Slide 1 Country Differences in Political Economy.

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Country Differences in Political Economy

Country Differences in Political Economy

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Political, Economic, Legal Systems

• How do they differ?• How do they influence a country’s ability to

achieve meaningful economic progress?• What are the main changes they are undergoing?• How do these affect benefits-costs-risks of doing

business in a country?• How does their nature affect ethical issues of

doing business in a country?

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Democratic

Totalitarian

Political SystemsPolitical Systems“The System of Government in a Nation”

Individualism

Collectivism

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Emphasis: “good of society”, “common good”

Emphasis: guaranteeing individual freedom and self-expression

Government by the people exercised directly or through elected representatives

One person or political party exercises absolute control over all spheres; opposing parties prohibited

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• Democracy: – Government is by the people, exercised either directly

or through elected representatives (representative democracy)

– Safeguards hold elected representatives accountable

• 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

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World’s Religious PhilosophiesWorld’s Religious Philosophies1. Christianity2. Islam3. Nonreligious4. Hinduism5. Other6. Buddhism7. Confucianism8. Jewish

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56 7 8

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Economically-Relevant Characteristics Economically-Relevant Characteristics of Religious/Spiritual Philosophies of Religious/Spiritual Philosophies

• Protestant Christianity: Work ethic, wealth creation, individual freedom

• Islamic fundamentalism: Pro free enterprise, right to private property, keep contractual obligations, avoid deception, sin to collect interest

• Hinduism: Spiritual progression (reincarnation), aesthetic (non-material) lifestyle, self-reliance, caste system

• Buddhism: Spiritual achievement but lack of support for extreme aesthetic behavior or caste system

• Confucianism: High moral/ethical conduct, loyalty, reciprocal obligations, honesty

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Economic SystemsEconomic Systems

Market

State-Directed

Mixed Command

State-Directed - e.g., Japan, S. Korea…gov’t plays significant role in directing investment via “industrial policy”

REALLY A CONTINUUM, WITH ALL ECO’S MIXED TO SOME DEGREE

Pure Market

not planned by anyone, no restrictions

Pure Command products, quantities, price planned, most business state-owned

Highly Mixed e.g., Canada… state-owned health-care,

electrical, liquor; also France

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Legal Systems and International Business

• 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– Bureaucratic Law

• Dispute resolution– Where to arbitrate?– Validity of contracts and

decisions

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Legal Systems

• property rights– use of a resource, use made of income from resource– enforcement issues, public vs private action violations

• protection of Intellectual Property– Patent, copyright, trademarks, industrial property (Paris Convention) – WTO/GATT

• product safety and product liability• criminal / civil liability

• contract law– document that specifies

• conditions under which an exchange will happen• rights/obligations of parties

– differences based on legal tradition• common law system• civil law system

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Differences of Economic Development

– GDP per capita; does not factor cost of living differences

– Purchasing Power Parity index: adjusts per capita GDP by cost-of-living

– Static picture– Human Development Index: life

expectancy, literacy, PPP based average incomes

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Political-Economic ProgressPolitical-Economic Progress• Trend from totalitarian, command toward

democratic, free-market systems– InnovationInnovation is engine of growth [for products, processes,

strategies, organizations, management practices, countries

– Innovation needs:• creativity

• market economy• strong property rights• the “right” political system

– Economic progress is related to Democracy– IT limits gov’t ability to control citizen access

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The The Migration PathMigration Path of Economic of Economic TransformationTransformation

• Deregulation– Removal of legal restrictions to free markets.

• Privatization– Transfer of state ownership of property into private

hands.

• Evolution of legal systems – to protect property rights.

• The road of transformation is rocky12

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Restrictive Trade Policy and Restrictive Trade Policy and PoliticsPolitics

• Protecting jobs and industries:– emerging industries.

• Increasing exports.• National security.• Retaliation.• International product domination:

– Subsidies for “first mover” advantages (New Trade theory).

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Instruments of Restrictive Trade PolicyInstruments of Restrictive Trade Policy

• Tariffs –Direct fees levied on imports

• Subsidies -- payment to a domestic producer, generated from taxes

• Import Quotas and Voluntary Export Restraints -- Restriction on the quantity of some good imported into a country

• Local Content Requirements -- Requires some specific fraction of a good to be produced domestically– Initially used by developing countries to help shift from assembly to production

of goods Developed countries (US) beginning to implement.

• Antidumping Policies – Penalties for selling goods in a foreign market below production costs or below fair market value

• Administrative Policies -- Bureaucratic rules designed to make it difficult for imports to enter a country

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Restrictive Trade Instruments: Administrative Policies

• Bureaucratic rules designed to make it difficult for imports to enter a country.

• Japanese ‘masters’ in imposing such rules.– Tulip bulbs.– Federal Express.

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16 Annual Cost to American Consumers for Import Protection

Textiles

Automobiles Dairy

Meat Sugar

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25

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Consumer LossesProducer Gains

$ Millions

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1994: Sales = $253m Loss = $310m

1994: Sales = $253m Loss = $310m

1998(3Q): Sales = $934m Profits = $260.2m

1998(3Q): Sales = $934m Profits = $260.2m

The Impact of Privatization

172000 = World’s dominant provider of regional jets

2000 = World’s dominant provider of regional jets

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18 Implications for Global Business• Political, economic, and legal environments of a country

– influence attractiveness– raise ethical Issues

• Attractiveness– balance long-term risks with short-term benefits of doing

business in a foreign country– benefits depend on: size, wealth, future economic growth

• first mover advantages• identify “star” future economies

– costs are affected by: • political payoffs• economic sophistication (may be more costly to operate in LDCs, no

infrastructure)• legal framework impact on costs

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Implications for Global Business

• Ethical Issues– human rights– adherence to same standards abroad as at home

– product safety

– work safety

– environmental protection

– bribes– Foreign Corrupt Practices Act (1977)

– what is unethical is not necessarily illegal

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The Nature of The Nature of RiskRisk• Political Risk

– Likelihood that political forces will cause drastic changes that adversely affect profits and other goals.

• Economic Risk– Likelihood that economic mismanagement will cause

drastic changes that adversely affect profits and other goals.

• Legal Risk– Likelihood that a trading partner will opportunistically

break a contract or expropriate property rights.

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21 Host Countries and the MNC

• Impact of MNC on host countries• Political

• Economic

• Environmental

• Cultural

• Impact of host country Governments on MNCs (Political Risk)

• Expropriation, Nationalization

• Privatization

• Constraints on ownership

• Intellectual property rights

• Offset obligations (profit/capital repatriation, exports, technology transfer)

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Benefit, Cost, Risk TradeoffBenefit, Cost, Risk Tradeoff

• Costs & risks typically lower in economically advanced and politically stable democratic nations

• But benefits dependent upon likely economic growth rates

• Tradeoff likely most favorable in politically stable developing nations that have free market systems

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23 CHOOSE• You are a CEO considering a $100mil

investment in either Russia or Czech Republic:

• Both investments promise same long run return

• so choice driven by risk considerations:– Assess risks of doing business in each of these

nations.

• Which investment do you favor and why?

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Which country makes best investment site?Which country makes best investment site?

• Country A & B identical size populations, low labor costs, and good access to world markets

• Country A– undeveloped education system, marked stratification

between upper & lower classes, dominant religion stresses reincarnation, three major linguistic groups

• Country B– well-developed education system, lack of social

stratification, group identification culturally valued, dominant religion stresses hard work, only one linguistic group

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