graham 10th ed. P.186

FOREIGN CORRUPT PRACTICES ACT

FCPA is a Legislative Act passed during the 1970’s when U.S. companies found to be bribing government officials in foreign countries in order to secure business. (e.g. Lockheed payments to Japan)

Law prohibited bribing foreign government officials to obtain or maintain business

Original act was confusing and narrow, including everything from lubrication (“grease”) payments to extortion.

The FCPA put U.S. business at a disadvantage compared to many other countries, especially Europe, where bribes were a legal tax deduction.

FOREIGN CORRUPT PRACTICES ACT(FCPA) 1970’s

Under U.S. law, U.S. businesses (including wholly owned U.S. subsidiaries or other U.S. entities controlled by foreign corporations) are prohibited from paying bribes to foreign government officials in order to secure or maintain business.

U.S. Publicly-traded companies are required to maintain records that provide enough information to determine if any violations of the law were committed.

U.S. businesses are not permitted to pay middlemen or agents fees if they know that part of the payment to the middleman or agent will be used as a bribe.

FOREIGN CORRUPT PRACTICES ACT(UPDATED)

Omnibus Trade and Competitiveness Act of 1988 amended FCPA to permit payments which expedite or secure routine government actions, not to actually secure business. e.g. obtaining permits, licenses, etc. (“facilitating payments” or “speed money” is acceptable)

Punishments for violations can include heavy fines, imprisonment, and ineligibility to do business with the U.S. government or receive export licenses.

Current Enforcement of FCPA

Business Week June 18, 2007 p. 12

Product Safety and LiabilityProduct safety laws set safety standards for

products and manufacturing processesProduct liability laws hold the firm and its officers

responsible for product safety standardsCriminal laws/ civil liability laws

Civil laws call for payment and monetary damages

Criminal liability laws result in fines or imprisonment

OTHER IMPORTANT LEGAL ISSUES

MARKETING LAWS GREEN MARKETING LAWS ANTITRUST ANTIBOYCOTT

LEGAL ISSUE: ANTITRUSTThe E.U.

has begun

to impose

Antitrust

Measures

on foreign

Companies

as well.San Jose Mercury. Dec 23, 2004 p. C 1-2

MANAGING THE DIFFERENCES ECONOMIC SYSTEMS IMPACT POLITICAL SYSTEMS

AND VISA-VERSA. DYNAMICS ARE SOMETIMES AN INTERPLAY or A TUG

OF WAR. LEGAL SYSTEMS SUPPORT and/or REFLECT THE

RELATIONSHIPS OF ECONOMICS/POLITICS/SOCIAL STRUCTURE and CULTURE.

THE POLITICAL, ECONOMIC, LEGAL SYSTEMS CAN HAVE A PROFOUND IMPACT ON THE LEVEL OF ECONOMIC DEVELOPMENT IN A COUNTRY AND HENCE THE ATTRACTIVENESS OF A COUNTRY AND ITS POTENTIAL AS A TRADING PARTNER OR HOST FOR A FOREIGN DIRECT INVESTMENT.

IMPACT OF

POLITICAL on

ECONOMIC

Source: IBD

June 15, 2004

Differences in Economic DevelopmentDifferent countries have dramatically different

levels of economic developmentTwo common measurements of economic

development Gross National Income (GNI) superseded

Gross National Product or GNP Purchasing Power Parity (PPP) which

accounts for differences in the cost of living

Differences in Economic Development: Purchasing Power Parity

Country GNI per Capita GNI PPP per Capita

GDP Growth Rate1993-2003(%)

Brazil $2,710 $7,480 2.6%

China $1,100 $4,990 9.3%

Germany $25,250 $27,460 1.2%

India $530 $2,880 6.1%

Japan $34,510 $28,620 1.2%

Nigeria $320 $900 3.1%

Poland $5,270 $11,450 4.8%

Russia $2,610 $8,920 0.1%

Switzerland $39,880 $32,030 0.9%

United Kingdom $28,350 $27,650 2.8%

United States $37,610 $37,500 3.2%

Table 2.1 p 61

Broader Conceptions of Development: Amartya Sen

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 (Human Development Index) measures quality of life in different nations.

Based on life expectancy, educational attainment, and PPP based average incomes

HOW POLITICAL ECONOMY IMPACTS ECONOMIC PROGRESS

ECONOMIC DEVELOPMENT IS A FUNCTION OF THE POLITICAL AND ECONOMIC SYSTEMS OF A COUNTRY.

ECONOMIC DEVELOPMENT AND TRANSFORMATION USUALLY OCCURS WHEN POLITICAL, ECONOMIC,

LEGAL SYSTEMS SUPPORT AN ENVIRONMENT WHICH FOSTERS:

INNOVATION ENTREPRENEURSHIPthrough a market economy having strong property

rights.

HOW POLITICAL ECONOMY IMPACTS ECONOMIC PROGRESS Innovation and entrepreneurial activity are known

to be “engines of economic growth.” Innovation and entrepreneurship:

require a market economy [economic freedom]; require strong property rights [incentive for innovation and

new ideas]; usually flourish best under more open political systems,

such as representative democracies, although certain kind of totalitarian regimes may produce economic growth if committed to it.

States in TransitionThe political economy of the world has changed radically since the late 1980’s.

Two trends have been evident: A wave of democratic revolutions swept the world There has been a strong move away from

centrally planned and mixed economies toward a free market economic model

The Spread of DemocracyMap 2.5 p 69

The Spread of Democracy Three main reasons account for the spread of democracy

Many totalitarian regimes failed to deliver economic progress to the vast bulk of their populations

New information and communication technologies, including shortwave radio, satellite television, fax machines, desktop publishing, and most importantly, the Internet, have broken down the ability of the state to control access to uncensored information

The economic advances of the past quarter century have led to the emergence of increasingly prosperous middle and working classes who have pushed for democratic reforms

The Spread of Market-Based Systems

Map 2.6 p 73

NATURE OF ECONOMIC TRANSFORMATION

Countries in a state of transition towards market economies often follow a course of:

1) DEREGULATION: removal of government restrictions on the conduct of a business to allow the free play of market systems and allow establishment and operations of private enterprises

NATURE OF ECONOMIC TRANSFORMATION

Transition towards market economies (cont’d)

2) PRIVATIZATION: sale of state-owned enterprises (i.e. owned by the government) to private investors.

3) FURTHER DEVELOPMENT OF THE LEGL SYSTEM to enact laws which support market economies

EXAMPLE OF EMERGING NATION IN ECONOMIC TRANSFORMATION

4) EMERGENCE OF THE MIDDLE CLASS: (not in the text) The middle class has the disposable income to spend on new or discretionary items. The middle class also exerts significant political and economic influence.

.

San Jose Mercury: June 10, 2004 p.1C

Foreign investment in China is benefited by rising per capita income

ADDED DIMENSION IN THE NEW WORLD ORDER: TERRORISM

NEW WORLD ORDER/GLOBALIZATION CAN RESULT IN:

INCREASE OF TENSIONS AMONG CIVILIZATIONS

INCREASE OF CONFLICTS DUE TO DIFFERENCES IN IDEOLOGY AND VALUES (Huntington)

SERIOUS ECONOMIC IMPACT

ADDED DIMENSION IN THE NEW WORLD ORDER: TERRORISM

Hill, Charles. International Business, 5th ed.

Managerial ImplicationsTwo broad implications for international business

Political, economic, and legal systems of a country raise important ethical issues that have implications for the practice of international business

The political, economic, and legal environment of a country clearly influences the attractiveness of that country as a market and/or investment site

CONSIDERATION OF IMPACT OF DIFFERENCES

ATTRACTIVENESS:

population, purchasing

power, future growth BENEFITS: first mover

advantages COSTS: level of

corruption, infrastructure, and legal exposure

RISKS: political, economic, legal

Attractiveness of a Market

Figure 2.1: Country Attractiveness

BenefitsSize of Economy

Likely Economic Growth

CostsCorruption

Lack of InfrastructureLegal Costs

RisksPolitical Risks: Social Unrest/Anti-Business Trends

Economic Risks: Economic MismanagementLegal Risks: Failure to Safeguard Property Rights

OverallAttractiveness

Return

RISKS in INTERNATIONAL BUSINESS

POLITICAL RISK: likelihood that political forces will cause drastic changes in a country’s business environment which will have a negative impact on the profit and other goals of a business enterprise.

ECONOMIC RISK: likelihood that economic events, including economic mismanagement, will cause drastic changes in a country’s business environment which will have a negative impact on the profit and other goals of a business enterprise.

RISKS in INTERNATIONAL BUSINESS

LEGAL RISKS: likelihood that a trading partner will opportunistically break a contract or expropriate intellectual property rights.

RISKS in INTERNATIONALBUSINESS

Current situation of Zimbabwe reflects the risks in international business: economic collapse created by political forces which passed laws to restrict certain business activities and types of ownership.

The Epoch Times March 29-April 4 Issues 20070128