Chapter 02 - National Differences in Political Economy

National Differences in Political Economy

national differences in political

economy.

Learning objectives

Understand how the

political systems of
countries differ.

Understand how the

economic systems of
countries differ.

Understand how the legal

systems of countries differ.

Be able to explain what

determines the level of
economic development of a
nation.

Discuss the macro-political

and economic changes
taking place worldwide.

Describe how transition

economies are moving
towards market based
systems.

Articulate the implications

for management practice of

This chapter discusses differences in national

political, economic, and legal systems,
highlighting the ways in which managers in
global settings need to be sensitive to these
differences.
Political differences are described along two
dimensions: collectivist vs. individualist and
democratic vs. totalitarian. Economic
systems are explored in terms of market
characteristics: market economies, command
economies, and mixed economies. Legal
systems are discussed in terms of the
protections they offer for business:
intellectual property, product safety, liability
and contracts.
The opening case explores the political and
economic situation in Venezuela since Hugo
Chavez was elected president in 1998. The
closing case describes the challenges facing
Indonesia, a vast country populated mainly
by Muslims that stretches over 17,000
islands. Indonesia, after decades of
corruption and a near dictatorship, now has
a newly elected president.

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Chapter 02 - National Differences in Political Economy

OUTLINE OF CHAPTER 2: NATIONAL DIFFERENCES IN POLITICAL ECONOMY

Opening Case: Chavezs Venezuela
Introduction
Political Systems
Collectivism and Individualism
Democracy and Totalitarianism
Economic Systems
Market Economy
Command Economy
Mixed Economy
Legal Systems
Different Legal Systems
Differences in Contract Law
Property Rights and Corruption
The Protection of Intellectual Property
Product Safety and Product Liability
Country Focus: Corruption in Nigeria
Management Focus: Starbucks Wins Key Trademark Case in China
The Determinants of Economic Development
Differences in Economic Development
Broader Conceptions of Development: Amartya Sen
Political Economy and Economic Progress
Geography, Education, and Economic Development
States in Transition
The Spread of Democracy
The New World Order and Global Terrorism
The Spread of Market-Based Systems
The Nature of Economic Transformation
Deregulation
Privatization
Legal Systems
Implications of Changing Political Economy

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Country Focus: Building a Market Economy in India

Implications for Managers
Benefits
Costs
Risks
Overall Attractiveness
Summary
Critical Thinking and Discussion Questions
Closing Case: IndonesiaThe Troubled Giant
CLASSROOM DISCUSSION POINT
Ask students to think about the two dimensions used to describe political systems: CollectivistIndividualist and Democratic-Totalitarian. Begin by drawing the following scale on the board:
______________________________________________________
Individualist
Collectivist
______________________________________________________
Democratic

Totalitarian

Then ask students to provide some examples of what might describe a collectivist system, where
does Canadas national healthcare system put it, which countries might be considered democratic,
where should China be placed, and so on.
Finally, move to a discussion of how differences in political economy present both opportunities
and threats for business. Managers must analyze each national market that they participate in and
identify specific ways in which the political economy of that nation could support or threaten the
companys business model.
If there are foreign students in the class or students with foreign experience, you might draw on
their observations of differences these dimensions impose on the practice of business.
OPENING CASE: Chavezs Venezuela

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Summary
The opening case explores the political and economic situation in Venezuela since the election of Hugo
Chavez as president in 1998. Chavez, who ran on a platform against corruption and economic
mismanagement, faced a country mired in recession. His strategy involved drafting a new constitution that
keeps him in power until 2013, and reconfiguring the Supreme Court. As a result, Venezuela is now
considered to be only partly free. Today, unemployment remains high, and poverty continues to rise,
corruption is rampant, and there is a move to privatize certain industries, with the oil industry being a
particular target. Discussion of the case can revolve around the following questions:
1. How has the political landscape of Venezuela changed under Chavez?
2. Discuss how Venezuelas rampant corruption is impeding the countrys economic growth.

3. Imagine the company you work for has operations in Venezuela. How would you react to the
changes under Chavez?
LECTURE OUTLINE
This lecture outline follows the Power Point Presentation (PPT) provided along with this
instructors manual. The PPT slides include additional notes that can be viewed by clicking on
view, then on notes. The following provides a brief overview of each Power Point slide along
with teaching tips, and additional perspectives.
Slides 2-3-2-4 Political Economy
The political, economic, and legal infrastructure of a nation has a major influence on the way
managers make decisions. Political systems have two dimensions: the degree of collectivism
versus individualism, and the degree of democracy versus totalitarianism.
These dimensions are interrelated; systems that emphasize collectivism tend towards totalitarian,
while systems that place a high value on individualism tend to be democratic.
However, a large gray area exists in the middle. It is possible to have democratic societies that
emphasize a mix of collectivism and individualism. Similarly, it is possible to have totalitarian
societies that are not collectivist.
Slides 2-5-2-10 Collectivism and Individualism
Collectivism refers to a political system that stresses the primacy of collective goals over
individual goals. Advocacy of collectivism can be traced to the ancient Greek philosopher Plato.
In modern times the collectivist system is largely the domain of nations that have embraced
socialism.
Individualism is the direct opposite of collectivism. Its central tenet is that individual economic
and political freedoms are the ground rules on which society is based.

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Slides 2-11-2-14 Democracy and Totalitarianism

Democracy, as originally practiced by several city-states in ancient Greece, is based on a belief
that citizens should be directly involved in decision making. Most modern democratic states
practice representative democracy in which citizens periodically elect individuals to represent
them. Totalitarianism is a 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.
(Communist, theocratic, tribal, right wing) Totalitarianism denies its citizens all of the
constitutional guarantees asserted by representative democracies.
Slide 2-16 Economic Systems
There is a connection between political ideology and economic systems. In countries where
individual goals are given primacy over collective goals, we are more likely to find free market
economic systems. In contrast, in countries where collective goals are given preeminence, the
state may have taken control over many enterprises, while markets in such countries are likely to
be restricted rather than free.
There are three broad types of economic systems: the market economy, the command economy,
and the mixed economy.
Slide 2-17 Market Economy
A market economy is an economy in which all productive activities are privately owned, as
opposed to being owned by the state. Production is determined by the interaction of supply and
demand and signaled to producers through the price system.
Slide 2-18 Command Economy
A command economy is an economy in which the goods and services that a country produces,
the quantity in which they are produced, and the prices at which they are sold are all planned by
the government.
Slide 2-19 Mixed Economy
A mixed economy is an economy in which certain sectors of the economy are left to private
ownership and free market mechanisms while other sectors have significant state ownership and
government planning. India has a mixed economy.
Mixed economies were once very common throughout much of the world, although they are
becoming much less so. There was a time not too long ago when Great Britain, France, and
Sweden were mixed economies, but extensive privatization has reduced state ownership of
businesses in all three.

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Slide 2-21 Legal Systems

Legal systems are the systems of rules or laws that regulate behavior along with the processes by
which the laws are enforced and through which redress for grievances is obtained.
There are three main types of legal systems or legal traditions in use around the world:
common law, civil law, and theocratic law. Common law is based on tradition, precedent, and
custom. Civil law is based on a very detailed set of laws organized into codes. Theocratic law
is based on religious teachings.
Another Perspective: The Encyclopedia of Corporate Governance is a site that contains a broad
base of information about international law and the legal systems of the countries of the world.
This site is available at {http://www.encycogov.com/B14IntCorpGov.asp}.
Slides 2-23-2-25 Contract Law
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.
Since common law tends to be relatively ill specified, contracts drafted under a common law
framework tend to be very detailed with all contingencies spelled out. In civil law systems,
contracts tend to be much shorter and less specific because many of the issues typically covered in
a common law contract are already covered in a civil code.
When contract disputes arise in international trade, there is always the question of which countrys
laws apply. Many countries including the United States have ratified the United Nations
Convention on Contracts for the International Sale of Goods (CIGS). The 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.
Slides 2-26-2-29 Property Rights
Property rights refer to a resource over which an individual or business holds a legal title; that is,
a resource that they own.
These rights can be violated through private or public action. Private action refers to theft,
piracy, blackmail, and the like by private individuals or groups. Public action violations occur
when public officials, such as politicians and government bureaucrats, extort income or resources
from property holders.

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Another Perspective: The U.S governments web page on intellectual property rights,
{http://usinfo.state.gov/products/pubs/intelprp/}, contains a wealth of information on intellectual
property rights including information on international intellectual property rights treaties and
protecting trademarks.
Another Perspective: U.S. exports of intellectual property were nearly $27 billion in 1995.
Intellectual property imports were just $6.3 billion. Much of the trade in intellectual property was
intracorporate trade. More details can be found at
{http://pubs.acs.org/hotartcl/chemtech/97/sep/comp.html}.
In the United States the Foreign Corrupt Practices Act makes bribing a foreign government
official in order to obtain or maintain business over which that foreign official has authority a
violation of United States law, and requires all publicly traded companies to keep audit records.
Slides 2-31-2-32 Intellectual Property Rights
Intellectual property is property that is the product of intellectual activity, such as computer
software, a screenplay, a music score, or the chemical formula for a new drug.
Ownership rights over intellectual property are established through patents, copyrights, and
trademarks.
Another Perspective: A summary of U.S. Trademark law, which may be interesting to your
students, can be found at {http://www.law.cornell.edu/topics/trademark.html}.
Another Perspective: The World Intellectual Property Organizations web site contains extensive
information on various treaties and agreements between countries regarding the protection of
intellectual property. The site is {http://www.wipo.org/treaties/ip/}.
Slide 2-34 Product Safety and Liability
Product safety laws set safety standards for products and manufacturing processes. Product
liability involves holding a firm and its officers responsible for product safety standards.
Slide 2-35 Determinants of Economic Development
Differences in economic development across countries are often linked to differences in their
political, economic, and legal systems.
Economic development can be measured by gross national income per head of population (GNI)
(rather than GNP) and purchasing power parity (PPP) which is GNI per capita adjusted for cost
of living.

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Slide 2-37 Broader Conceptions of Development: Amartya Sen

The Nobel prize-winning economist Amartya Sen has argued in his theory of social development
that development should be assessed less by material output measures such as GNI per
capita/GDP per capita and more by the capabilities and opportunities that people enjoy.
Sens influential thesis has been picked up by the United Nations, which has developed the
Human Development Index (HDI) to measure the quality of human life in different nations.
Slide 2-38 Political Economy and Economic Progress
A countrys economic development is a function of its economic and political systems.
Economic freedom associated with a market economy creates greater incentives for innovation
and entrepreneurship than either a planned or a mixed economy.
Innovation and entrepreneurship require strong property rights.. Without strong property rights
protection, businesses and individuals run the risk that the profits from their innovative efforts will
be expropriated, either by criminal elements or by the state.
There is debate on the kind of political system that best achieves a functioning market economy
with strong protection for property rights. People in the West tend to associate a representative
democracy with a market economic system, strong property rights protection, and economic
progress. Building on this, we tend to argue that democracy is good for growth.
However, some totalitarian regimes have fostered a market economy and strong property rights
protection and have experienced rapid economic growth. Four of the fastest-growing economies
of the past 30 yearsSouth Korea, Taiwan, Singapore, and Hong Konghad one thing in
common at the start of their economic growth: undemocratic governments!
While it is possible to argue that democracy is not a necessary precondition for a free market
economy in which property rights are protected, subsequent economic growth often leads to
establishment of a democratic regime
Slide 2-39 Geography, Education, and Economic Development
In addition to political and economic systems, geography and education are also important
determinants of economic development

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Slide2-41 States in Transition

Two trends are evident: first, during the late 1980s and early 1990s, a wave of democratic
revolutions swept the world; second, totalitarian governments collapsed and were replaced by
democratically elected governments that were typically more committed to free market capitalism
than their predecessors had been.
These changes were most dramatic in Eastern Europe, where the collapse of communism bought
an end to the Cold War and led to the breakup of the Soviet Union, but similar changes were
occurring throughout the world during the same period. Across much of Asia, Latin America, and
Africa there was a marked shift toward greater democracy.
Slides 2-42-2-43 The Spread of Democracy
There are three reasons for the spread of democracy:
First, many totalitarian regimes failed to deliver economic progress to the vast bulk of their
populations.
Second, new information and communication technologies have broken down the ability of the
state to control access to uncensored information.
Third, the economic advances of the past quarter century have led to the emergence of
increasingly prosperous middle and working classes who have pushed for democratic reforms.
Another Perspective: A number of countries and regions maintain an international Chamber of
Commerce to disseminate current information about their respective country or regional of the
world. These Chambers of Commerce provide a first stop when conducting research on the
market potential of a particular country or area. An index of Chambers of Commerce is available
at {http://www.serraintl.com//morelink2.html#cofc}.
Slide 2-44 The New World Order and Global Terrorism
There is intense speculation about the future shape of global geopolitics.
Many countries may be increasingly difficult places in which to do business, either because of their
inherent violent conflict, or because they are part of a civilization that is in conflict with an
enterprises home country.
Another Perspective: The U.S. State Department produces a series of annual "Country Reports"
to acquaint American businesses with other countries. Each report contains nine sections: (1) Key
Economic Indicators; (2) General Policy Framework; (3) Exchange Rate Policies; (4) Structural
Policies; (5) Debt Management Practices; (6) Significant Barriers to US Exports and Investments;
(7) Export Subsidies Policies; (8) Protection of US Intellectual Property; and (9) Worker Rights.
Information about obtaining these reports is available through the United States Department.
There is also a special section devoted to international business. The site is
{http://www.state.gov/travelandbusiness/}.

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Slides 2-45-2-46 The Spread of Market Based Systems

Paralleling the spread of democracy since the 1980s has been the transformation from centrally
planned command economies to market-based economies.
Slide 2-47 The Nature of Economic Transformation
These changes have involved:
Deregulation - removing legal restrictions to the free play of markets, and allowing the
establishment and operations of private enterprises. Privatization - transferring the ownership of
state property into the hands of private individuals, frequently by the sale of state assets through
an auction.
Privatization - a way to unlock gains in economic efficiency by giving new private owners a
powerful incentivethe reward of greater profitsto search for increases in productivity, to
enter new markets, and to exit losing ones.
Slides 2-48-2-49 Implications of Changing Political Economy
Markets that were formerly off-limits to Western business are now open.
China with its 1.2 billion people and India with its population of almost 1 billion are especially
important.
However, just as the potential gains are large, so are the risks. Democracy may not thrive in some
countries.
Slide 2-50 Managerial Implications
Managers need to focus on two broad areas:
First, the political, economic, and legal environment of a country influences the attractiveness of
that country as a market and/or investment site. The benefits, costs, and risks associated with
doing business in a country are a function of that countrys political, economic, and legal systems.
Second, the political, economic, and legal systems of a country can raise important ethical issues
that have implications for the practice of international business.
Slide 2-51 Benefits
The long-run benefits of doing business in a country are a function of the size of the market, the
present wealth of consumers in that market, and the likely future wealth of consumers.
Slide 2-52 Costs
There are three types of costs involved in international business: political costs, economic costs,
and legal costs.

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Slide 2-53 Risks

There are three types of risk involved in international business: political risk, economic risk, and
legal risk.
Slide 2-54 Overall Attractiveness
The overall attractiveness of a country as a market and/or investment site, depends on balancing
the likely long-term benefits of doing business in that country against the likely costs and risks.
CRITICAL THINKING AND DISCUSSION QUESTIONS
QUESTION 1: Free market economies stimulate greater economic growth, whereas statedirected economies stifle growth. Discuss.
ANSWER 1: In a market economy, private individuals and corporations are allowed to own
property and other assets. This right of ownership provides a powerful incentive for people to
work hard, introduce new products, develop better advertising campaigns, invent new products,
etc., all in the hopes of accumulating additional personal capital and wealth. In turn, the constant
search on the part of individuals and corporation to accumulate wealth enriches the entire
economy and creates economic growth. In contrast, in a command economy, private individuals
and corporations are not allowed to own substantial quantities of property and other assets. The
objective of a command economy is for everyone to work for the good of the society. Although
this sounds like a noble ideal, a system that asks individuals to work for the good of society rather
than allowing individuals to build personal wealth does not provide a great incentive for people to
invent new products, develop better advertising campaigns, find ways to be more efficient, etc.
As a result, command economies typically generate less innovation and are less efficient than
market economies.
QUESTION 2: A democratic political system is an essential condition for sustained economic
progress. Discuss.
ANSWER 2: Although you can always find examples of totalitarian regimes that have achieved
rapid economic growth, it seems fair to say that sustained, decades-long periods of economic
growth are quite rare under totalitarianism. There is a widespread belief in the West that
democratic principles are more conducive to long-term economic growth than are totalitarian
ones. One of the contributing factors is that democratic systems allow for the stable transfer of
power through elections, and thus provide political stability, which is an essential prerequisite for
rapid economic growth.

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QUESTION 3: What is the relationship between corruption in a country (i.e., bribe- taking by
government officials) and economic growth? Is corruption always bad?
ANSWER 3: In the United States we show public contempt for the practice of bribery although
evidence suggests that bribery is not uncommon in the United States. When government officials
engage in corruption, they subordinate the interest of their country to their personal gain. They
also reduce the level of transparency in business interactions. Many nations with rampant bribery
appear to be among the most economically underdeveloped, yet the inflexible generalization that
corruption is always bad oversimplifies the role of culture and its influence on meaning-giving.
There are many cultures that accept the role of bribes far more openly than we do in the United
States. That managers are aware that some countries France, Germany and Japan for example
recognize that bribes play an important role in some parts of the world and allow their
corporations to expense bribes (deduct bribes as a legal corporate expense) is important.
QUESTION 4: The Nobel prize-winning economist Amartya Sen argues that the concept of
development should be broadened to include more than just economic development. What other
factors does Sen think should be included in an assessment of development? How might adoption
of Sens views influence government policy? Do you think Sen is correct that development is
about more than just economic development? Explain.
ANSWER 4: Sen argues that the ultimate goal of economic life is freedom. Hence, development
requires the removal of major impediments to freedom: poverty as well as tyranny, poor economic
opportunities as well as systematic social deprivation, neglect of public facilities as well as the
intolerance of repressive states. In Sens view, development is not only an economic process, but a
political one too, and to succeed requires the democratization of political communities to give
citizens a voice. Sens philosophy forces us to confront the fact that economic development is but
one measure of a countrys overall development. Governments that are influenced by Sens
philosophy would value greater freedom for their citizens, usually by exchanging economic
development in favor of greater individual freedom. Sen is clearly right a country that is
economically prosperous while still limiting or imprisoning its citizens will ultimately wither
because it will be stifling the individual entrepreneurship that leads to economic vitality.

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QUESTION 5: You are the CEO of a company that has to choose between making a $100
million investment in Russia or the Czech Republic. Both investments promise the same long-run
return, so your choice is driven by risk considerations. Assess the various risks of doing business
in each of these nations. Which investment would you favor and why?
ANSWER 5: When assessing the risks of investment, one should consider the political, economic,
and legal risks of doing business in both Russia and the Czech Republic. The political risk in
Russia is still high but it is undergoing continual governmental changes under Putins leadership,
and courting foreign investment. Relatively, the Czech Republic is more stable, but it may have
less potential. On the economic front, both countries have inflation and high economic turmoil as
unproductive factories are still struggling. From the legal perspective, the Czech Republic is
making clear progress, while the situation in Russia is unclear. Thus at this time, the risk in Russia
would clearly be higher. (For discussion or to modify this question, you might want to substitute
other countries into this question depending on current events and the countries with which your
students will be most familiar.)
QUESTION 6: Read the Country Focus on India in this chapter and answer the following
questions:
a. What kind of economic system did India operate during 1947-1990? What kind of system is it
moving towards today? What are the impediments to completing this transformation?
b. How might widespread public ownership of businesses and extensive government regulations
have impacted (i) the efficiency of state and private businesses, and (ii) the rate of new business
formation in India during the 1947-1990 time frame? How do you think these factors affected the
rate of economic growth in India during this time frame?
c. How would privatization, deregulation, and the removal of barriers to foreign direct investment
affect the efficiency of business, new business formation, and the rate of economic growth in India
during the post-1990 time period?
d. India now has pockets of strengths in key high technology industries such as software and
pharmaceuticals. Why do you think India is developing strength in these areas? How might
success in these industries help to generate growth in other sectors of the Indian economy?
e. Given what is now occurring in the Indian economy, do you think that the country represents an
attractive target for inward investment by foreign multinationals selling consumer products? Why?
ANSWER:
a. The economic system that developed in India after 1947 was a mixed economy characterized by
a large number of state-owned enterprises, centralized planning, and subsidies. In 1991, Indias
government embarked on an ambitious economic reform program. Much of the industrial
licensing system was dismantled, and several areas once closed to the private sector were opened.
In addition, investment by foreign companies was welcomed, and plans to start privatizing stateowned businesses were announced. India has posted impressive gains since 1991, however there
are still impediments to further transformation. Attempts to reduce import tariffs have been
stalled by political opposition from employers, employees, and politicians. Moreover, the
privatization program has been slowed thanks to actions taken by the Supreme Court. Finally,
extreme poverty continues to plague the country.

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b. The mixed economy that developed in India after 1947 was characterized by a large number of
state-owned enterprises, centralized planning, and subsidies. This system not only constrained the
growth of the private sector, but it also consequently limited the effects of competition that
typically promote efficiency and productivity in a free market system. The system even limited
the actions of private companies, requiring them to get government approval for routine business
activities. Production quotas and high import tariffs also stunted the development of a healthy
private sector, as did restrictive labor laws that made it difficult to fire employees. Foreign
exchange restrictions, limitations on foreign investment, controls on land use, and managed prices
further exacerbated the situation. It would appear that Indias rate of economic growth was
negatively affected during this time frame. By 1994, Indias economy was still smaller than
Belgiums despite having a large population. Both GDP and literacy rates were very low, and
some 40 percent of the population lived in poverty.
c. In 1991, Indias government embarked on an ambitious economic reform program. So far, the
response to the program has been impressive. The economy expanded at an annual rate of about
6.3 percent from 1994 to 2004. Foreign investment is up from $150 million in 1990 to $6 billion
in 2005. Certain sectors of the economy including information technology and pharmaceuticals
have done particularly well. Still, problems persist. Actions taken by the government continue to
limit efficiency gains for private companies and the countrys high rate of poverty is still a major
problem.
d. Indias gains in information technology and pharmaceuticals are impressive. The country has
emerged as a vibrant global center for software development, and Indias pharmaceutical
companies have taken a strong global position by selling low cost generic versions of drugs that
have come of patent in the developed world. As these industries continue to prosper, other
sectors of the economy should also see the benefit of spillover effects.
e. Foreign investment is up in India. In fact, foreign investment rose from $150 million in 1990
to $6 billion in 2005. However, whether India is an attractive destination for foreign
multinationals selling consumer products remains to be seen. Certainly, the large population will
serve to attract some companies, but the fact that some 40 percent of the population is living in
abject poverty will scare other companies away. Moreover, it is still not easy to run a company in
India thanks to laws limiting everything from who can be fired to who can which products.
CLOSING CASE: IndonesiaThe Troubled Giant
Summary
The closing case describes the challenges facing Indonesia, a vast country populated mainly by
Muslims. For 30 years, President Suharto, a virtual dictator repressed internal dissent and crony
capitalism was the norm. In 2003, Suharto was forced to resign amid allegations that he had
personally profited from a 1990s IMF bailout. Since them, the country now under the rule of a
democratically elected president, has seen some economic progress. Still, the country lags behind
neighbors like China, Malaysia, and Thailand. Poor infrastructure, massive red tape, and
corruption have all been blamed for the countrys continued difficulties. A discussion of the case
can revolve around the following questions:

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QUESTION 1: What political factors explain Indonesias poor economic performance? What
economic factors? Are the two related?
ANSWER 1: For 30 years, Indonesia was run under a dictatorship style government where
internal dissent was repressed. Today, while a democracy is in place, the country continues to be
plagued by corruption and red tape. Foreign capital is fleeing the country, and the infrastructure is
in desperate need of improvement. All of these factors have contributed to the nations poor
economic climate. Most students will probably observe that the Indonesias political and
economic situations are intertwined, and that to fix one area, changes will have to made to the
other.
QUESTION 2: Why do you think foreign firms have been exiting Indonesia in recent years?
What are the implications for the country? What is required to reverse this trend?
ANSWER 2: Various factors have been blamed for the drop in the stock of foreign investment in
Indonesia including the countrys poor infrastructure, corruption, and red tape. Today, foreign
investment is down from $24.8 billion in 2001 to just $11.4 billion in 2004. To reverse this trend,
significant infrastructure improvements are probably necessary. In addition, a more streamlined
process for companies entering the market, and an effort to curb corruption will make the country
more attractive to foreign companies.
QUESTION 3: Why is corruption so endemic in Indonesia? What are its consequences?
ANSWER 3: Transparency International ranked Indonesia 137th out of the 158 countries it
tracked for corruption in 2005. This dismal situation is due in part to the low salaries paid to
government officials, and the extensive red tape that makes it easy for the officials to request
bribes. The countrys history of crony capitalism has also led to difficulties. In fact, the nations
attorney general has suggested that Indonesias entire legal system is corrupt. The consequences
of this situation are evident in the lack of economic growth made by the country and the
continued exit of foreign businesses such as Sony from the nation.
QUESTION 4: What are the risks facing foreign firms that do business in Indonesia? What is
required to reduce these risks?
ANSWER 4: Many companies might shy away from doing business in Indonesia. Indeed, there
has been a dramatic drop in the countrys stock of foreign investment in recent years. Companies
doing business in the country must be prepared to deal with extensive red tape, requests for
bribes, and a dubious legal system. Some students might suggest that the best way to deal with
the situation is to invest in a local company or form a joint venture with a local company. Others
may observe that it may be better to join forces with other firms fleeing the country.

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INTEGRATING iGLOBES
There are several iGLOBE video clips that can be integrated with the material presented in this
chapter. In particular, you might consider the following:
Title: Experts Discuss Global Democracy
Run Time: 18: 43
Abstract: This video explores Presidents George W. Bushs initiative to spread democracy around
the world.
Key Concepts: political systems, democracy, totalitarianism, economic development,
representative democracy
Notes: President George W. Bush maintains that spreading democracy to other nations is central
to the United States goal of defeating its enemies. Bush believes that promoting democracy is as
important as promoting new markets for trade. In a recent conversation with the president of
Vietnam, a country with one of the worlds most repressive dictatorships, Bush suggested that
countries must demonstrate a strong commitment to human rights, freedom, and democracy
before the U.S. will deepen relations. He notes that the best way to encourage the creativity and
economic potential of a nation is through freedom.
Yet, despite the rhetoric coming from the White House, it appears that the spread of democracy
may actually be slowing, and in some countries even reversing. Competing ideologies and
systems have gained popularity in some countries. Freedom House, a nonpartisan group that
tracks democracy around the world, is concerned about the trend, and the threat it presents to
new democracies. The situation is particularly worrisome in the Middle East. Yet, some experts
suggest that simply pushing for a spread of democracy may be misguided. Nikolas Gvosdev,
editor of National Interest, cautions that one assumption President Bush is making in his quest to
spread democracy is that once a nation adopts democracy, it will become pro-American. Gvosdev
argues that this may not always occur. He points out for example, that while both France and
India are under democratic rule, they frequently disagree with the United States on a range of
issues. Gvosdev also notes that some countries are autocratic, yet still support the United States
on key issues. Anne Marie Slaughter, of Princeton University, believes the United States may
have made a mistake by promoting democracy for democracy sake when in fact, Bush should
have been promoting the notion of a popular and accountable government. She points out that
the founding fathers of the United States were not focused on democracy, but instead emphasized
the achievement of a representative democracy with checks and balances.

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Nikolas Gvosdev notes that the decision in the United States to establish a representative
democracy was home-grown. In other words, another country did not push for the change. He
believes that shifting to a democracy is a natural process, and that forcing change by linking it to
aid or other issues may not be beneficial. In other words, change may occur in some countries
because it is a natural progression. It may not occur in other countries, because the basis for
change is not present. Gvosdev also points out that the United States is walking a tight rope in
some countries like China and Saudi Arabia. On the one hand, the United States is concerned
about its short-term interests, and on the other hand, it wants to push its long term goal. Lorne
Craner, of the International Republican Institute, feels that the United States can do boththat
while its primary goal should be safeguarding the interests of the United States, if it is engaged
with other countries, it can also push democracy.
Discussion Questions:
1. George W. Bush has been quite vocal in his push to spread democracy across the globe. Why
do you think he has made this issue such a priority? Do you agree with his policy? Why or why
not?
2. Consider the notion that a system of democracy makes the world a more secure place. Do you
agree with this idea? How well does it hold up in situations like the one that is currently found in
the Middle East?
3. Is the United States being hypocritical when it accepts the support of non-democratic
governments, yet preaches the need for democracy?
4. Lorne Craner, of the International Republican Institute, believes that the United States cannot
export democracy, rather it can only provide assistance to countries that want to build a
democracy. Do you agree with him? Why or why not?
INTEGRATING VIDEOS
There are also several longer video clips that can be integrated with the material presented in this
chapter. In particular, you might consider the following:
Title 2: Clearing the Air
Summary: Despite the fact that President Bush pulled the U.S. out of the Kyoto agreement in
2001 arguing that the science about global warming is unclear, and stating that he believes
that actions to reduce greenhouse gases are unacceptably costly, cities across the nation
are joining forces to fight global warming. Seattle is at the forefront of the movement
with a goal of meeting the terms of the Kyoto agreement, which called for the U.S. to
reduce greenhouse gas emissions 7 percent from 1990 levels by the year 2012. According
to Mayor Greg Nickels, the U.S. cannot afford to wait. Already there are suspicious
weather patterns that suggest global warming is an issue, and carbon dioxide levels are at
an all time high.

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City leaders from 37 states, and from both sides of the aisle, seem to agree with Nickels and have
implemented various programs to protect the environment in their own cities. In Laredo, Texas,
for example, concern about car and truck emissions at the Mexican border prompted the city to
sign on. For its part, Seattle has promoted the building of energy-efficient green buildings, and
has converted its city vehicles to biodiesel fuel. City leaders dismiss Bushs remarks about jobs
that could be lost if the country complied with the Kyoto agreement, noting that new job
opportunities will present themselves as the effort to curb greenhouse emissions moves forward.
There is concern however that cities cannot do it alone, that they need the support of the federal
government. However, like National Park Service geologist Jon Riedel, they warn global
warming should not be debated, it is happening.
Discussion Questions:
1. President Bush has come under much criticism, from both republicans and democrats, for his
decision to take the U.S. out of the Kyoto Agreement. Now mayors from across the country are
taking steps to fight global warming despite the actions of the federal government. Who is Bush
trying to protect? Why did he really make the decision to opt out of the Kyoto agreement? Can
local governments force business to comply with their efforts to meet the terms of the agreement?
2. Suppose a city such as Laredo, Texas wants to implement a program to help curb dangerous
fuel emissions. Should the Federal Government sponsor such a program? Why or why not?
3. President Bush has expressed concern over the number of jobs that could be lost if the U.S.
were to comply with the Kyoto agreement. However, cities leaders have pointed out that new
jobs will be created as a result of complying with the agreement. Which side is right? Why?
4. Should the U.S., because of its position in the global economy, be responsible for leading the
world in an effort to curb global warming? What message does Bushs action send to the rest of
the world? Do the local efforts to curb global warming affect the way the U.S. position of global
warming is perceived by the rest of the world?
globalEDGE Exercise Questions
Use the globalEDGE site {http://globalEDGE.msu.edu/} to complete the following exercises:
Exercise 1
The definition of words and political ideas can have different meanings in different contexts
worldwide. In fact, the Freedom in the World survey evaluates the state of political rights and
civil liberties around the world. Provide a description of this survey and a ranking (in terms of
freedom) of the leaders and laggards of the world. What factors are taken into consideration in
this survey?

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Exercise 2
One way that experts analyze conditions in different emerging markets and cultures in transition is
through the use of economic indictors. Market Potential Indicators (MPI) is an indexing study
conducted by the Michigan State University Center for International Business Education and
Research (MSU-CIBER) to compare emerging markets on a variety of dimensions. Provide a
description of the indicators used in the indexing procedure. Which of the indicators would have
greater importance for a company that markets laptop computers? Considering the MPI rankings,
which developing countries would you advise this company to enter first?
Answers to Exercise Questions
Exercise 1
The report can be accessed by search for the team Freedom in the World at
{http://globaledge.msu.edu/ResourceDesk/}. Using this search, the first link will lead the user to
the Freedom House website and to the Freedom in the World report. This resource is found under
the globalEDGE category Research: Multi-Country. Be sure to check the Resource Desk
only checkbox of the search function on the globalEDGE website.
Search Phrase: Freedom in the World
Resource Name: Freedom House Surveys
Website: {http://www.freedomhouse.org/}
globalEDGE Category: News & Periodicals: Publications
Exercise 2
The report can be accessed by searching for the term Market Potential Indicators at
{http://globaledge.msu.edu/ResourceDesk/}. Using this search, the link will lead the user to this
report. This resource is found under the globalEDGE category Research: Rankings. Be sure to
check the Resource Desk only checkbox of the search function on the globalEDGE website.
Search Phrase: Market Potential Indicators
Resource Name: MSU-CIBER: Market Potential Indicators
Website: {http://globaledge.msu.edu/resourceDesk/mpi.asp}
globalEDGE Category: Research: Rankings

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