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 Political, Economic, Legal Systems
‡ How do they differ?
‡ How do they influence a country¶s ability to
achieve meaningful economic progress?
‡ What are the main changes they are undergoing?
‡ How do these affect benefits-costs-risks of doing
business in a country?
‡ How does their nature affect ethical issues of
doing business in a country?

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iountry Differences in
Political Economy
‡ Political System: system of National Government
± Determinants (extremes never met)
‡ iollectivism and Individualism
‡ Democracy and Totalitarianism
‡ iollectivism: primacy of collectivist over
individual goals
± Emphasis: ³good of society´, ³common good´
± Plato (427-347 Bi) to Socialists (Marx, 1818 -83)
± iommunists-revolution, Social Democrats-democratic
outlook

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Individualism
‡ Individual freedom over economic and
political action
± Individual diversity and private ownership are
desirable. Private property is more highly
productive whereas communal property receives
little care -- Aristotle, 384-322 Bi
± ³the only purpose for which power can be
rightfully exercised over any member of a
civilized community, against his will, is to
prevent harm to others. His own good, either
physical or moral, is not a sufficient warrant´ --
John Stuart Mill, 1806-1873

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Individualism
± An individual who intends his own gain is ³led
by an invisible hand to promote an end which
was no part of his intention. Nor is it always
worse for the society that it was no part of it. By
pursuing his own interest he frequently promotes
that of the society more effectually than when he
really intends to promote it. I have never known
much good done by those who effect to trade for
the public good´
-- Adam Smith, 1723-1790

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‡ Democracy:
± Government is by the people, exercised either directly
or through elected representatives (representative
democracy)
± Safeguards hold elected representatives accountable
‡ Totalitarianism:
± One person/party exercises absolute control over all
spheres of human life (competing political parties are
banned)
± iommunist totalitarianism
± Theocratic totalitarianism
± Tribal totalitarianism
± Right wing totalitarianism

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National Differences in Political

Economy
‡ Economic Systems
± Market economy: what is produced in what
quantity is determined by supply/demand and
signaled to producers through a price system
± iommand 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 ³industrial policy.´

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National Differences in Political

Economy
‡ A Legal System is: ‡ Different Legal
± rules - laws - that regulate Systems
behavior
± iommon Law
± process through which
± iivil Law
‡ laws are enforced
‡ grievances are redressed
± Theocratic Law
± Bureaucratic Law
‡ Businesses must
‡ Dispute resolution
observe ± Where to arbitrate?
± Home country laws ± Validity of contracts and
± Host country laws decisions
± International Laws and
Treaties

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Legal Systems and International
Business
‡ Legal Systems and International Business
± property rights
‡ use of a resource
‡ use made of income from resource
‡ enforcement issues
‡ Public vs private action violations
± protection of Intellectual Property
‡ patent: inventors¶ exclusive rights to manufacture, use, sale an
invention
‡ copyright: same for authors, composers, artists, publishers
‡ trademarks: unique designs and names, often officially
registered
‡ Paris ionvention for the Protection of Industrial Property (96
countries)
‡ WTO/GATT
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Legal Systems and International
Business
‡ product safety and product liability
‡ criminal / civil liability
‡ contract law
± document that specifies
‡ conditions under which an exchange will happen
‡ rights/obligations of parties
± differences based on legal tradition
‡ common law system
‡ civil law system

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Differences of Economic
Development
± GDP per capita; does not factor cost of living
differences
± Purchasing Power Parity index: adjusts per
capita GDP by cost-of-living
± Static picture
± Human Development Index: life expectancy,
literacy, PPP based average incomes

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Political Economy and Economic

Progress
± Innovation -> Engine for Growth
(products, processes, strategies, organizations,
management practices)
± Innovation needs:
‡ market economy
‡ strong property rights
‡ the ³right´ political system
± Economic progress is related to Democracy

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States in Transition
‡ The spread of Democratic systems in the 1980s and
1990s
± Totalitarian regimes failed to deliver economic progress
± Spread of information trough new communication
technologies
± Emergence of prosperous middle classes
‡ Universal or ilashing iivilizations
± Fukuyama: ³« the end of history«´ and harmonious
existence
± Huntington: new conflicts, e.g., Islamic fundamentalism
± New realities: Russian 2000 elections, Zimbabwean
racial unrest, ihina¶s resurgence
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States in Transition (cont.)

‡ Spread of market-based systems

‡ Nature of economic transformation
± Deregulation: legal changes
± Privatization: transfer of state property/industries to
private individuals
‡ Auctions
‡ IPOs
± Evolution of legal systems
± The road of transformation is rocky

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Implications for Global Business

‡ Political, economic, and legal environments of a country
± influence attractiveness
± raise ethical Issues
‡ Attractiveness
± balance long-term risks with short-term benefits of doing business
in a foreign country
± benefits depend on: size, wealth, future economic growth
‡ first mover advantages
‡ identify ³star´ future economies
± costs are affected by:
‡ political payoffs
‡ economic sophistication (may be more costly to operate in LDis, no
infrastructure)
‡ legal framework impact on costs

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Implications for Global Business

‡ Ethical Issues
± human rights
± adherence to same standards abroad as at home
± product safety
± work safety
± environmental protection
± bribes
± Foreign iorrupt Practices Act (1977)
± what is unethical is not necessarily illegal

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Host iountries and the MNi

‡ Impact of MNi on host countries
‡ Political
‡ Economic
‡ Environmental
‡ iultural
‡ Impact of host country Governments on MNis
(Political Risk)
‡ Expropriation, Nationalization
‡ Privatization
‡ ionstraints on ownership
‡ Intellectual property rights
‡ Offset obligations (profit/capital repatriation, exports,
technology transfer)

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