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International
Business 8e
By Charles W.L. Hill
Chapter 2
National Differences in
Political Economy
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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 other
they affect the level of economic well-being in
the nation
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Political system refers to the system of
government in a nation
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 a Political Economy?
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What is Collectivism?
Collectivism stresses the primacy ofcollective goals over individual goals
can be traced to the Greek philosopher, Plato
(427-347 BC)
Today, collectivism is equated withsocialists (Karl Marx 1818-1883)
advocate state ownership of the basic means ofproduction, distribution, and exchange
manage to benefit society as a whole, rather
than individual capitalists
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How Does Modern-Day
Socialism Look? In the early 20th century, socialism split into
1. Communism – socialism can only be achievedthrough violent revolution and totalitariandictatorship 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 privatized
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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 theground rules on which a society should be based
implies democratic political systems and free market
economies
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What is Democracy?
Democracy refers to a political system in
which government is by the people, exercised
either directly or through elected
representatives
usually associated with individualism
pure democracy is based on the belief that citizens
should be directly involved in decision making
most modern democratic states practice
representative democracy where citizens
periodically elect individuals to represent them
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What is Totalitarianism?
Totalitarianism is a form of government in which oneperson or political party exercises absolute control overall spheres of human life and prohibits opposing politicalparties
1. Communist totalitarianism – found in states where thecommunist party monopolizes power
2. Theocratic totalitarianism - found in states where politicalpower is monopolized by a party, group, or individual thatgoverns according to religious principles
3. Tribal totalitarianism - found in states where a politicalparty that represents the interests of a particular tribemonopolizes power
4. Right-wing totalitarianism - permits some individual
economic freedom, but restricts individual political freedom
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What is An Economic System?
There are three types of economic systems
1. Market economies - all productive activities are privately owned andproduction is determined by the interaction of supply and demand
government encourages free and fair competition between privateproducers
2. Command economies - government plans the goods and services that acountry produces, the quantity that is produced, and the prices as whichthey 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 privateownership and free market mechanisms while other sectors have significantstate ownership and government planning
governments tend to own firms that are considered important to
national security
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What is a Legal System?
The legal system of a country refers to the rulesthat regulate behavior along with the processes bywhich the laws are enforced and through whichredress for grievances is obtained
There are three types of legal systems
1. Common law - based on tradition, precedent, andcustom
2. Civil law - based on detailed set of laws organizedinto codes. Derived from Roman law
3. Theocratic law - law is based on religiousteachings
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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 andobligations of the parties involved
Contract law is the body of law that governs contractenforcement
Under a common law system, contracts tend to be verydetailed with all contingencies spelled out
Under a civil law system, contracts tend to be much shorterand less specific because many issues are already covered inthe civil code
Many countries have ratified the United NationsConvention on Contracts for the International Sale ofGoods (CIGS) which establishes a uniform set of rulesgoverning certain aspects of the making and performance ofeveryday commercial contracts between buyers and sellerswho have their places of business in different nations
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Which Countries Are
Most Corrupt?Rankings of Corruption by Country 2008
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How Can Intellectual
Property be Protected?
Protection of intellectual property rights differsfrom country to country
World Intellectual Property Organization
Paris Convention for the Protection of IndustrialProperty
To avoid piracy, firms can
stay away from countries where intellectual propertylaws are lax
file lawsuits
lobby governments for international property rightsagreements and enforcement
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What is Product Safety
& Liability?
Product safety laws set certain standards towhich a product must adhere
Product liability involves holding a firm and its
officers responsible when a product causes injury,death, or damage
When product safety laws are stricter in a firm’s
home country than in a foreign country, or whenliability laws are more lax, the firm has to decidewhether to adhere to home country or hostcountry standards
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What Determines A Country’s Level
Of Economic Development?
Two ways to measure levels of economicdevelopment are
1. Gross national income (GNI) per person
2. Purchasing power parity (PPP) involves
adjusting GNI by purchasing power
Nobel-prize winner Amartya Sen argueseconomic development should be seen as aprocess of expanding the real freedoms that
people experience the removal of major impediments to freedom like
poverty, tyranny, and neglect of public facilities
the presence of basic health care and basic education
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What Determines A Country’s Level
Of Economic Development?
The United Nations used Sen’s ideas to
develop the Human Development Index
(HDI) which is based on
life expectancy at birth
educational attainment
whether average incomes are sufficient tomeet the basic needs of life in a country
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How Do Countries Compare on
Economic Development?Economic Data for Select Countries
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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
Democratic regimes are probably more conducive
to long-term economic growth than dictatorships,
even the benevolent kindSubsequent economic growth leads to the
establishment of democratic regimes
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How Do Geography And Education
Influence Economic Development?
Countries with favorable geography are
more likely to engage in trade, and so, be
more open to market-based economicsystems, and the economic growth they
promote
Countries that invest in education havehigher growth rates because the workforce
is more productive
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How Is The Political
Economy Changing? Since the late 1980s, 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 brokendown the ability of the state to control access to uncensoredinformation
economic advances of the last 25 years have led to increasinglyprosperous middle and working classes who have pushed fordemocratic reforms
2. A move away from centrally planned and mixedeconomies more countries have shifted toward the market-based model
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How Free Are
Countries Politically?Political Freedom in 2008
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What Is The Nature Of
Economic Transformation?
The shift toward a market-based systeminvolves
deregulation – removing legal restrictions tothe free play of markets, the establishment ofprivate enterprises, and the manner in whichprivate enterprises operate
privatization - transfers the ownership of stateproperty into the hands of private investors
the creation of a legal system to safeguardproperty rights
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What Does The Changing
Economy Mean For Managers? Managers must consider
1. Political risk - the likelihood that political forces willcause drastic changes in a country's businessenvironment that adversely affects the profit and other
goals of a business enterprise2. Economic risk - the likelihood that economic
mismanagement will cause drastic changes in a country'sbusiness environment that adversely affects the profit andother goals of a business enterprise
3. Legal risk - the likelihood that a trading partner willopportunistically break a contract or expropriateproperty rights
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How Can Managers Determine A
Market’s Overall Attractiveness?
The overall attractiveness of a country as apotential market and/or investment site for aninternational business depends on balancing the
benefits, costs, and risks associated with doingbusiness in that country
Other things being equal, the benefit-cost-risk
trade-off is likely to be most favorable inpolitically stable developed and developingnations that have free market systems and nodramatic upsurge in either inflation rates or
private sector debt
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Review Question
A political system that stresses the primacy of
collective goals over individual goals is called
a) individualism
b) collectivism
c) a democracyd) a market economy
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Review Question
_____ believe(s) that socialism can only be
achieved through violent revolution and
totalitarian dictatorship.
a) communists
b) social democrats
c) social republicans
d) Plato
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Review Question
A form of government in which one person or
political party exercises complete control over all
spheres of human life and prohibits opposing
political parties is
a) a democracy
b) a representative democracy
c) totalitarianism
d) socialism
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Review Question
______ is found in states where political power
is monopolized by a party according to
religious principles.
a) tribal totalitarianism
b) right-wing totalitarianism
c) theocratic totalitarianism
d) communist totalitarianism
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Review Question
In which type of economic system are all
productive activities privately owned?
a) a mixed economy
b) a command economy
c) a representative economyd) a market economy
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Review Question
Which country is not among the most corrupt
countries in the world?
a) Haiti
b) Indonesia
c) Malaysiad) Nigeria
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Review Question
Design and names by which merchants or
manufacturers designate and differentiate
their products are called
a) trademarks
b) copyrights
c) patents
d) name brands
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Review Question
Which is not a primary determinant of a
nation’s rate of economic development?
a) its political system
b) its economic system
c) its geography
d) its currency