International Business

Chapter 02

Country Differences in Political

Economy
 Political Systems
 System of Government in Nations

 Political systems have two dimensions:

 Degree of Collectivism vs. Individualism

 Degree of democracy vs. Totalitarianism
 Collectivism
 Collective goals are more important than
individual goals (……)
 Individual rights are sacrificed for the “good of
the majority”
 In the modern world collectivism is expressed
through socialism
 Socialism
 Socialist ideology is split into two broad
camps
 Communism
 Communists believe that socialism can only be
achieved through violent revolution and
totalitarian dictatorship
 Social democracy
 Marxist roots. State owned enterprises run for
public good rather than private profit.
 Individualism
 Is the direct opposite of collectivism

 Central tenet is that individual economic and

political freedoms are the ground rules on
which society is based.
 Democracy versus totalitarianism

 Democracy and totalitarianism are at different

ends of a continuum with many shades of
gray in between.
 Democracy

Government is by the people, exercised either

directly or through elected representatives
(representative democracy)
Elected representatives are held accountable
through safeguards.
Safeguards of representative democracy
1. Individuals right to freedom of expression, opinion
and organization
2. Free media
3. Regular elections
4. Adult suffrage
5. Limited terms for elected representatives,
6. A fair court system that is independent from the
political system
7. A non-political state bureaucracy
8. Non-political force and armed service
9. Relatively free access to state information
 Totalitarianism
 One person/party exercises absolute control over all spheres of human
life (competing political parties are banned)
 Communist totalitarianism (totalitarian states that deny many basic civil
liberties to their populations).
 Theocratic totalitarianism (states where political power is monopolized by a party, group, or
individual that governs according to religious principles).

 Tribal Totalitarianism (African countries such as Zimbabwe, Tanzania, Uganda, and

Kenya).
 Right wing totalitarianism (Many right-wing totalitarian governments are
backed by the military, and in some cases, the government may be made up of military
officers).
 Pseudo-Democracies
 Economic Systems
 Connection between political ideology and
economic systems

 Countries where individual goals are given

primacy free market economic systems are
fostered
 Countries where collective goals are given
primacy there is market state control of
markets
 Types of Economic Systems
 Market Economy: what is produced & in what
quantity is determined by supply/demand and
signaled to producers through a price system.
 Disadvantage: (monopolist might restrict output and let prices rise).
 Command Economy: planned by government
(allocate resources for “the good of society.” direction for investments) .
 Disadvantage: (little incentive to save cost and be efficient, no threat)
 Mixed Economy: a balance of both of the above.
 State-directed Economy: the state directly influences
the investment activities of private enterprise through
“industrial policy”
 Legal Systems
 Rules – laws – that regulate behavior
 Processes through which laws are enforced &
grievances are redressed.

 Business must observe

 Home country laws
 Host country laws
 International Laws and Treaties
 Legal Systems
 Three main types of legal systems – in use
around the world:

 Common Law: based on tradition (legal history), precedent

(past cases), and custom (laws to specific situation). e.g., England
 Civil Law: based on a detailed set of laws organized into codes
(80. Germany, France, Japan, and Russia). Less Flexibility.
 Theocratic Law: is one in which the law is based on religious
teachings (Islamic law is the most widely practiced theocratic legal
system in the modern world)

Moral rather than the commercial law (all aspects of life).

Muslim countries (legal systems - a blend of Islamic law and a
common or civil law system).
 Legal Systems
 Four issues important to international
business

 Contract law
 Property rights
 Protection of intellectual property
 Product safety and liability
 Contract Law
 Contract law is the body of law that enforces a
contract
 Specifies conditions under which an exchange is to
occur
 Details rights and obligations of parties
 Differences based on legal tradition
 Common law system
 Civil law system
 Theocratic law
 Bureaucratic law: (Environmental Protection Agency (EPA), the
Securities and Exchange Commission (SEC), and the Food and Drug
Administration (FDA)
 Contract Law
 Dispute resolution is often complex
 Where to arbitrate and whose laws apply?
 host country or home country
 Validity of contracts and decisions

 Role of United Nations Convention on

Contracts for the International Sale of Goods
(CIGS)
 Property Rights
 A bundle of legal rights over the use to which a
resource is put and over the use made of any
income from that resource
 Property rights can be violated
 Private action (private action refers to theft, piracy,
blackmail by private individuals or groups)
 Public action and corruption (public officials, such as
politicians and government bureaucrats, extort income, resources, or
the property)

Levying excessive taxation, requiring expensive licenses or
permits from property holders, taking assets into state ownership
without compensating the owners, or redistributing assets without
compensating the prior owners.
Country rankings of corruption in 2018
 Foreign Corrupt Practices Act
 The act was passed during the 1970s
following revelations that U.S. companies had
bribed government officials in foreign
countries in an attempt to win lucrative
contracts

 The act allows facilitating or expediting

payment to secure the performance of a
routine governmental action.
 Protection of Intellectual Property
 Intellectual property refers to property that is
the product of intellectual activity

 Patent: inventors’ exclusive rights to

manufacture, use, sale of an invention.
 Copyright: same for authors, composers,
artists, publishers.
 Trademarks: unique designs and names,
often officially registered.
 Protection of Intellectual Property
 Intellectual property laws are a very important
stimulus to innovation and creative work
 Protection of intellectual property rights differs
greatly from country to country
 WTO/GATT
 96 countries have signed the Paris convention
for the Protection of Industrial Property
 Enforcement of regulations is difficult and often
lax
Regional Piracy rates for software
2015 & 2017
 Product safety and liability
 Product safety laws set safety standards for
products and manufacturing processes
 Product liability laws hold the firm and its
officers responsible for product safety
standards
 Criminal laws / civil liability laws
 Least extensive in lesser developed countries
 Raise important ethical issues for firms doing
business abroad.
Determinants of economic development
 GNP measures total value of goods and
services produced annually
 Does not account for differences in cost of
living
 PPP allows for more direct comparison of
living standards
 Both GNP and PPP are static measures
 They do not reflect development accurately.
 Amartya Sen – Theory of social
development
 Development should be measured less by
material output measures such as GNP, per
capital and more by the capabilities and
opportunities that people enjoy.

 Human Development Index (HDI) measures

quality of life in different nations.

 Based on life expectancy, educational

attainment, and PPP based average incomes.
Innovation and economic progress
 Innovation (products, processes, strategies,
organizations, management practices) engine
for growth
 Innovation needs:
 Market economy
 Strong property rights
 The “right” political system

 Economic progress leads to adoption of

democracy…
States in transition
 Reasons for rise of democratic systems in the
1980s and 1990s
 Totalitarian regimes failed to deliver economic
progress
 Real time information with modern
telecommunication technologies
 Emergence of prosperous middle classes
The new world order and global terrorism
 Modernization has given rise to a resurgence
of fundamentalist thought in the Middle East-
 Global terrorism is the product of tensions
between civilizations and the clash of value
systems and ideology.
-Huntington
Total international terrorist attacks 1970-
2018
Spread of market based systems
The nature of economic
transformation
 Deregulation
 Removal of legal restriction to the free play of
market systems
 Allowing establishment and operations of
private enterprises
 Privatization
 Transfer of ownership of state-owned
enterprise to private individuals
 Legal systems
 Laws that support a market economy
Implications for international business
 Country differences influence:
 Attractiveness
 Benefits
 First mover
 Late mover advantages
 Cost
 Risk
 Political Risk
 Economic Risk
 Legal Risk
Implications for international business
 Country differences influence ethical
practices:
 Ethics and Human rights
 Ethics and Regulations
 Ethics & Corruption