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Mgnt4670 Ch 2 Differences In Political Economy

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    • 1. National Differences in Political Economy Chapter 2
    • 2. POLITICAL ECONOMY
      • Political Economy: What does it involve?
      • How political factors influence the functioning of an economic system.
      • A term that stresses that the political, economic, and legal systems of a country are interdependent; they interact and influence each other, and in doing so they affect the level of economic well-being.
    • 3. DIFFERENCES: POLITICAL ECONOMY
      • THE POLITICAL ECONOMY is made up collectively of:
      • POLITICAL SYSTEMS
      • ECONOMIC SYSTEMS
      • LEGAL SYSTEMS
    • 4. POLITICAL SYSTEMS
      • Political system: system of government in a country
      • Political systems can be assessed according to two dimensions:
        • Collectivism vs. Individualism
        • Democracy vs. Totalitarianism
    • 5. POLITICAL SYSTEMS
      • COLLECTIVISM VS. INDIVIDUALISM
      • Needs of many Interests of individuals
      • outweigh needs of take precedence over
      • the few. needs of the State.
    • 6. POLITICAL SYSTEMS
      • Collectivism:
        • Roots: Plato, Marx
        • Political system expressed in: Socialism
          • Communism:
          • (Revolution and Totalitarian Dictatorship)
          • Social Democracy
          • (State-owned enterprises run for public good not profit)
      • Individualism:
        • Roots: Socrates, Hume, Adam Smith, Declaration of Independence
        • Political system expressed in: Democracy
    • 7. POLITICAL SYSTEMS
      • DEMOCRACY VS. TOTALITARIANISM
      • A Political Continuum with many degrees in between:
      • Democracy Totalitarianism
    • 8. POLITICAL SYSTEMS
      • DEMOCRACY – the People are the State.
        • Individual freedom of expression
        • Free media
        • Elections
        • Adult Suffrage
        • Limited Terms for Officials
        • Fair and Independent courts
        • Non-Political State Bureaucracy, Military
        • Relative Access to State Information
      • TOTALITARIANISM
        • One person/party exercises absolute control over all spheres of human life (competing political parties are banned)
        • Communist totalitarianism
        • Theocratic totalitarianism
        • Tribal totalitarianism
        • Right wing totalitarianism
    • 9. ECONOMIC SYSTEMS
      • Connection between political ideology and economic systems
        • Countries where individual goals are given priority, free market economic systems are fostered.
        • Countries where collective goals are given priority, there is a marked state control of markets.
    • 10. ECONOMIC SYSTEMS
      • MARKET ECONOMY: Production determined by supply/demand.
        • Who determines production: consumer demand
        • Role of Government: encourage competition, prevent restrictions on individual achievement
        • What furthers market economy: private ownership, innovation and entrepreneurship
      • COMMAND ECONOMY: Production planned by the Government
        • Who determines production: Government (central planners)
        • Role of Government: mobilize economic resources for public good
        • What furthers command economy: state industrial policy
      • MIXED ECONOMY: Elements of both of the above
    • 11. LEGAL SYSTEMS
      • LEGAL SYSTEMS: the rules, laws, etc. which regulate behavior in a country; the process by which laws are enforced; and grievances are addressed.
      • DIFFERENT SYSTEMS:
        • COMMON LAW
        • CIVIL LAW
        • THEOCRATIC LAW
      • BUSINESSES COMPETING IN THE GLOBAL MARKETPLACE MUST HONOR:
      • Home Country Laws
      • Host Country Laws
      • International Laws and Treaties
    • 12. LEGAL SYSTEMS
      • COMMON LAW
      • Based on precedent, custom and interpretation
      • Judge can interpret laws
      • Ownership established by use
      • Innocent until proven guilty
      • Contracts tend to be longer, more detailed
      • Contract performance
      • except for Acts of God
      • More adversarial/more lawsuits
      • CIVIL LAW
      • Based on written codes
      • and detailed laws.
      • Judge can apply laws
      • Ownership established by registration
      • Guilty until proven innocent
      • Contracts tend to be shorter
      • Contract performance has “Acts of God” which include unforeseeable acts
      • Less adversarial/less lawsuits
    • 13. IMPORTANT LEGAL ISSUES FOR INTERNATIONAL BUSINESS
      • Contract Law: contracts describe conditions under which an exchange is to occur and detail rights and obligations of parties.
      • Multiple Issues in contract law, such as where to arbitrate disputes, which laws apply, validity of contracts, etc.
    • 14. IMPORTANT LEGAL ISSUES FOR INTERNATIONAL BUSINESS
      • Property Rights: all legal rights for use of a resource and income from that resource. These rights can be violated through:
        • Private action : theft, piracy , blackmail by private individuals or groups [e.g. “Mafia”-style groups]
        • Public action : extortion of income or property/resources by public officials [bribery] , various forms of corruption.
        • Note: There are legal mechanisms by which governments/public officials may extract property from individuals, such as excessive taxation, expensive permit/licensing procedures, seizure of property without compensation .
    • 15. IMPORTANT LEGAL ISSUES FOR INTERNATIONAL BUSINESS
      • Intellectual Property: a property that is the product or result of intellectual activity—ideas. Examples: software, chemical formula for a drug, music
        • Ownership rights over intellectual property can be established through:
          • Patents: rights to the inventor of a new process or product.
          • Copyrights: rights to music, written works, artistic creations.
          • Trademarks: rights to designs and names used to differentiate products.
    • 16. VIOLATION OF PROPERTY RIGHTS: PRIVATE ACTION THROUGH PIRACY
      • Intellectual property laws are a very important stimulus to innovation and creative work
      • Protection of intellectual property rights differs greatly from country to country, in spite of international conventions, such as World International Property Organization.
      • Enforcement of Intellectual
      • Property laws varies considerably.
      • M2 Reports: Beware, Piracy!
    • 17. VIOLATION OF PROPERTY RIGHTS: PUBLIC ACTION THROUGH CORRUPTION
      • MOST COMMON PRACTICE: BRIBERY, a demand by government officials for payment of bribes (gifts, money, etc.) in return to secure or conduct business.
      • Source: International Marketing, Philip Cateora, John L. Graham 10 th ed. P.186
    • 18. FOREIGN CORRUPT PRACTICES ACT
      • FCPA is a Legislative Act passed during the 1970’s when U.S. companies found to be bribing government officials in foreign countries in order to secure business. (e.g. Lockheed payments to Japan)
      • Law prohibited bribing foreign government officials to obtain or maintain business
      • Original act was confusing and narrow, including everything from lubrication (“grease”) payments to extortion.
      • The FCPA put U.S. business at a disadvantage compared to many other countries, especially Europe, where bribes were a legal tax deduction.
    • 19. FOREIGN CORRUPT PRACTICES ACT (FCPA) 1970’s
      • Under U.S. law, U.S. businesses (including wholly owned U.S. subsidiaries or other U.S. entities controlled by foreign corporations) are prohibited from paying bribes to foreign government officials in order to secure or maintain business.
      • U.S. Publicly-traded companies are required to maintain records that provide enough information to determine if any violations of the law were committed.
      • U.S. businesses are not permitted to pay middlemen or agents fees if they know that part of the payment to the middleman or agent will be used as a bribe.
    • 20. FOREIGN CORRUPT PRACTICES ACT (UPDATED)
      • Omnibus Trade and Competitiveness Act of 1988 amended FCPA to permit payments which expedite or secure routine government actions, not to actually secure business. e.g. obtaining permits, licenses, etc. (“facilitating payments” or “speed money” is acceptable )
      • Punishments for violations can include heavy fines, imprisonment, and ineligibility to do business with the U.S. government or receive export licenses.
    • 21. Current Enforcement of FCPA Business Week June 18, 2007 p. 12
    • 22. Product Safety and Liability
      • Product safety laws set safety standards for products and manufacturing processes
      • Product liability laws hold the firm and its officers responsible for product safety standards
      • Criminal laws/ civil liability laws
        • Civil laws call for payment and monetary damages
        • Criminal liability laws result in fines or imprisonment
    • 23. OTHER IMPORTANT LEGAL ISSUES
      • MARKETING LAWS
      • GREEN MARKETING LAWS
      • ANTITRUST
      • ANTIBOYCOTT
    • 24. LEGAL ISSUE: ANTITRUST
      • The E.U.
      • has begun
      • to impose
      • Antitrust
      • Measures
      • on foreign
      • Companies
      • as well.
      San Jose Mercury. Dec 23, 2004 p. C 1-2
    • 25. MANAGING THE DIFFERENCES
      • ECONOMIC SYSTEMS IMPACT POLITICAL SYSTEMS AND VISA-VERSA.
      • DYNAMICS ARE SOMETIMES AN INTERPLAY or A TUG OF WAR.
      • LEGAL SYSTEMS SUPPORT and/or REFLECT THE RELATIONSHIPS OF ECONOMICS/POLITICS/SOCIAL STRUCTURE and CULTURE.
      • THE POLITICAL, ECONOMIC, LEGAL SYSTEMS CAN HAVE A PROFOUND IMPACT ON THE LEVEL OF ECONOMIC DEVELOPMENT IN A COUNTRY AND HENCE THE ATTRACTIVENESS OF A COUNTRY AND ITS POTENTIAL AS A TRADING PARTNER OR HOST FOR A FOREIGN DIRECT INVESTMENT.
    • 26.
      • IMPACT OF
      • POLITICAL on
      • ECONOMIC
      • Source: IBD
      • June 15, 2004
    • 27. Differences in Economic Development
      • Different countries have dramatically different levels of economic development
      • Two common measurements of economic development
        • Gross National Income (GNI) superseded Gross National Product or GNP
        • Purchasing Power Parity (PPP) which accounts for differences in the cost of living
    • 28. Differences in Economic Development: Purchasing Power Parity Table 2.1 p 61 3.2% $37,500 $37,610 United States 2.8% $27,650 $28,350 United Kingdom 0.9% $32,030 $39,880 Switzerland 0.1% $8,920 $2,610 Russia 4.8% $11,450 $5,270 Poland 3.1% $900 $320 Nigeria 1.2% $28,620 $34,510 Japan 6.1% $2,880 $530 India 1.2% $27,460 $25,250 Germany 9.3% $4,990 $1,100 China 2.6% $7,480 $2,710 Brazil GDP Growth Rate 1993-2003(%) GNI PPP per Capita GNI per Capita Country
    • 29. Broader Conceptions of Development: Amartya Sen
      • Development should be measured less by material output measures, such as GNP, per capita and more by the capabilities and opportunities that people enjoy.
      • HDI (Human Development Index) measures quality of life in different nations.
      • Based on life expectancy, educational attainment, and PPP based average incomes
    • 30. HOW POLITICAL ECONOMY IMPACTS ECONOMIC PROGRESS
      • ECONOMIC DEVELOPMENT IS A FUNCTION OF THE POLITICAL AND ECONOMIC SYSTEMS OF A COUNTRY.
      • ECONOMIC DEVELOPMENT AND TRANSFORMATION USUALLY OCCURS WHEN POLITICAL, ECONOMIC,
      • LEGAL SYSTEMS SUPPORT AN ENVIRONMENT WHICH FOSTERS:
      • INNOVATION
      • ENTREPRENEURSHIP
      • through a market economy having strong property rights.
    • 31. HOW POLITICAL ECONOMY IMPACTS ECONOMIC PROGRESS
      • Innovation and entrepreneurial activity are known to be “engines of economic growth.”
      • Innovation and entrepreneurship:
        • require a market economy [economic freedom];
        • require strong property rights [incentive for innovation and new ideas];
        • usually flourish best under more open political systems, such as representative democracies, although certain kind of totalitarian regimes may produce economic growth if committed to it.
    • 32. States in Transition
      • The political economy of the world has changed radically since the late 1980’s.
      • Two trends have been evident:
        • A wave of democratic revolutions swept the world
        • There has been a strong move away from centrally planned and mixed economies toward a free market economic model
    • 33. The Spread of Democracy Map 2.5 p 69
    • 34. The Spread of Democracy
      • Three main reasons account for the spread of democracy
        • Many totalitarian regimes failed to deliver economic progress to the vast bulk of their populations
        • New information and communication technologies, including shortwave radio, satellite television, fax machines, desktop publishing, and most importantly, the Internet, have broken down the ability of the state to control access to uncensored information
        • 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
    • 35. The Spread of Market-Based Systems Map 2.6 p 73
    • 36. NATURE OF ECONOMIC TRANSFORMATION
        • Countries in a state of transition towards market economies often follow a course of:
        • 1) DEREGULATION : removal of government restrictions on the conduct of a business to allow the free play of market systems and allow establishment and operations of private enterprises
    • 37. NATURE OF ECONOMIC TRANSFORMATION
        • Transition towards market economies (cont’d)
        • 2) PRIVATIZATION : sale of state-owned enterprises (i.e. owned by the government) to private investors.
        • 3) FURTHER DEVELOPMENT OF THE LEGL SYSTEM to enact laws which support market economies
    • 38. EXAMPLE OF EMERGING NATION IN ECONOMIC TRANSFORMATION
      • 4) EMERGENCE OF THE MIDDLE CLASS: (not in the text) The middle class has the disposable income to spend on new or discretionary items. The middle class also exerts significant political and economic influence.
      • .
      • San Jose Mercury : June 10, 2004 p.1C
      Foreign investment in China is benefited by rising per capita income
    • 39. ADDED DIMENSION IN THE NEW WORLD ORDER: TERRORISM
      • NEW WORLD ORDER/GLOBALIZATION
      • CAN RESULT IN:
        • INCREASE OF TENSIONS AMONG CIVILIZATIONS
        • INCREASE OF CONFLICTS DUE TO DIFFERENCES IN IDEOLOGY AND VALUES (Huntington)
        • SERIOUS ECONOMIC IMPACT
    • 40. ADDED DIMENSION IN THE NEW WORLD ORDER: TERRORISM Hill, Charles. International Business, 5 th ed.
    • 41. Managerial Implications
      • Two broad implications for international business
        • 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 environment of a country clearly influences the attractiveness of that country as a market and/or investment site
    • 42. CONSIDERATION OF IMPACT OF DIFFERENCES
      • ATTRACTIVENESS :
      • population, purchasing
      • power, future growth
      • BENEFITS : first mover advantages
      • COSTS : level of corruption, infrastructure, and legal exposure
      • RISKS: political, economic, legal
    • 43. Attractiveness of a Market Return
    • 44. RISKS in INTERNATIONAL BUSINESS
      • POLITICAL RISK: likelihood that political forces will cause drastic changes in a country’s business environment which will have a negative impact on the profit and other goals of a business enterprise.
      • ECONOMIC RISK: likelihood that economic events, including economic mismanagement, will cause drastic changes in a country’s business environment which will have a negative impact on the profit and other goals of a business enterprise.
    • 45. RISKS in INTERNATIONAL BUSINESS
      • LEGAL RISKS: likelihood that a trading partner will opportunistically break a contract or expropriate intellectual property rights.
    • 46. RISKS in INTERNATIONAL BUSINESS
      • Current situation of Zimbabwe reflects the risks in international business: economic collapse created by political forces which passed laws to restrict certain business activities and types of ownership.
      The Epoch Times March 29-April 4 Issues 20070128

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