International Business Management (MGT 520) VU

Lecture 10

International Business: NATIONAL DIFFERENCES IN

POLITICAL ECONOMY

Learning Objectives
Describe how the variation of political systems of countries often follows 'collectivist vs.
individualist' and 'democratic vs. totalitarian' dimensions. That tendency can be best
visualized by looking at the degree of economic and political freedom enjoyed by a
country's citizens.

2. Explain the differences in economic systems between countries. Examining specifically

the characteristics of market economies, command economies, mixed economies, and
state-directed economies achieves that objective.

3. Examine the differences in the economic development of different countries. The

chapter presents and describes economic development measures like GDP, purchasing
power, and human development indices.

4. When considering international expansion, suggest that the potential for future
economic growth and the growth rate may be as or more important than static
measures of economic development.

5. Explain how differences in the legal systems of countries can dramatically affect the
attractiveness and ease of doing business in different countries. The chapter highlights
differences in protections of intellectual property (patents, copyrights, and trademarks),
product safety and liability, and contract law to suggest how legal systems affect the
conduct of international business.

6. Show how changes in the world order in the 1980s and 1990s affected countries in
Europe, Asia, Latin America, and Africa, and how these changes present both great
new opportunities and risks for international business.

7. Summarize issues that affect the attractiveness of doing business in different countries,
including the benefits, costs, and risks determined by the political economy of nations.

8. Present some ethical concerns of doing business in countries that have different
standards, political ideologies, economic systems, and patterns of acceptable and
expected behavior (i.e. bribes).

Lecture Outlines
THE CHANGING POLITICAL ECONOMY OF INDIA
INTRODUCTION
POLITICAL SYSTEMS
Collectivism and Individualism
Democracy and Totalitarianism
ECONOMIC SYSTEMS
Market Economy
Command Economy
Mixed Economy
State-Directed Economy

Copyright © Virtual University of Pakistan 31

International Business Management (MGT 520) VU
LEGAL SYSTEMS
Property Rights
Country Focus: Forty Years of Corruption in Nigeria
The Protection of Intellectual Property
Management Focus: Drug Patents and the AIDS Epidemic in South Africa
Product Safety and Product Liability
Contract Law
THE DETERMINANTS OF ECONOMIC DEVELOPMENT
Differences in Economic Development
Broader Concepts of Development: Amartya Sen
Political Economy and Economic Progress
Geography, Education and Economic Development
STATES IN TRANSITION
The Spread of Democracy
The New World Order?
The Spread of Market-Based Systems
The Nature of Economic Transformation
Country Focus: Privatization in Brazil
Implications
IMPLICATIONS FOR BUSINESS
Attractiveness
Ethical Issues

D. Legal Systems
1. The legal environment of a country is of immense importance to international business.
A country's laws regulate business practice, define the manner in which business
transactions are to be executed, and set down the rights and obligations of those
involved in business transactions. Differences in the structure of law can have an
important impact upon the attractiveness of a country as an investment site and/or
market.

2. Control over property rights are very important for the functioning of business.
Property rights refer to the bundle of legal rights over the use to which a resource is put
and over the use made of any income that may be derived from that source. Property
rights can be violated by either private action (theft, piracy, blackmail, Mafia) or public
action (governmental bribery and corruption, nationalization). Lack of confidence in a
country’s fair treatment of property rights significantly increases the costs and risks of
doing business.

3. The Country Focus on Corruption in Nigeria shows how a country that has huge
natural resources can still remain poor when its political leaders conspire to damage its
economic activity for their personal gain. High levels of corruption can naturally lead to
a significant reduction in economic activity.

4. Intellectual property rights (patents, copyrights, and trademarks) are important for
businesses if they are to capitalize on what they have developed. Firms like Microsoft,
Levis, Coca-Cola, or McDonald’s would have little reason to invest overseas if other
firms in other countries were able to use the same name and copy their products
without permission. The management focus article on drug patents in South Africa
illustrates the issue well. By allowing the purchase of AIDS drugs from the cheapest
source, the South African government was attempting to avert a health crisis. In doing
so, it created a violation of international property rights that may take many years of
court action to settle.

Copyright © Virtual University of Pakistan 32

International Business Management (MGT 520) VU
5. Different countries have different product safety and liability laws. In some cases US
businesses must customize products to adhere to local standards if they are to do
business in a country, whether these standards are higher or just different.

6. When product standards are lower in other countries, firms face an important ethical
dilemma. Should they produce products only of the highest standards even if this puts
them at a competitive disadvantage relative other producers and results in not
maximizing value to shareholders? Or should they produce products that respond to
local differences, even if that means that consumers may not be assured of the same
levels of safety in different countries? One serious example I use involves the flame
retardant nature of children’s pajamas. In many countries restrictions on the level of
flame retardency are very low and even nonexistent, and it is perfectly legal to
manufacture that product without protective standards. Should international firms
continue to manufacture to higher protection levels, with resulting increased costs that
may put them at a competitive disadvantage?

7. Differences in contract law force firms to use different approaches when negotiating
contracts. In countries with common law traditions, contracts tend to be much more
detail oriented and need to specify what will happen under a variety of contingencies.
Common law tends to interpret legal statutes according to the past decisions and
rulings of courts. The United States uses a common law system. Under civil law
systems, contracts tend to be much shorter and less specific since many of the issues
relating to contracts are covered in the civil code of the country. Under common law,
ownership is established by use; under civil law, ownership is determined by
registration. Therefore, another firm may register a product first and prevail in a bid for
ownership, even though the competition had been using the product for a long time
but had failed to register it.

Kinds of Legal Systems

1. Common law. Laws are based on tradition, precedent, and custom (e.g.,
United States, United Kingdom).

2. Civil law. The legal system is based on a detailed set of laws that make up a
code (e.g., Germany, France, Japan).

3. Theocratic law. The legal system is based on religious precepts (e.g., Iran).

B. Consumer Safeguards
Liability issues are a major challenge for international firms. Different legal
systems provide different safeguards for consumers. For example, a survey of
194 big Japanese manufacturers found that only 24 had ever faced a product-
liability suit at home and, of those, only seven had lost. In the United States,
one auto company had 250 product-liability suits in a year, but only 2 during the
same time frame in Japan. (See Exercise 3.2 in the “Going Global” section at
the end of the chapter)

C. The Legal Profession

MNEs must use lawyers for a variety of services, such as negotiating contracts and
protecting intellectual property. Some law firms have actually become international
through mergers with other law firms. More commonly, law firms often establish
correspondent relationships with law firms in other countries in order to provide better
international services to their business customers.
Copyright © Virtual University of Pakistan 33
International Business Management (MGT 520) VU
D. Legal Issues in International Business
Laws which govern domestic activities differ from country to country (e.g., minimum
wage level, length of workweek). Laws also exist that cover cross-border activities (e.g.,
import duties, foreign investment regulations). Laws affect so many aspects of
international business that legal issues will be addressed in more depth in several
additional chapters.

The Determinants of Economic Development

1. Different countries have dramatically different levels of development, as shown in Map

2.1. GDP/capita is a good yardstick of economic activity, as it measures average value
of the goods and services produced by an individual.

2. But GDP/capita does not consider the differences in costs of living. The UN's PPP
index as shown in Table 2.1 shows the differences in the standards of living of people
in different countries.

Copyright © Virtual University of Pakistan 34