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NUR IZIAWATI SUHAIMI 2011676184 NURULNADIA YUSOF 2011447692 PREPARED FOR : PROF. DR. FARIDAH HJ HASSAN GLOBAL BUSINESS ISSUES GBI795 EMBA 771 4B 2013
CHAPTER 2
NATIONAL DIFFERENCES IN POLITICAL ECONOMY
PART I
INTRODUCTION POLITICAL SYSTEMS ECONOMIC SYSTEMS LEGAL SYSTEMS
INTRODUCTION
Political Economy
POLITICAL SYSTEMS
A political system is the system of government in a nation.
Political systems can be assessed in terms of the degree to which they emphasize collectivism as opposed to individualism in terms of the degree to which they are democratic or totalitarian both dimensions are interrelated.
Needs of society more important than individual freedoms. individual rights should be sacrificed for the good of the majority and that property should be owned in common Plato, The Republic (427-347 BC). Today, socialists support collectivism.
Advocate state ownership of the basic means of production, distribution and exchange Karl Marx (1881-83) Manage state-owned enterprise to benefit society as a whole, rather than individual capitalists.
Communism: belief that socialism could be achieved only through revolution and totalitarian dictatorship.
Privatization
Sold state-owned enterprise to private investors
Individualism stresses
individual freedom and self-expression democratic political systems and free market economies
Tribal totalitarianism: a political party that represents the interests of a particular tribe monopolizes political power.
Right-wing totalitarianism: individual economic freedom is allowed but individual political freedom is restricted in the belief that it could lead to communism.
ECONOMIC SYSTEMS
Political ideology and economic systems are connected. A free market system is likely in countries where individual goals are given primacy over collective goals State-owned enterprises and restricted markets are common in countries where collective goals are dominant. There are three types of economic systems: the market economy, the command economy, and the mixed economy.
MARKET ECONOMY
Price system what & how much to produce is determined by supply and demand.
Customers are sovereign and all productive activities are privately owned.
The role of government is to encourage free and fair competition between private producers.
COMMAND ECONOMY
The goods of society - the goods/services, quantity and the price at which they are sold are all planned by the government. All businesses are state owned, and have little incentive to control costs and be efficient.
Little incentive to better serve consumer needs, hence dynamism & innovation are absent economies tend to stagnate.
MIXED ECONOMY
In mixed economy, some sectors are left to free market mechanisms while other sectors have significant government planning. Governments tend to take over troubled firms that are considered to be vital to national interests.
US government took over AIG (80%), Citigroup and General Motors to stop financial institution from collapsing.
LEGAL SYSTEMS
Refers to the rules, or laws, that regulate behavior along with the processes by which the laws of a country are enforced and through which redress for grievances is obtained. Influenced by the prevailing political system & historical tradition. A countrys legal system is important because
laws regulate business practice laws define the manner in which business transactions are to be executed laws set down the rights and obligations of those involved in business transactions
2) Civil law: based on a very detailed set of laws organized into codes.
Judges rely upon detailed legal codes and have less flexibility. Judges have the power only to apply the law
Islamic law is the most widely practiced in the modern world Islamic law is primarily a moral and intended to govern all aspects of life. Foundation for Islamic law Al-Quran, Sunnah and writings of Islamic scholars Basic foundations of Islamic law cannot be changed Extended to cover certain commercial activities. Most of Muslim country blend of Islamic law with either common or civil law system.
The protection of intellectual property rights differs greatly from country to country
The Paris Convention for the Protection of Industrial Property is an agreement signed by 96 countries to protect intellectual property rights The Trade Related Aspects of Intellectual Property Rights (TRIPS) requires WTO members to grant and enforce patents lasting at least 20 years and copyrights lasting 50 years
Firms must decide whether to adhere to the standards of the home country or the standards of the host country
PART II
THE DETERMINANTS OF ECONOMIC DEVELOPMENT STATES IN TRANSITION THE NATURE OF ECONOMIC TRANSFORMATION IMPLICATIONS OF CHANGING POLITICAL ECONOMY FOCUS ON MANAGERIAL IMPLICATIONS
A countrys level of economic development affects its attractiveness as a possible market or production location for firms
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Some experts argue that economic freedom associated with a market economy creates greater incentives for innovation and entrepreneurship than a planned economy
It also seems evident that the subsequent economic growth leads to establishment of democratic regimes
Education levels also influence economic development Countries that invest more in the education of their young people develop faster economically
STATES IN TRANSITION
Since the late 1980s, a wave of democratic revolutions has swept the world, and many of the previous totalitarian regimes collapsed
There has been a move away from centrally planned economies towards free markets
c. economic advances of the last quarter century have led to the emergence of increasingly prosperous middle and working classes who have pushed for democratic reforms
In general, command economies failed to deliver the kind of sustained economic performance that was achieved by countries that had adopted market-based systems, prompting many countries to shift to a market-based system
DEREGULATION
Involves removing legal restrictions on 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
Because private investors are motivated by potential profits to increase productivity, privatization should increase economic efficiency
LEGAL SYSTEM
A well-functioning market economy requires laws protecting private property rights and providing mechanisms for contract enforcement
Without a legal system that protects property rights, and without the machinery to enforce that system, growth is hampered Many countries have made significant strides toward creating a strong legal system, but more work is necessary
Markets that were formerly off-limits to Western business are now open
China (population of 1.2 billion) could be a bigger market than the U.S., the EU, and Japan combined India (population 1.1 billion) is also a potentially huge market
However, just as the potential gains are large, so are the risks
a. the political, economic, and legal systems of a country raise important ethical issues that have implications for the practice of international business
b. the political, economic, and legal environment of a country clearly influences the attractiveness of that country as a market and/or investment site
OVERALL ATTRACTIVENESS
RISKS POLITICAL RISKS: SOCIAL UNREST/ANTI BUSINESS TRENDS
OVERALL ATTRACTIVENESS
COSTS CORRUPTION
LACK OF INFRASTRUCTURS
LEGAL COSTS
PART III
QUESTION 1 QUESTION 2
QUESTION 2
A democratic political system is an essential condition for sustained economic progress. Discuss.
OVERVIEW
Basic Human Right
Individual Right
Equality
DEMOCRACY
Majority Rule
Participation
OVERVIEW
Economic Growth
Increased in value of the goods and services produced Measured as the % rate of increase in real GDP Indicating an increase in the average standard of living
Better education
Better health
Lower corruption
Transparent governance
MALAYSIA
57 years of democracy political system GDP average growth of 6.5% annually 1957 2005 Multi-sector economy Leveraging on the political stability to attract investor
INDIA
The most populous democracy country Tenth largest economy by market exchange rate and third largest by purchasing power parity (2011) Annual GDP growth rate of 5.8% - past two decades and 6.1% in 2011-12. Sosio-economic challenges: poverty, illiteracy, corruption, malnutrition, inadequate public healthcare and terrorism large population.
SOUTH KOREA
Democracy since 1987 previously dictator High income developed country Ranks 15th in the world by nominal GDP and 12th by purchasing power parity Identified as G-20 major economies Economic growth rate reached 6.2% in 2010 Suffers damage to its credit rating in the stock market North Korea threat
CHINA
Authoritarian Communist Party Socialism with Chinese characteristics heavy restrictions on the Internet, press, freedom of assembly, reproductive rights & freedom of religion The worlds second largest economy in terms of nominal GDP IMF, 2013 Annual GDP growth of 10.5% between 2001 to 2010 Worlds third largest recipient of inward FDI
NOT ESSENTIAL
POLITICAL STABILITY
ECONOMIC OPENNESS
HUMAN CAPITAL
LUXURIOUS RESOURCES