Chapter

Country Differences in Political Economy

2

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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

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Political Systems

System of Government in Nations”

Political systems have two dimensions

Degree of collectivism vs. individualismDegree of democracy vs. totalitarianism

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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

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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

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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

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Democracy versus totalitarianism

Democracy and totalitarianism are at different ends of a continuum with many shades of gray in between

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Democracy

Government is by the people, exercised either directly or through elected representatives (representative democracy)

Elected representatives are held accountable through safeguards

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Safe guards of representative democracy

1. Individuals right to freedom of expression, opinion and organization,

2.Free media, 3. Regular elections4. Adult suffrage5. Limited terms for elected representatives6. A fair court system that is independent from the political

system7. A non political state bureaucracy8. Nonpolitical force and armed service9. Relatively free access to state information

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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

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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

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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”

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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

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Legal systems

Three main types of legal systems – in use around the world: common law civil law theocratic law

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Legal systems

Four issues important to international business Contract law Property rights Protection of intellectual property Product safety and liability

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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

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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)

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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

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Country rankings of corruption in 2002

Fig 2.1

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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

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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

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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

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Regional piracy rates for software 2001

Fig 2.2

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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

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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

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GNI, PPP &GDP data for selected countries

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Gross national income per capita

Map 2.1

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Purchasing power parity, 2001

Map 2.2

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Map 2.3

Growth in gross domestic product, 1991-2001

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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

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The human development index 2001

Map 2.4

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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

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Global distribution of economic freedom

Map 2.6

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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

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Map 2.5

Countries with political freedom -2002

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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

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Total international terrorist attacks 1981-2002

Fig: 2.3

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Spread of market based systems

Shift

Centrally Planned

Economies

Mixed Economies

Market – Based

Economies

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The nature of economic transformation

DeregulationRemoval of legal restriction to the free play

of market systemsAllowing establishment and operations of

private enterprises Privatization

Transfer of ownership of state owned enterprise to private individuals

Legal systemsLaws that support a market economy

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Implications for international business

Country differences influence: Attractiveness Benefits

First moverLate mover advantages

Cost Risk

Political riskEconomic riskLegal risk

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Implications for international business

Country differences influence ethical practices:

Ethics and human rightsEthics & regulationsEthics & corruption