1. Country Differences in Political Economy

2. Political, Economic, Legal Systems
How do they differ?
How do they influence a country’s ability to achieve meaningful economic progress?
What are the main changes they are undergoing?
How do these affect benefits-costs-risks of doing business in a country?
How does their nature affect ethical issues of doing business in a country?

3. “The System of Government in a Nation”
Political Systems
“The System of Government in a Nation”
Government by the people exercised directly or through elected representatives
Emphasis: “good of society”, “common good”
Individualism
Collectivism
Democratic
Totalitarian
Emphasis: guaranteeing individual freedom and self-expression
One person or political party exercises absolute control over all spheres; opposing parties prohibited 3

4. Democracy: Totalitarianism:
Government is by the people, exercised either directly or through elected representatives (representative democracy)
Safeguards hold elected representatives accountable
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

5. World’s Religious Philosophies6 7 8 1 5 4 3 2 5

6. Economically-Relevant Characteristics of Religious/Spiritual Philosophies
Protestant Christianity: Work ethic, wealth creation, individual freedom
Islamic fundamentalism: Pro free enterprise, right to private property, keep contractual obligations, avoid deception, sin to collect interest
Hinduism: Spiritual progression (reincarnation), aesthetic (non-material) lifestyle, self-reliance, caste system
Buddhism: Spiritual achievement but lack of support for extreme aesthetic behavior or caste system
Confucianism: High moral/ethical conduct, loyalty, reciprocal obligations, honesty 6

7. Economic Systems
REALLY A CONTINUUM, WITH ALL ECO’S MIXED TO SOME DEGREE
Highly Mixed
e.g., Canada… state-owned health-care, electrical, liquor; also France
Pure Command products, quantities, price planned, most business state-owned
Pure Market
not planned by anyone, no restrictions
Market
Mixed
Command
State-Directed - e.g., Japan, S. Korea…
gov’t plays significant role in directing investment via “industrial policy”
State-Directed 7

8. Legal Systems and International Business
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
Bureaucratic Law
Dispute resolution
Where to arbitrate?
Validity of contracts and decisions

9. Legal Systems property rights protection of Intellectual Property
use of a resource, use made of income from resource
enforcement issues, public vs private action violations
protection of Intellectual Property
Patent, copyright, trademarks, industrial property (Paris Convention)
WTO/GATT
product safety and product liability
criminal / civil liability
contract law
document that specifies
conditions under which an exchange will happen
rights/obligations of parties
differences based on legal tradition
common law system
civil law system

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

11. Political-Economic Progress
Trend from totalitarian, command toward democratic, free-market systems
Innovation is engine of growth [for products, processes, strategies, organizations, management practices, countries
Innovation needs:
creativity
market economy
strong property rights
the “right” political system
Economic progress is related to Democracy
IT limits gov’t ability to control citizen access
POLITICAL & ECONOMIC ENVIRON OF A COUNTRY MATTERS BECAUSE
WHEN ECO FREEDOMS RESTRICTED, SO MAY BE FIRM’S ABILITY TO OPERATE EFFICIENTLY
WHEN POLITICAL FREEDOMS RESTRICTED, BOTH ETHICAL AND RISK CONCERNS ARISE
Poor Eco. Performance records of command & control governance…
perhaps because INNOVATION is the root of competitive advantage
SHIFT TOWARD A FREE-MARKET SYSTEM INVOLVES AT LEAST THREE DISTINCT ACTIVITIES (next slide) 11

12. The Migration Path of Economic Transformation
Deregulation
Removal of legal restrictions to free markets.
Privatization
Transfer of state ownership of property into private hands.
Evolution of legal systems
to protect property rights.
The road of transformation is rocky 12

13. Restrictive Trade Policy and Politics
Protecting jobs and industries:
emerging industries.
Increasing exports.
National security.
Retaliation.
International product domination:
Subsidies for “first mover” advantages (New Trade theory).

14. Instruments of Restrictive Trade Policy
Tariffs –Direct fees levied on imports
Subsidies -- payment to a domestic producer, generated from taxes
Import Quotas and Voluntary Export Restraints -- Restriction on the quantity of some good imported into a country
Local Content Requirements -- Requires some specific fraction of a good to be produced domestically
Initially used by developing countries to help shift from assembly to production of goods Developed countries (US) beginning to implement.
Antidumping Policies – Penalties for selling goods in a foreign market below production costs or below fair market value
Administrative Policies -- Bureaucratic rules designed to make it difficult for imports to enter a country

15. Restrictive Trade Instruments: Administrative Policies
Bureaucratic rules designed to make it difficult for imports to enter a country.
Japanese ‘masters’ in imposing such rules.
Tulip bulbs.
Federal Express.

16. Annual Cost to American Consumers for Import Protection
$ Millions

17. The Impact of Privatization
Brazil’s changing views on ownership of businesses has had dramatic effects on economic efficiency and foreign investment
1994: Sales = $253m Loss = $310m
1998(3Q): Sales = $934m Profits = $260.2m
2000 = World’s dominant
provider of regional jets 17

18. Implications for Global Business
Political, economic, and legal environments of a country
influence attractiveness
raise ethical Issues
Attractiveness
balance long-term risks with short-term benefits of doing business in a foreign country
benefits depend on: size, wealth, future economic growth
first mover advantages
identify “star” future economies
costs are affected by:
political payoffs
economic sophistication (may be more costly to operate in LDCs, no infrastructure)
legal framework impact on costs

19. Implications for Global Business
Ethical Issues
human rights
adherence to same standards abroad as at home
product safety
work safety
environmental protection
bribes
Foreign Corrupt Practices Act (1977)
what is unethical is not necessarily illegal

20. The Nature of Risk Political Risk Economic Risk Legal Risk
Likelihood that political forces will cause drastic changes that adversely affect profits and other goals.
Economic Risk
Likelihood that economic mismanagement will cause drastic changes that adversely affect profits and other goals.
Legal Risk
Likelihood that a trading partner will opportunistically break a contract or expropriate property rights.
CHOOSE
You are CEO, $100mil investment in either Russia or Czech Republic:
Both investments promise same long run return
so choice driven by risk considerations:
Assess risks of doing business in each of these nations.
Which investment do you favor and why?
Consider how your views on investments in Indonesia would be influenced by recent bribery scandals in its banking industry (PriceWaterhouse audit of Bank Bali, holding up $43 bil IMF rescue package) plus violent activity in East Timor (perhaps stirring other suppressed provinces to revolt). 20

21. Host Countries and the MNC
Impact of MNC on host countries
Political
Economic
Environmental
Cultural
Impact of host country Governments on MNCs (Political Risk)
Expropriation, Nationalization
Privatization
Constraints on ownership
Intellectual property rights
Offset obligations (profit/capital repatriation, exports, technology transfer)

22. Benefit, Cost, Risk Tradeoff
Costs & risks typically lower in economically advanced and politically stable democratic nations
But benefits dependent upon likely economic growth rates
Tradeoff likely most favorable in politically stable developing nations that have free market systems
GDP/capita and Purchasing Power Parity (PPP) indexes are static.
From int’l perspective, good to look at rate of eco growth and the status of its people
Human Development Index, factors in literacy rates, life expectencies.
Disturbing that some of the worse-off countries are among most heavily populated and rapidly expanding pop’s (most of Africa, India, SW Asia 22

23. CHOOSE
You are a CEO considering a $100mil investment in either Russia or Czech Republic:
Both investments promise same long run return
so choice driven by risk considerations:
Assess risks of doing business in each of these nations.
Which investment do you favor and why?

24. Which country makes best investment site?
Country A & B identical size populations, low labor costs, and good access to world markets
Country A
undeveloped education system, marked stratification between upper & lower classes, dominant religion stresses reincarnation, three major linguistic groups
Country B
well-developed education system, lack of social stratification, group identification culturally valued, dominant religion stresses hard work, only one linguistic group
COUNTRY B
supportive of capitalist mode of production and social harmony
best economic growth prospects (for pushing products)
COUNTRY A
not as conducive to capitalist production & social harmony
likely conflict between labor & management, and between linguistics groups can be expected to lead to social & industrial disruption.
Lack of good educ system and religious leaning toward ascetic behavior can also be expected to work against business goals
may experience economic stagnation 24