Political Economy and Ethics

POLITICAL ECONOMY and ETHICS
Copyright © 2016 Pearson Education Limited Chapter 2-1

This Chapter
This chapter first explores the political economy of nations.

We examine the main types of political, economic, and legal
systems in practice around the world.
We then examine key legal issues for international firms and
explore the importance of ethical behavior and social
responsibility.

Learning Objectives
1. Describe the key features of each form of political system.

2. Explain how the three types of economic systems differ.
3. Summarize the main elements of each type of legal system.
4. Outline the global legal issues facing international firms.
5. Describe the main issues of global ethics and social responsibility.

PepsiCo’s Global Challenge
Vietnamese Business Culture
 Government Involvement
 Avoidance of Confrontation

PepsiCo as an operating internationally
PepsiCo must carefully navigate unfamiliar political,

economic, and legal systems.
PepsiCo’s CEO, Indra Nooyi, is moving the company’s
product line in healthier directions. She introduced the
motto “Performance with Purpose” to reflect how the
company is transforming its global businesses.
She wants the company to balance its drive for profits
with making healthier snacks, decreasing its impact on
the environment, and taking care of its workforce.
Born and raised in India, Nooyi believes it is essential
that “we use corporations as a productive player in
addressing some of the big issues facing the world.”
Nooyi
Nooyi also helped spark “green” initiatives at PepsiCo.
She has proved that investments in water- and heat-
related conservation projects can be worthy endeavors.
In addition to their environmental benefits, those
projects now save the company $55 million annually.
Nooyi says, “Companies today are bigger than many
economies. We are little republics. We are engines of
efficiency. If companies don’t do [responsible] things,
who is going to?” As you read this chapter, consider how
companies adapt to political, economic, and legal
systems worldwide while fulfilling their ethical and
social responsibilities.
Political Systems
Political System: Structures, processes, and activities by which a

nation governs itself
Totalitarianism Pluralism Anarchism
Both private and public

groups need to balance
each other’s power
Every aspect of Only individuals and
people’s lives must be private groups can
controlled to preserve order preserve personal liberties

Political System
A country’s political system is rooted in the history and culture of

its people. Factors such as population, age and race composition,
and per capita income influence a country’s political system.
We can arrange the world’s three political ideologies on a
horizontal scale, with one on either end and one in the middle.
At the one extreme lies anarchism—the belief that only
individuals and private groups should control a nation’s political
activities.
An anarchist views public government as unnecessary and
unwanted because it tramples personal liberties.

Political System
At the other extreme lies totalitarianism—the belief that every aspect of
people’s lives must be controlled for a nation’s political system to be
effective.
Totalitarianism disregards individual liberties and treats people as slaves of
the political system. The state reigns supreme over institutions such as
family, religion, business, and labor.
Totalitarian political systems include authoritarian regimes such as
communism and fascism.
Between those two extremes lies pluralism—the belief that both private
and public groups play important roles in a nation’s political activities. Each
group (consisting of people with different ethnic, racial, class, and lifestyle
backgrounds) serves to balance the power that can be gained by the others.
Pluralistic political systems include democracies, constitutional
monarchies, and some aristocracies.
Chapter 2-10
Political Systems
Totalitarianism
Totalitarian Governments
Imposed Authority
Lack of Constitutional Guarantees
Restricted Participation

Political Systems
Totalitarianism (Cont.) see underline NOTE
Theocratic Communist
Totalitarianism Totalitarianism
Totalitarianism
Secular Tribal
Totalitarianism Totalitarianism
Right-Wing
Totalitarianism

Theocratic Totalitarianism: A political system in which a country’s
religious leaders are also its political leaders is called a theocracy.
The religious leaders enforce a set of laws and regulations based on

religious beliefs. A political system under the control of totalitarian
religious leaders is called theocratic totalitarianism.
Secular Totalitarianism: A political system in which political

leaders rely on military and bureaucratic power is called secular
totalitarianism. It takes three forms: communist, tribal, and right-
wing.
Communist totalitarianism (or simply communism) argues that social and
economic equality can be obtained only by establishing an all-powerful
Communist party and by granting the government ownership and control
over all types of economic activity.

Tribal totalitarianism is a system whereby one ethnic group
imposes its will on other ethnic groups within a nation.

Right-wing totalitarianism is a system whereby government
endorses private ownership of property and a market-based
economy, but grants few (if any) political freedoms.

Political Systems
Democracy
Democracy: Political system in

which government leaders are elected
directly by the wide participation of
the people or by their representatives
Representative Democracy:
Democracy in which citizens elect
individuals from their groups to
represent their political views

Political Systems
Democracy (Cont.)
Freedom of Expression
Representative Democracy
Periodic Elections
Full Civil and Property Rights
Minority Rights
Nonpolitical Bureaucracies

Economic Systems
Figure 3.1
Range of Economic Systems

Economic Systems
A country’s economic system consists of the structure and

processes that it uses to allocate its resources and conduct its
commercial activities. Every economy displays a tendency toward
individualist or collectivist economic values that reflects the
nation’s culture.
We can arrange national economies on a horizontal scale that is
anchored by two extremes.
At one end of the scale is a theoretical pure centrally planned
economy, at the other end is a theoretical pure market economy,
and in between is a mixed economy (see Figure 3.1).

Economic Systems
Marked Economy: In a market economy, the majority of a nation’s

land, factories, and other economic resources are privately owned,
either by individuals or businesses. This means that who produces
what and the prices of products, labor, and capital in a market
economy are determined by the interplay of two forces:
Supply: the quantity of a good or service that producers are willing
to provide at a specific selling price
Demand: the quantity of a good or service that buyers are willing
to purchase at a specific selling price

Centrally Planned Economy
Origin and Decline –SEE UNDERLINE
Origin Decline
Rooted in Collectivism Failure to create economic

value
Popularized by Karl Marx in
the nineteenth century Failure to provide incentives
Implemented in the twentieth Failure to achieve rapid growth
century by means of violent
upheaval Failure to satisfy consumer
needs

Mixed Economy
Origin and Decline
Goals Decline
Low unemployment and Lack of accountability, rising

poverty costs, and slow economic
growth
Steady economic growth
Equitable distribution of wealth
Move toward market-based
systems
Move toward privatization

Mixed Economy
Origin and Decline
Mixed Economy: Economic system in which land, factories, and

other economic resources are rather equally split between private
and government ownership.
In a mixed economy, ownership of economic resources is split
rather evenly between private and government entities.
Government controls the economic sectors important to national
security and stability and provides generous unemployment
programs.
Mixed economies strive for low unemployment and poverty, steady
economic growth, and an equitable distribution of wealth.

Mixed Economy
Many mixed economies are hampered by government ownership

that is less efficient than private ownership, and hurt by higher
prices and taxes that lower living standards.
Many mixed economies are remaking themselves to more closely
resemble free markets. When assets are owned by the government,
there seems to be less incentive to eliminate waste or to practice
innovation. Extensive government ownership on a national level
tends to result in a lack of accountability, rising costs, and slow
economic growth.
Privatization: Policy of selling government-owned economic
resources to private operators.

Market Economy
Origin, Essence, and Features
Origin and Essence Features
Private ownership Free choice

Alternative purchase options
Interplay of two forces: supply
and demand Free enterprise
Firms choose products and
Emphasis on individualism markets
Laissez-faire economics Price flexibility
Economic freedom Prices follow supply and
demand

Market Economy
Marked Economy: In a market economy, the majority of a nation’s land,

factories, and other economic resources are privately owned, either by
individuals or businesses. This means that who produces what and the
prices of products, labor, and capital in a market economy are determined
by the interplay of two forces:
Supply: the quantity of a good or service that producers are willing to
provide at a specific selling price
Demand: the quantity of a good or service that buyers are willing to
purchase at a specific selling price
Market economics is rooted in the belief that individual concerns should
be placed above group concerns.

Market Economy
To function smoothly and properly, a market economy requires three

things: free choice, free enterprise, and price flexibility:
Free choice, which gives individuals access to alternative purchase
options.
Free enterprise, which lets companies decide what to produce and which
markets to compete in.
And price flexibility, which allows most prices to rise and fall according
to the forces of supply and demand.
The essence of market economies is grounded in freedom: free choice,
free enterprise, free prices, and freedom from direct intervention by
government.
Market Economy
Government’s Role
Government’s Role
Enforce antitrust laws
Preserve property rights
Provide fiscal and monetary stability
Preserve political stability

Government’s Role
In a market economy, government is to enforce antitrust (antimonopoly)

laws. This encourages the development of industries with many
competing businesses, and prevents trade-restraining monopolies that can
raise prices and exploit consumers.
Governments in market economies also strive to preserve property
rights.
Strong property rights protection ensures that people and businesses
enjoy the fruits of their labor.
This encourages individuals and firms to create and to invest in new
technologies because their efforts are rewarded by the income that these
technologies generate.
.

Government’s Role
The government in a market economy is to provide a stable fiscal and

monetary environment.
This is achieved through effective management of fiscal and monetary
policies.
Stability reduces overall risk in an economy, improves business
forecasts, and helps control inflation and unemployment rates.
Finally, government in a market economy is to preserve political
stability.
This encourages the smooth operation of a market economy.
Political stability promotes economic growth, reduces worries over
political risk, and improves chances for business survival.

Legal Systems
Legal System: Set of laws and regulations, including the processes

by which a country’s laws are enacted and enforced and the ways in
which its courts hold parties accountable for their actions.
A country’s political system also influences its legal system.
Legal systems are frequently influenced by political moods and
upsurges of nationalism.

Legal Systems (Cont.)
Common Law
Tradition: A country’s legal history
Precedent: Past cases that have come before the courts
Usage: How laws are applied in specific situations
Civil Law
Legal code
Theocratic Law
Based on religious teachings

Global Legal Issues
Intellectual Property
Figure 3.2
Intellectual Property Business Software Piracy
Property Rights
Industrial Property
Patents
Trademarks
Copyright

Intellectual Property: Property that results from people’s
intellectual talent and abilities is called intellectual property. It
includes graphic designs, novels, computer software, machine-tool
designs, and secret formulas, such as that for making Coca-Cola.
Most national legal systems protect property rights—the legal
rights to resources and any income they generate.
Globally, business software piracy averages around 42 percent and
costs business software makers nearly $59 billion annually. Figure
3.2 shows piracy rates for some nations.

Industrial property includes patents and trademarks, which are
often a firm’s most valuable assets.
Patent: Property right granted to the inventor of a product or
process that excludes others from making, using, or selling the
invention.
Trademark: Property right in the form of words or symbols that
distinguish a product and its manufacturer.
Copyright: Property right giving creators of original works the
freedom to publish or dispose of them as they choose.

Global Legal Issues (Cont.)
Product Safety and Liability

Responsibility for damage, injury, or death
Taxation
Income, sales, consumption, and VAT
Antitrust Regulations
Prevent market sharing, price fixing, and unfair advantage

Ethics and Social Responsibility
Corporate Social
Responsibility
(CSR)
Traditional Risk
Strategic CSR
Philanthropy Management

CSR
Businesses are expected to exercise corporate social

responsibility—the practice of going beyond legal obligations to
actively balance commitments to investors, customers, other
companies, and communities.
Corporate social responsibility (CSR) includes a wide variety of
activities, including giving to the poor, building schools in
developing countries, and protecting the global environment.

CSR
We can think of CSR as consisting of three layers of activity.
The first layer is traditional philanthropy, whereby a corporation
donates money and, perhaps, employee time toward a specific social
cause.
The second layer is related to risk management, whereby a
company develops a code of conduct that it will follow in its global
operations and agrees to operate with greater transparency.
The third layer is strategic CSR, in which a business builds social
responsibility into its core operations to create value and build
competitive advantage.

Philosophies of Ethics and Social R esponsibility
Philosophies
Cultural Righteous
Friedman Utilitarian
Relativist Moralist
View View
View View

Philosophies of Ethics and Social Responsibility
There are four philosophies of ethics and social responsibility.

The Friedman view argues that a company’s sole responsibility is to
maximize profits for its owners (or shareholders) while operating
within the law.
This view has lost popularity because it argues that companies do
NOT have “social” obligations.
The cultural relativist view says that a company should adopt local
ethics wherever it operates because right and wrong are determined
within a cultural context.

Philosophies of Ethics and Social Responsibility
The righteous moralist view argues that a company should maintain

its home-country ethics wherever it operates because its ethics are
superior.
If headquarters instructs a subsidiary manager to refrain from
bribing local officials, it imposes its righteous moralist view on the
local manager.
The utilitarian view says that a company should behave in a way
that maximizes “good” outcomes and minimizes “bad” outcomes
wherever it operates.
A utilitarian manager will take the action that produces the best
outcome for all affected parties.
Key Issues
Bribery and Corruption

Labor Conditions and Human Rights
Fair Trade Practices
Environment

Key Issues
Although businesses can create policies regarding ethics and social

responsibility, issues arise on a daily basis that can cause dilemmas for
international managers.
Socially responsible businesses fight bribery and corruption because it

misallocates resources, hurts economic development, and damages the
integrity of free markets.

Key Issues
Responsible businesses monitor their own behavior and that of their

employees and business partners to uphold good labor conditions and
human rights.
They may also promote fair trade practices—which involve companies
working with suppliers in more equitable, meaningful, and sustainable
ways.
Finally, companies today pursue “green” initiatives to reduce their toll
on the environment and to reduce operating costs and boost profit
margins.

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POLITICAL ECONOMY and ETHICS

Copyright © 2016 Pearson Education Limited Chapter 2-1

This chapter first explores the political economy of nations.

Copyright © 2016 Pearson Education Limited Chapter 2-2

1. Describe the key features of each form of political system.

Copyright © 2016 Pearson Education Limited Chapter 3-3

Copyright © 2016 Pearson Education Limited Chapter 3-4

PepsiCo must carefully navigate unfamiliar political,

Political System: Structures, processes, and activities by which a

Totalitarianism Pluralism Anarchism

Both private and public

Copyright © 2016 Pearson Education Limited Chapter 3-8

A country’s political system is rooted in the history and culture of

Copyright © 2016 Pearson Education Limited Chapter 2-9

Lack of Constitutional Guarantees

Copyright © 2016 Pearson Education Limited Chapter 3-11

Copyright © 2016 Pearson Education Limited Chapter 3-12

The religious leaders enforce a set of laws and regulations based on

Secular Totalitarianism: A political system in which political

Copyright © 2016 Pearson Education Limited Chapter 1-14

Copyright © 2016 Pearson Education Limited Chapter 1-15

Copyright © 2016 Pearson Education Limited Chapter 1-16

Democracy: Political system in

Copyright © 2016 Pearson Education Limited Chapter 3-17

Full Civil and Property Rights

Copyright © 2016 Pearson Education Limited Chapter 3-18

Copyright © 2016 Pearson Education Limited Chapter 3-19

A country’s economic system consists of the structure and

Copyright © 2016 Pearson Education Limited Chapter 2-20

Marked Economy: In a market economy, the majority of a nation’s

Copyright © 2016 Pearson Education Limited Chapter 2-21

Rooted in Collectivism Failure to create economic

Copyright © 2016 Pearson Education Limited Chapter 3-22

Low unemployment and Lack of accountability, rising

Copyright © 2016 Pearson Education Limited Chapter 3-23

Mixed Economy: Economic system in which land, factories, and

Copyright © 2016 Pearson Education Limited Chapter 2-24

Many mixed economies are hampered by government ownership

Copyright © 2016 Pearson Education Limited Chapter 2-25

Origin and Essence Features

Private ownership Free choice

Copyright © 2016 Pearson Education Limited Chapter 3-26

Marked Economy: In a market economy, the majority of a nation’s land,

Copyright © 2016 Pearson Education Limited Chapter 2-27

To function smoothly and properly, a market economy requires three

Enforce antitrust laws

Preserve property rights

Provide fiscal and monetary stability

Preserve political stability

Copyright © 2016 Pearson Education Limited Chapter 3-29

In a market economy, government is to enforce antitrust (antimonopoly)

Copyright © 2016 Pearson Education Limited Chapter 2-30

The government in a market economy is to provide a stable fiscal and

Copyright © 2016 Pearson Education Limited Chapter 2-31

Legal System: Set of laws and regulations, including the processes

Copyright © 2016 Pearson Education Limited Chapter 3-32

Copyright © 2016 Pearson Education Limited Chapter 3-33

Copyright © 2016 Pearson Education Limited Chapter 3-34

Copyright © 2016 Pearson Education Limited Chapter 2-35

Copyright © 2016 Pearson Education Limited Chapter 2-36