Slide global business today chap002 country differences in political economy

Country Differences in Political Economy Country Differences in Political Economy 2... • How does their nature affect ethical issues of doing business in a country?... Country Differe

Country Differences in

Political Economy

Country Differences in

Political Economy

2

• How do they differ?

• How do they influence a country’s ability to

achieve meaningful economic progress?

• What are the main changes they are undergoing?

• How do these affect benefits-costs-risks of doing

business in a country?

• How does their nature affect ethical issues of

doing business in a country?

Country Differences in

Political Economy

• Political System: system of National Government

– Determinants (extremes never met)

• 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

• Individual freedom over economic and political action

– Individual diversity and private ownership are desirable Private property is more highly

productive whereas communal property receives little care Aristotle, 384-322 BC

– “the only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others His own good, either physical or moral, is not a sufficient warrant” John Stuart Mill, 1806-1873

– 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

Individualism

• Democracy :

– Government is by the people, exercised either directly

or through elected representatives (representative democracy)

– Safeguards hold elected representatives accountable

• Totalitarianism:

– One person/party exercises absolute control over all spheres of human life (competing political parties are

banned)

– Communist totalitarianism – Theocratic totalitarianism – Tribal totalitarianism

– Right wing totalitarianism

National Differences in Political

Economy

• Economic Systems

– Market economy: what is produced in what quantity is determined by supply/demand and signaled to producers through a price system – Command economy: planned by government – Mixed economy: a balance of both of the above – State-Directed economy: the state directly

influences the investment activities of private enterprise through “industrial policy.”

National Differences in Political

Economy

• A Legal System is:

– rules - laws - that regulate behavior

– process through which

• laws are enforced

• grievances are redressed

• Businesses must observe

– Home country laws – Host country laws – International Laws and Treaties

• Different Legal Systems

– Common Law – Civil Law

– Theocratic Law – Bureaucratic Law

• Dispute resolution

– Where to arbitrate?

– Validity of contracts and decisions

Legal Systems and International

Business

• Legal Systems and International Business

– property rights

• use of a resource

• use made of income from resource

• enforcement issues

• Public vs private action violations

– protection of Intellectual Property

• patent: inventors’ exclusive rights to manufacture, use, sale an invention

• copyright: same for authors, composers, artists, publishers

• trademarks: unique designs and names, often officially registered

Legal Systems and International

Business

• product safety and product liability

• criminal / civil liability

• contract law

– document that specifies

• conditions under which an exchange will happen

• rights/obligations of parties

– differences based on legal tradition

• common law system

• civil law system

Differences of Economic

Development

– GDP per capita; does not factor cost of living differences

– Purchasing Power Parity index: adjusts per capita GDP by cost-of-living

– Static picture – Human Development Index: life expectancy, literacy, PPP based average incomes

Political Economy and Economic

Progress

– Innovation -> Engine for Growth (products, processes, strategies, organizations, management practices)

– Innovation needs:

• market economy

• strong property rights

• the “right” political system

– Economic progress is related to Democracy

States in Transition

• The spread of Democratic systems in the 1980s and 1990s

– Totalitarian regimes failed to deliver economic progress – Spread of information trough new communication

technologies – Emergence of prosperous middle classes

• Universal or Clashing Civilizations

– Fukuyama: “… the end of history…” and harmonious existence

– Huntington: new conflicts, e.g., Islamic fundamentalism

States in Transition (cont.)

• 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 Global Business

• Political, economic, and legal environments of a country

– influence attractiveness – raise ethical Issues

• Attractiveness

– balance long-term risks with short-term benefits of doing business

in a foreign country – benefits depend on: size, wealth, future economic growth

• first mover advantages

• identify “star” future economies – costs are affected by:

• political payoffs

• economic sophistication (may be more costly to operate in LDCs, no

Implications for Global Business

• Ethical Issues

– human rights – adherence to same standards abroad as at home

– product safety – work safety – environmental protection

– bribes

– Foreign Corrupt Practices Act (1977) – what is unethical is not necessarily illegal

Host Countries and the MNC

• Impact of MNC on host countries

• Political

• Economic

• Environmental

• Cultural

• Impact of host country Governments on MNCs

(Political Risk)

• Expropriation, Nationalization

• Privatization

• Constraints on ownership

• Intellectual property rights