Chapter 2
National Differences
in Political Economy
McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
OUTLINE
3,4: political ecnonomy & political system
o 5,6: Collectivism
o 7 individualism
o 8: democracy
o 9: totalitarianism
10: Economic system
11,12: legal system
o 13,14: IP and corruption
o 15,16: IP protection
o 17: Product liability
18,19,20: Economic development
o 21,22,23,24,25,26: factor affecting economic development 2-2
What Is A Political Economy?
political economy: how the political, economic,
and legal systems of a country are interdependent
interact and influence
affect economic well-being
2-3
What Is A Political System?
Political system: system of government in a
nation
Evaluated according to:
o the degree of collectivism versus individualism
o the degree of being democratic or totalitarian
2-4
What Is Collectivism?
1. Collectivism :
collective goals >>>> individual goals
be traced to the Greek philosopher, Plato (427-347
BC)
2. Socialists: modern collectivism
Founded by Karl Marx (1818-1883)
state ownership of production, distribution, and
exchange
benefit society as a whole, rather than individual
capitalists
2-5
How Does Modern-Day
Socialism Look?
In the early 20th century, socialism split into:
1. Communism
achieved through violent revolution and
totalitarian dictatorship
in retreat worldwide by mid-1990s
2. Social democrats
achieved through democratic means
move toward free market economies
state-owned enterprises have been privatized
2-6
What Is Individualism?
Individualism : individual freedom in economic and
political pursuits
Traced to Greek philosopher, Aristotle (384-322 BC)
Ground rules of society: individual economic and political
freedoms
Democratic political systems and free market economies
2-7
What Is Democracy?
Democracy : government is by the people, exercised
either directly or through elected representatives
usually associated with individualism
pure democracy: citizens should be directly involved in
decision making
representative democracy:
o Used by modern democratic countries
o Citizens elect individuals to represent them
2-8
What Is Totalitarianism?
Totalitarianism: one person or political party exercises
absolute control over all spheres of human life and prohibits
opposing political parties
1. Communist totalitarianism: communist party monopolizes
power
2. Theocratic totalitarianism: political power is monopolized by a
party, group, or individual that governs according to religious
principles
3. Tribal totalitarianism : political party that represents the
interests of a particular tribe that monopolizes power
4. Right-wing totalitarianism: permits economic freedom, but
restricts political freedom
2-9
What Is An Economic System?
Three types of economic systems:
1. Market economies
privately owned
interaction of supply and demand
encourages free and fair competition
2. Command economies
plans the goods and services, the quantity, and the prices
state-owned
allocate resources for “the good of society”
little incentive to control costs and be efficient ---> stagnation
3. Mixed economies
private ownership and free market mechanisms
state ownership and government planning
governments tend to own firms that are considered important to national
security
2-10
What Is A Legal System?
The legal system are set of rules:
o Regulate behavior
o Regulate processes of enforcing law
o Regulate how to give redress for grievances
three types:
o Common law - based on tradition, precedent, and
custom
o Civil law - based on detailed set of laws organized
into codes
o Theocratic law - law is based on religious teachings
2-11
How Are Contracts Enforced In
Different Legal Systems?
A contract is a document that specifies the conditions under which an
exchange is to occur and details the rights and obligations of the
parties involved
Contract law is the body of law that governs contract enforcement
o Under a common law system: detailed contracts with all
contingencies
o Under a civil law system: many issues are already covered in the
civil code ---> shorter and less specific contacts
-----> CIGS:
o United Nations Convention on Contracts for the International
Sale of Good
o Ratified by many countries
o a uniform set of rules governing certain aspects of the making and
performance of everyday commercial contracts between buyers
and sellers who have their places of business in different nations
2-12
How Are Property Rights
And Corruption Related?
Property rights : legal rights over
o the use of resource
o the income derived from such resource
Can be violated through
1. Private action: theft, piracy, blackmail
2. Public action:
o legally - ex. excessive taxation
o illegally - ex. Bribes, blackmailing, corruption
2-13
Which Countries Are
Most Corrupt?
Rankings of Corruption by Country 2008
2-14
How Can Intellectual
Property Be Protected?
Intellectual property - property that is the product of
intellectual activity
Can be protected using:
1. Patents – exclusive rights for a defined period to the
manufacture, use, or sale of that invention
2. Copyrights – the exclusive legal rights of authors,
composers, playwrights, artists, and publishers to publish
and disperse their work as they see fit
3. Trademarks – design and names by which merchants or
manufacturers designate and differentiate their products
2-15
How Can Intellectual
Property Be Protected?
Protection of intellectual property rights differs
from country to country
o World Intellectual Property Organization
o Paris Convention for the Protection of Industrial
Property
To avoid piracy, firms can
o stay away from countries where intellectual property
laws are lax
o file lawsuits
o lobby governments for international property rights
agreements and enforcement
2-16
What Is Product Safety
And Liability?
Product safety laws set certain 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
When product safety laws are stricter in a firm’s
home country than in a foreign country, or when
liability laws are more lax, the firm has to decide
whether to adhere to home country or host
country standards
2-17
What Determines A Country’s Level
Of Economic Development?
Two ways to measure levels of economic development:
1. Gross national income (GNI) per person
2. Purchasing power parity (PPP) involves
adjusting GNI by purchasing power
Economic development = process of expanding the real
freedoms through:
o the removal of major impediments to freedom like
poverty, tyranny, and neglect of public facilities
o the presence of basic health care and basic education
2-18
What Determines A Country’s Level
Of Economic Development?
Human Development Index (HDI)
Used by the United nation
Based on:
o life expectancy at birth
o educational attainment
o whether average incomes are sufficient to meet
the basic needs of life in a country
2-19
How Do Countries Compare on
Economic Development?
Economic Data for Select Countries
2-20
How Does Political Economy
Influence Economic Progress?
Engines of long-run economic growth: Innovation
and entrepreneurship
Innovation and entrepreneurship require a market
economy and strong property rights
Democratic regimes are probably more conducive
to long-term economic growth than dictatorships,
even the benevolent kind
Subsequent economic growth leads to the
establishment of democratic regimes
2-21
How Do Geography And Education
Influence Economic Development?
Countries with favorable geography are
more likely to engage in trade, and so, be
more open to market-based economic
systems, and the economic growth they
promote
Countries that invest in education have
higher growth rates because the workforce
is more productive
2-22
How Is The Political
Economy Changing?
Since the late 1980s, two trends have emerged
1. Democratic revolution (late 1980s and early 1990s)
many totalitarian regimes failed to deliver economic progress to
the vast bulk of their populations
new information and communication technologies have broken
down the ability of the state to control access to uncensored
information
economic advances of the last 25 years have led to increasingly
prosperous middle and working classes who have pushed for
democratic reforms
2. A move away from centrally planned and mixed
economies
more countries have shifted toward the market-based model
2-23
How Free Are
Countries Politically?
Political Freedom in 2008
2-24
How Free Are
Countries Economically?
Distribution of Economic Freedom in 2008
2-25
What Is The Nature Of
Economic Transformation?
The shift toward a market-based system
involves
deregulation – removing legal restrictions to
the free play of markets, the establishment of
private enterprises, and the manner in which
private enterprises operate
privatization - transfers the ownership of state
property into the hands of private investors
the creation of a legal system to safeguard
property rights
2-26
What Does The Changing
Economy Mean For Managers?
Markets that were formerly off-limits to Western business
are now open
By identifying and investing early in a potential future
economic stars, firms may be able to gain first mover
advantages (advantages that accrue to early entrants into
a market) and establish loyalty and experience in a country
ex. China -1.2 billion people and India – 1.1 billion people
However, the potential risks are large
It can be more costly to do business in countries with
dramatically different product, workplace, and pollution
standards, or where there is poor legal protection for
property rights
2-27
What Does The Changing
Economy Mean For Managers?
Managers must consider
1. Political risk - the likelihood that political forces will
cause drastic changes in a country's business environment
that adversely affects the profit and other goals of a
business enterprise
2. Economic risk - the likelihood that economic
mismanagement will cause drastic changes in a country's
business environment that adversely affects the profit and
other goals of a business enterprise
3. Legal risk - the likelihood that a trading partner will
opportunistically break a contract or expropriate property
rights
2-28
How Can Managers Determine A
Market’s Overall Attractiveness?
The overall attractiveness of a country as a
potential market and/or investment site for an
international business depends on balancing the
benefits, costs, and risks associated with doing
business in that country
Other things being equal, the benefit-cost-risk
trade-off is likely to be most favorable in politically
stable developed and developing nations that have
free market systems and no dramatic upsurge in
either inflation rates or private sector debt
2-29
