Global Business
Today
Global Edition
by Charles W.L. Hill
Krishna Udayasankar
Chow-Hou Wee
2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized
for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded,
distributed, or posted on a website, in whole or part.
Chapter 2
National Differences
in Political Economy
2-2
Introduction
Question: What is the political economy of a
country?
Answer:
A countrys political economy refers to its political,
economic, and legal systems
These systems are interdependent, and interact
and influence each other
A countrys political system has major implications
for the practice of international business
2-3
Political Systems
Political system - the system of
government in a nation
Political systems can be assessed in terms
of the degree to which they:
Are democratic or totalitarian
Emphasize collectivism as opposed to
individualism
2-4
Collectivism and Individualism
Collectivism - a system that stresses the
primacy of collective goals over individual
goals
Can be traced to the Greek philosopher Plato
Today, socialists support collectivism
When collectivism is emphasized, the
needs of the society as whole are generally
viewed as being more important than
individual freedoms
2-5
Collectivism and Individualism
Socialism
Modern socialists trace their roots to
Karl Marx
Advocated state ownership of the basic
means of production, distribution, and
exchange
The state then manages the enterprises for
the benefit of society as a whole
2-6
Collectivism and Individualism
In the early 20th century, socialism split into
communists and social democrats:
Communists - collectivism could only be
achieved though revolution and totalitarian
dictatorship
Social democrats worked to achieve the same
goals by democratic means
Many state-owned enterprises failed to
succeed, and today, many nations are
implementing privatization programs
2-7
Collectivism and Individualism
Individualism - suggests individuals should
have freedom over their economic and
political pursuits
Can be traced to Aristotle who argued that
individual diversity and private ownership are
desirable
Individualism stresses:
Individual freedom and self-expression
Letting people pursue their own self-interests to
achieve the best overall good for society
Democratic systems and free markets
2-8
Democracy and Totalitarianism
Question: What is the difference between a
democracy and totalitarianism?
Answer:
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
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
2-9
Democracy and Totalitarianism
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 the regime are prohibited
2-10
Democracy and Totalitarianism
There are 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: 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 in the belief that it could lead to
communism
2-11
Putting it into Practice
Peaceful transfer of
power: Why was the
whole world watching?
2-12
Economic Systems
Political ideology and economic systems are
connected
There are three types of economic systems:
the market economy, the command economy,
and the mixed economy
A free market system is 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
2-13
Market Economy
In a pure market economy the goods and
services that a country produces, and the
quantity in which they are produced is
determined by supply and demand
Consumers, through their purchases,
determine what is produced and in what
quantity
The role of government is to encourage free
and fair competition between private
producers
2-14
Command Economy
In a pure command economy the goods
and services that a country produces, the
quantity in which they are produced, and
the price at which they are sold are all
planned by the government
All businesses are state owned, and so have
little incentive to control costs and be
efficient
Because there is no private ownership, there
is little incentive to better serve consumer
needs
2-15
Mixed Economy
A mixed economy includes some elements
of a market economy and some elements
of a command economy
Governments tend to take over troubled firms
that are considered to be vital to national
interests
The number of mixed economies in the
world today is falling
2-16
Legal Systems
The legal system of a country refers to the rules, or
laws, that regulate behavior, along with the
processes by which the laws of a country are
enforced and through which redress for grievances
is obtained
A countrys legal system is important because laws:
Regulate business practice
Define the manner in which business transactions are
to be executed
Set down the rights and obligations of those involved
in business transactions
2-17
Different Legal Systems
There are three main types of legal systems:
1. Common law - based on tradition,
precedent, and custom
Found in most of Great Britains former colonies,
including the United States
2. Civil law - based on a very detailed set of
laws organized into codes
Found in over 80 countries, including Germany,
France, Japan, and Russia
3. Theocratic law - based on religious teachings
Islamic law is the most widely practiced
2-18
Differences in Contract Law
Question: How do common law and civil differ?
The two systems approach contract law (the
body of law that governs contract enforcement)
in different ways
A contract - specifies the conditions under which an
exchange is to occur and details the rights and
obligations of the parties involved
In a civil law state, contracts are very detailed
with all contingencies spelled out
In a command law state, contracts are shorter
and much less specific
2-19
Differences in Contract Law
Question: In a contract dispute, which countrys
laws should apply?
Answer:
The United Nations Convention in Contracts for the
International Sales of Goods (CIGS) establishes a
uniform set of rules governing certain aspects of the
making and performance of everyday commercial
contracts between sellers and buyers who have their
places of business in different nations
Countries that adopt CIGS signal to other nations that
they will treat the Conventions rules as part of their law
2-20
Property Rights and Corruption
Property rights - the 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 resource
Property rights can be violated by:
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
2-21
Property Rights and Corruption
Corruption is present in all countries to
some degree, however when a country has
a high level of corruption:
Foreign direct investment falls
International trade falls
Economic growth falls
2-22
Property Rights and Corruption
Rankings of Corruption by Country, 2011
2-23
Foreign Corrupt Practices Act
The Foreign Corrupt Practices Act limits
corruption in the U.S
It is 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 that it is clear whether a
violation of the act has occurred
Facilitating or expediting payments to secure
the performance of routine government
actions are permitted
2-24
The Protection of
Intellectual Property
Intellectual property - property that is the
product of intellectual activity
Intellectual property rights include:
Patents - give the 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
2-25
Putting it into Practice
Are these products real or counterfeit?
2-26
The Protection of
Intellectual Property
The protection of intellectual property rights
differs greatly from country to country
Paris Convention for the Protection of Industrial
Property - agreement signed by 170 countries to
protect intellectual property rights
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
2-27
Product Safety and
Product Liability
Product safety laws set certain safety
standards to which a product must adhere
Product liability involves holding 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 the
standards of the home country or the
standards of the host country
2-28
Implications for Managers
Question: What are the implications of the
political economy for international businesses?
Answer:
The 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
2-29
Putting it into Practice
Would you do business here?
2-30
