Lesson 2:

National Differences in Political,

Economic, and Legal Systems,
Economic Development and Culture

Bayate, Llamos, & Silva

 Learning Objectives
Understand how political, economic and legal systems of countries
differ; and
Explain the implications for the management practice of national differences
in political economy.

Identify the macro-political and macroeconomic changes occurring

worldwide.
Explain the implications for the management practice of national differences
in political economy.

Identify the forces that lead to differences in social

culture.
Recognize how differences in social culture influence
values in business.
Demonstrate an appreciation for the economic and business implications of
cultural change
The world by income
Low income Lower middle income Upper middle income High income

EUROPE &
NORTH AMERICA CENTRAL ASIA

SOUTH ASIA

LATIN AMERICA
& CARIBBEAN
 introduction
International business more complicated
than domestic:
• Economic development
• Cultural, education, and skill levels
• The political, economic, and legal
systems are known as the political
economy
• Interdependent
• Societal culture and political
economy
 Political Systems
- system of government

• Collectivism vs. Individualism

• Democratic vs. Totalitarian

Political Systems

• Collectivism vs.
Individualism
 COLLECTIVIS
M

- Collective goals over individual goals.

- Greek philosopher, Plato.
- Socialists support collectivism.
 COLLECTIVIS
M
SOCIALISM

“The few benefit at the expense of the many

in a capitalist society where individual
freedoms are not restricted.” – Karl Marx

State ownership:
Production, distribution and exchange
 COLLECTIVIS
M
Early 20th century:
Communists vs. Social Democrats

COMMUNISTS – Revolution and

totalitarian dictatorship

SOCIAL DEMOCRATS – Democratic

means
 COLLECTIVIS
M
PRIVATIZATION PROGRAMS

- Communism reached its

high point in late 1970s.
 COLLECTIVIS
M
PRIVATIZATION PROGRAMS
Communist party:
• Former Soviet Union
• Eastern European client nations
• China
• Southeast Asian nations of Cambodia, Laos,
and Vietnam
• African nations
• Latin American nations of Cuba and Nicaragua
 COLLECTIVIS
M
PRIVATIZATION PROGRAMS
• China is still nominally a
communist state
• Old-style communism
• Social democracy passed a
high-water mark
 COLLECTIVIS
M
PRIVATIZATION PROGRAMS
• Social democracy’s greatest
influence in democratic Western
nations:
o Nordic countries are not truly
social democracies. They have
free capitalism.
 COLLECTIVIS
M
PRIVATIZATION PROGRAMS
• Great Britain (end of 1970s):
telecommunications, electricity,
gas, coal, railway, shipbuilding
industries, oil, airline, auto, and
steel industries.
• Most industries are privatized
now.
 INDIVIDUALIS
M
- Freedom over economic and
political pursuits.
- Aristotle: “Individual diversity and
private ownership are desirable.”
- Individual freedom and self-
expression
- Pursue economic self-interest
- Democratic systems and free
markets
 Political Systems
- system of government

• Democratic vs.
Totalitarian
 DEMOCRACY
- Government is by the
people, through
election.

- Representative
democracy: elected
 DEMOCRACY
Safeguards:
• Right to freedom of expression, opinion, and
organization
• Free media
• Regular elections
• Universal adult suffrage
• Limited terms for elected representatives
• Fair court system
• Nonpolitical state bureaucracy
• Nonpolitical police force and armed service
• Relatively free access to state information
 DEMOCRACY

PSEUDO-DEMOCRACIES – Lie between

pure democracies and complete
totalitarianism systems.

• Authoritarian elements to deny basic

political and civil liberties.
 TOTALITARIA
NISM

- Exercises absolute control and

oppositions are prohibited.
 TOTALITARIA
NISM
Totalitarian regimes:
• Widespread political repression
• No free and fair elections
• Media is censored
• Denied basic civil liberties
• Challenges to the regime are
prohibited
 TOTALITARIA
NISM
Four major forms:
• Communist totalitarianism: socialism through
totalitarian dictatorship
• Theocratic totalitarianism: political power is
monopolized by religious principles
• Tribal totalitarianism: a particular tribe
monopolizes power
• Right wing totalitarianism: individual
economic freedom is allowed but individual
political freedom is restricted
 Economic system
- Political ideology and economic systems are
connected

Types:
1. Traditional economic system
2. Command economic system
3. Market economic system
4. Mixed system
 TRADITIONAL
• Based on products, services, and labor that all
follow well-established patterns.
• The traditional economy is the most
fundamental and oldest of the four kinds.
• Traditional economic systems still exist in
several places of the world. It's most
widespread in rural areas of second and third-
world countries, where farming and other
traditional money-generating activities are the
main sources of revenue.
 COMMAND
• The command economic system, often known as a
planned system, is widespread in communist regimes
since production choices are made by the government.
• The command system works well in principle as long as
the central authority exercises control in the best
interests of the general people.
• The government controls the quantity of goods produced
and the price at which they are sold.
• All businesses are state-owned, and have little incentive
to control costs and be efficient.
• There is little incentive to better satisfy consumer
requirements because there is no private ownership.
• There is a lack of dynamism and innovation.
 MARKET
• The government has minimal control over resources and
avoids interfering with vital economic sectors. Instead,
individuals and the supply-demand connection are the
sources of regulation.
• In a pure market economy, the goods and services that a
country produces, and the quantity in which they are
produces is determined by supply and demand.
• Consumers control prices and product/ services and
attributes through demand.
• Supply must be restricted by monopolies.
• The government's role is encouraging free and fair
competition among private producers.
 MIXED
SYSTEM
• The characteristics of market and
command economic systems are
combined in mixed systems.
• Also called “dual systems”
• A mixed system is used by several nations
in the developed western hemisphere. The
majority of industries are private, while
the rest, largely public services, are under
government control.
 ECONOMIC
SYSTEM
Traditional, command, market, and mixed
economic systems are the four types of
economic systems. Traditional systems are
inspired by traditions and beliefs and focus on
the fundamentals of products, services, and
work. A centralized authority controls
command systems, whereas forces of demand
and supply regulate a market system. Finally,
mixed economies combine command and
market economies.
 Legal Systems
• A country's legal system refers to the
rules, or laws, that control conduct, as
well as the mechanisms by which those
laws are implemented and redress for
complaints is achieved.
• It is significantly impacted by the
political system, much like the
economic system.
 SIGNIFICANC
E
 Control business practices
 Define the procedure for doing
business transactions.
 Establish the rights and
responsibilities of persons who
are involved in business
transactions.
Different Legal
Systems
• Common law
• Civil law
• Theoretical law
 COMMON
LAW
Common law: based on tradition, precedent, and custom
• These features are taken into account when law courts
interpret common law. This provides a degree of
flexibility to the common law system that other systems
lack. In the common law system, judges have the
authority to interpret the law so that it relates to the
specific facts of each case. Each new interpretation, in
turn, establishes a precedent that can be applied in future
instances. To deal with new conditions, laws may be
changed, clarified, or updated when new precedents
emerge.
• US mostly has common law. Areas with more French or
Spanish influence (like Louisiana) have more civil
components
 CIVIL LAW
Civil law: based on a thorough set of laws that are arranged
into codes.
• Civil law is used in more than 80 nations, including
Germany, France, Japan, and Russia.
• A civil law system is less confrontational than a common
law system because judges depend on specific legal rules
rather than tradition, precedent, and custom to interpret the
law.
• In a civil law system, judges have less flexibility than in a
common law one.
• In a common law system, judges have the authority to
interpret the law, but in a civil law system, courts simply
have the authority to implement the law.
• Appear to be more "fair" on the surface, yet there is nearly
 THEORETICA
L LAW
Theoretical law: based on
religious beliefs.
• The most generally followed law
is Islamic law.
Ex: Saudi Arabia
• All countries have some blend
of theoretic and common or civil
law
 CONTRACT
LAW
• Contract: a document that lays out the terms of
an exchange and outlines the rights and
responsibilities of the parties concerned.
• Contract law is the body of law that governs the
enforcement of contracts.
• Contracts written under common law are
usually quite thorough, with all contingencies
spelt out. Contracts under the civil law system,
on the other hand, are typically shorter and less
explicit because many of the difficulties are
already addressed in the civic code.
 CISG
The UN Convention on Contracts for the International Sale
of Goods (CISG) created a consistent set of regulations
controlling many aspects of the making and fulfillment of
routine commercial contracts between sellers and purchasers
with offices in different countries.
• Countries who join the CISG send a signal to other countries
that the norms of the Convention will become part of their
legal system.
• One issue with the CISG is that it has only been approved by
83 countries as of 2015. (CISG went into effect in 1988). The
CISG has not been approved by several of the world's most
major trade nations, including India and the United Kingdom.
• When companies refuse to adopt the CISG, they frequently
choose to settle contract issues through arbitration by a
recognized arbitration court.
Property Rights
and Corruption
 PROPERTY
RIGHTS
Property Rights - refer to the legal rights to
control the use of a resource as well as the
use of any money earned from that resource.

• Resources include land, buildings,

equipment, capital, mineral rights,
businesses, and intellectual property
(ideas, which are protected by patents,
copyrights, and trademarks)
 PROPERTY
RIGHTS
Property Rights can be violated through:
 
1. Private Action
- Theft, piracy, blackmail, and the like by private
individuals or group
- Mafia
 
2. Public Action
- Public officials extort income or resources from
property holders
- Excessive taxation, requiring expensive licenses or
permits from property holders, or taking assets into
state ownership without compensating the owners.
 CORRUPTION
Foreign Corrupt Practices Act: U.S. law regulating behavior
regarding the conduct of international business in the taking of bribes
and other unethical actions
 
Corruption - is a sort of dishonesty or a criminal conduct committed
by a person or an organization in a position of authority in order to get
illegal advantages or to misuse power for personal gain.
 
When a country has a high level of corruption:
• Foreign direct investment falls
• International trade falls
• Economic growth falls
Ranking of Corruption by Countries as of 2021
 CORRUPTION
The Foreign Corrupt Practices Act limits corruption
in the U.S. (1970’s). 
 
• It is 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 that it is clear whether a violation of
the act has occurred.
• Facilitating or expediting payments to secure the
performance of routine government actions are
permitted.
 INTELLECTUAL
According
PROPERTY
to the World Intellectual Property Organization,
intellectual property refers to creations of the mind, such as
inventions; literary and artistic works; designs; and symbols,
names and images used in commerce.
 
Intellectual Property can be protected by:
 
• Patents - grant the creator exclusive rights to the invention's
manufacturing, use, and sale.
• Copyright - Writers, composers, playwrights, artists, and
publishers have exclusive legal rights to publish and dispose
of their work as they see fit.
• Trademarks - are designs and names that businesses or
manufacturers use to distinguish their products. They are
typically formally registered.
 INTELLECTUAL PROPERTY
PROTECTION

• World Intellectual Property Organization

(WIPO)
- 185 nations are members
 INTELLECTUAL PROPERTY
PROTECTION
• Paris Convention for the Protection of Industrial
Property
- Signed by 170 countries
 INTELLECTUAL PROPERTY
PROTECTION
Response to violations of intellectual
property:

• File lawsuits
• Lobby governments for international
property rights agreements and
enforcements
• Avoid countries with poor
intellectual property laws
 PRODUCT SAFETY
& LIABILITY
Product Safety and Product Liability
 
• Product safety laws - set certain safety standards to
which a product must adhere.
• Product liability - involves holding a firm and its
officers responsible when a product causes injury, death,
or damage.
 
Examples:
 
- Civil laws call for payment and monetary damages.
- Criminal liability laws result in fines or imprisonment.
 MACRO ENVIRONMENT

The Macro Environment Influences Market

Attractiveness
 
The political, economic, and legal systems of a
country generate significant ethical challenges that
affect international business conduct.
What Determines A Country’s Level of
Economic Development
 TO DETERMINE
• Two ways to measure levels of economic development are:
1. Gross national income (GNI) per person
2. Purchasing power parity (PPP) involves adjusting
GNI by purchasing power
• Nobel-prize winner Amartya Sen argues economic
development should be seen as a process of expanding the
real freedoms that people experience
o The removal of major impediments to freedom like
poverty, tyranny, and neglect of public facilities
o The presence of basic health care and basic education
How Do Countries Compare on
Economic Development?
 How Does Political Economy
Influence Economic Progress?

• Countries with favorable geography are more

likely to engage in trade, and so, be more
open to market-based economic growth they
promote.

• Countries that invest in education have

higher growth rates because the workforce is
more productive.
 How Do Geography and Education
Influence Economic Development?

• Innovation and Entrepreneurship - are engines of a

long-run economic growth

• Innovation and Entrepreneurships also require a

market economy and strong property rights.

• Democratic regimes are probably more conducive

to long-term economic growth than dictatorships,
even the benevolent kind.

• Subsequent economic growth leads to the

establishment if democratic regimes.
 HOW IS THE POLITICAL
ECONOMY CHANGING?

 Since the late 1980’s, two trends have emerged 

1. Democratic revolution (late 1980s and early 1990s)

-Many totalitarian regimes failed to deliver economic
progress to the vast bulk of their populations
-New information and communication technologies have
broken down the ability of the state to control access to
uncensored information
-Economic advances of the last 25 years have led to
increasingly prosperous middle and working classes who
have pushed for democratic reforms
 HOW IS THE POLITICAL
ECONOMY CHANGING?

2. A move away from centrally planned

and mixed economies
-More countries have shifted toward the
market-based model
 ECONOMIC
TRANSFORMATION?

- The shift toward a market- based system involves

 Deregulation- removing legal restrictions to the free
play of markets, the establishment of private
enterprises, and the manner in which private
enterprises operate
 Privatization- transfers the ownership of state
property into the hands of private investors

-The creation of a legal system to safeguard property rights

 WHAT DOES THE CHANGING
ECONOMY MEAN FOR MANAGERS?

 Markets that were formerly off-limits to Western

business are now opens
 By identifying and investing early in a potential
future economic stars, firms may be able to gain
first mover advantages (advantages that accrue
to early entrants into a market) and establish
loyalty and experience in a country
• Ex: china- 1.2 billion people and India – 1.1 billion
people
 WHAT DOES THE CHANGING
ECONOMY MEAN FOR MANAGERS?

 However, the potential risks are large

 It can be more costly to do business in
countries with dramatically different products,
workplace, and pollution standard or where
there is poor legal protection for property
rights
 WHAT DOES THE CHANGING
ECONOMY MEAN FOR MANAGERS?
 Managers must consider
1. Political risk – the likelihood that political forces will cause
drastic changes in a country’s business environment that
adversely affects the profit and other goals of a business
enterprise
2. Economic Risk – the likelihood that economic
mismanagement will cause drastic changes in a country’s
business environment that adversely affects the profit and
other goals of a business enterprise
3. Legal Risk – the likelihood that a trading partner will
opportunistically break a contract or expropriate property
rights.
 HOW CAN MANAGER DETERMINE A
MARKET’S OVERALL
ATTRACTIVENESS?
 The overall attractiveness of a country as a potential
market and/ or investment site for an international
business depends om balancing the benefits, cost and
risk associated with doing business in that country
 Other things being equal, the benefits-cost-risk trade-
off is likely to be most favorable in politically stabled
developed and developing nations that have free
market systems and no dramatic upsurge in either
inflations rates or private sector debt.
Thank You
For Listening!