National Differences in Political Economy

National Differences in Political Economy

How

do political, economic, legal systems of a country:

Differ among countries? Influence economic progress? Change during our times? Influence benefits, costs, risks of business?

What

are ethical issues that arise from doing business internationally?

National Differences in Political Economy

Political

System:

System of National Government Varies by country on the basis of

values and beliefs about Collectivism and Individualism Democracy and Totalitarianism

Collectivism
Primacy

of collectivist over individual

goals Emphasis: good of society, common good Plato,427-347 BC, to Socialists, Marx, 1818 - 83 Communists-revolution, Social Democrats-democratic outlook

Individualism
Individual

freedom over economic

and political action

Individual diversity and private

ownership are desirable

Private property is more productive

whereas communal property receives little care

 Without

private property, no man will be seen to be liberal and no man will ever do any act of liberality; for only in the use of money is liberality made effective -- Aristotle, 384-322 BC

 An individual who intends his own gain is

led by an invisible hand to promote an end which was no part of his intention. Nor is it always worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who effect to trade for the public good

-- Adam Smith, 1723-1790

Democracy:
- Government is by the people, exercised either directly or through elected representatives - Safeguards hold elected representatives accountable

Totalitarianism: One person/party exercises absolute control over all spheres of human life
Communist totalitarianism (PRC, Vietnam, Laos, N.

Korea,Cuba) Theocratic totalitarianism (Iran, S. Arabia) Tribal totalitarianism (Zimbabwe, Tanzania) Right wing totalitarianism

Economic Systems

Market economy: what is produced in what quantity determined by supply/demand and through a price system

Command economy: planned by government

Mixed economy: a balance of both of the above

State-Directed economy: state directly influences

investment activities of private enterprise through

industrial policy.

National Differences in Political Economy

A

Legal System is:

Different Legal

rules - laws - that regulate

behavior process through which

Systems
Common Law Civil Law Theocratic Law

laws are enforced grievances are redressed

Businesses

must

Dispute

observe
Home country laws Host country laws International Laws and Treaties

resolution
Where to arbitrate?

Mediate? Validity of contracts and decisions

Contract Law
A

contract specifies

conditions under which an exchange will happen rights/obligations of parties

It

is based on a countrys legal system. Systems differ based on legal tradition

common law system
civil law system

Legal Systems

Disputes need to be resolved based on a particular legal system

Which countrys? Home? Host?

UN Convention on Contracts for the International Sale of Goods (GIGS) International Court of Arbitration of the International Chamber of Commerce in Paris, France

Legal Systems and International Business

Property rights
use of a resource use made of income from resource enforcement issues Public vs private action violations

Legal Systems and International Business

Protection of Intellectual Property patent: inventors exclusive rights to

manufacture, use, sell an invention copyright: same for authors, composers, artists, publishers trademark: unique design and name, often officially registered Paris Convention for the Protection of Industrial Property (96 countries) WTO/GATT

Public Action and Corruption

Public

Action can violate property rights

Legal mechanisms
Illegal means: corruption

Corruption

across countries is tracked by Transparency International corruption levels reduce Foreign Direct Investment and economic growth

High

Public Action and Corruption

US foreign corrupt practices act:

illegal for US managers to bribe government

officials

OECD Convention on Bribery of Foreign Public Officials in International Business transactions

Legal Systems and International Business

Protection of intellectual property Patents, copyrights, trademarks Paris convention for the Protection of

Industrial Property TRIPS (WTO)Trade Related Aspects of Intellectual Property

Product safety and product Product safety laws Criminal / civil liability

liability

Differences of Economic Development

GDP

per capita: does not factor cost of living differences Purchasing Power Parity (PPP) index: adjusts per capita GDP by cost-ofliving Human Development Index: life expectancy, literacy, PPP based average incomes

Broader Conceptions of Development

Amartya Sen: development Should be assessed by material output measures Is an economic AND a political process that requires democratization
Human

Development Index (HDI) =

f{life expectancy, educational attainment, PPP based annual incomes sufficient to meet basic needs}

Political Economy and Economic Progress

Innovation >> Engine for Growth (products, processes, strategies, organizations, management practices) Innovation requires:
market economy strong property rights the right political system

Economic progress is related to democracy

States in Transition
Democratic

and 90s Totalitarian regimes failed to deliver economic progress Spread of information trough new communication technologies Emergence of prosperous middle classes

systems spread in the 80s

States in Transition: Universal or Clashing Civilizations

New

realities: Russian reemergence, Zimbabwean racial unrest, Chinas resurgence New world order and terrorism
Fukuyama: the end of history and

harmonious existence Huntington: new conflicts, e.g., Islamic fundamentalism

States in Transition: Spread of Market-Based Systems

Nature

of economic transformation

Deregulation: legal changes Privatization: transfer of state

property/industries to private individuals

Auctions IPOs

Evolution of legal systems The road of transformation is rocky

Implications for International Business

Countrys political, economic, and legal environment

influence attractiveness

raise ethical Issues

Country attractiveness
balance long-term risks with short-term benefits for business benefits depend on: size, wealth, future economic growth first mover advantages identify star future economies costs are affected by: economic sophistication (may be more costly to operate in LDCs, no infrastructure) legal framework impact on costs political payoffs