2. Chapter 2 National Differences in Political Economy

3. 2- 3 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 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?

4. 2- 4 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 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

5. 2- 5 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Collectivism Primacy of collectivist over individual goals Emphasis: “good of society”, “common good” Plato,427-347 BC, to Socialists, Marx, 1818 - 83 Communists-revolution, Social Democrats-democratic outlook

6. 2- 6 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Individualism 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

7. 2- 7 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Without private property, no man will be seen to be liberal and no man will ever do any act of liberality; for only in the use of money is liberality made effective -- Aristotle, 384-322 BC

8. 2- 8 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. -The only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others. His own good, either physical or moral, is not a sufficient warrant - - John Stuart Mill, 1806-1873

9. 2- 9 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. -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, 1723-1790

10. 2- 10 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 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

11. 2- 11 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 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.”

12. 2- 12 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 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

13. 2- 13 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 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

14. 2- 14 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 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

15. 2- 15 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Legal Systems and International Business Property rights use of a resource use made of income from resource enforcement issues Public vs private action violations

16. 2- 16 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 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

17. 2- 17 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

18. 2- 18 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 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

19. 2- 19 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 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

20. 2- 20 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 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

21. 2- 21 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 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 Differences of Economic Development

22. 2- 22 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

23. 2- 23 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

24. 2- 24 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

25. 2- 25 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

26. 2- 26 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Amartya Sen: development -Should be assessed by material output measures -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} Broader Conceptions of Development

27. 2- 27 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 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 Political Economy and Economic Progress

28. 2- 28 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 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

29. 2- 29 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 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

30. 2- 30 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

31. 2- 31 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

32. 2- 32 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 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

33. 2- 33 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 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