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Chapter 4 and 5
National Differences in
Political, Economic, and
Legal Systems
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© 2022 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw Hill.
Learning Objectives
2-1 Understand how the political systems of
countries differ.
2-2 Understand how the economic systems of
countries differ.
2-3 Understand how the legal systems of countries
differ.
2-4 Explain the implications for management
practice of national differences in political
economy.
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Opening Case
China’s Mixed Economy
China used to be a one-party state where private enterprise was
banned, and business activity was controlled by government.
Market-oriented reforms have now made China the second largest
economy in the world.
• Still a one-party state, but now a “socialist market economy.”
• Mixed economy with vibrant private sector and a significant state-
owned sector.
But China’s state-owned enterprises are less productive than
private-sector business, no matter how much support they receive
from the state.
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Industrial Activity in China
A worker handling hot cables at a steel factory in China.
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Introduction
International Business
More complicated than domestic.
Differing political, legal, and economic systems; vary in economic
development and growth trajectories.
Cultural, education, and skill levels vary.
The political, economic, and legal systems are known as the
political economy.
• Systems are interdependent.
• Societal culture affects political economy, and political economy
shapes societal culture.
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Political Systems 1
Political System
System of government in a nation.
Political systems assessed in terms of degree to which they:
• Emphasize collectivism as opposed to individualism.
• Are democratic or totalitarian.
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Political Systems 2
Collectivism and Individualism
Collectivism: system that stresses the primacy of collective goals
over individual goals.
• Traced to Greek philosopher Plato.
• Society should be stratified into classes.
• Property should be owned in common.
When collectivism is emphasized, needs of society are generally
viewed as being more important than individual freedoms.
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Political Systems 3
Socialism.
• Socialists: those who believe in public ownership of the means of
production for the common good of society.
• Modern socialists trace roots to Karl Marx.
• Advocates state ownership of basic means of production, distribution,
and exchange.
• State then manages enterprises to benefit society as a whole.
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Political Systems 4
In the early 20th century, socialism split into:
• Communists: believed socialism could only be achieved though
violent revolution and totalitarian dictatorship.
• In retreat worldwide by mid-1990s.
• Social democrats, who worked to achieve same goals by democratic
means.
• Many state-owned enterprises failed to succeed, and many nations
implemented privatization programs.
• Sale of state-owned enterprises to private investors.
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Political Systems 5
Individualism.
• Suggests individuals should have freedom over economic and political
pursuits.
• Traced to Aristotle, who argued that individual diversity and private
ownership are desirable.
• Refined in work of David Hume, Adam Smith, and John Stuart Mill.
Individualism stresses:
• Individual freedom and self-expression.
• Letting people pursue self-interests to achieve the best overall good for
society.
• Democratic systems and free markets.
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Political Systems 6
Democracy and Totalitarianism
Democracy.
• Political system in which government is by the people, exercised either
directly or through elected representatives.
• Most common form today is representative democracy: elected
representatives vote on behalf of constituents.
• Freedom of expression, opinion, and organization; free media; regular
elections; universal adult suffrage; limited terms for elected officials; fair
court system; nonpolitical state bureaucracy; nonpolitical police force and
armed services; free access to state information.
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Political Systems 7
Totalitarianism.
• Form of government in which one person or political party exercises
absolute control over all spheres of human life, and opposing political
parties are prohibited.
• In most totalitarian regimes:
• There is widespread political repression.
• There are no free and fair elections.
• Media is censored.
• Basic civil liberties are denied.
• Challenges to regime are prohibited.
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Political Systems 8
Four major forms of totalitarianism today:
1. Communist totalitarianism: advocates achieving socialism through
totalitarian dictatorship.
2. Theocratic totalitarianism: political power is monopolized by a party,
group, or individual that governs according to religious principles.
3. Tribal totalitarianism: where a political party that represents the
interests of a particular tribe monopolizes power.
4. Right-wing totalitarianism: individual economic freedom is allowed
but individual political freedom is restricted because it could lead to
communism.
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Political Systems 9
Pseudo-Democracies
Many nations lie between pure democracy and complete
totalitarianism.
• Authoritarian elements capture much of the machinery of state and use
this to deny basic political and civil liberties.
• Example: Russia under Vladimir Putin.
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Economic Systems 1
Political Ideology and Economic Systems Are Connected
Three types of economic systems: market economy, command
economy, and mixed economy.
• Market-based economic system likely in countries where individual
goals are given primacy over collective goals.
• State-owned enterprises and restricted markets are common in
countries where collective goals are dominant.
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Economic Systems 2
Market Economy
Goods and services a country produces and the quantity in which
they are produced is determined by supply and demand.
• Supply must not be restricted by monopolies.
• Government encourages free and fair competition between private
producers.
• Constant incentive to improve products and processes.
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Economic Systems 3
Command Economy
Goods and services a country produces, the quantity in which they
are produced, and the price at which they are sold are planned by
government.
• All businesses are state-owned and have little incentive to control
costs and be efficient.
• Because there is no private ownership, there is little incentive to better
serve consumer needs.
• Dynamism and innovation are absent.
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North Korea’s Command Economy
North Korean leader Kim Jong-un visiting a factory.
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Economic Systems 4
Mixed Economy
Includes some elements of market economies and some elements
of command economies.
• Governments take over troubled firms considered vital to national
interests.
Number of mixed economies becoming less common.
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Legal Systems 1
Legal System
Refers to rules, or laws, that regulate behavior, along with
processes by which laws are enforced and through which redress
for grievances is obtained.
A country’s legal system is important because laws:
• Regulate business practice.
• Define manner in which business transactions are executed.
• Set rights and obligations of those involved in business transactions.
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Legal Systems 2
Different Legal Systems
Common law: based on tradition, precedent, and custom.
• Found in most of Great Britain’s former colonies, including the U.S.
Civil law: based on detailed set of laws organized into codes.
• Found in more than 80 countries, including Germany, France, Japan,
and Russia.
Theocratic law: based on religious teachings.
• Islamic law is most widely practiced.
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Legal Systems 3
Differences in Contract Law
Common law and civil law systems approach contract law—body
of law that governs contract enforcement—differently.
• A contract specifies conditions under which an exchange is to occur
and details rights and obligations of parties.
In a common law state, contracts are very detailed with all
contingencies spelled out.
In a civil law state, contracts are shorter and much less specific.
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Legal Systems 4
United Nations Convention on Contracts for the International
Sales of Goods (CISG) establishes a uniform set of rules
governing certain aspects of the making and performance of
everyday commercial contracts between sellers and buyers who
have places of business in different nations.
• Countries that adopt CISG signal to other nations they treat the
Convention’s rules as part of their law.
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Legal Systems 5
Property Rights and Corruption
Property rights: legal rights over the use to which a resource is
put and over the use made of any income derived from that
resource.
Private action: theft, piracy, blackmail, and the like by private
individuals or groups.
Public action: public officials extort income or resources from
property holders.
• Excessive taxation, requiring expensive licenses or permits from
property holders, or taking assets into state ownership without
compensating the owners.
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Legal Systems 6
Corruption is present in all countries to some degree, but countries
with a high level of corruption face:
• Foreign direct investment falls.
• International trade falls.
• Economic growth falls.
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Figure 2.1 Rankings of Corruption by
Country, 2019
Access the text alternative for slide images.
© McGraw Hill Source: Constructed by the author from raw data from Transparency International, Corruption Perceptions Index 2019.. 26
Legal Systems 7
Foreign Corrupt Practices Act (FCPA).
• Makes it illegal to bribe a foreign government official in order to obtain
or maintain business over which the foreign official has authority.
• All publicly traded companies must keep detailed records so it is clear
whether a violation has occurred.
• Facilitating or expediting payments to secure performance of routine
government actions are permitted.
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Legal Systems 8
The Protection of Intellectual Property
Intellectual property: property that is the product of intellectual
activity.
• Patents: give inventor exclusive rights to the manufacture, use, or sale
of that invention.
• Copyrights: exclusive legal rights of authors, composers, playwrights,
artists, and publishers to publish and dispose of their work as they see
fit.
• Trademarks: designs and names, often officially registered, by which
merchants or manufacturers designate and differentiate their products.
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Legal Systems 9
Protection of intellectual property rights differs greatly from country
to country.
185 nations are members of World Intellectual Property
Organization.
• Paris Convention for the Protection of Industrial Property:
agreement signed by 170+ countries to protect intellectual property
rights.
• Enforcement is lax in many nations, especially China and Thailand.
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Legal Systems 10
Responses to violations of intellectual property:
• Lobbying governments for better laws and enforcement of those
laws.
• Trade-Related Aspects of Intellectual Property Rights (TRIPS): requires
WTO members to grant and enforce patents lasting at least 20 years
and copyrights lasting 50 years.
• Filing lawsuits.
• Avoiding countries with poor intellectual property laws.
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Legal Systems 11
Product Safety and Product Liability
Product safety laws set certain safety standards to which a
product must adhere.
Product liability holds a firm and its officers responsible when a
product causes injury, death, or damage.
• Liability laws are usually least extensive in less developed countries.
Firms must decide whether to adhere to standards of home
country or host country.
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360° View: Managerial Implications
The Macro Environment Influences Market Attractiveness
• Political, economic, and legal systems of a country raise
important ethical issues that have implications for practicing
international business.
• Political, economic, and legal environments of a country clearly
influence attractiveness of country as a market and/or
investment site.
• A democratic country with a market-based economy, protection
of property rights, and limited corruption is a more attractive
place to do business.
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Summary
In this chapter, we have
• Understood how political systems of countries differ.
• Understood how economic systems of countries differ.
• Understood how legal systems of countries differ.
• Explained implications for management practice of national
differences in political economy.
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© 2022 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw Hill.
