1. Irwin/McGraw-Hill Copyright  2001 The McGraw-Hill Companies, Inc. All rights reserved. TWO PART Country Differences Part two Country Differences

2. Irwin/McGraw-Hill Copyright  2001 The McGraw-Hill Companies, Inc. All rights reserved. C h a p t e rC h a p t e r Part Two Country Differences Two Country Differences in Political Economy

3. Irwin/McGraw-Hill Copyright  2001 The McGraw-Hill Companies, Inc. All rights reserved. National Differences in Political Economy Political System: system of National Government  Determinants (extremes never met) Collectivism and Individualism Democracy and Totalitarianism Collectivism: primacy of collectivist over individual goals  Emphasis: “good of society”, “common good”  Plato (427-347 BC) to Socialists (Marx, 1818 -83)  Communists-revolution, Social Democrats-democratic outlook Slide 2-1

4. Irwin/McGraw-Hill Copyright  2001 The McGraw-Hill Companies, Inc. All rights reserved. Individualism Individual freedom over economic and political action  Individual diversity and private ownership are desirable. Private property is more highly productive whereas communal property receives little care -- Aristotle, 384-322 BC  “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” -- John Stuart Mill, 1806-1873 Slide 2-2

5.  An individual who intends his own gain is “led by an invisible hand to promote an end which was no part of his intention. Nor is it always worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who effect to trade for the public good” -- Adam Smith, 1723-1790 Individualism Slide 2-3

6. Irwin/McGraw-Hill Copyright  2001 The McGraw-Hill Companies, Inc. All rights reserved. Democracy :  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 Slide 2-4

7. Irwin/McGraw-Hill Copyright  2001 The McGraw-Hill Companies, Inc. All rights reserved. National Differences in Political Economy Economic Systems  Market economy: what is produced in what quantity is determined by supply/demand and signaled to producers through a price system  Command economy: planned by government  Mixed economy: a balance of both of the above  State-Directed economy: the state directly influences the investment activities of private enterprise through “industrial policy.” Slide 2-5

8. Irwin/McGraw-Hill Copyright  2001 The McGraw-Hill Companies, Inc. All rights reserved. National Differences in Political Economy A Legal System  rules - laws - that regulate behavior  processes through which laws are enforced grievances are redressed Businesses must observe  Home country laws  Host country laws  International Laws and Treaties Different Legal Systems  Common Law  Civil Law  Theocratic Law  Bureaucratic Law Dispute resolution  Where to arbitrate?  Validity of contracts and decisions Slide 2-6

9. Irwin/McGraw-Hill Copyright  2001 The McGraw-Hill Companies, Inc. All rights reserved. Legal Systems and International Business  property rights use of a resource use made of income from resource enforcement issues Public vs private action violations  protection of Intellectual Property patent: inventors’ exclusive rights to manufacture, use, sale an invention copyright: same for authors, composers, artists, publishers trademarks: unique designs and names, often officially registered Paris Convention for the Protection of Industrial Property (96 countries) WTO/GATT Slide 2-7

10. Irwin/McGraw-Hill Copyright  2001 The McGraw-Hill Companies, Inc. All rights reserved. Legal Systems and International Business product safety and product liability  criminal / civil liability contract law  document that specifies conditions under which an exchange will happen rights/obligations of parties  differences based on legal tradition common law system civil law system Slide 2-8

11. Irwin/McGraw-Hill Copyright  2001 The McGraw-Hill Companies, Inc. All rights reserved. GDP per capita; does not factor cost of living differences Purchasing Power Parity index: adjusts per capita GDP by cost-of-living Static picture Human Development Index: life expectancy, literacy, PPP based average incomes Slide 2-9 Differences of Economic Development

12. Irwin/McGraw-Hill Copyright  2001 The McGraw-Hill Companies, Inc. All rights reserved. Innovation (products, processes, strategies, organizations, management practices) -> Engine for Growth Innovation needs:  market economy  strong property rights  the “right” political system Economic progress is related to Democracy Slide 2-10 Political Economy and Economic Progress

13. Irwin/McGraw-Hill Copyright  2001 The McGraw-Hill Companies, Inc. All rights reserved. States in Transition The spread of Democratic systems in the 1980s and 1990s  Totalitarian regimes failed to deliver economic progress  Spread of information trough new communication technologies  Emergence of prosperous middle classes Universal or Clashing Civilizations  Fukuyama: “… the end of history…” and harmonious existence  Huntington: new conflicts, e.g., Islamic fundamentalism  New realities: Russian 2000 elections, Zimbabwean racial unrest, China’s resurgence Slide 2-11

14. Irwin/McGraw-Hill Copyright  2001 The McGraw-Hill Companies, Inc. All rights reserved. States in Transition (cont.) Spread of market-based systems Nature of economic transformation  Deregulation: legal changes  Privatization: transfer of state property/industries to private individuals Auctions IPOs  Evolution of legal systems  The road of transformation is rocky Slide 2-12

15. Irwin/McGraw-Hill Copyright  2001 The McGraw-Hill Companies, Inc. All rights reserved. Implications for International Business Political, economic, and legal environments of a country  influence attractiveness  raise ethical Issues Attractiveness  balance long-term risks with short-term benefits of doing business in a foreign country  benefits depend on: size, wealth, future economic growth first mover advantages identify “star” future economies  costs are affected by: political payoffs economic sophistication (may be more costly to operate in LDCs, no infrastructure) legal framework impact on costs Slide 2-13

16. Irwin/McGraw-Hill Copyright  2001 The McGraw-Hill Companies, Inc. All rights reserved. Implications for International Business Ethical Issues  human rights  adherence to same standards abroad as at home  product safety  work safety  environmental protection  bribes  Foreign Corrupt Practices Act (1977)  what is unethical is not necessarily illegal Slide 2-14

17. Irwin/McGraw-Hill Copyright  2001 The McGraw-Hill Companies, Inc. All rights reserved. Host Countries and the MNC Impact of MNC on host countries Political Economic Environmental Cultural Impact of host country Governments on MNCs (Political Risk) Expropriation, Nationalization Privatization Constraints on ownership Intellectual property rights Offset obligations (profit/capital repatriation, exports, technology transfer) Slide 2-15