1. National Differences in Political Economy
Chapter 2
National Differences in Political Economy
This is a test

2. National Differences in Political Economy
How do political, economic, legal systems of a country
Differ among countries?
Influence economic progress?
Change during our times?
Influence benefits, costs, risks of business?
What are ethical issues that arise from doing business internationally?

3. National Differences in Political Economy
Political System:
System of National Government
Varies by country on the basis of values and beliefs about
Collectivism and Individualism
Democracy and Totalitarianism

4. Collectivism Primacy of collectivist over individual goals
Emphasis: “good of society”, “common good”
Plato, BC, to Socialists, Marx,
Communists-revolution, Social Democrats-democratic outlook

5. Individualism Individual diversity and private ownership are desirable
Individual freedom over economic and political action
Individual diversity and private ownership are desirable
Private property is more productive whereas communal property receives little care

6. An individual who intends his own gain is “led by an invisible hand to promote an end which was no part of his intention. Nor is it always worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who effect to trade for the public good”
-- Adam Smith,

7. Democracy:
Government is by the people, exercised either directly or through elected representatives
Safeguards hold elected representatives accountable
Totalitarianism: One person/party exercises absolute control over all spheres of human life
Communist totalitarianism (PRC, Vietnam, Laos, N. Korea,Cuba)
Theocratic totalitarianism (Iran, S. Arabia)
Tribal totalitarianism (Zimbabwe, Tanzania)
Right wing totalitarianism

8. Economic Systems
Market economy: what is produced in what quantity determined by supply/demand and through a price system
Command economy: planned by government
Mixed economy: a balance of both of the above
State-Directed economy: state directly influences investment activities of private enterprise through “industrial policy.”

9. National Differences in Political Economy
A Legal System is:
rules - laws - that regulate behavior
process through which
laws are enforced
grievances are redressed
Businesses must observe
Home country laws
Host country laws
International Laws and Treaties
Different Legal Systems
Common Law
Civil Law
Theocratic Law
Dispute resolution
Where to arbitrate?
Validity of contracts and decisions

10. Contract Law A contract specifies
conditions under which an exchange will happen
rights/obligations of parties
It is based on a country’s legal system. Systems differ based on legal tradition
common law system
civil law system

11. Legal Systems
Disputes need to be resolved based on a particular legal system
Which country’s? Home? Host?
UN Convention on Contracts for the International Sale of Goods (GIGS)
International Court of Arbitration of the International Chamber of Commerce in Paris, France

12. Legal Systems and International Business
Property rights
use of a resource
use made of income from resource
enforcement issues
Public vs private action violations

13. Legal Systems and International Business
protection of Intellectual Property
patent: inventors’ exclusive rights to manufacture, use, sell an invention
copyright: same for authors, composers, artists, publishers
trademark: unique design and name, often officially registered
Paris Convention for the Protection of Industrial Property (96 countries)
WTO/GATT

15. Public Action and Corruption
Public Action can violate property rights
Legal mechanisms
Illegal means: corruption
Corruption across countries is tracked by Transparency International
High corruption levels reduce Foreign Direct Investment and economic growth

16. Public Action and Corruption
US foreign corrupt practices act:
illegal for US managers to bribe government officials
OECD Convention on Bribery of Foreign Public Officials in International Business transactions

17. Legal Systems and International Business
Protection of intellectual property
Patents, copyrights, trademarks
Paris convention for the Protection of Industrial Property
TRIPS (WTO)Trade Related Aspects of Intellectual Property
Product safety and product liability
Product safety laws
Criminal / civil liability

18. Differences of Economic Development
GDP per capita: does not factor cost of living differences
Purchasing Power Parity (PPP) index: adjusts per capita GDP by cost-of-living
Human Development Index: life expectancy, literacy, PPP based average incomes

23. Broader Conceptions of Development
Amartya Sen: development
Should be assessed less by material output measures and more by capabilities and opportunities that people enjoy.
Is an economic AND a political process that requires “democratization”
Human Development Index (HDI) = f{life expectancy, educational attainment, PPP based annual incomes sufficient to meet basic needs}

24. Political Economy and Economic Progress
Innovation >> Engine for Growth (products, processes, strategies, organizations, management practices)
Innovation requires:
market economy
strong property rights
the “right” political system
Economic progress is related to Democracy

25. States in Transition Democratic systems spread in the ‘80s and ‘90s
Totalitarian regimes failed to deliver economic progress
Spread of information trough new communication technologies
Emergence of prosperous middle classes

26. States in Transition: Universal or Clashing Civilizations
New realities: Russian reemergence, Zimbabwean racial unrest, China’s resurgence
New world order and terrorism
Fukuyama: “… the end of history…” and harmonious existence
Huntington: new conflicts, e.g., Islamic fundamentalism

29. States in Transition: Spread of Market-Based Systems
Nature of economic transformation
Deregulation: legal changes
Privatization: transfer of state property/industries to private individuals
Auctions
IPOs
Evolution of legal systems
The road of transformation is rocky

30. Implications for International Business
Country’s political, economic, and legal environment
influence attractiveness
raise ethical Issues
Country attractiveness
balance long-term risks with short-term benefits for business
benefits depend on: size, wealth, future economic growth
first mover advantages
identify “star” future economies
costs are affected by:
economic sophistication (may be more costly to operate in LDCs, no infrastructure)
legal framework impact on costs
political payoffs