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