Country Differences in Political Economy 2 Chapter Country Differences in Political Economy

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

Political Systems System of Government in Nations” Political systems have two dimensions Degree of collectivism vs. individualism Degree of democracy vs. totalitarianism

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

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

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

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

Democracy Government is by the people, exercised either directly or through elected representatives (representative democracy) Elected representatives are held accountable through safeguards

Safe guards of representative democracy 1. Individuals right to freedom of expression, opinion and organization, 2.Free media, 3. Regular elections 4. Adult suffrage 5. Limited terms for elected representatives 6. A fair court system that is independent from the political system 7. A non political state bureaucracy 8. Nonpolitical force and armed service 9. Relatively free access to state information

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

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

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”

Legal systems home country laws host country laws 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

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

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

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

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)

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

Country rankings of corruption in 2002 Fig 2.1

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

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

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

Regional piracy rates for software 2001 Fig 2.2

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

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

GNI, PPP &GDP data for selected countries

Gross national income per capita Map 2.1

Purchasing power parity, 2001 Map 2.2

Growth in gross domestic product, 1991-2001 Map 2.3

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

The human development index 2001 Map 2.4

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

Global distribution of economic freedom Map 2.6

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

Countries with political freedom -2002 Map 2.5

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

Total international terrorist attacks 1981-2002 Fig: 2.3

Spread of market based systems Shift Centrally Planned Economies Mixed Market – Based

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 that support a market economy

Implications for international business Country differences influence: Attractiveness Benefits First mover Late mover advantages Cost Risk Political risk Economic risk Legal risk

Implications for international business Country differences influence ethical practices: Ethics and human rights Ethics & regulations Ethics & corruption