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Chapter 2 National Differences in Political Economy 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 2-2 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 2-3 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 2-4 Property Rights And Corruption Figure 2.1: Rankings of Corruption by Country 2006 2-5 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 2-6 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 2-7 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 2-8 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 2-9 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 2-10 Differences In Economic Development Table 2.1: Economic Data for Select Countries 2-11 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 2-12 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 2-13 The Spread Of Democracy Map 2.5: Political Freedom in 2006 2-14 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 2-15 The Spread Of MarketBased Systems Map 2.6: Distribution of Economic Freedom in 2007 2-16 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 2-17 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 2-18 Implications Of Changing Political Economy Figure 2.3: The World’s Largest National Economies, 20052025 (GDP $ billions) 2-19 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 2-20 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 2-21 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 2-22 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 2-23 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 2-24 Chapter 3 Differences in Culture Introduction Successful international managers need cross-cultural literacy - an understanding of how cultural differences across and within nations can affect the way in which business is practiced A relationship may exist between culture and the costs of doing business in a country or region 2-26 The Determinants Of Culture The values and norms of a culture are the evolutionary product of a number of factors at work in a society including religion, political and economic philosophies, education, language, and social structure 2-27 Religious And Ethical Systems Religion is a system of shared beliefs and rituals that are concerned with the realm of the sacred Ethical systems are a set of moral principles, or values, that are used to guide and shape behavior Religion and ethics are often closely intertwined Four religions dominate society -Christianity, Islam, Hinduism, and Buddhism Confucianism is also important in influencing behavior and culture in many parts of Asia 2-28 Religious And Ethical Systems Map 3.1 World Religions 2-29 Spoken Language Countries with more than one language often have more than one culture The most widely spoken language in the world, but Chinese is the mother tongue of the largest number of people English is also becoming the language of international business, but knowledge of the local language is beneficial, and in some cases, critical for business success 2-30 Education Formal education is the medium through which individuals learn many of the language, conceptual, and mathematical skills that are indispensable in a modern society Education is important in determining a nation’s competitive advantage General education levels can also be a good index for the kinds of products that might sell in a country 2-31 Culture And The Workplace It is important for companies to understand how a society’s culture affects workplace values Management processes and practices must be adapted to culturally-determined work-related values Geert Hofstede identified four dimensions of culture: power distance, uncertainty avoidance, individualism versus collectivism, and masculinity versus femininity 2-32 Culture And The Workplace Power distance focuses on how a society deals with the fact that people are unequal in physical and intellectual capabilities Individualism versus collectivism focuses on the relationship between the individual and his or her fellows Uncertainty avoidance measures the extent to which different cultures socialize their members into accepting ambiguous situations and tolerating ambiguity Masculinity versus femininity looks at the relationship between gender and work roles 2-33 Culture And The Workplace Table 3.1: Work-Related Values for 20 Selected Countries 2-34 Cultural Change Culture evolves over time, although changes in value systems can be slow and painful for a society Social turmoil is an inevitable outcome of cultural change As countries become economically stronger, cultural change is particularly common 2-35 Implications For Managers Societies differ because their cultures vary Cultures vary because of profound differences in social structure, religion, language, education, economic philosophy, and political philosophy There are three important implications that flow from these differences: 1. There is a need to develop cross-cultural literacy 2. There is a connection between culture and national competitive advantage 3. There is a connection between culture and ethics in decision making 2-36 Cross-Cultural Literacy Cross-cultural literacy is critical to the success of international businesses Companies that are ill informed about the practices of another culture are unlikely to succeed in that culture Managers must also beware of ethnocentric behavior, or a belief in the superiority of one's own culture 2-37 Culture And Competitive Advantage The connection between culture and competitive advantage is important because: it suggests which countries are likely to produce the most viable competitors it has implications for the choice of countries in which to locate production facilities and do business 2-38 Chapter 4 Ethics in International Business Ethical Issues In International Business The most common ethical issues in business involve: employment practices human rights environmental regulations corruption the moral obligation of multinational companies 2-40 Environmental Pollution Ethical issues arise when environmental regulations in host nations are far inferior to those in the home nation Environmental questions take on added importance because some parts of the environment are a public good that no one owns, but anyone can despoil The tragedy of the commons occurs when a resource held in common by all, but owned by no one, is overused by individuals, resulting in its degradation 2-41 Corruption The U.S. Foreign Corrupt Practices Act outlawed the practice of paying bribes to foreign government officials in order to gain business The Convention on Combating Bribery of Foreign Public Officials in International Business Transactions adopted by the Organization for Economic Cooperation and Development (OECD), obliges member states to make the bribery of foreign public officials a criminal offense 2-42 Corruption Some economists believe that in a country where preexisting political structures distort or limit the workings of the market mechanism, corruption in the form of black-marketeering, smuggling, and side payments to government bureaucrats to “speed up” approval for business investments may actually enhance welfare Other economists have argued that corruption reduces the returns on business investment and leads to low economic growth 2-43 Moral Obligations Social responsibility refers to the idea that business people should take the social consequences of economic actions into account when making business decisions, and that there should be a presumption in favor of decisions that have both good economic and good social consequences Social responsibility can be supported for its own sake simply because it is the right way for a business to behave Advocates argue that businesses need to recognize their noblesse oblige (honorable and benevolent behavior that is the responsibility of successful companies) and give something back to the societies that have made their success possible 2-44 Ethical Dilemmas Ethical dilemmas are situations in which none of the available alternatives seems ethically acceptable The ethical obligations of a multinational corporation toward employment conditions, human rights, corruption, environmental pollution, and the use of power are not always clear cut 2-45 The Roots Of Unethical Behavior Figure 4.1: Determinants of Ethical Behavior 2-46 Summary of Decision-Making Steps In the end, there are clearly things that an international business should do, and there are things that an international business should not do But, not all ethical dilemmas have a clean and obvious solution 2-47