chapter

2. Chapter 2
National Differences
in Political Economy

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OPENING CASE: The Poorest Continent
Sub-Saharan Africa.
• corrupt government
bad economic policies.
• 1. Because property rights are either not established or not
respected, it is difficult for property owners to raise capital to start
businesses.
2. There is little incentive to make the investments necessary to
make the properties more efficient and productive. Foreign
companies also shy away from making investments in the region
because of the poor economic state of the countries
•

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National Differences in Political
Economy
• How do political, economic, legal systems of a
country
- Differ among countries?
- Influence economic progress?
- Change during our times?
- Influence benefits, costs, risks of business?
• What are ethical issues that arise from doing
business internationally?

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National Differences in
Political Economy
• Political System:
Varies by country on the basis of values
and beliefs about
• Collectivism and Individualism
• Democracy and Totalitarianism

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Collectivism
• Primacy of collectivist over individual goals
• Emphasis: “good of society”, “common
good”
• Plato,427-347 BC, to Socialists, Marx, 1818
- 83
• Communists-revolution,
Social Democrats-democratic outlook

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Individualism
• Individual freedom over economic and
political action
- Individual diversity and private
ownership are desirable
- Private property is more productive
whereas communal property receives
little care

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• Without private property, no man will be
seen to be liberal and no man will ever do
any act of liberality; for only in the use
of money is liberality made effective
-- Aristotle, 384-322 BC

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- The only purpose for which power can be
rightfully exercised over any member of a
civilized community, against his will, is to
prevent harm to others. His own good, either
physical or moral, is not a sufficient warrant -
-
John Stuart Mill, 1806-1873

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- An individual who intends his own gain is “led
by an invisible hand to promote an end which
was no part of his intention. Nor is it always
worse for the society that it was no part of it.
By pursuing his own interest he frequently
promotes that of the society more effectually
than when he really intends to promote it. I
have never known much good done by those
who effect to trade for the public good”
-- Adam Smith, 1723-1790

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• Democracy:
- Government is by the people, exercised either directly or
through elected representatives
- Safeguards hold elected representatives accountable
• Totalitarianism:
One person/party exercises absolute control over all spheres of
human life
- Communist totalitarianism (PRC, Vietnam, Laos, N.
Korea,Cuba)
- Theocratic totalitarianism (Iran, S. Arabia)
- Tribal totalitarianism (Zimbabwe, Tanzania)
- Right wing totalitarianism

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Economic Systems
• Market economy: what is produced in what quantity determined by
supply/demand and through a price system
• Command economy: planned by government
• Mixed economy: a balance of both of the above
• State-Directed economy: state directly influences investment activities
of private enterprise through “industrial policy.”

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National Differences in
Political Economy
Businesses must observe
- Home country laws
- Host country laws
- International Laws and Treaties
- Different Legal Systems
- Common Law
- Civil Law
- Theocratic Law

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Contract Law
• A contract specifies
- conditions under which an exchange will happen
- rights/obligations of parties
• It is based on a country’s legal system.
Systems differ based on legal tradition
- common law system
- civil law system

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Disputes
• Disputes need to be resolved based on a particular
legal system
- Which country’s? Home? Host?
• UN Convention on Contracts for the International
Sale of Goods (GIGS)
• International Court of Arbitration of the
International Chamber of Commerce in Paris, France

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Legal Systems and International
Business
Property rights
• use of a resource
• use made of income from resource
• enforcement issues
• Public vs private action violations

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Legal Systems and International
Business
• protection of Intellectual Property
- patent: inventors’ exclusive rights to manufacture,
use, sell an invention
- copyright: same for authors, composers, artists,
publishers
- trademark: unique design and name, often
officially registered
• Paris Convention for the Protection of Industrial Property
(96 countries)
• WTO/GATT

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Public Action and Corruption
• Public Action can violate property rights
- Legal mechanisms
- Illegal means: corruption
• Corruption across countries is tracked by
Transparency International
• High corruption levels reduce Foreign Direct
Investment and economic growth

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Public Action and Corruption
• US foreign corrupt practices act:
- illegal for US managers to bribe government
officials
• OECD Convention on Bribery of Foreign Public
Officials in International Business transactions

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Legal Systems and International
Business
• Protection of intellectual property
- Patents, copyrights, trademarks
- Paris convention for the Protection of
Industrial Property
- TRIPS (WTO)Trade Related Aspects of
Intellectual Property
• Product safety and product liability
- Product safety laws
- Criminal / civil liability

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• GDP per capita:
does not factor cost of living differences
• Purchasing Power Parity (PPP) index:
adjusts per capita GDP by cost-of-living
• Human Development Index:
life expectancy, literacy, PPP based average
incomes
Differences of Economic
Development

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• Amartya Sen: development
- Should be assessed by material output
measures
- Is an economic AND a political process that
requires “democratization”
• Human Development Index (HDI) =
f{life expectancy, educational attainment,
PPP based annual incomes sufficient to
meet basic needs}
Broader Conceptions of
Development

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• Innovation >> Engine for Growth
(products, processes, strategies, organizations,
management practices)
• Innovation requires:
- market economy
- strong property rights
- the “right” political system
• Economic progress is related to Democracy
Political Economy and Economic
Progress

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States in Transition
• Democratic systems spread in the ‘80s and
‘90s
• Totalitarian regimes failed to deliver
economic progress
• Spread of information trough new
communication technologies
• Emergence of prosperous middle classes

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States in Transition: Universal or
Clashing Civilizations
• New realities: Russian reemergence,
Zimbabwean racial unrest, China’s
resurgence
• New world order and terrorism
- Fukuyama: “… the end of history…” and
harmonious existence
- Huntington: new conflicts, e.g., Islamic
fundamentalism

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States in Transition: Spread of
Market-Based Systems
• Nature of economic transformation
- Deregulation: legal changes
- Privatization: transfer of state
property/industries to private individuals
• Auctions
• IPOs
- Evolution of legal systems
- The road of transformation is rocky

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Implications for International Business
• Country’s political, economic, and legal environment
- influence attractiveness
- raise ethical Issues
• Country attractiveness
- balance long-term risks with short-term benefits for business
- benefits depend on: size, wealth, future economic growth
• first mover advantages
• identify “star” future economies
- costs are affected by:
• economic sophistication (may be more costly to operate in
LDCs, no infrastructure)
• legal framework impact on costs
• political payoffs