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International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
International business 7e   chapter 2
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International business 7e chapter 2

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International business 7e chapter 2

International business 7e chapter 2

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  • Political systems have two dimensions: the degree of collectivism versus individualism, and the degree of democracy versus totalitarianism. These dimensions are interrelated; systems that emphasize collectivism tend towards totalitarian, while systems that place a high value on individualism tend to be democratic. However, a large gray area exists in the middle. It is possible to have democratic societies that emphasize a mix of collectivism and individualism. Similarly, it is possible to have totalitarian societies that are not collectivist.
  • Collectivism refers to a political system that stresses the primacy of collective goals over individual goals. The needs of society as a whole are generally viewed as being more important than individual freedoms. In such circumstances, an individual’s right to do something may be restricted on the grounds that it runs counter to “the good of society” or to “the common good.”
  • The answer is B.
  • The answer is A.
  • Democracy , as originally practiced by several city-states in ancient Greece, is based on a belief that citizens should be directly involved in decision making. Totalitarianism is a form of government in which one person or political party exercises absolute control over all spheres of human life and opposing political parties are prohibited. (Communist, theocratic, tribal, right wing) Totalitarianism denies its citizens all of the constitutional guarantees asserted by representative democracies. The democratic–totalitarian dimension is not independent of the collectivism–individualism dimension. Democracy and individualism go hand in hand, as do the communist version of collectivism and totalitarianism. However, gray areas exist; it is possible to have a democratic state where collective values predominate, and it is possible to have a totalitarian state that is hostile to collectivism and in which some degree of individualism—particularly in the economic sphere—is encouraged. For example, China has seen a move toward greater individual freedom in the economic sphere, but the government is still a totalitarian dictatorship.
  • Most modern democratic states practice representative democracy in which citizens periodically elect individuals to represent them. These elected representatives then form a government, whose function is to make decisions on behalf of the electorate and it is assumed that if elected representatives fail to perform this job adequately, they will be recalled, impeached or voted down at the next election.
  • The answer is C.
  • The answer is C.
  • A market economy is an economy in which all productive activities are privately owned, as opposed to being owned by the state. Production is determined by the interaction of supply and demand and signaled to producers through the price system. For a market to work in this manner there must be no restrictions on supply. A restriction on supply occurs when a market is monopolized by a single firm. In such circumstances, rather than increase output in response to increased demand, a monopolist might restrict output and let prices rise.
  • A command economy is an economy in which the goods and services that a country produces, the quantity in which they are produced, and the prices at which they are sold are all planned by the government. Consistent with the collectivist ideology, the objective of a command economy is for government to allocate resources for “the good of society.” In addition, in a pure command economy, all businesses are state owned.
  • A mixed economy is an economy in which certain sectors of the economy are left to private ownership and free market mechanisms while other sectors have significant state ownership and government planning. India has a mixed economy. Mixed economies were once very common throughout much of the world, although they are becoming much less so. There was a time not too long ago when Great Britain, France, and Sweden were mixed economies, but extensive privatization has reduced state ownership of businesses in all three.
  • The answer is D.
  • Legal systems are the systems of rules or laws that regulate behavior along with the processes by which the laws are enforced and through which redress for grievances is obtained. The legal system of a country is of immense importance to international business. A country’s laws regulate business practice, define the manner in which business transactions are to be executed, and set down the rights and obligations of those involved in business transactions. There are three main types of legal systems – or legal traditions – in use around the world: common law, civil law, and theocratic law. Common law evolved in England over hundreds of years. It is now found in most of Great Britain’s former colonies, including the United States. Common law is based on tradition, precedent, and custom. When law courts interpret common law, they do so with regard to these characteristics. This gives a common law system a degree of flexibility that other systems lack because it allows the judge to interpret the law. Civil law is based on a very detailed set of laws organized into codes. When law courts interpret civil law, they do so with regard to these codes. Over 80 countries, including Germany, France, Japan, and Russia, operate with a civil law system. A civil law system tends to be less adversarial that a common law system, since the judges rely upon detailed legal codes rather than tradition, precedent and custom which they interpret. Judges under a civil law system have less flexibility than those under a common law system. Theocratic law is based on religious teachings. Islamic law is the most widely practiced theocratic legal system in the modern world, although usage of both Hindu and Jewish law persisted into the twentieth century.
  • The answer is B.
  • A contract is a document that specifies the conditions under which an exchange is to occur and details the rights and obligations of the parties involved. Contract law is the body of law that governs contract enforcement. The parties to an agreement normally resort to contract law when one party feels the other has violated either the letter or the spirit of an agreement.
  • Since common law tends to be relatively ill specified, contracts drafted under a common law framework tend to be very detailed with all contingencies spelled out. In civil law systems, contracts tend to be much shorter and less specific because many of the issues typically covered in a common law contract are already covered in a civil code. This suggests that it is more expensive to draw up contracts in a common law jurisdiction, and that resolving contract disputes can be a very adversarial process in common law systems.
  • Property rights refer to a resource over which an individual or business holds a legal title; that is, a resource that they own. Resources include land, buildings, equipment, capital, mineral rights, businesses, and intellectual property (such as patents, copyrights and trademarks). Countries differ significantly in the extent to which their legal system protects property rights.
  • These rights can be violated through private or public action. Private action refers to theft, piracy, blackmail, and the like by private individuals or groups. Public action violations occur when public officials, such as politicians and government bureaucrats, extort income or resources from property holders. This can be done through a number of legal mechanisms such as levying excessive taxation, requiring expensive licenses or permits from property holders, or taking assets into state ownership without compensating the owners, or through illegal means—corruption--by demanding bribes from businesses in return for the rights to operate in a country, industry, or location. The Country Focus on Corruption in Nigeria feature describes the corruption that has characterized Nigeria’s economy over the last 40 years. When the country initially gained its independence from Britain in 1960, expectations were high that Nigeria would become an economic heavyweight in Africa. With abundant natural resources and a large population, it seemed the stage was set for success. However, despite earnings of more than $300 billion from oil sales during the period 1970 to 2000, the country still suffered from extreme poverty, illiteracy, and high debt. Several factors have been blamed for Nigeria’s troubles including political instability and corruption. Teaching Tip: The CIA’s World Factbook on Nigeria { https:// www.cia.gov/cia/publications/factbook/geos/ni.html } provides a wealth of information on the country.
  • In the United States the Foreign Corrupt Practices Act was passed during the 1970s following revelations that U.S. companies had bribed government officials in foreign countries in an attempt to win lucrative contracts. This law makes bribing a foreign government official in order to obtain or maintain business over which that foreign official has authority a violation of United States law, and requires all publicly traded companies to keep audit records. The Act allows facilitating or expediting payments ("grease payments") to expedite or to secure the performance of a routine governmental action. The rationale for this exception is that grease payments are distinguishable from bribes used to obtain or maintain business, since they merely facilitate performance of duties that the recipients are already obligated to perform.
  • The answer is B.
  • The Management Focus: Starbucks Wins Key Trademark Case in China focuses on intellectual property laws in China. When Starbucks entered China in 1999, the company was quickly challenged by a look-alike competitor, Xing Ba Ke. Not only did the name Xing Ba Ke mimic the Starbucks name, but Xing Ba Ke’s stores were virtual replicas of those operated by Starbucks. In 2003, Starbucks sued Xing Ba Ke for trademark violations. In 2006, Starbucks won its case, and Xing Ba Ke was fined $62,000 and ordered to stop using its name. The case was seen as a break through of sorts, a signal that China was finally caving to pressure from other nations and the World Trade Organization to respect intellectual property rights. Today, Starbucks operates over 200 stores in China and expects the market to become second only to the U.S. Teaching Tip: To explore Starbucks in more depth, go to the company’s web site at { http://www.starbucks.com/default.asp?cookie%5Ftest=1 }. Click on “International” to explore individual country sites.
  • The answer is A.
  • Product safety laws set safety standards for products and manufacturing processes. Product liability involves holding a firm and its officers responsible for product safety standards. There are both civil and criminal product liability laws. Civil laws call for payment and monetary damages. Criminal liability laws result in fines or imprisonment. Both civil and criminal liability laws are probably more extensive in the United States than in any other country. Country differences in product safety and liability laws raise an important ethical issue for firms doing business abroad. When product safety laws are tougher in a firm’s home country than in a foreign country and/or when liability laws are more lax, should a firm doing business in that foreign country follow the more relaxed local standards or should it adhere to the standards of its home country?
  • The Nobel prize-winning economist Amartya Sen has argued in his theory of social development that development should be assessed less by material output measures such as GNI per capita/GDP per capita and more by the capabilities and opportunities that people enjoy. According to Sen, development should be seen as a process of expanding the real freedoms that people experience. Hence, development requires the removal of major impediments to freedom: poverty as well as tyranny, poor economic opportunities as well as systematic social deprivation, neglect of public facilities as well as the intolerance of repressive states. In Sen’s view, development is not just an economic process, but it is a political one too, and to succeed requires the “democratization” of political communities to give citizens a voice in the important decisions made for the community. This perspective leads Sen to emphasize basic health care, especially for children, and basic education, especially for women. Sen’s influential thesis has been picked up by the United Nations, which has developed the Human Development Index (HDI) to measure the quality of human life in different nations. The HDI is based on three measures: life expectancy at birth (which is a function of health care), educational attainment (which is measured by a combination of the adult literacy rate and enrollment in primary, secondary, and tertiary education), and whether average incomes, based on PPP estimates, are sufficient to meet the basic needs of life in a country (adequate food, shelter, and health care).
  • A country’s economic development is a function of its economic and political systems. Economic freedom associated with a market economy creates greater incentives for innovation and entrepreneurship than either a planned or a mixed economy. Innovation and entrepreneurship require strong property rights.. Without strong property rights protection, businesses and individuals run the risk that the profits from their innovative efforts will be expropriated, either by criminal elements or by the state. There is debate on the kind of political system that best achieves a functioning market economy with strong protection for property rights. People in the West tend to associate a representative democracy with a market economic system, strong property rights protection, and economic progress. Building on this, we tend to argue that democracy is good for growth. However, some totalitarian regimes have fostered a market economy and strong property rights protection and have experienced rapid economic growth. Four of the fastest-growing economies of the past 30 years—South Korea, Taiwan, Singapore, and Hong Kong—had one thing in common at the start of their economic growth: undemocratic governments! While it is possible to argue that democracy is not a necessary precondition for a free market economy in which property rights are protected, subsequent economic growth often leads to establishment of a democratic regime
  • The answer is D.
  • Two trends are evident: first, during the late 1980s and early 1990s, a wave of democratic revolutions swept the world; second, totalitarian governments collapsed and were replaced by democratically elected governments that were typically more committed to free market capitalism than their predecessors had been. These changes were most dramatic in Eastern Europe, where the collapse of communism bought an end to the Cold War and led to the breakup of the Soviet Union, but similar changes were occurring throughout the world during the same period. Across much of Asia, Latin America, and Africa there was a marked shift toward greater democracy.
  • There are three reasons for the spread of democracy: First, many totalitarian regimes failed to deliver economic progress to the vast bulk of their populations. Second, new information and communication technologies, including shortwave radio, satellite television, fax machines, desktop publishing, and the Internet have broken down the ability of the state to control access to uncensored information. Third, the economic advances of the past quarter century have led to the emergence of increasingly prosperous middle and working classes who have pushed for democratic reforms.
  • There is intense speculation about the future shape of global geopolitics. Francis Fukuyama has argued that “we may be witnessing . . . the end of history as such: that is, the end point of mankind’s ideological evolution and the universalization of Western liberal democracy as the final form of human government.” Fukuyama goes on to say that the war of ideas may be at an end and that liberal democracy has triumphed. Samuel Huntington sees a world that is split into different civilizations, each of which has its own value systems and ideology. In addition to Western civilization, Huntington predicts the emergence of strong Islamic and Chinese civilizations, as well as civilizations based on Japan, Africa, Latin America, Eastern Orthodox Christianity (Russian), and Hinduism (Indian). Huntington also sees the civilizations as headed for conflict, particularly along the “fault lines” that separate them, such as Bosnia (where Muslims and Orthodox Christians have clashed), Kashmir (where Muslims and Hindus clash), and the Sudan (where a bloody war between Christians and Muslims has persisted for decades). Huntington predicts conflict between the West and Islam and between the West and China. He bases his predictions on an analysis of the different value systems and ideology of these civilizations, which in his view tend to bring them into conflict with each other. 6. While some commentators originally dismissed Huntington’s thesis, in the aftermath of the terrorist attacks on the United States on September 11, 2001, Huntington’s views received new attention.
  • More than 30 countries that were in the former Soviet Union or the Eastern European Communist bloc are now changing their economic systems. In addition, countries including Asian states such as China and Vietnam, as well as African countries such as Angola, Ethiopia, and Mozambique are moving toward market based systems. There has been a similar shift away from a mixed economy. Many states in Asia, Latin America, and Western Europe have sold state-owned businesses to private investors (privatization) and deregulated their economies to promote greater competition. The underlying rationale for economic transformation has been the same the world over. In general, command and mixed economies failed to deliver the kind of sustained economic performance that was achieved by countries adopting market-based systems, such as the United States, Switzerland, Hong Kong, and Taiwan.
  • The shift toward a market-based system involves: Deregulation- involves removing legal restrictions to the free play of markets, and allowing the establishment and operations of private enterprises. Privatization- transfers the ownership of state property into the hands of private individuals, frequently by the sale of state assets through an auction. Privatization -is seen as a way to unlock gains in economic efficiency by giving new private owners a powerful ­incentive—the reward of greater profits—to search for increases in productivity, to enter new markets, and to exit losing ones. Without a legal system that protects property rights, and without the machinery to enforce that system, the incentive to engage in economic activity can be reduced substantially.
  • The Country Focus: Building a Market Economy in India feature describes the changes in India’s political economy since the country gained independence from Britain in 1947. Until the early 1990s, India followed a mixed economy system that was characterized by a large number of state-owned enterprises, centralized planning, and subsidies. The system failed to deliver significant growth and in 1991 India’s government implemented a series of reforms designed to foster increased privatization, inward investment, and exports. While initially successful, economic reform stalled by the later 1990s, and poverty was widespread. Teaching Tip : The Indian Embassy maintains a web site that provides useful information about doing business in India. The site is {http://www.indianembassy.org/newsite/Doing_business_In_India/FDI_Policy_Procedures.asp}.
  • The costs of doing business in a country are influenced by political, economic, and legal factors: Political costs include the cost of paying bribes or lobbying for favorable or fair treatment . Economic costs relate primarily to the sophistication of the economic system, including the infrastructure and supporting businesses. It can be more costly to do business in countries with dramatically different product, workplace, and pollution standards, or where there is poor legal protection for property rights.
  • The risks of doing business are determined by a number of political, economic, and legal factors: Political risk is the likelihood that political forces will cause drastic changes in a country's business environment that adversely affects the profit and other goals of a business enterprise. Economic risk is the likelihood that economic mismanagement will cause drastic changes in a country's business environment that adversely affects the profit and other goals of a business enterprise. Legal risk is the likelihood that a trading partner will opportunistically break a contract or expropriate property rights.
  • Transcript

    • 1. InternationalBusiness 7eby Charles W.L. HillMcGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
    • 2. Chapter 2National Differences inPolitical Economy
    • 3. 2-3Political SystemsThe political economy of a nation refers to how thepolitical, economic, and legal systems of a country areinterdependent; they interact and influence each other, andin doing so they affect the level of economic well-being
    • 4. 2-4Political SystemsPolitical system refers to the system of government in anationPolitical systems can be assessed according to twodimensionsthe degree to which they emphasize collectivism asopposed to individualismthe degree to which they are democratic or totalitarian
    • 5. 2-5Collectivism And IndividualismCollectivism refers to a political system that stresses theprimacy of collective goals over individual goalsCollectivism can be traced back to the Greekphilosopher, Plato (427-347 BC), but in modern times,collectivism is equated with socialists
    • 6. 2-6Collectivism And IndividualismSocialists advocate state ownership of the basic meansof production, distribution, and exchangeState-owned enterprises are managed to benefit societyas a whole, rather than individual capitalistsIn the early 20thcentury, socialism split into:Communism – socialism can only be achieved throughviolent revolution and totalitarian dictatorshipSocial democrats – socialism is achieved throughdemocratic means
    • 7. 2-7Classroom Performance SystemA political system that stresses the primacy of collectivegoals over individual goals is calleda) individualismb) collectivismc) a democracyd) a market economy
    • 8. 2-8Collectivism And IndividualismBy the mid-1990s, communism was in retreat worldwideSocial democracy is also retreating as many countriesmove toward free market economiesState-owned enterprises have been privatized
    • 9. 2-9Classroom Performance System_____ believe (s) that socialism can only be achievedthrough violent revolution and totalitarian dictatorship.a) communistsb) social democratsc) social republicansd) Plato
    • 10. 2-10Collectivism And IndividualismIndividualism refers to philosophy that an individualshould have freedom in his own economic and politicalpursuitsIndividualism can be traced to Greek philosopher,Aristotle (384-322 BC), who argued that individual diversityand private ownership are desirableUnder individualism, individual economic and politicalfreedoms are the ground rules on which a society shouldbe basedMore practically, individualism means democratic politicalsystems and free market economies
    • 11. 2-11Democracy And TotalitarianismDemocracy refers to a political system in whichgovernment is by the people, exercised either directly orthrough elected representativesTotalitarianism is a form of government in which oneperson or political party exercises absolute control over allspheres of human life and prohibits opposing politicalpartiesDemocracy is usually associated with individualism andcommunism is usually associated with collectivism andtotalitarianism
    • 12. 2-12Democracy And TotalitarianismPure democracy is based on the belief that citizensshould be directly involved in decision makingMost modern democratic states practice representativedemocracy where citizens periodically elect individuals torepresent them
    • 13. 2-13Classroom Performance SystemA form of government in which one person or political partyexercises complete control over all spheres of human lifeand prohibits opposing political parties isa) a democracyb) a representative democracyc) totalitarianismd) socialism
    • 14. 2-14Democracy And TotalitarianismThere are four major forms of totalitarianism:Communist totalitarianism – found in states where thecommunist party monopolizes powerTheocratic totalitarianism - found in states where politicalpower is monopolized by a party, group, or individual thatgoverns according to religious principlesTribal totalitarianism - found in states where a politicalparty that represents the interests of a particular tribemonopolizes powerRight-wing totalitarianism - permits some individualeconomic freedom, but restricts individual political freedom
    • 15. 2-15Classroom Performance System______ is found in states where political power ismonopolized by a party according to religious principles.a) tribal totalitarianismb) right-wing totalitarianismc) theocratic totalitarianismd) communist totalitarianism
    • 16. 2-16Economic SystemsPolitical ideology and economic systems are connectedIn countries where individual goals are emphasized freemarket economies are likelyThere are three types of economic systems:market economiescommand economiesmixed economies
    • 17. 2-17Market EconomyIn a market economy all productive activities are privatelyowned and production is determined by the interaction ofsupply and demandThe role of government is to encourage free and faircompetition between private producers
    • 18. 2-18Command EconomyIn a command economy, the government plans thegoods and services that a country produces, the quantitythat is produced, and the prices as which they are soldAll businesses are state-owned, and governmentsallocate resources for “the good of society”However, because there is little incentive to control costsand be efficient, command economies tend to stagnate
    • 19. 2-19Mixed EconomyIn a mixed economy, certain sectors of the economy areleft to private ownership and free market mechanisms whileother sectors have significant state ownership andgovernment planningGovernments tend to own firms that are consideredimportant to national security
    • 20. 2-20Classroom Performance SystemIn which type of economic system are all productiveactivities privately owned?a) a mixed economyb) a command economyc) a representative economyd) a market economy
    • 21. 2-21Legal SystemsThe legal system of a country refers to the rules thatregulate behavior along with the processes by which thelaws are enforced and through which redress forgrievances is obtainedThere are three types of legal systems:Common law - based on tradition, precedent, and customCivic law - based on detailed set of laws organized intocodesTheocratic law - law is based on religious teachings
    • 22. 2-22Classroom Performance SystemWhich type of law is based on tradition, precedent, andcustom?a) civil lawb) common lawc) theocratic lawd) contract law
    • 23. 2-23Differences In Contract LawDepending on the legal system, contracts areapproached in different waysA contract is a document that specifies the conditionsunder which an exchange is to occur and details the rightsand obligations of the parties involvedContract law is the body of law that governs contractenforcement
    • 24. 2-24Differences In Contract LawUnder a common law system, contracts tend to be verydetailed with all contingencies spelled outUnder a civil law system, contracts tend to be muchshorter and less specific because many issues are alreadycovered in the civil code
    • 25. 2-25Differences In Contract LawMany countries have ratified the United NationsConvention on Contracts for the International Sale ofGoods (CIGS) which establishes a uniform set of rulesgoverning certain aspects of the making and performanceof everyday commercial contracts between buyers andsellers who have their places of business in differentnations
    • 26. 2-26Property Rights And CorruptionProperty rights refer to the legal rights over the use towhich a resource is put and over the use made of anyincome that may be derived from that resourceCountries differ in terms of how their legal systems defineand protect property rightsProperty rights can be violated through:private actionpublic action
    • 27. 2-27Property Rights And CorruptionPublic action and private action to violate property rightsoccurs when public officials extort income, resources, orthe property itself from property holdersThis can be done legally through mechanisms likeexcessive taxation or illegally through corrupt mechanismslike demanding bribes or blackmailingHigh levels of corruption reduce foreign directinvestment, the level of international trade, and theeconomic growth rate in a country
    • 28. 2-28Property Rights And CorruptionFigure 2.1: Rankings of Corruption by Country 2006
    • 29. 2-29Property Rights And CorruptionThe Foreign Corrupt Practices Act makes it illegal forU.S. companies to bribe foreign government officials toobtain or maintain business over which that foreign officialhas authorityThe OECD has also adopted a convention that obligesmember states to make the bribery of foreign publicofficials a criminal offense
    • 30. 2-30Classroom Performance SystemWhich country is not among the most corrupt countries inthe world?a) Haitib) Indonesiac) Malaysiad) Nigeria
    • 31. 2-31The Protection OfIntellectual Property RightsIntellectual property refers to property that is the productof intellectual activityIntellectual property can be protected using:Patents – exclusive rights for a defined period to themanufacture, use, or sale of that inventionCopyrights – the exclusive legal rights of authors,composers, playwrights, artists, and publishers to publishand disperse their work as they see fitTrademarks – design and names by which merchants ormanufacturers designate and differentiate their products
    • 32. 2-32The Protection OfIntellectual Property RightsProtection of intellectual property rights differs fromcountry to country – when intellectual property protection islax, piracy is commonMany countries are members of the World IntellectualProperty Organization and have signed internationaltreaties to protect intellectual property including the ParisConvention for the Protection of Industrial PropertyTo avoid piracy, firms can stay away from countrieswhere intellectual property laws are lax, file lawsuits, andlobby governments for international property rightsagreements and enforcement
    • 33. 2-33Classroom Performance SystemDesign and names by which merchants or manufacturersdesignate and differentiate their products are calleda) trademarksb) copyrightsc) patentsd) name brands
    • 34. 2-34Product Safety And Product LiabilityProperty safety laws set certain standards to which aproduct must adhereProduct liability involves holding a firm and its officersresponsible when a product causes injury, death, ordamageWhen product safety laws are stricter in a firm’s homecountry than in a foreign country, or when liability laws aremore lax, the firm has to decide whether to adhere to homecountry or host country standards
    • 35. 2-35The Determinants OfEconomic DevelopmentCountries have different levels of economic developmentGross national income (GNI) per person is a commonmeasure of economic developmentPurchasing power parity (PPP) involves adjusting GNI bypurchasing power
    • 36. 2-36Differences InEconomic DevelopmentTable 2.1: Economic Data for Select Countries
    • 37. 2-37Broader Conceptions Of Development:Amartya SenNobel Prize winning economist Amartya Sen argues thatdevelopment should be seen as a process of expanding thereal freedoms that people experienceSo, development requires the removal of majorimpediments to freedom like poverty, tyranny, and neglectof public facilitiesSen emphasizes basic health care and basic educationThe United Nations used Sen’s ideas to develop theHuman Development Index (HDI) which is based on threemeasures: life expectancy at birth, educational attainment,and whether average incomes are sufficient to meet thebasic needs of life in a country
    • 38. 2-38Political Economy AndEconomic ProgressWhat is the relationship between political economy andeconomic progress? Experts agree that:Innovation and entrepreneurship are the engines of long-run economic growthInnovation and entrepreneurship require a marketeconomyInnovation and entrepreneurship require strong propertyrightsIt seems likely that democratic regimes are moreconducive to long-term economic growth than adictatorship, even one of the benevolent kindSubsequent economic growth leads to establishment ofdemocratic regimes
    • 39. 2-39Geography, Education, AndEconomic DevelopmentIn addition to political and economic systems, geographyand education are also important determinants of economicdevelopmentCountries with favorable geography are more likely toengage in trade, and so, be more open to market-basedeconomic systems, and the economic growth they promoteCountries that invest in education have higher growthrates because the workforce is more productive
    • 40. 2-40Classroom Performance SystemWhich is not a primary determinant of a nation’s rate ofeconomic development?a) its political systemb) its economic systemc) its geographyd) its currency
    • 41. 2-41States In TransitionSince the late 1980s, two trends have emerged in thepolitical economy:A wave of democratic revolutions swept the world in thelate 1980s and early 1990sThere has been a move away from centrally planned andmixed economies and toward a more free market economicmodel
    • 42. 2-42The Spread Of DemocracyThere are three main reasons for the spread of democracy:Many totalitarian regimes failed to deliver economicprogress to the vast bulk of their populationsNew information and communication technologies, havebroken down the ability of the state to control access touncensored informationThe economic advances of the past quarter century haveled to the emergence of increasingly prosperous middleand working classes who have pushed for democraticreforms
    • 43. 2-43The Spread Of DemocracyMap 2.5: Political Freedom in 2006
    • 44. 2-44The New World OrderAnd Global TerrorismMany countries may be increasingly difficult places inwhich to do business, either because of their inherentviolent conflict, or because they are part of a civilization thatis in conflict with an enterprise’s home countryTerrorism represents one of the major threats to worldpeace and economic progress in the 21stcentury
    • 45. 2-45The Spread Of Market-Based SystemsCommand and mixed-economies failed to deliver the kindof sustained economic performance that was achieved bycountries adopting market-based systemsAs a result, more countries have shifted toward themarket-based model
    • 46. 2-46The Spread Of Market-Based SystemsMap 2.6: Distribution of Economic Freedom in 2007
    • 47. 2-47The Nature OfEconomic TransformationThe shift toward a market-based system involves:Deregulation – removing legal restrictions to the free playof markets, the establishment of private enterprises, andthe manner in which private enterprises operatePrivatization - transfers the ownership of state propertyinto the hands of private investorsThe creation of a legal system to safeguard propertyrights
    • 48. 2-48Implications OfChanging EconomyMarkets that were formerly off-limits to Western businessare now openChina with its 1.2 billion people and India with itspopulation of almost 1 billion are especially importantHowever, just as the potential gains are large, so are therisksDemocracy may not thrive in some countries
    • 49. 2-49Implications Of ChangingPolitical EconomyFigure 2.3: The World’s Largest National Economies, 2005-2025 (GDP $ billions)
    • 50. 2-50Implications For ManagersThere are two broad implications for managers:the political, economic, and legal systems of a countryraise important ethical issues that have implications for thepractice of international businessthe political, economic, and legal environment of acountry clearly influences the attractiveness of that countryas a market and/or investment site
    • 51. 2-51BenefitsThe long-run benefits of doing business in a country area function of the size of the market, the present wealth ofconsumers in that market, and the likely future wealth ofconsumersBy identifying and investing early in a potential futureeconomic stars, firms may be able to gain first moveradvantages (advantages that accrue to early entrants into amarket) and establish loyalty and experience in a country
    • 52. 2-52CostsThe costs of doing business in a country are influenced bypolitical, economic, and legal factors:Political costs include the cost of paying bribes orlobbying for favorable or fair treatmentEconomic costs relate primarily to the sophistication ofthe economic system, including the infrastructure andsupporting businessesIt can be more costly to do business in countries withdramatically different product, workplace, and pollutionstandards, or where there is poor legal protection forproperty rights
    • 53. 2-53RisksThe risks of doing business are determined by a number ofpolitical, economic, and legal factors:Political risk is the likelihood that political forces willcause drastic changes in a countrys business environmentthat adversely affects the profit and other goals of abusiness enterpriseEconomic risk is the likelihood that economicmismanagement will cause drastic changes in a countrysbusiness environment that adversely affects the profit andother goals of a business enterpriseLegal risk is the likelihood that a trading partner willopportunistically break a contract or expropriate propertyrights
    • 54. 2-54Overall AttractivenessThe overall attractiveness of a country as a potentialmarket and/or investment site for an international businessdepends on balancing the benefits, costs, and risksassociated with doing business in that countryOther things being equal, the benefit-cost-risk trade-off islikely to be most favorable in politically stable developedand developing nations that have free market systems andno dramatic upsurge in either inflation rates or privatesector debt

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