National Differences in Political, Economic, and Legal Systems

• Source: ©Bandar Algaloud/Saudi Kingdom Council/Handout/Anadolu Agency/Getty Images

 Introduction
International business is more complicated than domestic
• Differing political, legal, and economic systems
• Vary in economic development and growth trajectories
• Cultural, education, and skill levels vary

The political, economic, and legal systems are known as the political economy
• Systems are interdependent
• Societal culture affects political economy, and political economy shapes societal
culture
 Political Systems

Political system: system of government in a nation

• Political systems assessed in terms of degree to which they:

• Emphasize collectivism as opposed to individualism

• Are democratic or totalitarian

• Long term or short term orientation

 Brain Teasers
1. Just what is the role of government in our lives
E.g. USA viewpoint vs China viewpoint vs. Iran/Iraq viewpoint

2. Are the people who run your government competent to do what you
want them to do.
 Collectivism and Individualism
• Collectivism: system that stresses the primacy of collective goals over
individual goals
• Collectivism is a value that is characterized by emphasis on cohesiveness
among individuals and prioritization of the group over the self
• Traced to Greek philosopher Plato in “The Republic”
 Argues that individual rights should be sacrificed for the good of the
majority and that property should be owned in common.
• Society should be stratified into classes (the ruling class vs. the ruled
class)

• When collectivism is emphasized, needs of society as whole are

generally viewed as being more important than individual freedoms
 Collectivism and Individualism continued

• Socialism, a la Karl Marx

• The few benefit at the expense of the many in a capitalist society
where individual freedoms are not restricted
• Capitalists expropriate for their own use the value created by
workers while paying workers only subsistence wages in return.
• Advocated for state ownership of the basic means of production,
distribution and exchange
• Management of state owned enterprise to benefit society as a
whole rather than individual capitalists
 Collectivism and Individualism
• In the early 20th century, socialism split into:
• Communists – socialism could only be achieved though violent revolution and totalitarian
dictatorship
• In retreat worldwide by mid-1990s – collapse of the Soviet Union & the fall of the Berlin Wall
• Hold-out = North Korea

• Social democrats, who worked to achieve same goals by democratic means

• Many state-owned enterprises failed to succeed, and many nations implemented privatization programs
• Great Britain = Conservative party = committed to free market economies
• Germany = Christian Democratic party = committed to free market economies

• “The inherent vice of capitalism is the unequal sharing of blessings. The

inherent virtue of socialism is the equal sharing of miseries” – Winston
Churchill
 Collectivism and Individualism

• Individualism
• Suggests individuals should have freedom over economic and political pursuits
• Traced to Aristotle, who argued that individual diversity and private ownership are
desirable
• Imagine if the State of New York dictated what major you need to have in order to
graduate.

• Individualism stresses:
• Individual freedom and self-expression
• Private property is more productive than communal property
• Letting people pursue self-interests to achieve the best overall good for society
• Democratic systems and free markets
Individualism vs. collectivism is a centuries-old debate topic

For example, does an individual’s life belong to him or her or to the community,
society, or country in which he or she resides,

There is no consensus on which answer is correct depending on which country

you reside in or which personal “compass” you subscribe to.

Military training motto:

Your soul belongs to God, but your ass belongs to the commandant

Source: Objective Standard, March 3, 2014. www.theobjectivestandard.com

 Democracy and Totalitarianism
• Democracy
• Political system in which government is by the people, exercised either directly or through
elected representatives
• Most common form today is representative democracy – elected representatives vote on
behalf of constituents (e.g. United States – a constitutional republic)
• Freedom of expression, opinion, and organization;
• Free media; Regular elections;
• Universal adult suffrage; Limited terms for elected officials;
• Fair court system; Nonpolitical police force and armed services;
• Free access to state information (FOIA)
 Democracy and Totalitarianism
• Totalitarianism
• Form of government in which one person or political party exercises
absolute control over all spheres of human life, and opposing political
parties are prohibited
• In most totalitarian regimes:
• There is widespread political repression
• There are no free and fair elections
• Media is censored
• Basic civil liberties are denied
• Challenges to regime are prohibited
 Democracy and Totalitarianism
• Four major forms of totalitarianism today:
1. Communist totalitarianism: advocates achieving socialism through totalitarian dictatorship
E.G. China, Vietnam, Laos, North Korea, Cuba)
1. Theocratic totalitarianism: political power is monopolized by a party, group, or individual
that governs according to religious principles (e.g. Iran & Saudi Arabia)
2. Tribal totalitarianism: where a political party that represents the interests of a particular
tribe monopolizes power (e.g. Africa, Zimbabwe, Tanzania, Uganda, Kenya)
3. Right-wing totalitarianism: individual economic freedom is allowed but individual political
freedom is restricted because it could lead to communism (e.g. Brazil, South Korea,
Taiwan – although most are in decline)
4.
 Economic Systems
Political ideology and economic systems are connected
Three types of economic systems:
1. market economy
2. command economy
3. mixed economy
 MARKET ECONOMY
Market Economy
• Goods and services a country produces and the quantity in which they are
produced is determined by supply and demand
• Supply must not be restricted by monopolies
• (Are Boeing & Airbus monopolies)
• Government encourages free and fair competition between private producers
• Constant incentive to improve products and processes (Amazon, Apple, UPS/FedEx)
 Command Economy
Goods and services a country produces, the quantity in which they are
produced, and the price at which they are sold are planned by government

• All businesses are state-owned and have little incentive to control costs and be efficient
• Because there is no private ownership, there is little incentive to better serve consumer needs
• Dynamism and innovation are absent
• Collectivist goals were given priority over individual goals
 North Korea’s Command Economy

Kim Jong-un, the

leader of the
Democratic People's
Republic of Korea,
inspecting a factory.
North Korea functions
as a centralized, single
party and tightly
controlled dictatorial
command economy.

Source: ©AFP/Getty Images

 MIXED ECONOMY
Mixed Economy
• Includes some elements of market economies and some elements of
command economies
• Governments take over troubled firms considered vital to national interests
• The US government does not have a stellar record of running troubled firms and actively
seeks competent buyers

• Number of mixed economies becoming less common

• The UK privatized much of many industries during Prime Minister Thatcher’s
term, e.g. Airlines, railroads, trucking
 Legal Systems
Legal system of a country refers to rules, or laws, that regulate behavior,
along with processes by which laws are enforced and through which
redress for grievances is obtained.

• A country’s legal system is important because laws:

• Regulate business practice
• Define manner in which business transactions are executed
• Set rights and obligations of those involved in business transactions
 DIFFERENT LEGAL SYSTEMS
• Common law: Defined as a body of legal rules that have been made by judges as they
issue rulings on cases, as opposed to rules and laws made by the legislature or in
official statutes. (e.g. a rule that a judge made that says that people have a duty to
read contracts.
• Found in most of Great Britain’s former colonies, including the United States

• Civil law: based on detailed set of laws organized into codes - its core principles are
codified into a referable system which serves as the primary source of law.
• Found in more than 80 countries, including Germany, France, Japan, and Russia

• Theocratic law: based on religious teachings

• Islamic law is most widely practiced
 FOREIGN CORRUPT PRACTICES ACT - 1977
• Foreign Corrupt Practices Act
• Makes it illegal to bribe a foreign government official in order to obtain or maintain
business over which the foreign official has authority
• All publicly traded companies must keep detailed records so it is clear whether a violation
has occurred
• Facilitating or expediting payments to secure performance of routine government actions
are permitted
 Legal Systems
The Protection of Intellectual Property
• Intellectual property: property that is the product of intellectual activity
• Patents: give inventor exclusive rights to the manufacture, use, or sale of that invention
• Copyrights: exclusive legal rights of authors, composers, playwrights, artists, and publishers
to publish and dispose of their work as they see fit
• Trademarks: designs and names, often officially registered, by which merchants or
manufacturers designate and differentiate their products
 Focus on Managerial Implications
The Macro Environment Influences Market Attractiveness

• Political, economic, and legal systems of a country raise important ethical

issues that have implications for practicing international business

• Political, economic, and legal environments of a country clearly influence

attractiveness of country as a market and/or investment site

• A democratic country with a market-based economy, protection of property

rights, and limited corruption is a more attractive place to do business
 National Differences

Class 2 - Chapter 3: National Differences

in Economic Development

Source: ©EVARISTO SA/AFP/Getty Images

 Introduction

• Differences in political, economic, and legal systems influence level of

economic development and its attractiveness for doing business

• General move toward democratic forms of government, market-based

economic reforms, and adoption of legal systems that better enforce
property rights
 Differences in Economic Development
Level of economic development affects a country’s attractiveness as a
possible market or production location for firms

• Common measure is gross national income (GNI)

• Purchasing power parity (PPP) adjustment provides a more direct

comparison of living standards in different countries

• Economic growth rates provide a dynamic picture of

development
 Some Common Economic Definitions
• Gross Domestic Product (GDP)
The total monetary or market value of all the finished goods and services
produced within a country's borders in a specific time period. As a broad
measure of overall domestic production, it functions as a comprehensive
scorecard of the country’s economic health.
• Gross National Income (GNI)
GNI is the total amount of money earned by a nation's people and businesses. It is used
to measure and track a nation's wealth from year to year. The number includes the
nation's gross domestic product plus the income it receives from overseas sources.
GNI is an alternative to gross domestic product (GDP) as a means of measuring and
tracking a nation's wealth and is considered a more accurate indicator for some
nations.
Map 3.1 GNI per Capita, 2017

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 Purchasing Power Parity
• An economic theory that allows the comparison of the purchasing power of
various world currencies to one another.

• It is a theoretical exchange rate that allows you to buy the same amount of
goods and services in every country.

• E.G. The price of a market basket of goods in one country compared to the
same basket of goods in another country
Map 3.2 GNI PPP per Capita, 2017

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 HUMAN DEVELOPMENT INDEX
UN attempt to assess the impact of human life in a country, based upon three
factors:

1. Life expectancy at birth – a function of health care & health education

2. Educational attainment/literacy

3. Whether average incomes are sufficient to meet the basic needs of life in a
country (e.g. adequate food, shelter, health care)
Map 3.4 Human Development Index, 2015

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 Innovation and Entrepreneurship Are the Engines of Growth
Innovation and Entrepreneurship Are the Engines of Growth

• For a country to sustain long-term economic growth, the business environment

needs to be conducive to innovation and entrepreneurial activity

• Innovation: new products, new processes, new organizations, new

management practices, and new strategies

• Entrepreneurs: first to commercialize innovative new products and processes

 Brain Teaser

How would a non-capitalism person argue this case?

 Innovation and Entrepreneurship Require a Market Economy

Innovation and Entrepreneurship Require a Market Economy

• Countries with high economic freedom have high economic growth and richer
citizens
• Hong Kong, Switzerland, Singapore, U.S., Canada, and Germany

• Countries that lack economic freedom fail to achieve respectable economic

growth
Innovation and Entrepreneurship Require Strong Property Rights
• Individuals and businesses must have opportunity to profit from innovative ideas

• No nation can have a strong market economy without adequate participation in an

information framework that records ownership of property and other economic
information.

• Many small entrepreneurs who lack legal ownership of their property, making it
difficult for them to obtain credit, sell the business, or expand. They cannot seek legal
remedies to business conflicts in court, since they do not have legal ownership. Lack of
information on income prevents governments from collecting taxes and acting for the
public welfare.
 ECONOMIC PROGRESS BEGETS DEMOCRACY

• Democratic regimes tend to be more conducive to long-term

economic growth than dictatorships, even the benevolent kind

• Limiting human freedom also suppresses human development

and therefore limits progress
 Political Economy and Economic Progress

• Democracy is often a consequence of economic growth

• E.g. South Korea and Taiwan

• Contributed to attitude of many Western governments

towards human rights violations in China
• If China establishes a free market system, it is hoped that
greater individual freedom and democracy will follow
 THE SPREAD OF DEMOCRACTIC CONCEPTS

• Many totalitarian regimes failed to deliver economic progress to majority of

population, e.g. North Korea

• New information and communication technologies have broken down ability

of state to control access to uncensored information

• Economic advances of last quarter century led to increasingly prosperous

middle and working classes who pushed for democratic reforms
 States in Transition
Since late 1980s, the political economy of the world’s nation-states has
changed radically
Three trends:
1. A wave of democratic revolutions has swept the world and many previous
totalitarian regimes have collapsed
2. A move away from centrally planned and mixed economies towards free
markets
3. A shift back toward greater authoritarianism in some nations and signs of a
retreat from the free market model
Map 3.5 Freedom in the World, 2018

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Source: The Freedom House Survey Team, “Freedom in the World 2018,” www.freedomhouse.org
 The Spread of Market-Based Systems

• Since the late 1980s, a transformation from centrally planned

command economies to market-based economies

• Command and mixed economies failed to deliver the sustained

economic performance achieved by countries that had adopted
market-based systems

• Many countries shifted to a market-based system

 The Nature of Economic Transformation

Deregulation
• Removing legal restrictions to the free play of markets
• Establishment of private enterprises
• Removing price controls

• E.g. airlines, trucking, transportation in the 1970s

 The Nature of Economic Transformation
Privatization
• Transfers ownership of state property into hands of private individuals

Legal Systems
• Laws protecting private property rights and providing mechanisms for contract
enforcement
• Without a legal system in place, little incentive to engage in economic activity
 Focus on Managerial Implications
Benefits, Costs, Risks, and Overall Attractiveness of Doing Business
Internationally

• Overall attractiveness of a country depends upon balance between likely

benefits of doing business in that country against the likely costs and risks

• Benefits:
 Function of market size and current and future consumer purchasing power
 May be able to gain first-mover advantages
 Late entrants face late-mover disadvantages
 Benefits, Costs, Risks, and Overall Attractiveness
of Doing Business Internationally

• Costs
• Political costs – include cost of paying bribes, lobbying for favorable or fair treatment,
scratching each others’ backs

• Economic costs – relate primarily to sophistication of economic system, including

infrastructure and supporting businesses, e.g. the former East Germany

• Legal costs – can be higher in countries with dramatically different product, workplace, and
pollution standards, or where there is poor legal protection for property rights
 Risks

• Political risk – likelihood that political forces will cause drastic changes in a country's
business environment that adversely affects profit and other goals of a business
enterprise

• Economic risk – likelihood that economic mismanagement will cause drastic changes
in a country's business environment that adversely affects profit and other goals of a
business enterprise

• Legal risk – likelihood that a trading partner will opportunistically break a contract or
expropriate property rights

• Security Risk – Security of employees within the country

 OVERALL ATTRACTIVENESS

• Overall attractiveness of a country as a potential market and/or investment

site for an international business depends on balancing benefits, costs, and
risks associated with doing business in that country

• Generally, costs and risks are lower in economically developed and

politically stable markets

• However, potential for growth may be higher in less developed nations

Figure 3.1 Country Attractiveness

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