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Dr Zain Yusufzai International Politics Chapter # 4 (page 96-123).

Political and economic systems and linkage between them
Five levels of economic integrations
Use of strategic planning
Impact of NGOs (Non Governmental Organization)

Changing political systems
Moving toward democracy
Former communist bloc of Eastern Europe, converting to
free market systems from command economy advocate,

MNEs feel until Government willing to take the steps

necessary to ensure that promises are kept and they are
able to repatriate they funds, these developing economies
proceed with caution, with their investment plans

Attract foreign investment: (requires)

• Development of high technology
• Initiation of many large scale projects
• Employee equipped with modern tools. Knowledge

Political ideologies and economics

a set of integrated beliefs, theories, and doctrines that
helps to direct the actions of a society. For example; the
political ideology of USA is written in the constitution that
guarantees the rights of private property and the freedom
of choice. This ideology helped in laying the economic
political system (US Capitalism).

Political systems: (two types)

1. democracy
2. totalitarianism
Number of totalitarianism systems:
• communism
• theocratic
• secular
1. Democracy: a system of government in which the
people either directly or through their elected officials,
decide what is to be done
2. Totalitarianism: a system of government on which one
individual or party maintains complete control and either
refuses to recognize other parties or suppresses them

International business 1
Alan M. Rugman, Richard M. Hodgetts
Dr Zain Yusufzai International Politics Chapter # 4 (page 96-123).

Communism: a political system in which the government

owns all property and makes all decisions regarding
production and distribution of goods and services
Theocratic: a system of government in which a religious
group exercises total power and represses or persecuted
non orthodox factions
Secular: a system of government in which the military
controls everything and makes decisions, which it deems
to be in the best interests of the country

Economic systems: (Three basic economic systems).

1. Capitalism
2. Socialism
3. Mixed
Classification of these systems in terms of resource
1. Market driven versus centrally determined
2. Property ownership ( private versus public)

Market driven economy: An economy in which goods

and services allocated based on consumer demand
• Market driven economies are characterized
by private ownership
• Assets in the hands of privately owned
companies that compete for market share
by offering the best quality product (goods
and services) at competitive prices.

Centrally determined economy: An economy in which

goods and services allocated based on a plan formulated
by a committee that decides what is to be offered
Characteristics of Centrally determined economies
• Owned by public
• Asset of production are owned by the state and
production quotas are set for each organization
Mixed economies: Economic systems characterized by a
combination of market and centrally driven planning
Characteristics of mixed economies
• Combination of market and centrally driven
• Most nations of the world have mixed economies
For example a leading proponent of market driven
economic policy:
• Provides health care and other social services to
many of its citizens through government
regulatory agencies

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Alan M. Rugman, Richard M. Hodgetts
Dr Zain Yusufzai International Politics Chapter # 4 (page 96-123).

• Many market driven economies are making

greater use of centrally determined ideas such as
using business , government cooperation to fend of
external competitors
• Most economies moving from central planning to
market driven and mixed economies
• Privatization movement around the3 world is good

Government control of assets

1. Privatization: The process of selling government assets
to private buyers
2. Nationalization: A process by which the government
takes control of business assets, sometimes with
remuneration of the owners and other times with out such
remuneration (Six steps involved in this process)
i. Promoting economic development , for example by
coordinating the assets of many businesses into one
overall master plan;
ii. Earning profits for the national treasury;
iii. Preventing companies from going bankrupt and
closing their doors;
iv. Enhancing programs that are in the national
v. Increasing the political or economic control of those I
vi. Ensuring goods and services to all citizens regardless
of their economic status

Opposite situation privatization takes two forms;

1. Divestiture: A process by which government or
business sells assets
2. Contract management: A process by which an
organization (government) transfers operating
responsibility of an industry without transferring the
legal title and ownership
Primary reasons for privatization include (7 reasons).
i. More efficient to have the goods and services provided
by private business than by government run
ii. Change in the political culture brings about a desire to
sell off these assets;
iii. Company making money and the government feels
that there is more to be gained by selling now than by
holding on;

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Alan M. Rugman, Richard M. Hodgetts
Dr Zain Yusufzai International Politics Chapter # 4 (page 96-123).

iv. Purchase price can be used to reduce the national

v. Company is losing money and the government has to
assume the losses out of the national treasury;
vi. Company needs research and development funds in
order to maintain a competitive stance and it is
unwilling to make this investment;
vii. International funding agencies are making assistance
to the country conditional on a reduction in the size of
the government;

Privatization in action:
• Countries with moderate per capita gross domestic
products, (Argentina, China Brazil, Mexico, and
• Countries with advanced economies (US, Japan,
UK, Germany
• Have a strong feeling that their economies will
strengthen through privatization program
• Competition increases (positive outcome)

Government business cooperation

Government can act as big brother or umbrella for
business (Saudi Hilal Ahmar);

Japan and EU assistance

Ministry of international Trade and Industry (MITI): A
Japanese ministry charged with providing information
about foreign markets and with encouraging investment
in select industries and, in the process, helping to direct
the economy
• Initial focus providing protection to Japanese
companies and marketing the product of four
major industries: 1. electric power, 2.steel, 3. ship
building, and 4. Fertilizers
• Incentives created to invest in these industries and
to help firms export their products
• Become less proactive and more cooperative
• Main role finding export markets for Japanese

European Union (EU)

• Helps promote business
• One way through funding of research projects
for other governments

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Alan M. Rugman, Richard M. Hodgetts
Dr Zain Yusufzai International Politics Chapter # 4 (page 96-123).

• Best known R&D consortium is EUREKA, a

pan European group whose main objective is to
create closer cooperation between private
companies and research institutes , in the field
of advance technologies for the purpose of
exploiting commercial opportunities

The American response:

Beginning in 1990 > white house panel of experts from

industry academia, and government released a list of 22
technologies, considered essential to the national defense
and economic prosperity of U.S.A.

List included - 1. Composite material 2. Flexible computer

integrated manufacturing 3. High
definition electronic displays
Conduct:- long range strategic planning and to work
closely with private sector in developing
important technologies
Economic integration:-
The establishment of transnational rules and regulations
that enhance economic trade and cooperation among
At one extreme, economic integration would result in lone
world wide free trade market in which all nations had
common currency and could export any thing they
wanted to any other nation
The other extreme total lack of economic integration in
which nations were self sufficient and did not trade with
any one

Implementation problems
Economic integration requires that participants agree to
surrender some of their individual economic power,
examples as the authority to set tariffs and quotas
Free trade flow: ------- neither side can restrict the others
right to export these commodities
to its country

Trade creation and trade diversion:-

i. Result in trade creation

A process in which members of an economic integration

group begin to focus their efforts on these goods and

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Alan M. Rugman, Richard M. Hodgetts
Dr Zain Yusufzai International Politics Chapter # 4 (page 96-123).

services for which they have a comparative advantage and

start trading more extensively with each other
Countries integrate other economies bring about a shift in
business activity
Example U.S. Mexico, car deal built in Mexico shipped
back to us
Result in efficient, low cost producers in member
countries gaining market share from high cost member
producers. As well as generating increased export
Result in efficient, low cost producers

2. Result in trade diversion

Members of an economic integration group decrease their

trade with non member countries in favor of trade with
each other. Leads to loses of production and exports from
more efficient member countries to less efficient member
countries that are protected by tariffs or other barriers.

Levels of economic integration (five levels)

i. Free trade area
An economic integration arrangement in which barriers
to trade (such as tariffs) among member countries are
removed example NAFTA
NAFTA: North American Free trade Union: - a regional
free trade agreement between Canada, the US, and

ii. Customs union

A form of economic integration in which all tariffs
between member countries are eliminated and a common
trade policy toward non member countries is established

iii. Common market

A form of economic integration characterized the
elimination of trade barriers among member nations, a
common external trade policy, and mobility of factors of
production among member countries
iv. Economic union
A form of economic integration characterized by free
movement of goods, services, and factors of production
among member countries and full integration of economic
v. Political union

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Alan M. Rugman, Richard M. Hodgetts
Dr Zain Yusufzai International Politics Chapter # 4 (page 96-123).

An economic union which there is full economic

integration unification of economic policies and a single

Economic integration: an overall perspective

Four point merit:
First it is not necessary for a country to pursue economic
integration by starting with a free trade area and then
working up to a common market or an economic union
example Britain left free trade area and joined EU
Second, economic integration in the form of free trade
typically results in a winning situation for all group
members since each member can specialize in those goods
and services
Third and complementary to the above bloc members
often find that their business is able to achieve internal
economies of scale brought about by lower production
costs and other savings within the firm
Fourth factors of production a common market are
allowed to flow freely across borders, the firm may also
achieve external economies of scale brought about by
access to low cost capital, more highly skilled labor, and
superior technology. In short, in group companies can
draw on resources in member countries to help increase
Finally in the short run some bloc countries may suffer
because of other member countries are able to achieve
greater increases in efficiency and thus dominate certain
industries and markets in the bloc
NGO: - Non governmental organizations:
Non profit organizations that act to advance diverse social
Civil society:-
A group of individual’s orgtanizations and institutions
that act outside the government and the market to
advance a diverse set of interests

Ethics, environment, MNEs and the civil society

The European Union (EU)
A treaty based institutional framework that manages
economic and political cooperation among its member
European free trade association (EFTA)
A free trade area currently consisting of Iceland
Liechtenstein, Norway and Switzerland past members
included the UK (before it joined EU)

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Alan M. Rugman, Richard M. Hodgetts
Dr Zain Yusufzai International Politics Chapter # 4 (page 96-123).

Growth and challenges:-

Organization (five major institutions that manage the EU)
i. The European council
ii. The Council of ministers
iii. The European commission
iv. The European parliament
v. Court of justice

The future:-
Other economic alliances:-
Andean pact
Economic integration and strategic management
Strategic alliances and acquisitions
Telecommunication and electronics
Localization of business operations
Localization of profits
Localization of production
Localization of management

International business 8
Alan M. Rugman, Richard M. Hodgetts