Fourth Edition

InternationalBusiness

CHAPTER 2

National Differences in Political Economy

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India

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Chapter FocusThe term Political Economy is used to stressthat the political, economic, and legal systems of a country are not independent of each other.

This chapter will review these systems and explore how differences in political economy influence the benefits, costs, and risks associated with doing business in different countries.

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Political Systems

“The system of government in a nation.”

Collectivism: A political system that stresses the primacy of

collective goals over individual goals.Advocated by Plato in the “Republic”.In modern times, the Socialists advocate

Collectivism.Socialism:

Trace intellectual roots to Karl Marx.Argued that the pay of workers does not reflect

the full value of their labor.Advocated state ownership of production,

distribution, and exchange (businesses), thereby ensuring that workers were fully compensated for their labor.

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Communists:Socialism is achieved through violent revolution.

Social Democrats:Socialism is achieved through

democratic means.

Two Approaches

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Political Systems

Individualism: Opposite of Collectivism. Individual should have freedom in political and economic

pursuits. Advocated by Aristotle.

Private property is more highly productive than communal property and will thus stimulate progress.

Revived during the 16th century in England and the Netherlands.

Hume (1711-1776) Adam Smith (1723-1790) John Stuart Mill (1806-1873)

Embodied in the U.S. Declaration of Independence.

“The system of government in a nation.”

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Two tenets: An emphasis on the importance of guaranteeing individual freedom and self-expression. The welfare of society is best served by letting people pursue their own economic self-interest, as opposed to some collective body (government) dictating what is in society’s best interest.

Individualism advocates: Democratic political systems. Free market economics.

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Democracy and Totalitarianism

DemocracyGovernment by the people, exercised either directly or through elected representatives.

TotalitarianismGovernment in which one person or political party exercises absolute control over all spheres of human life and opposing political parties are prohibited.

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Democracy

Safeguards to protect a democracy:Right to freedom of expression, opinion, and organization.A free media.Regular elections in which all eligible citizens are allowed to vote.Universal adult suffrage.Limited terms for elected representatives.A fair court system independent of the political system.A nonpolitical state bureaucracy.A nonpolitical police force and armed service.Relatively free access to state information.

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Totalitarianism

4 major forms:Communism

Collectivism is achieved through total dictatorship.

TheocraticPolitical power is influenced by religious principles.

TribalA political party representing the interests of a particular tribe monopolizes power.

Right-wingGenerally permits individual economic freedom, but restricts political freedom to prevent the rise of communism.

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Economic Systems

Market Economy:All productive activities are privately owned.

Command Economy:Goods and services produced, their quantity, and prices are determined by the government.

Mixed Economy:Parts of the economy are left to private ownership and free market mechanisms while other sectors are state-owned and have government planning.

State-Directed Economy:The state plays a significant role through its “industrial policy” and setting national goals.

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Legal Systems

Property Rights: the legal rights over the use of a resource and the income derived from it.

Private Action:Theft, piracy, blackmail and the like by private individuals and groups.

Public Action and Corruption:Violation of property rights by public officials, such as politicians and government officials, by extorting income or resources from property holders.

Rules, or laws, that regulate behavior and the processes by which laws are enforced

and grievances redressed.

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Country Corruption Rankings 2000

0

2

4

6

8

10Fin

land

Sin

gapo

re

Sw

itze

rlan

d

U.S

.A.

Jap

an

Chi

na

Indo

nesi

a

Ranking

Canada

U.K

.

Aust

ralia

France

Gre

ece

Russ

ia

Nig

eri

a

10=Highly clean 0=Totally corrupt

Figure 2.1

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Protection of Intellectual Property

Property that is the product of intellectual activity.

Patent: through exclusive use rights, it protects the inventor of a product for a certain period of time.Copyright: Gives exclusive rights to authors, composers, playwrights and artists to publish and dispense their work.Trademark: Officially registered designs and names that protect owners product designations.

Piracy remains a significant problem in international business.

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Software Piracy by Region

0

10

20

30

40

50

60

70N

.Am

er.

W.E

urop

e

Asi

a/Pa

cifi

c

L.A

mer

.

Mid

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t/A

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E.E

urop

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1999

2000

2000 Avg.

Figure 2.2

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Software Piracy Losses by Region 2000

3% 7%

37%

27%

26% Mid East Af rica

Latin Amer.

Asia/ Pacifi c

W. Europe

N. Amer.

Figure 2.3

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Product Safety and Product Liability

Product Safety:Safety standards to which a product must adhere.

Product Liability:Civil and criminal penalties if standards are not met.

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Product Standards and Ethical Dilemmas

StrongProduct

Standards

WeakProduct

Standards

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Contracts

Common LawEvolved in EnglandBased on:

TraditionPrecedentCustom

United States

Contracts tend to be long

Civil Law‘Code Napoleon’Detailed set of laws organized into ‘Codes’.EuropeRussiaJapan80 countries

Short contracts

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Differences in Economic Development

Gross National Product (GNP)Common yardstick for measuring economic activity.

Measures total value of goods and services produced annually.

Doesn’t consider the differences in costs of living.

Purchasing Power Parity.Uses U.S. cost of living for basis of adjustment among countries.

Both givea static picture ofdevelopment

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PPP Index and GNP Data for Selected Countries 2000

Country GNP/ Capita PPP/ Capita GNP Growth Rate (%) 90-99

Brazil $3,570 $7,320 3.0

China 840 3,940 10.7 Germany 25,050 25,101 1.3

I ndia 460 2,390 6.0 J apan 34,210 26,460 1.3 Nigeria 260 790 2.4

Poland 4,200 9,030 4.5 Russia 1,660 8,030 - 6.1

Switzerland 38,120 24,970 0.6 United Kingdom 24,500 23,550 2.5 United States 34,260 34,260 3.3

Table 2.1

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Amartya SenMeasure development by capabilities and opportunities people enjoy.

Requires removal of:PovertyTyrannyPoor economic opportunitiesSystemic social deprivationNeglect of public facilitiesIntolerance of repressive states

U.N.’s Human Development IndexBased on:

Life expectancy at birthEducational attainmentWhether average income is sufficient

           

  

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Political Economy and Economic Development

Innovation and Entrepreneurship are Engines of Growth

Innovation and Entrepreneurship Require a Market Economy

Innovation and Entrepreneurship Require Strong Property Rights

Economic Progress Begets Democracy

What kind of political system?

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Geography, Education and Economic Development

“..that throughout history, coastal states, with their longengagements in international trade, have been more supportive of market institutions than landlocked states,which have tended to organize themselves as hierarchical(and often military) societies. Mountainous states, as a result of physical isolation, have often neglected market-based trade. Temperate climes have generally supported higher densities of population and thus more extensivedivision of labor than tropical regions.”

Jeffrey SachsHarvard University

The general assertion is thatnations that invest more ineducation will have highergrowth rates because an educated population is a moreproductive population.

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States in Transition

Two Trends

Democratic Revolutions

Decline in Centrally Plannedand Mixed Economies

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Spread of Democracy

Why?1. Totalitarian regimes failed to deliver economic progress to the vast bulk of their populations.2. New information and communications technologies, Internet, have broken down the ability of the state to control access to uncensored information. 3. Economic advances of the last quarter century have led to the emergence of increasingly prosperous middle and working classes who have pushed for democratic reforms.

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Fukuyama

           

  

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There is no “universal” civilization based on widespread acceptance of Western liberal democratic ideals.

Clash of Civilizations

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The spread of Market-Based Systems

Shift

Centrally Planned

Economies

Mixed Economies

Market – Based

Economies

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The Nature of Economic Transformation

The shift to market-based economies entails:

Deregulation Removal of legal restrictions to free

markets.Privatization

Transfer of state ownership of property into private hands.

Legal Systems Creation of systems to protect property

rights.

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Implications for Business

AttractivenessBenefits

First-mover advantagesLate-mover disadvantages

Costs

RisksPoliticalEconomicLegal

EthicsHuman rightsRegulationsCorruption

Foreign Corrupt Practices Act