The document provides an overview of the interplay between economics and politics, particularly in the context of international business. It discusses various political systems, including democracy and totalitarianism, and their implications for economic development and political risk. Additionally, it outlines the roles of the state in regulating markets and the significance of economic freedom as it relates to performance indicators like growth rates and income levels.

1. Economics, Strategy and
Management
Topic 2:
Economics and Politics
M.S. Oowise MBA (ECU Australia)
FCIM (UK), FIMS (UK), MSLIM, MIM(S/L),
CeMA, CPM (Asia/Pacific)

2. Your gains…
After the sessions you will be able to:
• Explain what is “State” and “political system
• Profile trends and characteristics of different political and economic
systems and understand their significance for international business
• Demonstrate how businesses attempt to influence the State
• Identify sources and nature of political risk
• Discuss the idea of economic freedom
• Explain the main indicators of economic development, performance, and
potential and explain their significance for international business
• Define key measures of economic performance

3. Outline of the session
• Overview of political environment
• Political systems (democracy, totalitarianism)
Characteristics? Shortcomings?
• Role of the Nation-State
• Business / State interactions
• Political risk
• Economic freedom
• Economic systems
• Assessing economic development and potential

4. International Business Environment

5. Political and Legal Environment
The political and legal environments comprise institutions that
• pass laws and establish regulations
• implement and enforce laws and regulations
• interpret, execute and protect the law
• shape the political environment through their
policies

6. Political Systems
The system of Government in any nation (Hill 2009, p.43)
A set of formal institutions that constitute a government (Cavusgil
et al. 2017, p. 212)
Political institutions:
• political parties
• legislative bodies
• trade unions
• lobby groups
(Cavusgil et al. 2017, p.212)

7. National Decision-Making
Unitary systems
decision-making power is centralized in hands of
central government – regions (local authorities)
have little or no autonomy
Federal systems
power is shared between the centre and the
regions (localities)

8. Political Systems
(Liberal) democracy (less than half of 193 UN members)
Totalitarian
• Authoritarian / absolutist (e.g. Burma, Saudi Arabia)
• Communist (China, Cuba, Vietnam, N. Korea)
• Theocratic (Iran, Vatican)

9. The Political Spectrum

10. Map of ‘freedom’

11. Democracy
"A political system in which government is by the
people, exercised directly or indirectly through elected
representatives.“ (Hill 2009, p.46)
• Right of citizens to elect governments to represent
their interests
• Governmental institutions based on majority rule
• members drawn from a variety of political parties
• Free elections

12. Democracy
- The consent of the governed
- Free, fair & regular elections
- Constitutional limits on government
- Majority rule/minority rights
- Accountability & Transparency
- The multiparty system
- Freedom of speech, press, religion

13. Democracy
In liberal democracies, conflicts occur between different branches of the
state, e.g.:
­ Politicians and judiciary
­ Politicians and bureaucrats
"There is a permanent power struggle between commissioners and high
ranking bureaucrats.”; “In my opinion, too much is decided by civil
servants." (G.Verheugen, EU Industry Commissioner, quoted in EU
Observer 5 & 10 Oct 2006)
“Every time I want to do something, the department argues with it….if
they don’t want you to do something, they produce the lengthiest, most
obscurantist document… (with)…the pluses and minuses (but) with the
minuses… highlighted….(They inflate) the costings (making it)
impossible…to (argue) with the Treasury.” (D.Blunkett diaries, The
Guardian 11 Oct 2006)

14. Churchill on Democracy
"Democracy is the worst form of
government, except for all those
other forms that have been tried
from time to time.“
(Winston Churchill on 11th
November 1947)

15. Totalitarianism
"A political system in which one person or political party exercises absolute control
over ALL spheres of human life and prohibits opposing political parties.“
(Hill 2009: 46)
Forms of totalitarianism
Communism (aimed at attaining socialism; e.g. North Korea)
Theocratic systems (control through religious principles, e.g.
Iran)
Fascism / Nazism (radical, authoritarian nationalism)
Historical Examples: Nazi Germany, Soviet Union, China under
Mao Zedong

16. Totalitarianism
• Restrictions on operations of political parties
• Power in hands of one or a few people
• No checks or balances on those holding power
• Power retained through patronage
• The abolition of property right
(For example: Confiscation of private property)

17. Totalitarianism
• Government ownership of
1. communication and transport
2. factories and agriculture
• Government control of
1. labour
2. Education
• Heavy progressive income tax
• Corporate farms and centralised
spatial/regional planning

18. Communism
• Means of production owned by the State
• Domination by one political party
• The party controls the legislative, executive and
judicial branches of the State as well as trade unions
and the media

19. Theocratic Systems
• Religion/faith plays dominant role
• Religious leaders and political rulers are the same
people
• Political decisions derived from principles of the
dominant religion

20. Factors Limiting the Spread of Democracy
• The link between democracy and economic development is getting
questioned
­ economic success of totalitarian states (e.g. China, oil-rich Islamic
States)
• Inconsistencies in democratic state operations
­ Western countries’ involvement in Iraq, Libya, Afghanistan &
biased foreign policies Saudi vs. Venezuela
• The difficulties in implementing a functioning democracy
­ The Arab Spring (e.g. Egypt)
• Standards of democracy
­ Who defines democracy? Washington (traditional “Western” view
of democracy) vs. Beijing consensus (Non-Western View of
Democracy).

21. Roles of the STATE
The State performs some very important functions with
major implications for international business:
• establishes the legal framework
• regulator and deregulator
• public expenditure and taxation
• international negotiator
• internal and external security
• arbitrator / judge

22. Roles of the STATE
States are also important market players:
• Subsidiser
• Competitor
• Customer and supplier

23. Four Roles of the State
Dicken (2015) outlines four key roles played by the nation-state
within the contemporary global economy:
1) States as containers of cultures, of varied economic systems
2) States as regulators of trade, industry and FDI, and agents of
economic development
3) States as competitors: for talent, capital, resources, global
political influence (Do states compete with each other, just as firms
do? In what sense? In what ways?)
4) States as collaborators: e.g. in regional trade agreements (RTA),
Bilateral Investment Treaties (BIT)

24. Business Influences on the Political
Environment
How do business attempt to influence politics (i.e. politicians)?
Pressure group – lobbying
Promises or threats
State consultation with business
Representation on government bodies
Giving money or gifts
Employment and exchange of personnel

25. Business / State Influences
In 2011 The Guardian reported that:
• 50 energy company employees had been working in
UK government on energy issues
• Energy companies had met ministers from the
Department of Energy 195 times after the 2010
election
• The Treasury had received over 200 secondees from
business in previous 4 years
(The Guardian 6th December 2011)

26. Political Risk
• Government interference with private investment
• Sudden or gradual change in the local political
environment that is disadvantageous or counter-
productive to the interests of foreign firms
• Risk of loss of assets, earning power and managerial
control due to events or actions that are politically
biased or politically motivated
“potential loss arising from a change in government
policy”
(Daniels et al 2019: 118)

27. Classes and Characteristics of Political Risk

28. Classes and Characteristics of Political Risk

29. Systemic
System change / political change: shift in public policy
can have either a positive or negative effect.
Exemplified by:
• expropriation or nationalisation (Bolivarian
socialism)
• restrictions on repatriation of profit
• discriminatory tax regimes
• unilateral breach of contract
Systemic Political Risk also presents opportunities

30. Procedural
Associated with political actions that interfere with the
movement of people, products and funds (Daniels et al.
2019).
• Corruption / 'extra costs'
• e.g. additional costs of business transactions for
'special assistance', corrupt bureaucratic procedures.
• Difficult to change, depends on
• how long-lasting the corrupt procedures have been
• how in-depth (level of public administration)

31. Distributive
• Political stand and regulations related to wealth
distribution.
• Linked to questions around distributive justice.
• Balancing between gaining more from the MNEs but not
provoking them to leave
Exemplified by: Formal changes in investment rules
(shared ownership)
(Lou, 2008)

32. Catastrophic
• Random (unforeseen?) events
• international military conflicts, civil / ethnic unrest
• Critical impact on business environment and firms'
operations
• Suppliers, markets
• Physical destruction of company's assets (Daniels et
al. 2019)

33. Political Risk

34. International Business Environment

35. The context
Managers assess a country’s economic environment knowing…
1. Countries differ in different ways
2. Economic and political changes alter market
circumstances
3. It is important to understand connections,
change, and consequences
4. Choices of citizens, policymakers, and institutions

36. International Economic Analysis
A universal assessment of economic environments is difficult because
System Complexity
• Identifying proper indicators is difficult
Market Dynamism
• New economic circumstances
Market Interdependence
• Markets influence each other
Data Overload
• Complicates decision-making

37. Economic Freedom
Economic freedom: people have the right to work,
produce, consume, save, and invest the way they
prefer
Measured across: business freedom, trade freedom,
fiscal freedom, government size (spending), monetary
freedom, investment freedom, financial freedom,
property rights, freedom from corruption, and labor
freedom

38. Global Distribution of Economic Freedom

39. Economic Freedom (by region and population)

40. The Value of Economic Freedom
Economic freedom is related to a range of business and
development-focused issues:
­ Growth rates
­ Productivity
­ Income levels
­ Inflation
­ Employment
­ Life expectancy
­ Literacy
­ Political openness
­ Environmental sustainability

41. Economic Freedom & Standard of Living

42. Trends in Economic Freedom
The trend toward increased economic freedom is no longer
certain
­ Questions about the legitimacy of free markets
• Particularly relevant after the recent global
financial crisis
­ The benefits of more state control
• Performance of China
• State intervention during Covid-19 pandemic

43. Types in Economic Systems
Economic system:
The mechanism that deals with the production, distribution,
and consumption of goods and services
Types
­ Market economy
­ Command economy
­ Mixed economy

44. Types in Economic Systems
Source: Daniels et al. (2019: 156).

45. Market Economy
In a market economy individuals rather than governments
make most economic decisions (i.e. decide on allocation of
resource)
­ Capitalism
• private ownership of capital
­ Laissez-faire
• governmental noninterference in economic affairs

46. Command Economy
In a command economy the “visible hand of the state”
supersedes the “invisible hand of the market” (the
individuals)
• Socialism
­ Government (as a ‘representative’ of society) owns
and controls resources and determines prices
• control over supply of resources and, through
central planning, also of demand

47. Mixed Economy
Most economies are mixed economies
­ fall between market and command economies
• Social market economy
­ Influence/regulate economic activity with a
focus on social equality and a fair(er)
distribution of wealth

48. State Capitalism: Detour or Destination?
State capitalism: a system in which the government
explicitly manipulates market outcomes for political
purposes
­ promote certain industries to encourage economic
development
­ develop national companies into global leaders
­ foreign companies restricted from strategic industries

49. Economic Development, Performance, and Potential
Developing countries
• largest number of countries
• low per capita income
Emerging economies
• fast growing, relatively prosperous
• BRIC – Brazil, Russia, India, China
• MIST – Mexico, Indonesia, South Korea, Turkey
• MINT – Malaysia, Indonesia, Nigeria, Turkey
Developed countries
• high per capita income and standard of living
(e.g. U.S., Japan, France, Australia)

50. Emerging Economies of the World
Source: Daniels et al. (2019: 144).

51. Size of the Economy
(national income and product)
Gross National Income (GNI)
­ the broadest measure of economic activity for a country
­ the sum of value added by all resident producers + taxes (but
excluding subsidies) not included in the valuation of output + net
receipts of primary income (compensation of employees and
property income) from abroad.
Gross Domestic product (GDP)
­ the total market value of goods and services produced by
workers and capital within a nation’s borders

52. Improving Analysis and Meaning
GNI (and/or GDP) data should be adjusted for
­ growth rate of the economy (i.e. %)
­ number of people in a country (i.e per capita)
­ local cost of living (i.e purchasing power parity)

53. GDP contribution by country (2018)
Source: WorldMapper Project (2019; available at:
https://worldmapper.org/maps/gdp-2018/)

54. Problems with interpretation of GDP data
Source: The Economist (2020)

55. GNI Growth Rates of 10 Largest Economies
(2011, NB as measured by GNI)

56. GNI Per Capita (2011)

57. GNI Per Capita (2011)
Adjusted with Purchasing Power Parity (PPP)

58. Economic Analysis
Managers should also consider other key
macroeconomic indicators:
­ Inflation
­ Unemployment
­ Debt
­ Income distribution
­ Poverty
­ Balance of payments

59. Inflation & Unemployment
• Inflation: a measure of the increase in the cost of living
• Deflation: when prices for products go down not up
• Reflation: increase the money supply and reduce taxes to
accelerate economic activity
• Unemployment rate: share of unemployed workers seeking
employment for pay relative to the total civilian labor force
• Misery index: the sum of a country’s inflation and unemployment
rates

60. Debt and Income Distribution
Debt: the total of a governments (external/internal) financial
obligations
­ Growing public debt signals include reduced growth, rising
inflation, increasing austerity (public spending cuts), tax
increases
Income distribution: estimates the proportion of the population
that earns various levels of income
­ Gini coefficient: measures the extent to which the
distribution of resources deviates from a perfectly equal
distribution (value of 0 represents absolute equality, a value
of 100 absolute inequality; Germany: 28, UK: 36, USA: 40,
Chile: 52, South Africa 63)

61. Poverty
• Poverty: the state of having little or no money and few or no material
possessions
­ extreme poverty
• less than $1.25 per day
­ moderate poverty
• less than $2.00 per day
• Today the world population is approx. 80% poor, 10% middle
income, and 10% rich
• Base of the Pyramid
­ Frugal engineering

62. Preparation
READ
• Case: China: Big Opportunities Complicated Risks
• Case: The BRICs: Vanguard of the Revolution