1. Country Differences in Political Economy2
Chapter
Country Differences in Political Economy

2. 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

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

4. 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

5. 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

6. 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

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

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

9. 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

10. 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

11. 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

12. 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”

13. 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

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

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

16. 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

17. 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)

18. 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

19. Country rankings of corruption in 2002
Fig 2.1

20. 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

21. 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

22. 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

23. Regional piracy rates for software 2001
Fig 2.2

24. 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

25. 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

26. GNI, PPP &GDP data for selected countries

27. Gross national income per capita
Map 2.1

28. Purchasing power parity, 2001
Map 2.2

29. Growth in gross domestic product, 1991-2001
Map 2.3

30. 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

31. The human development index 2001
Map 2.4

32. 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

33. Global distribution of economic freedom
Map 2.6

34. 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

35. Countries with political freedom -2002
Map 2.5

36. 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

37. Total international terrorist attacks 1981-2002
Fig: 2.3

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

39. 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

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

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