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Political Economy and Global Business

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1 Political Economy and Global Business

2 Our political economy topics…
Political-economic systems of the developed world Ways of classifying, analyzing political systems Ways of classifying, analyzing economic systems Legal systems The corruption problem Levels of economic development The spread of freedom, democracy, and markets Managing your relationship with government Portions (c) McGraw-Hill Companies Inc.

3 We complain about government and politics…
But the U.S. and other developed countries have important safeguards in their constitutions Portions (c) McGraw-Hill Companies Inc.

4 Safeguards of Successful Representative Democracy
Individual’s right to freedom of expression, opinion and organization Free media Regular elections Adult suffrage Limited terms for elected representatives A fair court system that is independent from the political system A non-political state bureaucracy Non-political force and armed service Relatively free access to state information Last slide presented, sept Start class talking about OECD. Portions (c) McGraw-Hill Companies Inc.

5 The rich countries almost all belong to a group called the Organization for Economic Cooperation and Development (OECD) To join, a country must be guaranteeing these rights to its people Portions (c) McGraw-Hill Companies Inc.

6 Business benefits in mature democracy
Constitutions limit what government can take and what other changes governments can make Legal systems enforce contracts between businesspeople between businesspeople and customers Portions (c) McGraw-Hill Companies Inc.

7 Political systems… provide the written “rules of the game” (institutions) in a nation that allow people to govern themselves and work together To do business, you have to know the rules Sometimes … the written rules aren’t followed there are no agreed rules to say whether what you want is OK Portions (c) McGraw-Hill Companies Inc.

8 2 key dimensions of difference
Political systems as they are designed can be assessed according to two dimensions Degree to which they are democratic or totalitarian Degree to which they emphasize individualism as opposed to collectivism These dimensions are interrelated; systems that emphasize collectivism tend toward totalitarian, while systems that place a high value on individualism tend to be democratic. However, a large gray area exists in the middle. It is possible to have democratic societies that emphasize a mix of collectivism and individualism. Similarly, it is possible to have totalitarian societies that are not collectivist. Portions (c) McGraw-Hill Companies Inc.

9 Democracy versus totalitarianism
Government is by the people, exercised either directly or through elected representatives (representative democracy) Elected representatives are held accountable through safeguards Totalitarianism One person/party exercises absolute control over all spheres of human life (competing political parties are banned) Communist totalitarianism Theocratic totalitarianism Tribal totalitarianism Right wing totalitarianism Democracy and totalitarianism are at different ends of a continuum with many shades in between. Portions (c) McGraw-Hill Companies Inc.

10 Collectivism and Individualism
Central tenet is that individual economic and political freedoms are the ground rules on which society is based Is the direct opposite of collectivism Collectivism Collective goals are more important than individual goals Individual rights are sacrificed for the good of the majority In the modern world collectivism is expressed through socialism The term collectivism refers to a political system that stresses the primacy of collective goals over individual goals. When collectivism is emphasized, the needs of society as a whole are generally viewed as being more important than individual freedoms. In such circumstances, an individual’s right to do something may be restricted on the grounds that it runs counter to “the good of society” or to “the common good.” Advocacy of collectivism can be traced to the ancient Greek philosopher Plato (427–347 BC), who in The Republic argued that individual rights should be sacrificed for the good of the majority and that property should be owned in common. Individualism is built on two central tenets. The first is an emphasis on the importance of guaranteeing individual freedom and self-expression. As John Stuart Mill put it,The sole end for which mankind are warranted, individually or collectively, in interfering with the liberty of action of any of their number is self-protection The only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others. His own good, either physical or moral, is not a sufficient warrant.... The only part of the conduct of any one, for which he is amenable to society, is that which concerns others. In the part which merely concerns himself, his independence is, of right, absolute. Over himself, over his own body and mind, the individual is sovereign.The second tenet of individualism is that the welfare of society is best served by letting people pursue their own economic self-interest, as opposed to some collective body (such as government) dictating what is in society’s best interest [i] J. S. Mill, On Liberty (London: Longman’s, 1865), p. 6. Portions (c) McGraw-Hill Companies Inc.

11 But government’s official principles don’t tell everything
Perhaps we should have an additional classification of political systems More mature (e.g., the rich countries’ systems – usually) Less mature (many systems in poorer countries) Are some of the rich countries turning their systems into less mature ones? Portions (c) McGraw-Hill Companies Inc.

12 Portions (c) 2007-2013 McGraw-Hill Companies Inc.

13 Classifying Economic Systems
Market economy: what is produced & in what quantity is determined by supply/demand and signaled to producers through a price system Hong Kong is closest Command economy: planned by government rare today – North Korea, Cuba Mixed economy: a balance of both of the above most countries, but degree of mixture varies Portions (c) McGraw-Hill Companies Inc.

14 Individualism vs. Collectivism in Economic Systems
There is a connection between political ideology and economic systems In countries where individual goals are given primacy free market economic systems are fostered Countries where collective goals are given primacy there is marked state control of markets Portions (c) McGraw-Hill Companies Inc.

15 In any new country, consider whether rules are real
Many poor countries have what used to be called a “soft state” Powerful people can break or change the rules when they want People don’t follow the rules (take bribes, etc.) Even in many rich countries (Japan), the rules may tilt in favor of local people Portions (c) McGraw-Hill Companies Inc.

16 Portions (c) 2007-2013 McGraw-Hill Companies Inc.

17 Legal Systems Rules, laws, and processes that enforce them regulate behavior Processes through which grievances are addressed All countries have legal systems, but they may work very differently The legal system of a country is of immense importance to international business. A country’s laws regulate business practice, define the manner in which business transactions are to be executed, and set down the rights and obligations of those involved in business transactions. Like the economic system of a country, the legal system is influenced by the prevailing political system (although it is also strongly influenced by historical tradition). The government of a country defines the legal framework within which firms do business—and often the laws that regulate business reflect the rulers’ dominant political ideology.

18 Property Rights A bundle of legal rights over the use to which a resource is put and over the use made of any income from that resource Can be violated through Private action (e.g., theft) Public (government) action Corruption Private action refers to theft, piracy, blackmail, and the like by private individuals or groups. While theft occurs in all countries, a weak legal system allows for a much higher level of criminal action in some than in others. Public action to violate property rights occurs when public officials, such as politicians and government bureaucrats, extort income, resources, or the property itself from property holders. This can be done through legal mechanisms such as levying excessive taxation, requiring expensive licenses or permits from property holders, taking assets into state ownership without compensating the owners, or redistributing assets without compensating the prior owners. It can also be done through illegal means, or corruption, by demanding bribes from businesses in return for the rights to operate in a country, industry, or location. Portions (c) McGraw-Hill Companies Inc.

19 Contract Law Contracts specify conditions under which an exchange is to occur Detail rights and obligations of parties Contract law is the body of law that enforces a contract Dispute resolution is often complex Where to sue, where to arbitrate - whose laws apply? Validity of contracts and decisions The United Nations has a Convention on Contracts for the International Sale of Goods (CIGS) Because common law tends to be relatively ill specified, contracts drafted under a common law framework tend to be very detailed with all contingencies spelled out. In civil law systems, however, contracts tend to be much shorter and less specific because many of the issues typically covered in a common law contract are already covered in a civil code. Thus, it is more expensive to draw up contracts in a common law jurisdiction, and resolving contract disputes can be a very adversarial process in common law systems. But, common law systems have the advantage of greater flexibility and allow for judges to interpret a contract dispute in light of the prevailing situation. International businesses need to be sensitive to these differences; approaching a contract dispute in a state with a civil law system as if it had a common law system may backfire (and vice versa). Portions (c) McGraw-Hill Companies Inc.

20 Intellectual Property Rights
Intellectual property refers to property that is the product of intellectual activity Intellectual property laws are believed very important stimulus to innovation and creative work Protection of intellectual property rights varies greatly from country to country There are international rules, and the U.S. is struggling to get them enforced Ownership rights over intellectual property are established through patents, copyrights, and trademarks. A patent grants the inventor of a new product or process exclusive rights for a defined period to the manufacture, use, or sale of that invention. Copyrights are the exclusive legal rights of authors, composers, playwrights, artists, and publishers to publish and disperse their work as they see fit. Trademarks are designs and names, often officially registered, by which merchants or manufacturers designate and differentiate their products Portions (c) McGraw-Hill Companies Inc.

21 Piracy of Intellectual Property
Portions (c) McGraw-Hill Companies Inc.

22 Product Safety and Liability
Product safety laws set safety standards for products and manufacturing processes Product liability laws hold the firm and its officers responsible for product safety standards Environmental standards limit pollution etc. Laws differ radically from country to country Portions (c) McGraw-Hill Companies Inc.

23 Portions (c) 2007-2013 McGraw-Hill Companies Inc.

24 The ‘corruption’ problem
Many (most?) traditional codes of behavior require people to do things that in developed countries are called ‘corruption’ For example, in most traditional societies, a key obligation is taking care of your extended family But doing this often contradicts laws of both capitalist and socialist societies Transparency International produces good measures of corruption for nations Portions (c) McGraw-Hill Companies Inc.

25 Which Countries Are Most Corrupt?
Rankings of Corruption by Country 2010 Country Focus on Corruption in Nigeria describes the corruption that has characterized Nigeria’s economy over the last 40 years. When the country initially gained its independence from Britain in 1960, expectations were high that Nigeria would become an economic heavyweight in Africa. With abundant natural resources and a large population, it seemed the stage was set for success. However, despite earnings of more than $300 billion from oil sales during the period 1970 to 2000, the country still suffered from extreme poverty, illiteracy, and high debt. Several factors have been blamed for Nigeria’s troubles including political instability and corruption.

26 Portions (c) 2007-2013 McGraw-Hill Companies Inc.

27 Differences in Economic Development
Different countries have dramatically different levels of economic development

28 Two common measurements of economic development
Gross National Income (GNI) superseded Gross National Product or GNP the sum of all income received by residents of a nation Gross National Income at Purchasing Power Parity (PPP), which accounts for differences in the cost of living

29 To estimate how big a market a country is, look at GNI
U.S. GNI for 2011 was $15.2 trillion. China’s GNI was $7.3 trillion. India’s was $1.9 trillion. Portions (c) McGraw-Hill Companies Inc.

30 To gauge how rich the country is, look at GNI per capita
Large GNI does not prove a country is rich China has the second highest GNI in the world, but many of its people are very poor GNI per capita is GNI per head: Total GNI divided by population This is called “nominal” GNI per capita because it is not adjusted for price differences U.S. “nominal” GNI per capita in 2011 was $48,328 China’s nominal GNI per capita was $5,417 India’s nominal GNI per capita was $1,514 Portions (c) McGraw-Hill Companies Inc.

31 Differences in Economic Development
GNI per Capita, 2006

32 The single best measure of the wealth of the people of a country is GNI per capita at purchasing power parity (GNI PPP) Agencies calculating GNI at purchasing power parity take GNI and population calculated by governments Then they make an adjustment based on price indexes for different countries Portions (c) McGraw-Hill Companies Inc.

33 Differences in Economic Development
GNI PPP per Capita, 2006

34 Differences in Economic Development
Growth Rate in GDP per Capita,

35 Broader Conceptions of Development: Amartya Sen
Sen says development should be measured less by material output measures, such as GNP per capita, and more by the capabilities and opportunities that people enjoy. His Human Development Index (HDI) measures quality of life in different nations Based on life expectancy, educational attainment, and GNI at PPP average incomes The Nobel Prize-winning economist Amartya Sen has argued that development should be assessed less by material output measures such as GNI per capita and more by the capabilities and opportunities that people enjoy. According to Sen, development should be seen as a process of expanding the real freedoms that people experience. Hence, development requires the removal of major impediments to freedom: poverty as well as tyranny, poor economic opportunities as well as systematic social deprivation, neglect of public facilities as well as the intolerance of repressive states. In Sen’s view, development is not just an economic process, but it is a political one too, and to succeed requires the “democratization” of political communities to give citizens a voice in the important decisions made for the community.

36 Broader Conceptions of Development: Amartya Sen
Map 2.4 – The Human Development Index, p. 65

37 Portions (c) 2007-2013 McGraw-Hill Companies Inc.

38 States in Transition The political economy of the world has changed radically since the late 1980’s Two trends A wave of democratic revolutions swept the world There has been a strong move away from centrally planned and mixed economies toward a free market model

39 The Spread of Democracy
Map 2.5 – Political Freedom, 2004, p. 69

40 The Spread of Democracy
Three main reasons account for the spread of democracy Totalitarian regimes failed to deliver economic progress New information and communication technologies, including shortwave radio, satellite television, fax machines, desktop publishing, and most importantly, the Internet, have broken down the ability of the state to control access to information The economic advances of the past quarter century have led to the emergence of increasingly prosperous middle and working classes who have pushed for democratic reforms Even though democracy is advancing it is important to remind students that democracy is still rare in large parts of the world. In sub-Saharan Africa in 2004, only 11 countries are considered free, 21 are partly free, and 16 are not free. Among the 27 post-Communist countries in Eastern and Central Europe, 8 are still not electoral democracies and Freedom House classifies only 12 of these states as free (primarily in Eastern Europe). And there is only one partial democracy among the 16 Arabic states of the Middle East and North Africa, Iraq, where foreign occupiers are imposing a democratic system.

41 The Spread of Market-Based Systems
Paralleling the spread of democracy since the 1980s has been the transformation from centrally planned command economies to market-based economies. The rationale for economic transformation has been the same the world over. In general, command and mixed economies failed to deliver the kind of sustained economic performance that was achieved by countries adopting market-based systems. Economic freedom does not necessarily equate with political freedom, as detailed in Map 2.6. For example, 3 of the top 16 states in the Heritage Foundation index, Hong Kong, Singapore, and Bahrain, cannot be classified as politically free. Hong Kong was reabsorbed into Communist China in 1997, and the first thing Beijing did was shut down Hong Kong’s freely elected legislature. (Map 2.6 – Distribution of Economic Freedom, 2005, p. 73)

42 Portions (c) 2007-2013 McGraw-Hill Companies Inc.

43 What does this mean for businesspeople?
Political economy often tells you how attractive a country is for business When operating in a country, understand the political economic situation to know what you can do in the country how to address political problems You have to plan how you’ll address the differences between your home system and the ones you enter You will face major ethical issues Portions (c) McGraw-Hill Companies Inc.

44 Political risks Political risk is the danger that political forces will cause drastic changes or unexpected behaviors in a country that adversely affect profit or other business goals. Many kinds of change can alter a business’ position in a country. Portions (c) McGraw-Hill Companies Inc.

45 Homework assignment 1

46 The homework task Pick one company that operates internationally
Many people will be able to do this easily If you need help, flip through issues of Fortune or Economist magazine, look at or check out the Wall St. Journal or NY Times (or their web pages) List at least 3 countries where the firm operates It’s OK to guess

47 Describe at least five political risks the firm faces in these countries
Plan on writing at least one sentence about each risk to describe it It’s OK if the risks all come from 1 country But include a diverse group of risks

48 You don’t have to write a lot to get a good grade
But you do have to describe 5 risks clearly and accurately Students who get less than C- will be required to re-write

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