Professional Documents
Culture Documents
McGraw-Hill/Irwin
Chapter 2
Introduction
Question: What is the political economy of a country? Answer: A countrys political economy refers to its political, economic, and legal systems These systems are interdependent, and interact and influence each other A countrys political system has major implications for the practice of international business
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Political Systems
A political system - the system of government in a nation Political systems can be assessed in terms of the degree to which they emphasize collectivism as opposed to individualism in terms of the degree to which they are democratic or totalitarian
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When collectivism is emphasized, the needs of the society as whole are generally viewed as being more important than individual freedoms
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Economic Systems
Political ideology and economic systems are connected There are three types of economic systems: the market economy, the command economy, and the mixed economy A free market system is likely in countries where individual goals are given primacy over collective goals State-owned enterprises and restricted markets are common in countries where collective goals are dominant
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Market Economy
In a pure market economy the goods and services that a country produces, and the quantity in which they are produced is determined by supply and demand Consumers, through their purchases, determine what is produced and in what quantity The role of government is to encourage free and fair competition between private producers
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Command Economy
In a pure command economy the goods and services that a country produces, the quantity in which they are produced, and the price at which they are sold are all planned by the government All businesses are state owned, and so have little incentive to control costs and be efficient Because there is no private ownership, there is little incentive to better serve consumer needs
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Mixed Economy
A mixed economy includes some elements of a market economy and some elements of a command economy Governments tend to take over troubled firms that are considered to be vital to national interests The number of mixed economies in the world today is falling
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Legal Systems
The legal system of a country refers to the rules, or laws, that regulate behavior, along with the processes by which the laws of a country are enforced and through which redress for grievances is obtained A countrys legal system is important because laws regulate business practice laws define the manner in which business transactions are to be executed laws set down the rights and obligations of those involved in business transactions
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Geography, Education, and Economic Progress Other factors influencing a countrys rate of economic development : Geography - influences economic policy, and thus economic development countries with favorable geography are more likely to engage in trade which can promote economic growth Education levels countries that invest more in the education of their young people develop faster economically
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States in Transition
Since the late 1980s, a wave of democratic revolutions has swept the world, and many of the previous totalitarian regimes collapsed There has been a move away from centrally planned and mixed economies towards free markets
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Benefits
The benefits of doing business in a country are a function of market size, and current and future consumer purchasing power by identifying and investing early in a potential future economic stars, firms may be able to gain first mover advantages (advantages that accrue to early entrants into a market)
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Costs
Firms must be prepared to deal costs of doing business in foreign markets 1. Political costs - include the cost of paying bribes or lobbying for favorable or fair treatment 2. Economic costs - relate primarily to the sophistication of the economic system, including the infrastructure and supporting businesses 3. Legal costs - can be higher in countries with dramatically different product, workplace, and pollution standards, or where there is poor legal protection for property rights
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Risks
Doing business in foreign markets involves risk Political risk - the likelihood that political forces will cause drastic changes in a country's business environment that adversely affects the profit and other goals of a business enterprise Economic risk - the likelihood that economic mismanagement will cause drastic changes in a country's business environment that adversely affects the profit and other goals of a business enterprise Legal risk - the likelihood that a trading partner will opportunistically break a contract or expropriate property rights
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Overall Attractiveness
The overall attractiveness of a country as a potential market and/or investment site for an international business depends on balancing the benefits, costs, and risks associated with doing business in that country Generally, the costs and risks are lower in economically developed and politically stable markets However, the potential for growth may be higher in less developed nations
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