National Differences in Political Economy Chapter 2 National Differences in Political Economy This is a test

National Differences in Political Economy How do political, economic, legal systems of a country Differ among countries? Influence economic progress? Change during our times? Influence benefits, costs, risks of business? What are ethical issues that arise from doing business internationally?

National Differences in Political Economy Political System: System of National Government Varies by country on the basis of values and beliefs about 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

Individualism Individual diversity and private ownership are desirable Individual freedom over economic and political action Individual diversity and private ownership are desirable Private property is more productive whereas communal property receives little care

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

Democracy: Government is by the people, exercised either directly or through elected representatives Safeguards hold elected representatives accountable Totalitarianism: One person/party exercises absolute control over all spheres of human life Communist totalitarianism (PRC, Vietnam, Laos, N. Korea,Cuba) Theocratic totalitarianism (Iran, S. Arabia) Tribal totalitarianism (Zimbabwe, Tanzania) Right wing totalitarianism

Economic Systems Market economy: what is produced in what quantity determined by supply/demand and through a price system Command economy: planned by government Mixed economy: a balance of both of the above State-Directed economy: state directly influences investment activities of private enterprise through “industrial policy.”

National Differences in Political Economy A Legal System is: rules - laws - that regulate behavior process 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 Dispute resolution Where to arbitrate? Validity of contracts and decisions

Contract Law A contract specifies conditions under which an exchange will happen rights/obligations of parties It is based on a country’s legal system. Systems differ based on legal tradition common law system civil law system

Legal Systems Disputes need to be resolved based on a particular legal system Which country’s? Home? Host? UN Convention on Contracts for the International Sale of Goods (GIGS) International Court of Arbitration of the International Chamber of Commerce in Paris, France

Legal Systems and International Business Property rights use of a resource use made of income from resource enforcement issues Public vs private action violations

Legal Systems and International Business protection of Intellectual Property patent: inventors’ exclusive rights to manufacture, use, sell an invention copyright: same for authors, composers, artists, publishers trademark: unique design and name, often officially registered Paris Convention for the Protection of Industrial Property (96 countries) WTO/GATT

Public Action and Corruption Public Action can violate property rights Legal mechanisms Illegal means: corruption Corruption across countries is tracked by Transparency International High corruption levels reduce Foreign Direct Investment and economic growth

Public Action and Corruption US foreign corrupt practices act: illegal for US managers to bribe government officials OECD Convention on Bribery of Foreign Public Officials in International Business transactions

Legal Systems and International Business Protection of intellectual property Patents, copyrights, trademarks Paris convention for the Protection of Industrial Property TRIPS (WTO)Trade Related Aspects of Intellectual Property Product safety and product liability Product safety laws Criminal / civil liability

Differences of Economic Development GDP per capita: does not factor cost of living differences Purchasing Power Parity (PPP) index: adjusts per capita GDP by cost-of-living Human Development Index: life expectancy, literacy, PPP based average incomes

Broader Conceptions of Development Amartya Sen: development Should be assessed less by material output measures and more by capabilities and opportunities that people enjoy. Is an economic AND a political process that requires “democratization” Human Development Index (HDI) = f{life expectancy, educational attainment, PPP based annual incomes sufficient to meet basic needs}

Political Economy and Economic Progress Innovation >> Engine for Growth (products, processes, strategies, organizations, management practices) Innovation requires: market economy strong property rights the “right” political system Economic progress is related to Democracy

States in Transition Democratic systems spread in the ‘80s and ‘90s Totalitarian regimes failed to deliver economic progress Spread of information trough new communication technologies Emergence of prosperous middle classes

States in Transition: Universal or Clashing Civilizations New realities: Russian reemergence, Zimbabwean racial unrest, China’s resurgence New world order and terrorism Fukuyama: “… the end of history…” and harmonious existence Huntington: new conflicts, e.g., Islamic fundamentalism

States in Transition: 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

Implications for International Business Country’s political, economic, and legal environment influence attractiveness raise ethical Issues Country attractiveness balance long-term risks with short-term benefits for business benefits depend on: size, wealth, future economic growth first mover advantages identify “star” future economies costs are affected by: economic sophistication (may be more costly to operate in LDCs, no infrastructure) legal framework impact on costs political payoffs