CHAPTER 02

National Differences in Political Economy

Learning Objectives

Identify differences in political, economic, and legal systems

Examine global trends in political economy

Consider implications for managers

Political Economy

The political economy of a nation refers to the interdependence between the

political, economic, and legal systems

The interaction of these systems

affect the level of economic well-being in a particular country

influence the benefits, costs and risks of doing business in that country

Political Systems

Political system refers to the system of government in a nation

Political systems can be assessed according to two dimensions

the degree to which they emphasize individualism as opposed to collectivism

the degree to which they are democratic or totalitarian

Collectivism versus Individualism

Collectivism

Collective goals are more important than individual goals

Individual rights are sacrificed for the good of the majority

In the modern world collectivism is expressed through socialism

Individualism

Is the direct opposite of collectivism

Central tenet is that individual economic and political freedoms are the ground

rules on which society is based

Collectivism versus Individualism

By the mid-1990s, communism was in retreat worldwide

Social democracy is also retreating as many countries move toward free market

economies

State-owned enterprises are increasingly being privatized

Democracy versus Totalitarianism

Democracy

Government is by the people, exercised either directly or through elected

representatives

Elected representatives are held accountable through safeguards

Totalitarianism

One person/party exercises absolute control over all spheres of human life

Types of totalitarianism:

Communist

Theocratic

Tribal

Right wing/Military

Democracy versus Totalitarianism

Democracy is usually associated with individualism and communism is usually

associated with collectivism and totalitarianism

Economic Systems

Political ideology and economic systems are connected

In countries where individual goals are emphasized free market economies are

likely

In countries where collective goals are given primacy there is greater chance of

state control of markets

Economic Systems

Market economy: what is produced and in what quantity is determined by

supply/demand and signaled to producers through the price system

Command economy: planned by government

Mixed economy: a combination of both of the above

Legal Systems

The legal system of a country refers to the rules that regulate behavior along

with the processes by which the laws are enforced and through which redress

for grievances is obtained

There are three types of legal systems:

Common law - based on tradition, precedent and custom

Civil law - based on detailed set of laws organized into codes

Theocratic law - based on religious teachings

Legal Systems and Contracts

A contract is a document that specifies the conditions under which an exchange

is to occur and details the rights and obligations of the parties

Parties resort to contract law (body of law that governs contract enforcement)

when there is disagreement

Different legal systems have different approaches to contracts

Common law detailed contracts, flexible interpretation

Civil law short contracts, code dictates

Property Rights and Corruption

Property rights refer to the legal rights over the use to which a resource is put

and over the use made of any income that may be derived from that resource

Countries differ in terms of how their legal systems define and protect property

rights

Property rights can be violated through:

private action

public action and corruption

Which Countries Are Most Corrupt?

Rankings of Corruption by Country 2014

What is Cause of High Corruption?

According to Transparency International, many of the countries that score high

on corruption have poorly functioning public institutions like the police and

judiciary.

In such countries, even where anti-corruption laws are on the books, in practice

they are often skirted or ignored.

Protection of Intellectual Property Rights

Intellectual property refers to property that is the product of intellectual activity

Intellectual property ownership established through:

Patents exclusive rights for a defined period to the manufacture, use, or sale

of that invention

Copyrights the exclusive legal rights of authors, composers, playwrights,

artists, and publishers to publish and disperse their work as they see fit

Trademarks design and names by which merchants or manufacturers

designate and differentiate their products

Protection of Intellectual Property Rights

Protection of intellectual property rights differs from country to country

World Intellectual Property Organization

Paris Convention for the Protection of Industrial Property

To avoid piracy, firms can

stay away from countries where intellectual property laws are lax, and/or

corruption is high

file lawsuits

lobby governments for international property rights agreements and

enforcement

Implications for Managers

There are two broad implications of the political, economic, and legal

environment of a country:

Raises ethical issues that have a bearing on the practice of international

business

For example, human rights violations and corruption

Determines the attractiveness of a country as a market and/or investment site

Balance benefits, costs and risks to determine overall attractiveness

Implications for Managers

Other things being equal, more attractive countries have

democratic political institutions,

market based economies, and

strong legal systems that protect property rights and limit corruption