International Business

Chapter 4
International Politics
 Introduction
• Over the past two decades, many countries have seen a dramatic change
in their political systems.
• International politics and economic integration are altering the way
international business is being conducted, and those nations that cannot
keep up with these developments are going to find themselves falling
farther and farther behind.
• In this chapter we will look at the major current economic and political
systems and their impact on the world of international business.
• We will begin by examining political ideologies and economics.

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 Political ideologies and economics
• An ideology is a set of integrated beliefs, theories, and doctrines that helps direct the
actions of a society.
• Political ideology is almost always intertwined with economic philosophy.
• For example, the political ideology of the United States is grounded in the Constitution,
which guarantees the rights of private property and the freedom of choice.
• The two-nation theory advocated by the All India Muslim League is the founding
principle of the Pakistan Movement (i.e. the ideology of Pakistan as a Muslim 
nation-state in the northwestern and eastern regions of India) through the 
partition of India in 1947.
• This has helped lay the foundation for US capitalism. A change in this fundamental
ideology would alter the economic environment of the United States.
• The same is true, for example, for China and the former USSR republics.
• Simply put, the political and economic ideologies of nations help to explain their
national economic policies. 3
 Political systems
• A political system is a system of politics and government.
• It is usually compared to the legal system, economic system, cultural
system, and other social systems.
• However, this is a very simplified view of a much more complex system of
categories involving the views: who should have authority, how religious
questions should be handled, and what the government's influence on its
people and economy should be.
• A political system is a complete set of institutions, interest groups (such as
political parties, trade unions, lobby groups), the relationships between
those institutions and the political norms and rules that govern their
functions (constitution, election law).
• A political system is composed of the members of a social organization
(group) who are in power. 4
 Political systems
• There are two types of political systems: democracy and totalitarianism.
• Democracy is a system of government in which the people, either
directly or through their elected officials, decide what is to be done.
• Good examples of democratic governments include the United States,
Canada, England, and Australia.
• Common features of democratic governments include:
(1) the right to express opinions freely,
(2) election of representatives for limited terms of office,
(3) an independent court system that protects individual property and rights, and
(4) a relatively non-political bureaucracy and defense infrastructure that ensure
the continued operation of the system.

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 Political systems (cont..)
• Totalitarianism is a system of government in which one individual or political
party maintains complete control and either refuses to recognize other parties
or suppresses them.
• A number of types of totalitarianism currently exist.
• Communism is an economic system in which the government owns all property and
makes all decisions regarding the production and distribution of goods and services.
• Another form of totalitarianism is theocratic totalitarianism, in which a religious group
exercises total power and represses or persecutes non-orthodox factions.
• Iran and some of the sheikdoms of the Middle East are good examples.
• Theocratic totalitarianism is “a political system under the control of totalitarian
religious leaders” (wild, 2014 pg76). Religion is used to rule these governments
and the religious readings associated with the religion are said to make the
laws. Countries such as Islamic ran governments practice theocratic
totalitarianism.
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Socialism and communism
• It may be easier to explain what the two have in common.
• The word communism is derived from the word ‘Common”. And we tend to see the
words like ‘community’ and ‘communal’ derived from it as well.
• The word ‘socialism’ is derived from the word society.
• Both ideologies originate from a desire to limit worker exploitation and lower or
eliminate the influence of economic classes in society.
• There are dozens of variations on both communism and socialism based on the different
ways these ideologies are implemented in different countries.
• There is Leninism, Maoism, Stalinism which are essentially versions of Marxism coupled
with various styles of revolution.
• Karl Marx was an economist and philosopher who co-wrote the communist manifesto
among other foundational books on communism.

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Socialism and communism (cont.)
• In short, his theory, centered around the idea that as Europe
transitioned from centralized monarchies to quasi-democratic
capitalist economies, workers were being exploited by those who
owned the means of production.
• So, if you work in a factory or on a farm as many at the time did,
whoever owns the factory or farm is getting more out of the worker
than they are putting in.
• This creates an inherent inequality giving the owners whom Marx
called the Bourgeoise power over the workers called ‘proletariat’.

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Socialism and communism (cont.)
• In Marxism to fix this inequality, society must shift towards a model, where
the proletariat hold this power instead by collectively controlling the means of
production.
• That’s where socialism and communism come into play.
• According to Marx, socialism is a precursor to communism and the next
logical step after capitalism.
• In socialism, a democratic state controls the means of production rather than
having private companies hold ownership.
• Instead of competing with each other as in capitalist society, socialism has
workers contribute as much as they can to the greater good, and then they all
share equality in that good.

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Socialism and communism (cont.)
• Variations of this idea are already popular within capitalist societies in the form of
universal health care of social services like fire departments and schools funded by
taxes.
• While the use of these services is unequal and everyone is equally responsible for
contributing to them based on their ability or level of income. So that’s socialism.
• But once the state controls all the means of production, the next step is collective
ownership.
• Not just of production but all aspects of society and economy, including private
property.
• The intention of abolishing private property is a classless, moneyless, and stateless
society where everyone works toward the same collective goal of being healthy, happy
and free. Everyone does what they can to contribute and takes only what they need in
return.

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Socialism and communism (cont.)
• There are no true communist countries and there never have been.
• Every so-called communist country is actually a socialist country with
the state controlling employment and economy to some degree.
• Even the widely referred to communist Russia was actually called the
Union of Soviet socialist Republics.

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Socialism and communism (cont.)
• In short, Socialism and communism are not altogether different,
rather most schools of economics consider socialism to be a precursor
of communism once the state has enough control over society and
economy.
• But this total control is a major reason that socialist countries struggle
to reach this ideal. Corruption is rampant in countries like the former
USSR, Venezuela, Vietnam and North Korea.
• Largely, due to people in power abusing that power instead of using it
to help the society they control and refusing to give up that power to
the people.

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• Nonetheless, socialist ideals have seen incredible success when paired
with capitalism in countries like Sweden and Canada.
• The human hurdle of overcoming power and greed and government is
the biggest reason we have never seen a true communist country.

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• Industrial Revolution, in modern history, the process of change
from an agrarian and handicraft economy to one dominated by 
industry and machine manufacturing.
• This process began in Britain in the 18th century and from there
spread to other parts of the world.
• Although used earlier by French writers, the term Industrial
Revolution was first popularized by the English economic historian 
Arnold Toynbee (1852–83) to describe Britain’s economic
development from 1760 to 1840.
• Since Toynbee’s time the term has been more broadly applied.

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 A brief treatment of the Industrial Revolution follows.
• The main features involved in the Industrial Revolution were technological, socioeconomic, and
cultural.
• The technological changes included the following: (1) the use of new basic materials, chiefly iron
 and steel,
• (2) the use of new energy sources, including both fuels and motive power, such as coal, the 
steam engine, electricity, petroleum, and the internal-combustion engine,
• (3) the invention of new machines, such as the spinning jenny and the power loom that permitted
increased production with a smaller expenditure of human energy,
• (4) a new organization of work known as the factory system, which entailed increased 
division of labour and specialization of function,
• (5) important developments in transportation and communication, including the steam locomotive,
steamship, automobile, airplane, telegraph, and radio, and
• (6) the increasing application of science to industry.
These technological changes made possible a tremendously increased use of natural resources and
the mass production of manufactured goods.
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 Political ideologies and economics
• Economics is concerned with studying and influencing the economy.
• Politics is the theory and practice of influencing people through the exercise of power, e.g.
governments, elections and political parties.
• In theory, economics could be non-political.
• An ideal economist should ignore any political bias or prejudice to give neutral, unbiased
information and recommendations on how to improve the economic performance of a country.
• Elected politicians could then weigh up this economic information and decide.
• In practice there is a strong relationship between economics and politics because the
performance of the economy is one of the key political battlegrounds.
• Many economic issues are inherently political because they lend themselves to different
opinions.

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Political ideology influencing economic thought
• Many economic issues are seen through the eyes of political beliefs.
• For example, some people are instinctively more suspicious of government
intervention.
• Therefore, they prefer economic policies which seek to reduce government
interference in the economy.
• For example,  supply side economics, which concentrates on privatization and
tax cuts.
• On the other hand, economists may have a preference for promoting greater
equality in society and be more willing to encourage government intervention
to pursue that end.

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• If you set different economists to report on the desirability of income
tax cuts for the rich, their policy proposals are likely to reflect their
political preferences. You can always find some evidence to support
the benefits of tax cuts, you can always find some evidence to support
the benefits of higher tax.
• However, for a politician, they can use those economists and
economic research which backs their political view

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 Political ideologies and economics
• An economic system is a means by which societies or governments
organize and distribute available resources, services, and goods across a
geographic region or country. Economic systems regulate the factors of
production, including land, capital, labor.
• Market-driven economy: An economy in which goods and services are allocated
on the basis of consumer demand.
• Centrally determined economy: An economy in which goods and services are
allocated based on a plan formulated by a committee that decided what is to be
offered.
• Mixed economies: Economic systems characterized by a combination of market-
and centrally-driven planning.

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• Over the last decade or so, an increasing number of countries have
begun moving toward privatization, the process of selling
government assets to private buyers.
• To understand the reasons for, and the economic impact of, this
process, it is helpful to examine both the potential benefits of
government ownership and the advantages of moving to privatization.

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• There are six common, and sometimes interdependent, reasons for
countries to control business assets, a process known as
nationalization.
• These include (1) promoting economic development, such as by
coordinating the assets of many businesses into one overall master
plan; (2) earning profits for the national treasury; (3) preventing
companies from going bankrupt and closing their doors; (4) enhancing
programs that are in the national interest; (5) increasing the political
or economic control of those in power; and (6) ensuring goods and
services to all citizen regardless of their economic status.

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 Privatization
• The opposite situation, privatization can take two forms. The most common form is Divestiture, in which the
government sells its assets.
• The other is contract management, in which the government transfers operating responsibility of an industry
without transferring the legal title and ownership. The major trend today is toward divestiture.
• Some of the primary reasons for privatization are:
• (1) it is more efficient to have the goods and services provided by private business than by government-run
companies;
• (2) a change in the political culture brings about a desire to sell these assets;
• (3) the company has been making money, and the government feels there is more to be gained by selling now
than by holding on;
• (4) the purchase price can be used to reduce the national debt;
• (5) the company is losing money, and the government has to assume the losses out of the national treasury;
• (6) the company needs research and development funds in order to maintain a competitive stance, and it is
unwilling to make this investment; and
• (7) international funding agencies are making assistance to the country conditional on a reduction in the size
of
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 Economic integration
• The establishment of transnational rules and regulations that enhance
economic trade and cooperation among countries.
• At one extreme, economic integration would result in one worldwide
free trade market in which all nations had a common currency and
could export anything they wanted to any other nation.
• At the other extreme would be a total lack of economic integration, in
which nations were self-sufficient and did not trade with anyone.

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 Economic integration (cont.)
• The concept of economic integration is attractive, but there are many
implementation problems.
• In particular, it requires that the participants agree to surrender some of
their national sovereignty, such as the authority to set tariffs and quotas.
• For example, if the United States and the EU agree to allow free trade of
agricultural products, neither country can restrict the other’s right to
export these commodities.
• So although free trade may lead to lower prices, those who are unwilling
to give up the right to control goods being imported into their country
may well be opposed to it.

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 Trade creation and diversion
• Before examining economic integration in more depth, it is important
to realize that the agreement of countries to integrate their economies
will bring about a shift in business activity. This shift can result in trade
creation as well as trade diversion.
• Trade creation: A process in which members of an economic integration group
begin to focus their efforts on those goods and services for which they have a
comparative advantage and start trading more extensively with each other.
• Trade diversion: A process in which members of an economic integration group
decreases trade with non-member countries in favor of trade with each other.

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Levels of economic integration
• Free Trade Area: barriers to trade (such as tariffs) among member
countries are removed (e.g. NAFTA).
• Customs Union: is a form of economic integration in which all tariffs
between member countries are eliminated and a common trade policy
toward non-member countries is established. This policy often results in a
uniform external tariff structure. Under this arrangement, a country
outside the union will face the same tariff on exports to any member
country receiving the goods.
• Common Market: elimination of trade barriers trade policy and mobility
of factors of production among member countries, a common external
among member countries.

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 Levels of economic integration (cont.)
• Economic union: A deep form of integration characterized by free
movement of goods services, and factors of production among member
countries and full integration of economic policies.
• Political union: An economic union in which there is full economic
integration, unification of economic policies and a single government.

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References
• international business by Alan Rugman
• https://www.business-to-you.com/porter-diamond-model/