Download Chapter 2 - Political Economics

National Differences in Political Economy
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?
National Differences in Political
Economy
 Political
System:
– System of National Government
– Varies by country on the basis of
values and beliefs about
 Collectivism and Individualism
 Democracy and Totalitarianism
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
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
 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
– 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
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
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.”
National Differences in
Political Economy
A Legal
System is:
– rules - laws - that regulate
behavior
– process through which


laws are enforced
grievances are redressed
Businesses
must
observe
– Home country laws
– Host country laws
– International Laws and Treaties
 Different Legal
Systems
– Common Law
– Civil Law
– Theocratic Law
 Dispute
resolution
– Where to arbitrate?
Mediate?
– Validity of contracts
and decisions
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
Legal Systems

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
Legal Systems and
International Business
Property rights
use of a resource
 use made of income from resource
 enforcement issues
 Public vs private action violations

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
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
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
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
– Product safety laws
– Criminal / civil liability
liability
Differences of Economic
Development
 GDP per capita:
does not factor cost of living
differences
 Purchasing Power Parity (PPP) index:
adjusts per capita GDP by cost-ofliving
 Human Development Index:
life expectancy, literacy, PPP based
average incomes
Broader Conceptions of
Development
 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}
Political Economy and Economic
Progress

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
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
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
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
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