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International Business

By Charles W.L. Hill
Chapter 2

National Differences
in Political Economy
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
 they affect the level of economic
well-being in the nation


 The political, economic, and
legal environments of a country
can have a significant impact on
its economic development, and
on its attractiveness as a
potential investment location or
target market.
What Is A Political System?

 Political system refers to the
system of government in a
 Assessed according to
 the degree to which the country
emphasizes collectivism as
opposed to individualism
 the degree to which the country is
democratic or totalitarian
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
 manage to benefit society as a whole,
rather than individual capitalists


 There is nothing liberal in us!
We are collectivists! We are
communists! ~ Fidel Castro
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
How Does Modern-Day
Socialism Look?
 In the early 20th century, socialism split
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

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 2-10
economic freedom, but restricts
individual political freedom
What Is An Economic
 There are three types of economic systems
1. 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
2. Command economies - government plans the goods
and services that a country produces, the quantity that
is produced, and the prices as 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
3. 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
Legal Systems

 Three main types of legal
systems – in use around the
 Common law
 Civil law
 Theocratic law

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
 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
How Can Intellectual
Property Be Protected?
 Protection of intellectual property
rights differs from country to country
 World Intellectual Property
 Paris Convention for the Protection
of Industrial Property
 To avoid piracy, firms can
 stay away from countries where
intellectual property laws are relax
 file lawsuits
 lobby governments for international
property rights agreements and
Determinants of Economic
 Two ways to measure levels of
economic development are
1. Gross national income (GNI) per
2. Purchasing power parity (PPP)
involves adjusting GNI by
purchasing power
 GNI figures can be misleading
because they do not take into
account the Cost of Living.
 PPP allows for more direct
comparison of living standards
What Determines A Country’s Level
Of Economic Development?

 The United Nations used Dr. Mahbub ul
Haq (Pakistani Economist) and
Amartya Sen’s ideas to develop the
Human Development Index (HDI) which
is based on
 Life expectancy at birth
 Education Index- EI (Literacy
 Standard of living. (GDP per
capita at PPP) Now its known as
Income Index -II
Economist Big Mac Index
Table 1. Human Development Index and its components

Human Life Gross national GNI per capita
Development expectancy at Expected years Mean years of income (GNI) rank minus HDI
Index (HDI) birth of schooling schooling per capita rank HDI rank
HDI rank Country Value (years) (years) (years) (2011 PPP $)
a a
2015 2015 2015 2015 2015 2015 2014
1 Norway 0.949 81.7 17.7 12.7 67,614 5 1
2 Australia 0.939 82.5 20.4 13.2 42,822 19 3
2 Switzerland 0.939 83.1 16.0 13.4 56,364 7 2
4 Germany 0.926 81.1 17.1 13.2 45,000 13 4
5 Denmark 0.925 80.4 19.2 12.7 44,519 13 6
d e
5 Singapore 0.925 83.2 15.4 11.6 78,162 -3 4
7 Netherlands 0.924 81.7 18.1 11.9 46,326 8 6
8 Ireland 0.923 81.1 18.6 12.3 43,798 11 8
b c
9 Iceland 0.921 82.7 19.0 12.2 37,065 20 9
10 Canada 0.920 82.2 16.3 13.1 42,582 12 9
10 United States 0.920 79.2 16.5 13.2 53,245 1 11
 HDI is measured on a scale
from 0 to 1
 Countries having less than 0.5
are classified as having low HDI
 Those scoring from 0.55 to 0.7
are classified as medium HDI
 Countries scoring above 0.7 and
below 0.8 are classified as
having High HDI. Above 0.8
Very high HDI.
 Pakistan has 0.55 HDI
Difference between GDP, GNP & GNI

 GNP and GDP both reflect the national output and
income of an economy. The main difference is that
GNP (Gross National Product) takes into account
net income receipts from abroad.
 GDP (Gross Domestic Product) is a measure of
national income / national output and national
expenditure produce in a particular country.
 GNP = GDP + Net income from abroad. This net
income from abroad includes, dividends , interest
and profit.
GNP includes the value of all goods and services
produced by nationals whether in the country or not.


Income Earned by: GDP GNI GNP

Residents in

Foreigners in Includes If Spent in
Includes Excludes All
Country Country

Residents Out of Includes If Remitted
Excludes Includes All
Country Back

Foreigners Out of
Excludes Excludes Excludes
 If a country has many multinationals who
repatriate income from local production,
then GNP will be lower than GDP.
 For example, Luxembourg has a GDP of
$87,400 but a GNP of only $45,360.
 A country like Ireland has received
significant foreign investment. Therefore for
Ireland, there is a net outflow of income
from the profits of these multinationals.
Therefore, Irish GNP is lower than GDP.

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
 Pakistan ranks 122 out of 137 states on
Global Entrepreneurship Index (GEI)
 Democratic regimes are probably more
conducive to long-term economic growth
than dictatorships, even the benevolent
 Subsequent economic growth leads to the
establishment of democratic regimes

 Innovation is not just new
products but also new
processes, new organizations,
new management practices and
new strategies.
 Eg. MRI (Magnetic Resonance
Imaging –New Process)
 Tesla Motors, UBER, HireArt.
 Just in Time, TMF (Think Mobile
How Geography And Education
Influence Economic
 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

Chapter 3

Differences in Culture
What is Culture?

1. Art and Music.
2. Clothes and Artifacts.
3. History.
5. Behavior patterns, rituals,

Successful international
managers need cross-cultural
literacy - an understanding of how
cultural differences across and
within nations can affect the way
in which business is practiced
A relationship may exist between
culture and the costs of doing
business in a country or region