Chapter
2
Country Differences in
Political Economy
2-2
Political Systems

System of Government in Nations”

Political systems have two dimensions
 Degree
of collectivism vs. individualism
 Degree 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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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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Spread of market based systems
Centrally
Planned
Economies
Shift
Market –
Based
Economies
Mixed
Economies
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The nature of economic transformation

Deregulation
 Removal
of legal restriction to the free play
of market systems
 Allowing establishment and operations of
private enterprises

Privatization
 Transfer
of ownership of state owned
enterprise to private individuals

Legal systems
 Laws
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that support a market economy
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Implications for international business

Country differences influence:




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Attractiveness
Benefits
 First mover
 Late mover advantages
Cost
Risk
 Political risk
 Economic risk
 Legal risk
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