Unit 03

National Differences
in Political Economy

Corresponds to Chapter 2 of the textbook:

International Business: Competing in the Global Marketplace, 8 th Ed.
By Charles W. L. Hill

McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
 What Is A Political Economy?
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
they affect the level of economic well-being in
the nation
Political Economy

Economic
Political System Legal System
System

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 What Is A Political System?
Political system refers to the system of
government in a nation
 Assessed according to
 the degree to which ownership of resources in
the country belong to collectivism as opposed
to individualism
 the degree to which power to make national
decision in the country is democratic or
totalitarian

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 What Is A Political System?
Political System

Collectivism/
Individualism
Socialism

Social
democrats

Communism Totalitarianism Democracy

Communist Theocratic

Tribal Right-wing
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 What Is Collectivism?
 Collectivism stresses the primacy of
collective goals over individual goals
can be traced to the Greek philosopher, Plato
(427-347 BC).
 Today, collectivism is equated with
socialists (Karl Marx 1818-1883)
advocate state ownership of the basic means of
production, distribution, and exchange
manage to benefit society as a whole, rather
than individual capitalists

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 How Does Modern-Day
Socialism Look?
 In the early 20th century, socialism split into
1. Communism – socialism can only be achieved
through violent revolution and totalitarian
dictatorship
 in retreat worldwide by mid-1990s
2. Social democrats – socialism is achieved
through democratic means
 retreating as many countries move toward free
market economies
 state-owned enterprises have been privatized

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 What Is Individualism?
Individualism refers to philosophy that an
individual should have freedom in his own economic
and political pursuits
 can be traced to Greek philosopher, Aristotle
(384-322 BC), who argued that individual
diversity and private ownership are desirable
 individual economic and political freedoms are
the ground rules on which a society should be
based.
 implies democratic political systems and free
market economies
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 What Is Democracy?
Democracy refers to a political system in which
government is by the people, exercised either
directly or through elected representatives
usually associated with individualism
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
 Some of the characteristics of democracies include:
freedom of expression, free media, regular elections, and free
access to state information.

Of course, these freedoms do not exist in totalitarian systems.

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 What Is Totalitarianism?
 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
1. Communist totalitarianism – found in states where
the communist party monopolizes power
2. Theocratic totalitarianism - found in states where
political power is monopolized by a party, group, or
individual that governs according to religious principles
3. Tribal totalitarianism - found in states where a
political party that represents the interests of a
particular tribe monopolizes power
4. Right-wing totalitarianism - permits some individual
economic freedom, but restricts individual political
freedom 2-9
 What Is An Economic System?
 There are three types of economic systems
 Market economies - all productive activities are privately
owned and production is determined by the interaction of supply
and demand
 government encourages free and fair competition between private
producers
 Command economies - government plans the goods and
services that a country produces, the quantity that is produced,
and the prices at which they are sold
 all businesses are state-owned, and governments allocate
resources for “the good of society”
 because there is little incentive to control costs and be efficient,
command economies tend to stagnate
 Mixed economies - 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
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 What Is A Legal System?
 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
1. Common law - based on tradition, precedent,
and custom
2. Civic law - based on detailed set of laws
organized into codes
3. Theocratic law - law is based on religious
teachings

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 How Are Contracts Enforced In
Different Legal Systems?
 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
 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
 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
 Legal System in world countries:
https://www.cia.gov/library/publications/the-world-
factbook/fields/2100.html
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 How Can Intellectual
Property Be Protected?
 Intellectual property - refers to creations of the mind:
inventions; literary and artistic works; and symbols,
names and images used in commerce. Can be protected
using.

1. Patents – exclusive rights for a defined period to the

manufacture, use, or sale of that invention
2. Copyrights – the exclusive legal rights of authors,
composers, playwrights, artists, and publishers to publish
and disperse their work as they see fit
3. Trademarks – design and names by which merchants or
manufacturers designate and differentiate their products

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 How Can Intellectual
Property Be Protected?
Protection of intellectual property rights differs
from country to country
World Intellectual Property Organization
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
convince governments for international property rights
agreements and enforcement

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 What Is Product Safety
And Liability?
Product 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

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 What Determines A Country’s Level
of Economic Development?
 Two ways to measure levels of economic
development are
1. Gross national income (GNI) per person
2. Purchasing power parity (PPP) involves
adjusting GNI by purchasing power
3. Human Development Index (HDI) by UNO which
is based on
 life expectancy at birth
 educational attainment
 whether average incomes are sufficient to meet
the basic needs of life in a country
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How Do Countries Compare on
Economic Development?
Economic Data for Select Countries

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 How Does Political Economy
Influence Economic Progress?
Innovation and entrepreneurship are the engines
of long-run economic growth
Innovation and entrepreneurship require a
market economy and strong property rights
Democratic regimes are probably more favorable
to long-term economic growth than dictatorships,
even the benevolent kind.
Subsequent economic growth leads to the
establishment of democratic regimes.

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How Do Geography and Education
Influence 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

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 How is The Political
Economy Changing?
 Since the late 1980s, two trends have emerged
1. Democratic revolution (late 1980s and early 1990s)
 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
 economic advances of the last 25 years have led to increasingly
prosperous middle and working classes who have pushed for
democratic reforms
2. A move away from centrally planned and mixed
economies
 more countries have shifted toward the market-based model

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 What is 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

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 What Does The Changing
Economy Mean For Managers?
 Markets that were formerly off-limits to Western business
are now open
 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
 ex. China -1.2 billion people and India – 1.1 billion people
 However, the potential risks are large
 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

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 What Does The Changing
Economy Mean For Managers?
 Managers must consider
1. Political risk - 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
2. Economic risk - 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
3. Legal risk - the likelihood that a trading partner will
opportunistically break a contract or expropriate
property rights

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 How Can Managers Determine A
Market’s 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

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