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2-1

International Business
Country Differences:
We need mental models to help us to:
 Understand the similarities and differences
of political, economic, and legal
infrastructures in nations across the globe
 Investigate the intricate changes in these
infrastructures that contain opportunities
or threats for the business

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International Business, 5/e
2-2

Political Systems
 System of Government in Nations”

 Political systems have two dimensions

 Degree of collectivism vs. individualism


 Degree of democracy vs. totalitarianism

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2-3

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

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Socialism
 Socialist ideology is split into 2 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

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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

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Democracy versus
totalitarianism

 Democracy and totalitarianism are at


different ends of a continuum with
many shades of gray in between

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International Business, 5/e
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Democracy

 Government is by the people,


exercised either directly or through
elected representatives (representative
democracy)
 Elected representatives are held
accountable through safeguards

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2-8

Safe guards 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. Nonpolitical force and armed service
9. Relatively free access to state information

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Totalitarianism
 One person/party exercises absolute
control over all spheres of human life
(competing political parties are
banned)
 communist totalitarianism
 theocratic totalitarianism
 tribal totalitarianism
 right wing totalitarianism

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International Business, 5/e
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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 marked state
control of markets
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International Business, 5/e
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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
 Command economy: planned by government
 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”

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Legal systems
 Rules - laws - that regulate behavior
 processes through which laws are
enforced & grievances are redressed
 Businesses must observe
 home country laws
 host country laws
 international Laws and Treaties
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International Business, 5/e
2-13

Legal systems

 Three main types of legal systems – in use


around the world:
 common law
 civil law
 theocratic law

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International Business, 5/e
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Legal systems

 Four issues important to international


business
 Contract law
 Property rights
 Protection of intellectual property
 Product safety and liability

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International Business, 5/e
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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
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International Business, 5/e
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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)

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International Business, 5/e
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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 through


 private action
 public action and corruption

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International Business, 5/e
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Country rankings of corruption in 2002

Fig 2.1

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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
payments to secure the performance of a
routine governmental action

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International Business, 5/e
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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

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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

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International Business, 5/e
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Regional piracy rates for software 2001

Fig 2.2

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International Business, 5/e
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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

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International Business, 5/e
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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

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International Business, 5/e
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GNI, PPP &GDP data for selected countries

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Gross national income per capita

Map 2.1

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International Business, 5/e
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Purchasing power parity, 2001

Map 2.2

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International Business, 5/e
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Growth in gross domestic product, 1991-2001

Map 2.3

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International Business, 5/e
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Amartya Sen- Theory of social development

 Development should be measured less by


material output measures such as GNP,
per capita and more by the capabilities and
opportunities that people enjoy.
 HDI measures quality of life in different
nations
 Based on life expectancy, educational
attainment, and PPP based average
incomes
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International Business, 5/e
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The human development index 2001

Map 2.4

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International Business, 5/e
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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
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International Business, 5/e
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Global distribution of economic freedom

Map 2.6

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International Business, 5/e
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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

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Countries with political freedom -2002

Map 2.5

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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

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International Business, 5/e
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Total international terrorist attacks 1981-2002

Fig: 2.3

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International Business, 5/e
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Spread of market based systems

Centrally
Planned
Economies
Market –
Based
Shift Economies

Mixed
Economies

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International Business, 5/e
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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

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Implications for international business


 Country differences influence:
 Attractiveness
 Benefits
 First mover advantage
 Late mover advantages
 Cost
 Risk
 Political risk
 Economic risk
 Legal risk

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International Business, 5/e
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Implications for international business

 Country differences influence ethical


practices:
 Ethics and human rights

 Ethics & regulations

 Ethics & corruption

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International Business, 5/e
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India Emergence in Global Economy

 Goldman Sachs Report 2003


 Emergence of BRIC Countries
 Among 3 largest Economies by 2040
 India’s Macro Vision 2020- a developed country
 On PPP basis Economy equal to Japan
 Knowledge Driven Economy
 Liberalization, Privatization and Globalization
 300+700 million opportunity- Go Rural, Go global
 Constraints that Pull back India’s surge

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International Business, 5/e

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