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International

Business
Fourth Edition
National
Difference
s in
Political
Economy
India
• The economic, legal& political systems
are interdependent

• Politicians write the laws that help to


shape economic activity in a nation
state, and politicians like everybody are
influenced by the prevailing culture or
cultures of their nation.
Focus

The term Political Economy is used to stress


that the political, economic, and legal systems
of a country are not independent of each other.

Review these systems and explore how


differences in political economy influence the
benefits, costs, and risks associated with doing
business in different countries.
Political Systems
“The system of government in a nation.”

Collectivism:
◆ A political system that stresses the primacy of
collective goals over individual goals.
◆Advocated by Plato in the “Republic”.
◆In modern times, the Socialists advocate Collectivism.
Socialism:
◆Trace intellectual roots to Karl Marx.
◆Argued that the pay of workers does not reflect the
full value of their labor.
◆Advocated state ownership of production, distribution,
and exchange (businesses), thereby ensuring that workers were
fully compensated for their labor.
Two Approaches

Communists:
◆Socialism is achieved through violent
revolution.
Social Democrats:
◆Socialism is achieved through democratic
means.
Political Systems
“The system of government in a nation.”

Individualism:
❑ Opposite of Collectivism.
❑ Individual should have freedom in political and economic
pursuits.
❑ Advocated by Aristotle.
❑ Private property is more highly productive than
communal property and will thus stimulate progress.
❑ Revived during the 16th century in England and the
Netherlands.
❑ Hume (1711-1776)
❑ Adam Smith (1723-1790)
❑ John Stuart Mill (1806-1873)
❑ Embodied in the U.S. Declaration of Independence.
Two tenets:
❑ An emphasis on the importance of guaranteeing
individual freedom and self-expression.
❑ The welfare of society is best served by letting
people pursue their own economic self-interest, as
opposed to some collective body (government) dictating
what is in society’s best interest.

Individualism advocates:
❑ Democratic political systems.
❑ Free market economics.
Democracy and Totalitarianism
• Democracy • Totalitarianism
– Government by the – Government in which
people, exercised one person or
political party
either directly or
exercises absolute
through elected control over all
representatives. spheres of human
life and opposing
political parties are
prohibited.
Democracy
• Safeguards to protect a democracy:
– Right to freedom of expression, opinion, and
organization.
– A free media.
– Regular elections in which all eligible citizens are
allowed to vote.
– Universal adult suffrage.
– Limited terms for elected representatives.
– A fair court system independent of the political
system.
– A nonpolitical state bureaucracy.
– A nonpolitical police force and armed service.
– Relatively free access to state information.
Totalitarianism
• 4 major forms:
– Communism
• Collectivism is achieved through total
dictatorship
• eg., China, Cuba, Vietnam,Laos,North Korea
– Theocratic
• Political power is influenced by religious
principles. Islamic countries
– Tribal
• A political party representing the interests of a
particular tribe monopolizes power.
• Zimbabwe, Tanzania, Uganda and Kenya
– Right-wing
• Generally permits individual economic freedom,
but restricts political freedom to prevent the
rise of communism.
• Sometimes backed by military
• Military officers government
• The fascism in Germany & Italy
Economic Systems
• Market Economy:
– All productive activities are privately owned.
• Command Economy:
– Goods and services produced, their quantity, and
prices are determined by the government.
– Consistent with the collectivist ideology
– Govt can always direct the companies investing in
the best interest of the nation
– Historically, this command economy is found in
communist countries
– Some elements of command economy are also
evident in socialist economies
• Mixed Economy:
– Parts of the economy are left to private
ownership and free market mechanisms
while other sectors are state-owned and
have government planning.
– India has a mixed economy, Great
Britain ,France, Sweden
Legal Systems
Rules, or laws, that regulate behavior and the
processes by which laws are enforced and
grievances redressed.

• Immense importance to international


business
• A country’s laws regulate business
practice, define the manner in which
it can be conducted
• Difference in legal system can always
affect the attractiveness of a
country for investment
• Legal system is also influenced by the
prevailing political system
• Collectivist oriented government would
restrict the private owned enterprises.
• Individualistic government would favor
the private enterprise and consumerism
• There are different types of legal
systems;
• Common Law, Civil Law, Theocratic Law
Common Law
• Evolved in England over 100 year ago
• Based on Tradition, precedent & custom
• Tradition refers to country’s legal history
• Precedent to cases that have come before
the court in the past
• Custom to the ways in which laws are applied
in specific situations
• Each new interpretations set a precedent
that can be followed in the future
Civil Law
• Based on very detailed set of laws organized
into codes
• More than 80 countries operate with civil law
• A civil law is less adversarial than the common
law because judges rely upon detailed legal
codes
• Judges here have les flexibility than the
common law because they only have power to
apply the law not to interpret the law
Theocratic Law
• Law is based on religious teachings

• Islamic law is the widely practiced theocratic laws

• Kuran & Sunnah are the foundation of theocratic


laws

• Primarily concerned with the moral behavior

• Has been extended to cover certain commercial


activities
• Acceptance of interest is seen as a great sin
Contract Law
• Body of law that governs the contract
enforcement
• Very detailed , all contingencies mentioned
and spelled out
• International dispute handled by United
Nations Convention on Contracts for the
International Sale of Goods (CISG)
• International Court of arbitration of the
International Chambers of Commerce in Paris
• Property Rights: the legal rights over the
use of a resource and the income derived
from it.
• Property refers to a resource over which an
individual or business holds a legal title, i.e., a
resource is owned
• Countries differ significantly in the extent to
which their legal system protect the property
rights
• Property rights can be violated in two ways:
– Private Action:
• Theft, piracy, blackmail and the like by private individuals
and groups.
• Russian Mafia
– Public Action and Corruption:
• Violation of property rights by public officials, such as
politicians and government officials, by extorting income
or resources from property holders.
• By levying excessive taxation, expensive licenses from the
property holders, taking asset into state ownership
without compensating the property holders
10

0
2
4
6
8
Finland
Canada
Singapore
U.K.
Switzerland
10=Highly clean

Australia
0=Totally corrupt

U.S.A.
France
Japan
Greece
2000

China
Russia
Indonesia
Nigeria
Country Corruption Rankings

Figure 2.1
Ranking
Protection of Intellectual Property
• Property that is the product
of intellectual activity.
– Patent: through exclusive use
rights, it protects the inventor of a
product for a certain period of time.
– Copyright: Gives exclusive rights
to authors, composers, playwrights
and artists to publish and dispense
their work.
– Trademark: Officially registered
designs and names that protect
owners product designations.
• Piracy remains a significant
problem in international
business.
Software Piracy by Region
70
60
50
40
30
20 1999
10 2000
0 L.Amer.
N.Amer.

Asia/Pacific
W.Europe

E.Europe
MidEast/Africa
2000 Avg.

Figure 2.2
Software Piracy Losses by
Region 2000
3% 7%
26% Mid East Africa
Latin Amer.
Asia/Pacific
37% W. Europe
27% N. Amer.

Figure 2.3
Product Safety and Product
Liability
• Product Safety:
– Safety standards to which a product
must adhere.
• Product Liability:
– Civil and criminal penalties if standards
are not met.
– Civil law results in fine
– Criminal law results in imprisonments
Product Standards and Ethical
Dilemmas

Strong Weak
Product Product
Standards Standards
Contracts
• Common Law • Civil Law
– Evolved in England – ‘Code Napoleon’
– Based on: – Detailed set of laws
• Tradition organized into
• Precedent ‘Codes’.
• Custom – Europe
– United States – Russia
• Contracts tend to be – Japan
long – 80 countries
• Short contracts
Differences in Economic
Development
• Gross National Product (GNP)
– Common yardstick for measuring
economic activity.
• Measures total value of goods and Both give
services produced annually. a static
picture of
– Doesn’t consider the differences in development
costs of living.
• Purchasing Power Parity.
– Uses U.S. cost of living for basis of
adjustment among countries.
PPP Index and GNP Data for
Selected Countries 2000
Country GNP/Capita PPP/Capita GNP Growth
Rate (%) 90-99
Brazil $3,570 $7,320 3.0
China 840 3,940 10.7
Germany 25,050 25,101 1.3
India 460 2,390 6.0
Japan 34,210 26,460 1.3
Nigeria 260 790 2.4
Poland 4,200 9,030 4.5
Russia 1,660 8,030 -6.1
Switzerland 38,120 24,970 0.6
United Kingdom 24,500 23,550 2.5
United States 34,260 34,260 3.3

Table 2.1
Amartya Sen
• Measure development by
capabilities and opportunities
people enjoy.
– Requires removal of:
• Poverty
• Tyranny
• Poor economic opportunities
• Systemic social deprivation
• Neglect of public facilities
• Intolerance of repressive states
• U.N.’s Human Development
Index
– Based on:
• Life expectancy at birth
• Educational attainment
• Whether average income is
sufficient
Political Economy and Economic
Development
Innovation and Entrepreneurship are Engines of Growth

Innovation and Entrepreneurship Require a Market Economy

Innovation and Entrepreneurship Require Strong Property Rights

What kind of
political system?
Economic Progress Begets Democracy
Geography, Education and Economic
Development
“..that throughout history, coastal states, with their long
engagements in international trade, have been more
supportive of market institutions than landlocked states,
which have tended to organize themselves as hierarchical
(and often military) societies. Mountainous states, as a
result of physical isolation, have often neglected market-
based trade. Temperate climes have generally supported
higher densities of population and thus more extensive
division of labor than tropical regions.”
Jeffrey Sachs The general assertion is that
Harvard University nations that invest more in
education will have higher
growth rates because an
educated population is a more
productive population.
States in Transition

Democratic Revolutions

Two
Trends

Decline in Centrally Planned


and Mixed Economies
Spread of Democracy
Why?
1. Totalitarian regimes failed to deliver
economic progress to the vast bulk of their
populations.
2. New information and communications
technologies, Internet, have broken down
the ability of the state to control access to
uncensored information.
3. 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.
Fukuyama
Clash of Civilizations

There is no “universal”
civilization based on widespread
acceptance of Western liberal
democratic ideals.
The spread of Market-Based
Systems

Centrally
Planned
Economies
Market –
Based
Shift Economies

Mixed
Economies
The Nature of Economic
Transformation
The shift to market-based economies entails:
• Deregulation
Removal of legal restrictions to free
markets.
• Privatization
• Transfer of state ownership of property into
private hands.
• Legal Systems
Creation of systems to protect property
rights.
Implications for Business
• Risks
– Political
• Attractiveness
– Economic
• Benefits – Legal
– First-mover
• Ethics
advantages
– Human rights
– Late-mover
disadvantages – Regulations
– Corruption
• Costs
• Foreign Corrupt
Practices Act

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