Part two
PART
Country Differences
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Country Differences
TWO
Copyright  2001 The McGraw-Hill Companies, Inc. All rights reserved.
Part Two
Chapter
Country Differences in
Political Economy
Irwin/McGraw-Hill
Country Differences
Two
Copyright  2001 The McGraw-Hill Companies, Inc. All rights reserved.
Slide
2-1

National Differences in
Political Economy
Political System: system of National
Government

Determinants (extremes never met)



Collectivism and Individualism
Democracy and Totalitarianism
Collectivism: primacy of collectivist over
individual goals



Emphasis: “good of society”, “common good”
Plato (427-347 BC) to Socialists (Marx, 1818 -83)
Communists-revolution, Social Democrats-democratic
outlook
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Copyright  2001 The McGraw-Hill Companies, Inc. All rights reserved.
Slide
2-2
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 BC
 “the 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

Irwin/McGraw-Hill
Copyright  2001 The McGraw-Hill Companies, Inc. All rights reserved.
Slide
2-3
Individualism
An individual who intends his own gain is “led 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
Slide
2-4
 Democracy:
Government is by the people, exercised either directly or
through elected representatives (representative democracy)
 Elected representatives are held accountable through
safeguards

 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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Copyright  2001 The McGraw-Hill Companies, Inc. All rights reserved.
Slide
2-5
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
 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.”

Irwin/McGraw-Hill
Copyright  2001 The McGraw-Hill Companies, Inc. All rights reserved.
Slide
2-6
National Differences in Political
Economy
A
Legal System
 Different
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

Irwin/McGraw-Hill
Legal Systems
Common Law
 Civil Law
 Theocratic Law
 Bureaucratic Law

 Dispute
resolution
Where to arbitrate?
 Validity of contracts and
decisions

Copyright  2001 The McGraw-Hill Companies, Inc. All rights reserved.
Slide
2-7
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 Convention for the Protection of Industrial Property (96 countries)
 WTO/GATT
Irwin/McGraw-Hill
Copyright  2001 The McGraw-Hill Companies, Inc. All rights reserved.
Slide
2-8
Legal Systems and International
Business
 product

criminal / civil liability
 contract

safety and product liability
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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Copyright  2001 The McGraw-Hill Companies, Inc. All rights reserved.
Slide
2-9
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
Irwin/McGraw-Hill
Copyright  2001 The McGraw-Hill Companies, Inc. All rights reserved.
Slide
2-10
Political Economy 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
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progress is related to Democracy
Copyright  2001 The McGraw-Hill Companies, Inc. All rights reserved.
Slide
2-11
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 Clashing Civilizations
Fukuyama: “… the end of history…” and harmonious
existence
 Huntington: new conflicts, e.g., Islamic fundamentalism
 New realities: Russian 2000 elections, Zimbabwean racial
unrest, China’s resurgence

Irwin/McGraw-Hill
Copyright  2001 The McGraw-Hill Companies, Inc. All rights reserved.
Slide
2-12
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

Irwin/McGraw-Hill
Copyright  2001 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 2-13
Implications for International 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 “star” future economies


costs are affected by:
political payoffs
 economic sophistication (may be more costly to operate in LDCs, no
infrastructure)


legal framework impact on costs
Irwin/McGraw-Hill
Copyright  2001 The McGraw-Hill Companies, Inc. All rights reserved.
Slide
2-14
Implications for International Business
 Ethical
Issues
human rights
 adherence to same standards abroad as at home

 product safety
 work safety
 environmental protection

bribes
 Foreign Corrupt Practices Act
(1977)
 what is unethical is not necessarily illegal
Irwin/McGraw-Hill
Copyright  2001 The McGraw-Hill Companies, Inc. All rights reserved.
Slide
2-15
Host Countries and the MNC
 Impact
of MNC on host countries
 Political
 Economic
 Environmental
 Cultural
 Impact
of host country Governments on MNCs
(Political Risk)
 Expropriation,
Nationalization
 Privatization
 Constraints
on ownership
 Intellectual property rights
 Offset obligations (profit/capital repatriation, exports, technology
transfer)
Irwin/McGraw-Hill
Copyright  2001 The McGraw-Hill Companies, Inc. All rights reserved.