Chap 002

Chapter 2
Country Differences in
Political Economy
2-2
Opening case-India
 Lessons learned:
 Pace of reform determined by the interplay between the
economic goals of the reformers and the political and
cultural realities of the country
 Managers need mental models to help them
 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
McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

International Business, 5/e
2-3
Political Systems
 System of Government in Nations”
 Political systems have two dimensions
 Degree of collectivism vs. individualism

 Degree of democracy vs. totalitarianism

2-4
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

2-5
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

2-6
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

2-7
Democracy versus totalitarianism
 Democracy and totalitarianism are at

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

2-8
Democracy
 Government is by the people, exercised

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

2-9
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

2-10
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

2-11
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

2-12
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”

2-13
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
2-14
Legal systems
 Three main types of legal systems – in use

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

2-15
Legal systems
 Four issues important to international

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

2-16
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

2-17
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)

2-18
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

2-19
Country rankings of corruption in 2002
Fig 2.1

2-20
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

2-21
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

2-22
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

2-23
Regional piracy rates for software 2001
Fig 2.2

2-24
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

2-25
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

2-26
GNI, PPP &GDP data for selected countries

2-27
Gross national income per capita
Map 2.1

2-28
Purchasing power parity, 2001
Map 2.2

2-29
Growth in gross domestic product, 1991-2001
Map 2.3

2-30
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

2-31
The human development index 2001
Map 2.4

2-32
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

2-33
Global distribution of economic freedom
Map 2.6

2-34
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

2-35
Countries with political freedom -2002
Map 2.5

2-36
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

2-37
Total international terrorist attacks 1981-2002
Fig: 2.3

2-38
Spread of market based systems
Centrally
Planned
Economies
Market –
Based
Shift Economies
Mixed
Economies

2-39
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

2-40
Implications for international business

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

2-41
Implications for international business
 Country differences influence ethical

practices:
 Ethics and human rights
 Ethics & regulations
 Ethics & corruption


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Chapter 2

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

 Political systems have two dimensions

 Degree of collectivism vs. individualism

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

 Collective goals are more important than

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

 Is the direct opposite of collectivism

 Central tenet is that individual economic

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Democracy versus totalitarianism

 Democracy and totalitarianism are at

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

 Government is by the people, exercised

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Safe guards of representative democracy

1.Individuals right to freedom of expression, opinion and

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

 One person/party exercises absolute

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

 Connection between political ideology and

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Types of economic systems

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

 Rules - laws - that regulate behavior

 Three main types of legal systems – in use

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

 Four issues important to international

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

 Role of United Nations Convention on Contracts

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

 A bundle of legal rights over the use to which a

 Property rights can be violated through

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Country rankings of corruption in 2002

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Foreign Corrupt Practices Act

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Protection of intellectual property

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Protection of intellectual property

 Intellectual property laws are a very important

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Regional piracy rates for software 2001

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Product safety and liability

 Product safety laws set safety standards for

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Determinants of economic development

 GNP measures total value of goods and

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

GNI, PPP &GDP data for selected countries

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Gross national income per capita

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Purchasing power parity, 2001

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Growth in gross domestic product, 1991-2001

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Amartya Sen- Theory of social development

 Development should be measured less by material

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.