chapter

National Differences
in Political Economy

McGraw-Hill/Irwin
Global Business Today, 5e

2008 The McGraw-Hill Companies, Inc., All Rights

Reserved.

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
Explain the implications for management practice of national
differences in political economy

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Introduction
How do political, economic, and legal systems
of a country:
- Differ among countries?
- Influence economic development?
- Influence benefits, costs, and risks of business?
Reminder_: The political, economic and legal systems are
interconnected. The chapter addresses each separately for
analysis and discussion purposes only.

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POLITICAL SYSTEMS
Political systems - systems of national government,
mechanism of government in reality (may be different from
official form of government)

Political systems can be assessed according to two

dimensions:
The degree to which they emphasize collectivism as opposed
to individualism
The degree to which they are democratic or totalitarian
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Collectivism
Primacy of societal goals over individual goals

views the needs of society as being more important than the needs of
individual

Emphasis on the good of society, the common

good
Modern collectivism - socialism
Approaches vary from communist revolutions to
social democracies
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Individualism
A political philosophy based on the idea that an
individual should have freedom over his or her
economic and political activities
Individual diversity and private ownership are
desirable
Private property is emphasized and communal
property receives less attention

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Democracy
Government by the people, exercised either directly or
through elected representatives
Elected officials are held accountable through
safeguards such as
- Individuals right to freedom of expression, opinion, and
organization
- Free media
- Regular elections in which eligible citizens are allowed to vote
- Limited terms for elected representatives
- A fair court system that is independent from the political system
- A nonpolitical police forces and armed serves
- Relatively free access to state information
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Totalitarianism
One person/party exercises absolute control over all or
most spheres of human life
Opposing political parties are prohibited
Types of totalitarian systems
- Communist totalitarianism: advocates achieving socialism
through totalitarian dictatorship

- Theocratic totalitarianism: political power is monopolized by a

-

party, group, or individual that governs according to religious principles

Tribal totalitarianism: a political party that represents the interests
of a particular tribe monopolizes power
Right wing totalitarianism: individual economic freedom is
allowed but individual political freedom is restricted in the belief that it
could lead to communism
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ECONOMIC SYSTEMS
Pure market economy - goods and services that a

country produces and the quantity in which they are

produced is determined by supply and demand
Pure command economy - goods and services that a
country produces, the quantity in which they are
produced, and the price at which they are sold are all
planned by the government
Mixed economy - includes some elements of a market
economy and some elements of a command economy
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Note on Capitalism

An economic and political system characterized by a

free market for goods and services and private
control of production and consumption.

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A Classification of Capitalism
(Source: Cornell University)

Neoliberalism (free market capitalism)

- Emphasis on individualism and self-interest
- Minimal state role in the economy
- Marginalization of labor by businesses

Corporatism (social-democratic capitalism)

- Coordination among political parties, trade unions, and
industry associations
- Proactive role of the government in managing the economy

Statism (Asian statism or developmentalism)

- Government is expected to regulate markets, control profits,
direct economic investment, and equalize employment
opportunities
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How would you classify these countries

political and economic systems?
Germany
Britain
China
Singapore
Argentina
Venezuela

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LEGAL SYSTEMS
A country's

laws regulate

- business practices
- define the manner in which business transactions
are to be executed, and
- set down the rights and obligations of those
involved in business transactions
Differences

in the structure of law can impact

the attractiveness of a country as an investment
site and/or market
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Different Legal Systems

Common law system - based on tradition, precedent,

and custom (found in most of Great Britains former

colonies, including the United States)

Civil law system - based on a very detailed set of laws

organized into codes (found in over 80 countries,
including Germany, France, Japan, and Russia)
Theocratic law system - based on religious teachings
(Islamic law is the most widely practiced theocratic law
system)
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Contract Law
Contract law - body of law that governs contract enforcement
How can contract disputes be resolved? Which countrys laws?
- Home country laws?
- Host country laws?
United Nations Convention in Contracts for the International Sales of Goods (CIGS) establishes a uniform set of
rules governing some aspects of international commercial
contracts
By adopting CIGS, a nations signal to other nations that it will
treat the Conventions rules as part of its law
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Property Rights
Legal rights over the use of a resource (e.g., land,
buildings, equipment, intellectual property) and income
derived from that resource (e.g., repatriation of profits)
Property rights can be violated by:
- Private action - theft, piracy, blackmail, etc., by private
individual or groups
- Public action public officials extort income or resources
from property holders through legal mechanisms (e.g.,
excessive taxation) or illegal methods (e.g., bribes)

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Public Action and Corruption

Transparency International tracks corruption across
countries and publishes rankings for:
- Corruption Perceptions Index
- Bribe Payers Index

Do high corruption levels affect direct investment and

economic growth? If so, how?

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Rankings of Corruption by
Country 2007

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Reducing Corruption
U.S. Foreign Corrupt Practices Act
- Makes it a violation of the United States law to bribe a
foreign government official in order to obtain or
maintain business over which the foreign official has
authority
- Requires all publicly traded countries to keep detailed
records so that it is clear whether a violation of the act
has occurred or not

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Reducing Corruption
Convention on Combating Bribery of Foreign
Public Officials in International Business
Transactions
- Adopted by the Organization for Economic
Cooperation and Development (OECD)
- Obliges member states to make bribery of foreign
public officials a criminal offense

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Protection of
Intellectual Property Rights
Paris Convention for the Protection of Industrial
Property - an agreement signed by 96 countries to
protect intellectual property rights
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

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Product Safety and Liability

Product safety laws set safety standards to which a

product must adhere

Product liability involves holding a company and its
officers responsible when a product causes injury, death,
or damage.
Which standards should companies use?
- Host country standards?
- Home country standards?

What are the ethical implications?

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ECONOMIC
DEVELOPMENT

A common measure of economic development is a

countrys gross national income per head of
population (GNI) or GDP per capita

A purchasing power parity (PPP) adjustment allows

for a more direct comparison of living standards in
different countries
A drawback of both GNI and PPP data is that they
provide only a static picture of development
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Broader Conceptions of
Development
Nobel Prize winning economist Amartya Sen argued that
development should be assessed less by material output and more
by the capabilities and opportunities that people enjoy

Human Development Index

- A United Nations developed index based on life expectancy,
education attainment, and whether average incomes are sufficient
to meet the basic needs of life in a country
- Used to gauge a countrys economic development and likely
future growth rate

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Political Economy and

Economic Progress
What is the relationship between political economy and
economic progress?
Innovation, entrepreneurship and FDI engines of growth
What are the requirements for the business environment of a
country to be conducive to innovation and entrepreneurship?
- A market economy?
- Strong property rights?
- The right political system?
What role do geography and education play in economic
progress? Other factors?
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A Tale of Two Countries*

Source: Schwerin, David A. 2005.
Conscious Globalism.
Example for possible disparity between economic development and political economy

Argentina:
Individualistic
Democratic
Politically unstable
Corruption problems
No long-term economic
planning

Singapore:
Collectivist
Totalitarian?
Politically stable
Low corruption
Long-term economic
planning by government
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Implications for Managers

Political,

country

economic, and legal systems of a

- Raise important ethical issues that have

implications for the practice of international

business
- Influences the attractiveness of that country as a
market and/or investment site
Reminder: The actions of multinational corporations influence

the economic decisions of national governments! MNCs can withdraw

their investments if national governments do not meet their
requirements (for ex. Protection of intellectual property rights)
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