3. 2-3
Political Systems
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, and
in doing so they affect the level of economic well-being
4. 2-4
Political Systems
Political system refers to the system of government in a
nation
Political systems can be assessed according to two
dimensions
the degree to which they emphasize collectivism as
opposed to individualism
the degree to which they are democratic or totalitarian
5. 2-5
Collectivism And Individualism
Collectivism refers to a political system that stresses the
primacy of collective goals over individual goals
Collectivism can be traced back to the Greek
philosopher, Plato (427-347 BC), but in modern times,
collectivism is equated with socialists
6. 2-6
Collectivism And Individualism
Socialists advocate state ownership of the basic means
of production, distribution, and exchange
State-owned enterprises are managed to benefit society
as a whole, rather than individual capitalists
In the early 20th
century, socialism split into:
Communism – socialism can only be achieved through
violent revolution and totalitarian dictatorship
Social democrats – socialism is achieved through
democratic means
7. 2-7
Classroom Performance System
A political system that stresses the primacy of collective
goals over individual goals is called
a) individualism
b) collectivism
c) a democracy
d) a market economy
8. 2-8
Collectivism And Individualism
By the mid-1990s, communism was in retreat worldwide
Social democracy is also retreating as many countries
move toward free market economies
State-owned enterprises have been privatized
9. 2-9
Classroom Performance System
_____ believe (s) that socialism can only be achieved
through violent revolution and totalitarian dictatorship.
a) communists
b) social democrats
c) social republicans
d) Plato
10. 2-10
Collectivism And Individualism
Individualism refers to philosophy that an individual
should have freedom in his own economic and political
pursuits
Individualism can be traced to Greek philosopher,
Aristotle (384-322 BC), who argued that individual diversity
and private ownership are desirable
Under individualism, individual economic and political
freedoms are the ground rules on which a society should
be based
More practically, individualism means democratic political
systems and free market economies
11. 2-11
Democracy And Totalitarianism
Democracy refers to a political system in which
government is by the people, exercised either directly or
through elected representatives
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
Democracy is usually associated with individualism and
communism is usually associated with collectivism and
totalitarianism
12. 2-12
Democracy And Totalitarianism
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
13. 2-13
Classroom Performance System
A form of government in which one person or political party
exercises complete control over all spheres of human life
and prohibits opposing political parties is
a) a democracy
b) a representative democracy
c) totalitarianism
d) socialism
14. 2-14
Democracy And Totalitarianism
There are four major forms of totalitarianism:
Communist totalitarianism – found in states where the
communist party monopolizes power
Theocratic totalitarianism - found in states where political
power is monopolized by a party, group, or individual that
governs according to religious principles
Tribal totalitarianism - found in states where a political
party that represents the interests of a particular tribe
monopolizes power
Right-wing totalitarianism - permits some individual
economic freedom, but restricts individual political freedom
15. 2-15
Classroom Performance System
______ is found in states where political power is
monopolized by a party according to religious principles.
a) tribal totalitarianism
b) right-wing totalitarianism
c) theocratic totalitarianism
d) communist totalitarianism
16. 2-16
Economic Systems
Political ideology and economic systems are connected
In countries where individual goals are emphasized free
market economies are likely
There are three types of economic systems:
market economies
command economies
mixed economies
17. 2-17
Market Economy
In a market economy all productive activities are privately
owned and production is determined by the interaction of
supply and demand
The role of government is to encourage free and fair
competition between private producers
18. 2-18
Command Economy
In a command economy, the government plans the
goods and services that a country produces, the quantity
that is produced, and the prices as which they are sold
All businesses are state-owned, and governments
allocate resources for “the good of society”
However, because there is little incentive to control costs
and be efficient, command economies tend to stagnate
19. 2-19
Mixed Economy
In a mixed 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
20. 2-20
Classroom Performance System
In which type of economic system are all productive
activities privately owned?
a) a mixed economy
b) a command economy
c) a representative economy
d) a market economy
21. 2-21
Legal Systems
The legal system of a country refers to the rules that
regulate behavior along with the processes by which the
laws are enforced and through which redress for
grievances is obtained
There are three types of legal systems:
Common law - based on tradition, precedent, and custom
Civic law - based on detailed set of laws organized into
codes
Theocratic law - law is based on religious teachings
22. 2-22
Classroom Performance System
Which type of law is based on tradition, precedent, and
custom?
a) civil law
b) common law
c) theocratic law
d) contract law
23. 2-23
Differences In Contract Law
Depending on the legal system, contracts are
approached in different ways
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
24. 2-24
Differences In Contract Law
Under a common law system, contracts tend to be very
detailed with all contingencies spelled out
Under a civil law system, contracts tend to be much
shorter and less specific because many issues are already
covered in the civil code
25. 2-25
Differences In Contract Law
Many countries have ratified the United Nations
Convention on Contracts for the International Sale of
Goods (CIGS) which establishes a uniform set of rules
governing certain aspects of the making and performance
of everyday commercial contracts between buyers and
sellers who have their places of business in different
nations
26. 2-26
Property Rights And Corruption
Property rights refer to 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
Countries differ in terms of how their legal systems define
and protect property rights
Property rights can be violated through:
private action
public action
27. 2-27
Property Rights And Corruption
Public action and private action to violate property rights
occurs when public officials extort income, resources, or
the property itself from property holders
This can be done legally through mechanisms like
excessive taxation or illegally through corrupt mechanisms
like demanding bribes or blackmailing
High levels of corruption reduce foreign direct
investment, the level of international trade, and the
economic growth rate in a country
29. 2-29
Property Rights And Corruption
The Foreign Corrupt Practices Act makes it illegal for
U.S. companies to bribe foreign government officials to
obtain or maintain business over which that foreign official
has authority
The OECD has also adopted a convention that obliges
member states to make the bribery of foreign public
officials a criminal offense
31. 2-31
The Protection Of
Intellectual Property Rights
Intellectual property refers to property that is the product
of intellectual activity
Intellectual property can be protected using:
Patents – exclusive rights for a defined period to the
manufacture, use, or sale of that invention
Copyrights – the exclusive legal rights of authors,
composers, playwrights, artists, and publishers to publish
and disperse their work as they see fit
Trademarks – design and names by which merchants or
manufacturers designate and differentiate their products
32. 2-32
The Protection Of
Intellectual Property Rights
Protection of intellectual property rights differs from
country to country – when intellectual property protection is
lax, piracy is common
Many countries are members of the World Intellectual
Property Organization and have signed international
treaties to protect intellectual property including the Paris
Convention for the Protection of Industrial Property
To avoid piracy, firms can stay away from countries
where intellectual property laws are lax, file lawsuits, and
lobby governments for international property rights
agreements and enforcement
33. 2-33
Classroom Performance System
Design and names by which merchants or manufacturers
designate and differentiate their products are called
a) trademarks
b) copyrights
c) patents
d) name brands
34. 2-34
Product Safety And Product Liability
Property safety laws set certain 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
When product safety laws are stricter in a firm’s home
country than in a foreign country, or when liability laws are
more lax, the firm has to decide whether to adhere to home
country or host country standards
35. 2-35
The Determinants Of
Economic Development
Countries have different levels of economic development
Gross national income (GNI) per person is a common
measure of economic development
Purchasing power parity (PPP) involves adjusting GNI by
purchasing power
37. 2-37
Broader Conceptions Of Development:
Amartya Sen
Nobel Prize winning economist Amartya Sen argues that
development should be seen as a process of expanding the
real freedoms that people experience
So, development requires the removal of major
impediments to freedom like poverty, tyranny, and neglect
of public facilities
Sen emphasizes basic health care and basic education
The United Nations used Sen’s ideas to develop the
Human Development Index (HDI) which is based on three
measures: life expectancy at birth, educational attainment,
and whether average incomes are sufficient to meet the
basic needs of life in a country
38. 2-38
Political Economy And
Economic Progress
What is the relationship between political economy and
economic progress? Experts agree that:
Innovation and entrepreneurship are the engines of long-
run economic growth
Innovation and entrepreneurship require a market
economy
Innovation and entrepreneurship require strong property
rights
It seems likely that democratic regimes are more
conducive to long-term economic growth than a
dictatorship, even one of the benevolent kind
Subsequent economic growth leads to establishment of
democratic regimes
39. 2-39
Geography, Education, And
Economic Development
In addition to political and economic systems, geography
and education are also important determinants of economic
development
Countries with favorable geography are more likely to
engage in trade, and so, be more open to market-based
economic systems, and the economic growth they promote
Countries that invest in education have higher growth
rates because the workforce is more productive
40. 2-40
Classroom Performance System
Which is not a primary determinant of a nation’s rate of
economic development?
a) its political system
b) its economic system
c) its geography
d) its currency
41. 2-41
States In Transition
Since the late 1980s, two trends have emerged in the
political economy:
A wave of democratic revolutions swept the world in the
late 1980s and early 1990s
There has been a move away from centrally planned and
mixed economies and toward a more free market economic
model
42. 2-42
The Spread Of Democracy
There are three main reasons 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, 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
44. 2-44
The New World Order
And Global Terrorism
Many countries may be increasingly difficult places in
which to do business, either because of their inherent
violent conflict, or because they are part of a civilization that
is in conflict with an enterprise’s home country
Terrorism represents one of the major threats to world
peace and economic progress in the 21st
century
45. 2-45
The Spread Of Market-
Based Systems
Command and mixed-economies failed to deliver the kind
of sustained economic performance that was achieved by
countries adopting market-based systems
As a result, more countries have shifted toward the
market-based model
46. 2-46
The Spread Of Market-
Based Systems
Map 2.6: Distribution of Economic Freedom in 2007
47. 2-47
The Nature Of
Economic Transformation
The shift toward a market-based system involves:
Deregulation – removing legal restrictions to the free play
of markets, the establishment of private enterprises, and
the manner in which private enterprises operate
Privatization - transfers the ownership of state property
into the hands of private investors
The creation of a legal system to safeguard property
rights
48. 2-48
Implications Of
Changing Economy
Markets that were formerly off-limits to Western business
are now open
China with its 1.2 billion people and India with its
population of almost 1 billion are especially important
However, just as the potential gains are large, so are the
risks
Democracy may not thrive in some countries
50. 2-50
Implications For Managers
There are two broad implications for managers:
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 environment of a
country clearly influences the attractiveness of that country
as a market and/or investment site
51. 2-51
Benefits
The long-run benefits of doing business in a country are
a function of the size of the market, the present wealth of
consumers in that market, and the likely future wealth of
consumers
By identifying and investing early in a potential future
economic stars, firms may be able to gain first mover
advantages (advantages that accrue to early entrants into a
market) and establish loyalty and experience in a country
52. 2-52
Costs
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
53. 2-53
Risks
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
54. 2-54
Overall Attractiveness
The overall attractiveness of a country as a potential
market and/or investment site for an international business
depends on balancing the benefits, costs, and risks
associated with doing business in that country
Other things being equal, the benefit-cost-risk trade-off is
likely to be most favorable in politically stable developed
and developing nations that have free market systems and
no dramatic upsurge in either inflation rates or private
sector debt
Editor's Notes
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.
