1. National Differences in Political Economy2
National Differences in Political Economy

2. National Differences in Political Economy
INTRODUCTION
To explores how the political, economic, and legal systems of countries differ
Together these systems are known as the political economy of a country

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POLITICAL SYSTEMS
A political system is the system of government in a nation
Political systems can be assessed according to:
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 and Individualism
Collectivism refers to a system that stresses the primacy of collective goals over individual goals
When collectivism is emphasized, the needs of the society as whole are generally viewed as being more important than individual freedoms

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Socialism
Communists generally believed that collectivism could only be achieved though revolution and totalitarian dictatorship, while social democrats worked to achieve the same goals by democratic means
Privatization is the movement toward free market economies by selling state-owned enterprises to private investors

6. Chapter 2: National Differences in Political Economy
Individualism
Individualism is a political philosophy that an individual should have freedom over his or her economic and political pursuits.
Individualism focuses on:
guaranteeing individual freedom and self-expression
letting people pursue their own self-interest in order to achieve the best overall good for society

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Democracy and Totalitarianism
Democracy is a political system in which government is by the people, exercised either directly or through elected representatives
Totalitarianism is a form of 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
The most common form of democracy today is representative democracy, where elected representatives vote on behalf of constituents

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Totalitarianism
The four major forms of totalitarianism are:
communist totalitarianism: advocates achieving socialism through totalitarian dictatorship (China, Laos, Vietnam, South Korea)
theocratic totalitarianism: political power is monopolized by a party, group, or individual that governs according to religious principles (Iran, Saudi Arabia)
tribal totalitarianism: a political party that represents the interests of a particular tribe monopolizes power (Africa)
right wing totalitarianism: individual economic freedom is allowed but individual political freedom is restricted in the belief that it could lead to communism (Military Dictatorship)

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ECONOMIC SYSTEMS
A free market system is likely in countries where individual goals are given primacy over collective goals
State-owned enterprises and restricted markets are common in countries where collective goals are dominant

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Three broad types of economic systems can be identified-a market economy, a command economy, and a mixed economy.
Market Economy
In a pure market economy the goods and services that a country produces, and the quantity in which they are produced is determined by supply and demand. Consumers are sovreign.

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Command Economy
In a pure command economy the 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
In a mixed economy the various economic sectors includes some elements of a market economy and some elements of a command economy

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LEGAL SYSTEMS
The legal system of a country is the rules, or laws, that regulate behavior, along with the processes by which the laws of a country are enforced and through which redress for grievances is obtained.
The legal environment of a country is important because a country's laws regulate business practice, 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
The common law system (based on tradition, precedent, and custom) is found in most of Great Britain’s former colonies, including the United States
The civil law system is based on a very detailed set of laws organized into codes and is found in over 80 countries, including Italy, Germany, France, Japan, and Russia
Islamic law is the most widely practiced theocratic law system (based on religious teachings) in the modern world

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Differences in Contract Law
Contract law is the body of law that governs contract enforcement
A contract is a document that specifies the conditions under which an exchange is to occur and details the rights and obligations of the parties involved
The United Nations Convention in Contracts for the International Sales of Goods (CIGS) establishes a uniform set of rules governing certain aspects of the making and performance of everyday commercial contracts between sellers and buyers who have their places of business in different nations
By adopting CIGS, a nations signals to other nations that it will treat the Convention’s rules as part of its law
Country Focus: Corruption in Nigeria
Summary
This feature describes the corruption that has characterized Nigeria’s economy over the last 40 years. When the country initially gained its independence from Britain in 1960, expectations were high that Nigeria would become an economic heavyweight in Africa. With abundant natural resources and a large population, it seemed the stage was set for success. However, despite earnings of more than $300 billion from oil sales during the period 1970 to 2000, the country still suffered from extreme poverty, illiteracy, and high debt. Several factors have been blamed for Nigeria’s troubles including political instability and corruption.
Suggested Discussion Questions
1. What is meant by corruption? Explain how a corrupt political system affects the well being of a country.
2. With its huge oil reserves and large population, Nigeria was expected to emerge as a major player in Africa. Yet today the country is extremely poor with little expectation for an economic turnaround any time in the near future. Explain how Nigeria came to be in such a sad state.
3. Clearly, Nigeria’s corrupt government has been a major factor in the country’s demise. In contrast, other countries including Finland and Canada expressly prohibit corruption. In your opinion, would Nigeria be better off following the example of countries like Finland and Canada? Why or why not?

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Property Rights and Corruption
Property rights (the legal rights over the use to which a resource is put and over the use made of any income that may be derived from that resource) are very important for the functioning of business, but can be violated by either private action or public action

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Private Action
refers to theft, piracy, blackmail, and the like by private individuals or groups
Public Action and Corruption
occurs when public officials extort income or resources from property holders using various legal mechanisms including excessive taxation, requiring expensive licenses or permits from property holders, or taking assets into state ownership without compensating the owners. It can also be done through corruption by demanding bribes in return for the right to operate in a country. (400 billion a year)

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The Protection of Intellectual Property
Intellectual property is property, such as computer software, a screenplay, or the chemical formula for a new drug, that is the product of intellectual activity .
Internet Extra: Focus on Intellectual Property Rights is the U.S government’s web page on intellectual property rights. The site is at {
1. Click on Discuss Intellectual Property. List some examples of intellectual property.
2. Next, click on The Cost of Developing a New Drug. What protections do you feel should be awarded to pharmaceutical firms? Why?
3. Last, click on Taking Action. How are countries fighting intellectual property rights violations?

20. National Differences in Political Economy
Intellectual Property rights include:
patents -- documents giving the inventor of a new product or process exclusive rights to the manufacture, use, or sale of that invention
copyrights -- exclusive legal rights of authors, composers, playwrights, artists, and publishers to publish and dispose of their work as they see fit
trademarks -- designs and names, often officially registered, by which merchants or manufacturers designate and differentiate their products
Internet Extra: Focus on Intellectual Property Rights is the U.S government’s web page on intellectual property rights. The site is at {
1. Click on Discuss Intellectual Property. List some examples of intellectual property.
2. Next, click on The Cost of Developing a New Drug. What protections do you feel should be awarded to pharmaceutical firms? Why?
3. Last, click on Taking Action. How are countries fighting intellectual property rights violations?

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World Intellectual Property Organization (183 countries)
The Paris Convention for the Protection of Industrial Property (1983) is an agreement signed by 170 countries to protect intellectual property rights
The 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
Management Focus: Starbucks Wins Key Trademark Case in China
Summary
This feature focuses on intellectual property laws in China. When Starbucks entered China in 1999, the company was quickly challenged by a look-alike competitor, Xing Ba Ke. Not only did the name Xing Ba Ke mimic the Starbucks name, but Xing Ba Ke’s stores were virtual replicas of those operated by Starbucks. In 2003, Starbucks sued Xing Ba Ke for trademark violations. In 2006, Starbucks won its case, and Xing Ba Ke was fined $62,000 and ordered to stop using its name. The case was seen as a break through of sorts, a signal that China was finally caving to pressure from other nations and the World Trade Organization to respect intellectual property rights. Today, Starbucks operates over 200 stores in China and expects the market to become second only to the U.S.
Suggested Discussion Questions
1. Discuss the concept of property rights protection and why it is so important to companies. What does he court ruling against Xing Ba Ke mean for other companies that are already doing business in China, or are considering entering the market?
2. How important is the Chinese market to Starbucks? Does the presence of look-alike companies like Xing Ba Ke deter firms from entering the market?
Teaching Tip: To explore Starbucks in more depth, go to the company’s web site at { Click on “International” to explores individual country sites.

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Product Safety and Product Liability
Countries have different product safety and liability laws that may require foreign companies to customize products to adhere to local standards
If product standards are lower in other countries, firms must decide whether to produce products only of the highest standards even if this puts them at a competitive disadvantage relative to other producers and results in not maximizing value to shareholders, or whether they should produce products that respond to local differences, even if that means that consumers may not be assured of the same levels of safety in different countries

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THE DETERMINANTS OF ECONOMIC DEVELOPMENT
Differences in Economic Development
One common measure of economic development is a country’s gross national income per head of population (GNI)
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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The GNI per capita of the world’s nations in 2004

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GLOBALIZZAZIONE 25

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Broader Conceptions of Development: Amartya Sen
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
the 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) reflects Sen’s ideas and was developed to gauge a country’s economic development and likely future growth rate

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Geography, Education, and Economic Development
Geography can affect economic development
Countries that invest more in the education of their young people develop faster economically

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STATES IN TRANSITION
Since the late 1980s, a wave of democratic revolutions has swept the world, and many of the previous totalitarian regimes collapsed
There has been a move away from centrally planned and mixed economies towards free markets

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Spread of Democracy
The spread of democracy has occurred because:
many totalitarian regimes failed to deliver economic progress to the vast bulk of their population
new information and communication technologies have broken down the ability of the state to control access to uncensored information
in many countries the 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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Political freedom around the world in 2005.

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Spread of Market-Based Systems
In general, command and mixed economies failed to deliver the kind of sustained economic performance that was achieved by countries adopting market-based systems
Since the late 1980s there has been a transformation from centrally planned command economies to market-based economies

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Economic freedom around the world

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IMPLICATIONS FOR MANAGERS
political, economic, and legal systems of a country raise important ethical issues that have implications for the practice of international business
the political, economic, and legal environment of a country clearly influences the attractiveness of that country as a market and/or investment site

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Benefits
By identifying and investing early in a potential future economic stars, firms may be able to gain first mover advantages (advantages that accrue to early entrants into a market) and establish loyalty and experience in a country

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Costs
Political costs include the cost of paying bribes or lobbying for favorable or fair treatment (corruption)
Economic costs relate primarily to the sophistication of the economic system, including the infrastructure and supporting businesses
It can be more costly to do business in countries with dramatically different product, workplace, and pollution standards, or where there is poor legal protection for property rights

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Risks
Political risk is the likelihood that political forces will cause drastic changes in a country's business environment that adversely affects the profit and other goals of a business enterprise
Economic risk is the likelihood that economic mismanagement will cause drastic changes in a country's business environment that adversely affects the profit and other goals of a business enterprise
Legal risk is the likelihood that a trading partner will opportunistically break a contract or expropriate property rights

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Overall Attractiveness
The overall attractiveness of a country as a potential market and/or investment site for an international business depends on balancing the benefits, costs, and risks associated with doing business in that country.
Internet Extra: The U.S. State Department produces a series of annual "Country Reports“. The site is {
1. Click on Doing Business in International Markets. Discuss the ways the State Department helps American companies doing business in other countries.
2. Next, click on More Business Information and then on Investment Climate Statements. Compare the investment climate in several countries. Where would you invest? Which countries would you avoid?