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GLOBAL BUSINESS TODAY

NUR IZIAWATI SUHAIMI 2011676184 NURULNADIA YUSOF 2011447692 PREPARED FOR : PROF. DR. FARIDAH HJ HASSAN GLOBAL BUSINESS ISSUES GBI795 EMBA 771 4B 2013

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CHAPTER 2
NATIONAL DIFFERENCES IN POLITICAL ECONOMY

PART I
• INTRODUCTION • POLITICAL SYSTEMS • ECONOMIC SYSTEMS • LEGAL SYSTEMS

BY; NURULNADIA YUSOF 2011447692

and legal systems in a country. These systems interact and influence each other. . which affect the level of economic well-being. Differences in political economy has major implications for the practice of international business.INTRODUCTION Political Economy Interdependent of political. economic.

Political systems can be assessed • in terms of the degree to which they emphasize collectivism as opposed to individualism • in terms of the degree to which they are democratic or totalitarian • both dimensions are interrelated. .POLITICAL SYSTEMS A political system is the system of government in a nation.

COLLECTIVISM AND INDIVIDUALISM Collectivism refers to a political system that stresses the primacy of collective goals over individual goals. • Today. • Needs of society more important than individual freedoms. socialists support collectivism. • “individual rights should be sacrificed for the good of the majority and that property should be owned in common” – Plato. . The Republic (427-347 BC).

rather than individual capitalists. .COLLECTIVISM AND INDIVIDUALISM Collectivism / Socialism Advocate state ownership of the basic means of production. distribution and exchange – Karl Marx (1881-83) Manage state-owned enterprise to benefit society as a whole.

Social democrats: achieving socialism by democratic. socialism split into: Communism: belief that socialism could be achieved only through revolution and totalitarian dictatorship. .COLLECTIVISM AND INDIVIDUALISM In the early 20th Century.

transform state-owned enterprise to be run for the “public good rather than private profit”.COLLECTIVISM AND INDIVIDUALISM After WWII. State-owned companies performed poorly: • Monopoly position • Government financial support – increasingly inefficient • Higher prices & higher taxes Privatization • Sold state-owned enterprise to private investors .

• Communal property receives little care.COLLECTIVISM AND INDIVIDUALISM Individualism Individuals should have freedom over their economic and political pursuits. whereas property that is owned by an individual will receive the greatest care and therefore be most productive – Aristotle (384-322 BC) Individualism stresses • individual freedom and self-expression • democratic political systems and free market economies .

DEMOCRACY AND TOTALITARIANISM Difference between a democracy and totalitarianism? Democracy: political system in which government is by the people. as do the communist version of collectivism and totalitarianism. Democracy and individualism go hand in hand. and opposing political parties are prohibited. . exercised either directly or through elected representatives Totalitarianism: form of government in which one person or political party exercises absolute control over all spheres of human life.

• Individual’s right to freedom of opinion • A free media • Regular elections in which all eligible citizens are allowed to vote • Universal adult suffrage • Limited terms for elected representatives • A fair court system – independent from political system • A non-political state bureaucracy.DEMOCRACY AND TOTALITARIANISM Representative democracy – citizens periodically elect individuals to represent them. police force & armed service • Free access to state information .

DEMOCRACY AND TOTALITARIANISM In most totalitarian regimes • widespread political repression • no free and fair elections • media is censored • basic civil liberties are denied • challenges to the regime are prohibited .

Right-wing totalitarianism: individual economic freedom is allowed but individual political freedom is restricted in the belief that it could lead to communism. Tribal totalitarianism: a political party that represents the interests of a particular tribe monopolizes political power. Theocratic totalitarianism: political power is monopolized by a party. . group. or individual that governs according to religious principles .DEMOCRACY AND TOTALITARIANISM Four major forms of totalitarianism today: Communist totalitarianism: advocates achieving socialism through totalitarian dictatorship.

. There are three types of economic systems: the market economy.ECONOMIC SYSTEMS Political ideology and economic systems are connected. A free market system is likely in countries where individual goals are given primacy over collective goals State-owned enterprises and restricted markets are common in countries where collective goals are dominant. and the mixed economy. the command economy.

.MARKET ECONOMY Price system – what & how much to produce is determined by supply and demand. The role of government is to encourage free and fair competition between private producers. Customers are sovereign and all productive activities are privately owned.

the goods/services. . hence dynamism & innovation are absent – economies tend to stagnate. All businesses are state owned.COMMAND ECONOMY “The goods of society” . and have little incentive to control costs and be efficient. quantity and the price at which they are sold are all planned by the government. Little incentive to better serve consumer needs.

some sectors are left to free market mechanisms while other sectors have significant government planning. Governments tend to take over troubled firms that are considered to be vital to national interests. US government took over AIG (80%).MIXED ECONOMY In mixed economy. Citigroup and General Motors – to stop financial institution from collapsing. .

LEGAL SYSTEMS Refers to the rules. that regulate behavior along with the processes by which the laws of a country are enforced and through which redress for grievances is obtained. or laws. A country’s legal system is important because • laws regulate business practice • laws define the manner in which business transactions are to be executed • laws set down the rights and obligations of those involved in business transactions . Influenced by the prevailing political system & historical tradition.

precedent to case that have come before the courts in the past and custom to the ways in which laws are applied in specific situation • Judges have more flexibility & power to interpret the law. • Laws may be amended to deal with new situations. 2) Civil law: based on a very detailed set of laws organized into codes. • Judges have the power only to apply the law . and custom • Tradition refers to a country’s legal history.DIFFERENT LEGAL SYSTEMS Three main types of legal systems: 1) Common law: based on tradition. • Judges rely upon detailed legal codes and have less flexibility. precedent.

DIFFERENT LEGAL SYSTEMS 3) Theocratic law: based on religious teachings • Islamic law is the most widely practiced in the modern world • Islamic law is primarily a moral and intended to govern all aspects of life. Sunnah and writings of Islamic scholars • Basic foundations of Islamic law cannot be changed • Extended to cover certain commercial activities. • Most of Muslim country – blend of Islamic law with either common or civil law system. . • Foundation for Islamic law – Al-Quran.

contracts are very detailed with all contingencies spelled out.contracts are shorter and much less specific. . in different ways. Common law .DIFFERENCES IN CONTRACT LAW Common law & civil law approach contract law. 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. the body of law that governs contract enforcement. Contract law is the body of law that governs contract enforcement. Civil law .

which country’s laws should apply? The United Nations Convention in Contracts for the International Sales of Goods (CIGS) establishes a uniform set of rules governing certain aspects of the making and performance of everyday commercial contracts between sellers and buyers who have their places of business in different nations.DIFFERENCES IN CONTRACT LAW In an international business contract dispute. Countries that adopt CIGS signal to other nations that they will treat the convention’s rules as part of their law. . Non-CIGS opt for arbitration to settle contract disputes. Less than 70 nations have ratified the convention.

Almost all countries have laws that protect property right.when public officials extort income or resources from property holders using various legal & illegal mechanisms including excessive taxation & bribes.PROPERTY RIGHTS AND CORRUPTION Property rights . .the legal rights over the use to which a resource is put and over the use made of any income that may be derived from that resource. blackmail.theft. In many countries. piracy. Property rights can be violated • by private action . these law are not enforced. and the like by private individuals or groups • by public action .

PROPERTY RIGHTS AND CORRUPTION Corruption is present in all countries to some degree. however when a country has a high level of corruption significantly will cause • Foreign direct investment falls • International trade falls • Economic growth falls .

PROPERTY RIGHTS AND CORRUPTION Rankings of Corruption by Country. 2009 .

S. • Illegal to bribe a foreign government official in order to obtain or maintain business over which the foreign official has authority.PROPERTY RIGHTS AND CORRUPTION The Foreign Corrupt Practices Act – to limit corruption in the U. • Requires all publicly traded countries to keep detailed records • Allow grease payment or speed money to secure the performance of routine government actions .

Patent : documents giving the inventor of a new product or process exclusive rights to the manufacture. or sale of that invention for a defined period. by which merchants or manufacturers designate and differentiate their products . artists. playwrights. and publishers to publish and dispose of their work as they see fit. Trademarks: designs and names.THE PROTECTION OF INTELLECTUAL PROPERTY Intellectual property: property that is the product of intellectual activity. use. Copyrights: exclusive legal rights of authors. composers. often officially registered.

• To stimulate innovation and creative work The protection of intellectual property rights differs greatly from country to country • The Paris Convention for the Protection of Industrial Property is an agreement signed by 96 countries to protect intellectual property rights • The Trade Related Aspects of Intellectual Property Rights (TRIPS) requires WTO members to grant and enforce patents lasting at least 20 years and copyrights lasting 50 years .THE PROTECTION OF INTELLECTUAL PROPERTY WHY protect intellectual property? • Source of economic value for business • Reward the originator of a new invention for his or her effort.

or damage.PRODUCT SAFETY AND PRODUCT LIABILITY Product safety laws set certain safety standards to which a product must adhere. • Much greater if product does not conform to required safety standards • Liability laws are usually least extensive in less developed countries Firms must decide whether to adhere to the standards of the home country or the standards of the host country . death. Product liability involves holding a firm and its officers responsible when a product causes injury.

PART II • THE DETERMINANTS OF ECONOMIC DEVELOPMENT • STATES IN TRANSITION • THE NATURE OF ECONOMIC TRANSFORMATION IMPLICATIONS OF CHANGING POLITICAL ECONOMY FOCUS ON MANAGERIAL IMPLICATIONS • • BY. NUR IZIAWATI SUHAIMI 2011676184 .

THE DETERMINANTS OF ECONOMIC DEVELOPMENT A country’s level of economic development affects its attractiveness as a possible market or production location for firms .

DIFFERENCES IN ECONOMIC DEVELOPMENT One common measure of economic development is a country’s gross national income (GNI) per head of population A purchasing power parity (PPP) adjustment allows for a more direct comparison of living standards in different countries Because both GNI and PPP data only provide a static picture of development. it is also important to consider growth rates .

2008 34 .DIFFERENCES IN ECONOMIC DEVELOPMENT GNI per Capita.

2008 .DIFFERENCES IN ECONOMIC DEVELOPMENT GNI PPP per Capita.

DIFFERENCES IN ECONOMIC DEVELOPMENT Growth Rate in GDP per Capita.2008 . 1999 .

BROADER CONCEPTIONS OF DEVELOPMENT: AMARTYA SEN Nobel Prize winning economist Amartya Sen argued that development should be assessed less by material output and more by the capabilities and opportunities that people enjoy To reflect Sen’s ideas and gauge a country’s economic development and likely future growth rate. and whether average incomes are sufficient to meet the basic needs of life in a country . education attainment. the United Nations created the Human Development Index based on life expectancy.

BROADER CONCEPTIONS OF DEVELOPMENT: AMARTYA SEN Human Development Indicators. 2007 .

and new strategies) and entrepreneurship are the engines of long-run economic growth Some experts argue that economic freedom associated with a market economy creates greater incentives for innovation and entrepreneurship than a planned economy . new processes.POLITICAL ECONOMY AND ECONOMIC PROGRESS Question: What is the relationship between political economy and economic progress? There is broad agreement among experts that innovation (new products. new management practices. new organizations.

even one of the benevolent kind It also seems evident that the subsequent economic growth leads to establishment of democratic regimes . and economic growth It seems likely that democratic regimes are more conducive to long-term economic growth than a dictatorship. entrepreneurship.POLITICAL ECONOMY AND ECONOMIC PROGRESS Strong legal protection of property rights is another requirement for a business environment conducive to innovation.

AND ECONOMIC DEVELOPMENT In addition to the political and economic systems. EDUCATION. and thus economic development • Countries with favorable geography are more likely to engage in trade which can promote economic growth Education levels also influence economic development • Countries that invest more in the education of their young people develop faster economically .GEOGRAPHY. other factors can influence a country’s rate of economic development Geography can influence economic policy.

STATES IN TRANSITION Since the late 1980s. and many of the previous totalitarian regimes collapsed There has been a move away from centrally planned economies towards free markets . a wave of democratic revolutions has swept the world.

new information and communication technologies have broken down the ability of the state to control access to uncensored information c.THE SPREAD OF DEMOCRACY Democracy has spread to new countries because : a. many totalitarian regimes failed to deliver economic progress to the majority of their population b. economic advances of the last quarter century have led to the emergence of increasingly prosperous middle and working classes who have pushed for democratic reforms .

THE SPREAD OF DEMOCRACY Political Freedom in 2009 .

command economies failed to deliver the kind of sustained economic performance that was achieved by countries that had adopted market-based systems.THE SPREAD OF MARKET-BASED SYSTEMS Since the late 1980s there has been a transformation from centrally planned command economies to market-based economies In general. prompting many countries to shift to a market-based system .

THE SPREAD OF MARKET-BASED SYSTEMS Distribution of Economic Freedom in 2009 .

THE NATURE OF ECONOMIC TRANSFORMATION The shift toward a market-based economic system typically involves at least three distinct activities • deregulation • privatization • the creation of a legal system to protect property rights .

and the manner in which private enterprises operate . the establishment of private enterprises.DEREGULATION Involves removing legal restrictions on the free play of markets.

privatization should increase economic efficiency .PRIVATIZATION Transfers the ownership of state property into the hands of private investors Because private investors are motivated by potential profits to increase productivity.

LEGAL SYSTEM
A well-functioning market economy requires laws protecting private property rights and providing mechanisms for contract enforcement
Without a legal system that protects property rights, and without the machinery to enforce that system, growth is hampered Many countries have made significant strides toward creating a strong legal system, but more work is necessary

IMPLICATIONS OF A CHANGING ECONOMY
The changes in the political and economic systems have significant implications for international firms

Markets that were formerly off-limits to Western business are now open
• China (population of 1.2 billion) could be a bigger market than the U.S., the EU, and Japan combined • India (population 1.1 billion) is also a potentially huge market

However, just as the potential gains are large, so are the risks

IMPLICATIONS FOR MANAGERS
Question: What are the implications of the political economy for international businesses?
There are two main implications :

a. the political, economic, and legal systems of a country raise important ethical issues that have implications for the practice of international business
b. the political, economic, and legal environment of a country clearly influences the attractiveness of that country as a market and/or investment site

OVERALL ATTRACTIVENESS RISKS POLITICAL RISKS: SOCIAL UNREST/ANTI BUSINESS TRENDS ECONOMIC RISKS:ECONOMIC MISMANAGEMENT LEGAL RISKS: FAILURE TO SAFEGUARD PROPERTY RIGHTS OVERALL ATTRACTIVENESS COSTS CORRUPTION BENEFITS SIZE OF ECONOMY LIKELY ECONOMIC GROWTH LACK OF INFRASTRUCTURS LEGAL COSTS .

PART III • QUESTION 1 • QUESTION 2 .

QUESTION 2 A democratic political system is an essential condition for sustained economic progress. . Discuss.

OVERVIEW Basic Human Right Individual Right Equality DEMOCRACY Majority Rule Participation .

OVERVIEW Economic Growth • Increased in value of the goods and services produced • Measured as the % rate of increase in real GDP • Indicating an increase in the average standard of living .

ECONOMIC GROWTH MEASUREMENT Lower military / civilian budget ratio Growth of infrastructure & public resources Better income distribution Better education Better health Adequate expansion of basic services Housing availability & quality Lower corruption Transparent governance .

5% annually 1957 – 2005  Multi-sector economy  Leveraging on the political stability to attract investor .MALAYSIA  57 years of democracy political system  GDP average growth of 6.

inadequate public healthcare and terrorism – large population.8% .INDIA  The most populous democracy country  Tenth largest economy by market exchange rate and third largest by purchasing power parity (2011)  Annual GDP growth rate of 5. illiteracy.1% in 2011-12. malnutrition. .  Sosio-economic challenges: poverty.past two decades and 6. corruption.

SOUTH KOREA  Democracy since 1987 – previously dictator  High income developed country  Ranks 15th in the world by nominal GDP and 12th by purchasing power parity  Identified as G-20 major economies  Economic growth rate reached 6.2% in 2010  Suffers damage to its credit rating in the stock market – North Korea threat .

CHINA  Authoritarian – Communist Party  “Socialism with Chinese characteristics” – heavy restrictions on the Internet. press. freedom of assembly.5% between 2001 to 2010  World’s third largest recipient of inward FDI . 2013  Annual GDP growth of 10. reproductive rights & freedom of religion  The world’s second largest economy in terms of nominal GDP – IMF.

DEMOCRACY POLITICAL SYSTEM ENCOURAGE & INFLUENCE SUSTAINABILITY OF ECONOMIC GROWTH BUT NOT ESSENTIAL .

FACTORS INFLUENCING SUSTAINABLE ECONOMIC GROWTH POLITICAL STABILITY ECONOMIC OPENNESS HUMAN CAPITAL LUXURIOUS RESOURCES .