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?
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 countrys 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 countrys? 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 I nternational
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 liability
Product safety laws
Criminal / civil liability
GDP per capita:
does not factor cost of living
differences
Purchasing Power Parity (PPP) index:
adjusts per capita GDP by cost-of-
living
Human Development Index:
life expectancy, literacy, PPP based
average incomes
Differences of Economic
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}
Broader Conceptions of
Development
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
Political Economy and Economic
Progress
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, Chinas
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
Countrys 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