International Business Environment

associate professor Radu Mușetescu, PhDradu.musetescu@gmail.com

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North Korea versus South Korea (at night from satellite)

The tipology of the social / political / economic systems

• capitalism (and the market economy)• socialism (and the planned economy)• some attempted hybrids: market socialism (or

state capitalism) and economic fascism (corporatism)

• interventionism

The core difference between human societies and national economies in the international arena = the attitude of the governments towards private property rights (= the property regime) → such an institutional framework is the core determinant of how individuals act and interact

private property versus common property (state property)

Private property

• is natural → derives from the scarcity of goods that are its object• allows capitalization = the value of future cash flows can be taken into account in order to assess the present capital value = a market value for the capital goods (see the stock exchange)• align the „control” incentive with „saving” incentive = the owner is the only one who can maximize the present and future cash flows in order to preserve the capital value of his good;• private property is void unless there is also free trade in it and in its services

Capitalism= the political and economic system where the proprerty rights are private and there is also the freedom to exchange

→ a capitalist system = is naturally competitive, generate competition (= the market economy) → the economics goods are usually held by those who value them most (and have the ability to pay their price)→ production is oriented towards the satisfaction of the consumer preferences of the population → it is „anarchic” = each entrepreneur will assume an economic risk for his investment → entrepreneurial decision = taken under uncertainty = imply discoveries = there is always a process of „creative destruction” = business failures are natural

World Economic Forum – 2011- the protection of private property rights in the world

The most protected:1. Switzerland2. Finland3. Singapore4. Hong Kong5. Sweden6. Luxembourg7. Austria8. Germany

The least protected:79. Romania

133. Bosnia & Herțegovina134. Argentina135. Ukraine136. Chad137. Bolivia138. Zimbabwe139. Venezuela

The market economy • scarcity – the need for choice among competing uses• the market = the allocation of economics goods is made

through the mechanism of free supply and demand (free prices)

• an economic good is employed in the most profitable use identified by market participants (everyone attempts to maximize his profit)

• from a aggregate perspective, economic goods are allocated towards the most profitable uses = determines the maximization of the use of economics goods

Collective property

• either natural (and compatible with capitalism) or imposed (by the state = state property = socialism)

• collective ownership = generate „the tragedy of the commons” = each one attempts to maximize his own gain so they consume the capital value of the commonly held goods

State ownership

• state ownership implies the centralization of the allocation of resources → economic planning = prices are fixed by a central planner + the quantities are established through „plans”

• the state allocate the resources (including credit, labor or currency) after political criteria, ignoring profit and loss = economic planning

Impossibility of Economic Calculation in socialism

= as long as prices are politically fixed in order to reach political objectives → at some point they will ignore the real scarcity of resources as well as consumer preferences

Prices versus costs: does the price is a sum of costs and a profit?

From a production perspective• the concepts of profit / loss are arbitrary / void;• however, real scarcity remain (government decrees cannot

eliminate scarcity) = the criterion for the allocation of resources is however „political” and not „economic”

• no differences in motivation and rewards (= same wages for the education / training) = no incentive to excel, to be more professional than the others

• state companies have usually the objectives to avoid firings, promote hirings, national war effort and so on.

as a general rule, socialist economies have rejected private property and especially foreign ownership → however, these economies were involved in trade and investments with other companies sometimes, huge opportunities for profit

The impossibility of market socialism (MS)

= can we have a „market economy” without „capitalism”?MS = defined as a system where ownership belongs to the state but prices are free = state enterprises had the liberty to negotate prices (ex. former Yugoslavia, up to a point) → the failure of planning cannot be ignored = without a free capital goods market and the liberty to fail / start a new business → no correct incentives

Economic fascism= a particular form of „planning” and, fundamentally, socialism = while property rights are formally private, their exercise is somehow socialized – the state plans production and fixes prices and the companies are obliged to honor these (especially as the major client / supplier is the state)

→ the private business decision is denied→ the only real „liberty” for private entrepreneurs = the liberty to fail→ all private producers are members of state imposed cartels = they are “told” what and how much to produce

Dilemma: is the economic success of contemporary China a counterexample of the impossibility of

economic calculation in socialism?

• Paradoxically, no. It seems to be even an argument.• the economic performance of China in the last 35 years is due to the emergence of private property and freedom of exchange and the engine of growth have been the foreign direct investments (FDI).

• 1978: „special economic zones” + „open cities”:- allowed FDI (initially, through joint ventures);- some national legislation didn’t apply (more business friendly);- fiscal facilities;

China- „a country, two systems”: while Hong Kong is among the freest market

economies in the world, mainland China still experiences state ownership and planning

- onshore jurisdictions = an area inside the borders of a country where there is a special legislation with different objectives (like free ports and son on)

- offshore jurisdictions = an autonomuous or independent jurisdiction, usually in tropical islands, where there are manifestly different legislations (commercial, fiscal, so on)