Learning Objectives • Understand how the political systems of countries differ. • Understand how the economic systems of countries differ. • Understand how the legal systems of countries differ. • Explain the implications for management practice of national differences in political economy. Introduction International business more complicated than domestic • Countries vary in economic development • Cultural, education, and skill levels vary • The political, economic, and legal systems are known as the political economy • Societal culture affects the political economy and the political economy shapes societal culture Political System • The political economy of a nation refers to how the political, economic, and legal systems of a country are interdependent
• they interact and influence each other
• they affect the level of economic well being in the nation
Political System • Political system refers to the system of government in a nation • Assessed according to • the degree to which the country emphasizes collectivism as opposed to individualism • the degree to which the country is democratic or totalitarian Collectivism • Collectivism and Individualism • Collectivism: a system that stresses the primacy of collective goals over individual goals • Can be traced to the Greek philosopher Plato • Today, socialists support collectivism • When collectivism is emphasized, the needs of the society as whole are generally viewed as being more important than individual freedoms Socialism • Modern socialists trace their roots to Karl Marx • Advocated state ownership of the basic means of production, distribution, and exchange • The state then manages the enterprises for the benefit of society as a whole Socialism (cont’) • In the early 20th century, socialism split into communists and social democrats: • Communists - socialism could only be achieved though revolution and totalitarian dictatorship • Social democrats worked to achieve the same goals by democratic means • Many state-owned enterprises failed to succeed, and many nations implemented privatization programs Individualism • Individualism: suggests individuals should have freedom over their economic and political pursuits • Can be traced to Aristotle who argued that individual diversity and private ownership are desirable • Individualism stresses: • Individual freedom and self-expression • Letting people pursue their own self-interests to achieve the best overall good for society • Democratic systems and free markets Democracy • Democracy refers to a political system in which government is by the people, exercised either directly or through elected representatives • usually associated with individualism • pure democracy is based on the belief that citizens should be directly involved in decision making • most modern democratic states practice representative democracy where citizens periodically elect individuals to represent them Totalitarianism • Totalitarianism is a form of government in which one person or political party exercises absolute control over all spheres of human life and prohibits opposing political parties 1) Communist totalitarianism found in states where the communist party monopolizes power 2) Theocratic totalitarianism found in states where political power is monopolized by a party, group, or individual that governs according to religious principles 3) Tribal totalitarianism found in states where a political party that represents the interests of a particular tribe monopolizes power. 4) Right wing totalitarianism permits some individual economic freedom, but restricts individual political freedom Pseudo-Democracies • Many nations lie between pure democracy and complete totalitarianism • Authoritarian elements capture much of the machinery of state and use this in an attempt to deny basic political and civil liberties • Russia under Vladimir Putin Economic Systems • Political ideology and economic systems are connected • There are three types of economic systems: the market economy, the command economy, and the mixed economy • A market-based economic system is likely in countries where individual goals are given primacy over collective goals • State-owned enterprises and restricted markets are common in countries where collective goals are dominant Market Economy • In a pure market economy, the goods and services that a country produces, and the quantity in which they are produced is determined by supply and demand • Supply must not be restricted by monopolies • The role of government is to encourage free and fair competition between private producers Command Economy • In a pure command economy, the goods and services that a country produces, the quantity in which they are produced, and the price at which they are sold are all planned by the government • All businesses are state-owned, and have little incentive to control costs and be efficient • Because there is no private ownership, there is little incentive to better serve consumer needs • Dynamism and innovation are absent North Korea’s Command Economy • Kim Jong-un, the leader of the Democratic People's Republic of Korea, inspecting a factory. North Korea functions as a centralized, single party, and tightly controlled dictatorial command economy. Mixed Economy • A mixed economy includes some elements of a market economy and some elements of a command economy • Certain sectors of the economy are left to private ownership and free market mechanisms while other sectors have significant state ownership and government planning • Governments tend to own firms that are considered important to national security Legal Systems • The legal system of a country refers to the rules, or laws, that regulate behavior, along with the processes by which the laws of a country are enforced and through which redress for grievances is obtained • A country’s legal system is important because laws: • Regulate business practice • Define the manner in which business transactions are to be executed • Set down the rights and obligations of those involved in business transactions Legal Systems (cont’) Different Legal Systems • Common law: based on tradition, precedent, and custom • Found in most of Great Britain’s former colonies, including the United States • Civil law: based on detailed set of laws organized into codes • Found in more than 80 countries, including Germany, France, Japan, and Russia • Theocratic law: based on religious teachings • Islamic law is the most widely practiced Differences in Contract Law • They approach contract law (the body of law that governs contract enforcement) differently • A contract specifies the conditions under which an exchange is to occur and details the rights and obligations of the parties involved • In a common law state, contracts are very detailed with all contingencies spelled out • In a civil law state, contracts are shorter and much less specific Differences in Contract Law (cont’) • The United Nations Convention on Contracts for the International Sales of Goods (CISG) establishes a uniform set of rules governing certain aspects of the making and performance of everyday commercial contracts between sellers and buyers who have their places of business in different nations • Countries that adopt CISG signal to other nations that they will treat the Convention’s rules as part of their law Property Rights and Corruption • Property rights: the legal rights over the use to which a resource is put and over the use made of any income that may be derived from that resource • Private action: theft, piracy, blackmail, and the like by private individuals or groups • Public action: public officials extort income or resources from property holders • Excessive taxation, requiring expensive licenses or permits from property holders, or taking assets into state ownership without compensating the owners Property Rights and Corruption (cont’) • Corruption is present in all countries to some degree, however when a country has a high level of corruption: • Foreign direct investment falls • International trade falls • Economic growth falls Source: Constructed by the author from raw data from Transparency International, Corruption Perceptions Index 2015. 2018 Rankings of Corruption by Country, Legal Systems • The Foreign Corrupt Practices Act limits corruption in the U.S • It is illegal to bribe a foreign government official in order to obtain or maintain business over which the foreign official has authority • All publicly traded companies must keep detailed records so that it is clear whether a violation of the act has occurred • Facilitating or expediting payments to secure the performance of routine government actions are permitted The Protection of Intellectual Property • Intellectual property: property that is the product of intellectual activity • Patents: give the inventor exclusive rights to the manufacture, use, or sale of that invention • Copyrights: exclusive legal rights of authors, composers, playwrights, artists, and publishers to publish and dispose of their work as they see fit • Trademarks: designs and names, often officially registered, by which merchants or manufacturers designate and differentiate their products The Protection of Intellectual Property (cont’) • The protection of intellectual property rights differs greatly from country to country • 185 nations are members of the World Intellectual Property Organization • Paris Convention for the Protection of Industrial Property: agreement signed by 170+ countries to protect intellectual property rights • Enforcement is lax in many nations especially in China and Thailand The Protection of Intellectual Property (cont’) Response to violations of intellectual property • Lobbying governments for better laws and enforcement of those laws • Trade Related Aspects of Intellectual Property Rights (TRIPS) - requires WTO members to grant and enforce patents lasting at least 20 years and copyrights lasting 50 years • Filing lawsuits • Avoiding countries with poor intellectual property laws Product Safety and Product Liability • Product safety laws set certain safety standards to which a product must adhere • Product liability involves holding a firm and its officers responsible when a product causes injury, death, or damage • Liability laws are usually least extensive in less developed countries • Firms must decide whether to adhere to the standards of the home country or the standards of the host country Focus on Managerial Implications The macro environment influences market attractiveness • The political, economic, and legal systems of a country raise important ethical issues that have implications for the practice of international business • The political, economic, and legal environments of a country clearly influence the attractiveness of that country as a market and/or investment site • A democratic country with a market-based economy, protection of property rights, and limited corruption is a more attractive place to do business. REFERENCES
Hill, C. (2021), International Business: Competing in the Global Marketplace. (13th
