International
Business
Fourth Edition
CHAPTER 2
National Differences in Political
Economy
2-3
India
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Chapter 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.
This chapter will review these systems and explore
how differences in political economy influence the
benefits, costs, and risks associated with doing
business in different countries.
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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.
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Two Approaches
Communists:
Socialism is achieved through violent
revolution.
Social Democrats:
Socialism is achieved through democratic
means.
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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.
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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.
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Democracy and Totalitarianism
Democracy
Government by the
people, exercised either
directly or through
elected representatives.
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Totalitarianism
Government in which one
person or political party
exercises absolute
control over all spheres
of human life and
opposing political parties
are prohibited.
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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.
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Totalitarianism
4 major forms:
Communism
Collectivism is achieved through total dictatorship.
Theocratic
Political power is influenced by religious principles.
Tribal
A political party representing the interests of a
particular tribe monopolizes power.
Right-wing
Generally permits individual economic freedom, but
restricts political freedom to prevent the rise of
communism.
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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.
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.
State-Directed Economy:
The state plays a significant role through its “industrial
policy” and setting national goals.
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Legal Systems
Rules, or laws, that regulate behavior and the
processes by which laws are enforced and
grievances redressed.
Property Rights: the legal rights over the use of a
resource and the income derived from it.
Private Action:
Theft, piracy, blackmail and the like by private
individuals and groups.
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.
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Country Corruption Rankings 2000
10=Highly clean
0=Totally corrupt
10
8
6
4
Ranking
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China
Russia
Indonesia
Nigeria
0
Finland
Canada
Singapore
U.K.
Switzerland
Australia
U.S.A.
France
Japan
Greece
2
Figure 2.1
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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.
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Software Piracy by Region
70
60
50
40
30
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E.Europe
L.Amer.
Asia/Pacific
W.Europe
2000
MidEast/Africa
Figure 2.2
1999
N.Amer.
20
10
0
2000 Avg.
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Software Piracy Losses by Region
2000
26%
3%
7%
Mid East Africa
Latin Amer.
Asia/Pacific
37%
27%
W. Europe
N. Amer.
Figure 2.3
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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.
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Product Standards and Ethical
Dilemmas
Strong
Product
Standards
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Weak
Product
Standards
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Contracts
Common Law
Evolved in England
Based on:
Tradition
Precedent
Custom
United States
Contracts tend to be
long
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Civil Law
‘Code Napoleon’
Detailed set of laws
organized into ‘Codes’.
Europe
Russia
Japan
80 countries
Short contracts
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Differences in Economic Development
Gross National Product (GNP)
Common yardstick for measuring economic
activity.
Measures total value of goods and services
produced annually.
Doesn’t consider the differences in costs
of living.
Purchasing Power Parity.
Both give
a static
picture of
development
Uses U.S. cost of living for basis of
adjustment among countries.
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PPP Index and GNP Data for Selected
Countries 2000
Country
GNP/Capita
PPP/Capita
Brazil
China
Germany
India
Japan
Nigeria
Poland
Russia
Switzerland
United Kingdom
United States
$3,570
840
25,050
460
34,210
260
4,200
1,660
38,120
24,500
34,260
$7,320
3,940
25,101
2,390
26,460
790
9,030
8,030
24,970
23,550
34,260
2-23
GNP Growth
Rate (%) 90-99
3.0
10.7
1.3
6.0
1.3
2.4
4.5
-6.1
0.6
2.5
3.3
Table 2.1
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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
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Political Economy and Economic
Development
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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
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Geography, Education and Economic
Development
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“..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 marketbased trade. Temperate climes have generally supported
higher densities of population and thus more extensive
division of labor than tropical regions.”
The general assertion is that
Jeffrey Sachs
nations that invest more in
Harvard University
education will have higher
growth rates because an
educated population is a more
productive population.
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States in Transition
Democratic Revolutions
Two
Trends
Decline in Centrally Planned
and Mixed Economies
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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.
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Fukuyama
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Clash of Civilizations
There is no “universal”
civilization based on widespread
acceptance of Western liberal
democratic ideals.
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The spread of Market-Based
Systems
Centrally
Planned
Economies
Shift
Market –
Based
Economies
Mixed
Economies
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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.
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Implications for Business
Risks
Political
Economic
Legal
Attractiveness
Benefits
First-mover advantages
Late-mover disadvantages
Costs
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Ethics
Human rights
Regulations
Corruption
Foreign Corrupt
Practices Act
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