1. Fourth Edition International Business

2. CHAPTER 2 National Differences in Political Economy

3. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-3 India

4. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-4 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.

5. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-5 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.

6. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-6 Communists:  Socialism is achieved through violent revolution. Social Democrats:  Socialism is achieved through democratic means. Two Approaches

7. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-7 Political Systems 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. “The system of government in a nation.”

8. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-8 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.

9. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-9 Democracy and Totalitarianism Democracy Government by the people, exercised either directly or through elected representatives. Totalitarianism Government in which one person or political party exercises absolute control over all spheres of human life and opposing political parties are prohibited.

10. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-10 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.

11. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-11 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.

12. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-12 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.

13. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-13 Legal Systems 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. Rules, or laws, that regulate behavior and the processes by which laws are enforced and grievances redressed.

14. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-14 Country Corruption Rankings 2000 Canada U.K. Australia France Greece Russia Nigeria 10=Highly clean 0=Totally corrupt Figure 2.1

15. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-15 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.

16. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-16 Software Piracy by Region 2000 Avg. Figure 2.2

17. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-17 Software Piracy Losses by Region 2000 Figure 2.3

18. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-18 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.

19. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-19 Product Standards and Ethical Dilemmas Strong Product Standards Weak Product Standards

20. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-20 Contracts Common Law Evolved in England Based on: Tradition Precedent Custom United States Contracts tend to be long Civil Law ‘Code Napoleon’ Detailed set of laws organized into ‘Codes’. Europe Russia Japan 80 countries Short contracts

21. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-21 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. Uses U.S. cost of living for basis of adjustment among countries. Both give a static picture of development

22. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-22

23. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-23 PPP Index and GNP Data for Selected Countries 2000 Table 2.1

24. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-24

25. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-25

26. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-26 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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28. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-28 Political Economy and Economic Development Innovation and Entrepreneurship are Engines of Growth Innovation and Entrepreneurship Require a Market Economy Innovation and Entrepreneurship Require Strong Property Rights Economic Progress Begets Democracy What kind of political system?

29. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-29 Geography, Education and Economic Development “..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 market- based trade. Temperate climes have generally supported higher densities of population and thus more extensive division of labor than tropical regions.” Jeffrey Sachs Harvard University The general assertion is that nations that invest more in education will have higher growth rates because an educated population is a more productive population.

30. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-30 States in Transition Two Trends Two Trends Democratic Revolutions Decline in Centrally Planned and Mixed Economies Decline in Centrally Planned and Mixed Economies

31. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-31 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.

32. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-32

33. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-33 Fukuyama

34. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-34 There is no “universal” civilization based on widespread acceptance of Western liberal democratic ideals. Clash of Civilizations

35. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-35 The spread of Market-Based Systems Shift Centrally Planned Economies Mixed Economies Market – Based Economies

36. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-36

37. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-37 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.

38. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-38 Implications for Business Attractiveness Benefits First-mover advantages Late-mover disadvantages Costs Risks Political Economic Legal Ethics Human rights Regulations Corruption Foreign Corrupt Practices Act