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Part 2: National Differences Chapter 2: National Differences in Political, Economic, and Legal Systems ©McGraw-Hill Education Source: ©Bandar Algaloud/Saudi Kingdom Council/Handout/Anadolu Agency/Getty Images Learning Objectives 2-1 Understand how the political systems of countries differ. 2-2 Understand how the economic systems of countries differ. 2-3 Understand how the legal systems of countries differ. 2-4 Explain the implications for management practice of national differences in political economy. ©McGraw-Hill Education Opening Case: Transformation in Saudi Arabia Absolute monarchy with laws based on interpretation of Qur’an World’s largest exporter of oil enhances economy Oil prices collapsed in 2014 and wiped out revenue surplus Potential for social unrest • Young population, high unemployment • Most non-government jobs taken by low-paid foreign workers Crown prince Muhammad bin Salman—Vision 2030 • Reduce dependence on oil • Loosen stifling moral codes • Has met with strong resistance ©McGraw-Hill Education Introduction International business more complicated than domestic • Differing political, legal, and economic systems • Vary in economic development and growth trajectories • Cultural, education, and skill levels vary The political, economic, and legal systems are known as the political economy • Systems are interdependent • Societal culture affects political economy, and political economy shapes societal culture ©McGraw-Hill Education Political Systems 1 Political system: system of government in a nation • Political systems assessed in terms of degree to which they: • Emphasize collectivism as opposed to individualism • Are democratic or totalitarian ©McGraw-Hill Education Political Systems 2 Collectivism and Individualism • Collectivism: system that stresses the primacy of collective goals over individual goals • Traced to Greek philosopher Plato • Society should be stratified into classes • Property should be owned in common • When collectivism is emphasized, needs of society as whole are generally viewed as being more important than individual freedoms ©McGraw-Hill Education Political Systems 3 Collectivism and Individualism continued • Socialism • Modern socialists trace roots to Karl Marx • Advocates state ownership of basic means of production, distribution, and exchange • State then manages enterprises to benefit society as a whole ©McGraw-Hill Education Political Systems 4 Collectivism and Individualism continued • In the early 20th century, socialism split into: • Communists – socialism could only be achieved though violent revolution and totalitarian dictatorship • In retreat worldwide by mid-1990s • Social democrats, who worked to achieve same goals by democratic means • Many state-owned enterprises failed to succeed, and many nations implemented privatization programs ©McGraw-Hill Education Political Systems 5 Collectivism and Individualism continued • Individualism • Suggests individuals should have freedom over economic and political pursuits • Traced to Aristotle, who argued that individual diversity and private ownership are desirable • Refined in work of David Hume, Adam Smith, and John Stuart Mill • Individualism stresses: • Individual freedom and self-expression • Letting people pursue self-interests to achieve the best overall good for society • Democratic systems and free markets ©McGraw-Hill Education What About People’s Future Rights? Individualism versus collectivism is a century-old debate topic and an inherently interesting issue. For example, does an individual’s life belong to him or her or to the community, society, or country in which he or she resides? Most people have a direct and immediate answer, but there is no consensus on which answer depending on which country you reside in or which personal “compass” you subscribe to. Everyone has tendencies toward being both individualistic and collectivistic but prefers one way more than the other. So, which of these ideas— individualism or collectivism—do you think is correct, and which cultural belief do you prefer and why? Source: Objective Standard, March 3, 2014. www.theobjectivestandard.com ©McGraw-Hill Education Political Systems 6 Democracy and Totalitarianism • Democracy • Political system in which government is by the people, exercised either directly or through elected representatives • Most common form today is representative democracy – elected representatives vote on behalf of constituents • Freedom of expression, opinion, and organization; Free media; Regular elections; Universal adult suffrage; Limited terms for elected officials; Fair court system; Nonpolitical state bureaucracy; Nonpolitical police force and armed services; free access to state information ©McGraw-Hill Education Political Systems 7 Democracy and Totalitarianism continued • Totalitarianism • Form of government in which one person or political party exercises absolute control over all spheres of human life, and opposing political parties are prohibited • In most totalitarian regimes: • There is widespread political repression • There are no free and fair elections • Media is censored • Basic civil liberties are denied • Challenges to regime are prohibited ©McGraw-Hill Education Political Systems 8 Democracy and Totalitarianism continued • Four major forms of totalitarianism today: 1. Communist totalitarianism: advocates achieving socialism through totalitarian dictatorship 2. Theocratic totalitarianism: political power is monopolized by a party, group, or individual that governs according to religious principles 3. Tribal totalitarianism: where a political party that represents the interests of a particular tribe monopolizes power 4. Right-wing totalitarianism: individual economic freedom is allowed but individual political freedom is restricted because it could lead to communism ©McGraw-Hill Education Political Systems 9 Pseudo-Democracies • Many nations lie between pure democracy and complete totalitarianism • Authoritarian elements capture much of the machinery of state and use this in an attempt to deny basic political and civil liberties • Russia under Vladimir Putin ©McGraw-Hill Education Economic Systems 1 Political ideology and economic systems are connected Three types of economic systems: market economy, command economy, and mixed economy • Market-based economic system 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 ©McGraw-Hill Education Economic Systems 2 Market Economy • Goods and services a country produces and the quantity in which they are produced is determined by supply and demand • Supply must not be restricted by monopolies • Government encourages free and fair competition between private producers • Constant incentive to improve products and processes ©McGraw-Hill Education Economic Systems 3 Command Economy • Goods and services a country produces, the quantity in which they are produced, and the price at which they are sold are planned by government • All businesses are state-owned and have little incentive to control costs and be efficient • Because there is no private ownership, there is little incentive to better serve consumer needs • Dynamism and innovation are absent ©McGraw-Hill Education North Korea’s Command Economy Kim Jong-un, the leader of the Democratic People's Republic of Korea, inspecting a factory. North Korea functions as a centralized, single party and tightly controlled dictatorial command economy. ©McGraw-Hill Education Source: ©AFP/Getty Images Economic Systems 4 Mixed Economy • Includes some elements of market economies and some elements of command economies • Governments take over troubled firms considered vital to national interests • Number of mixed economies becoming less common ©McGraw-Hill Education Legal Systems 1 Legal system of a country refers to rules, or laws, that regulate behavior, along with processes by which laws are enforced and through which redress for grievances is obtained • A country’s legal system is important because laws: • Regulate business practice • Define manner in which business transactions are executed • Set rights and obligations of those involved in business transactions ©McGraw-Hill Education Legal Systems 2 Different Legal Systems • Common law: based on tradition, precedent, and custom • Found in most of Great Britain’s former colonies, including the United States • Civil law: based on detailed set of laws organized into codes • Found in more than 80 countries, including Germany, France, Japan, and Russia • Theocratic law: based on religious teachings • Islamic law is most widely practiced ©McGraw-Hill Education Legal Systems 3 Differences in Contract Law • Common law and civil law systems approach contract law – body of law that governs contract enforcement – differently • A contract specifies conditions under which an exchange is to occur and details rights and obligations of parties • In a common law state, contracts are very detailed with all contingencies spelled out • In a civil law state, contracts are shorter and much less specific ©McGraw-Hill Education Legal Systems 4 Differences in Contract Law continued • United Nations Convention on Contracts for the International Sales of Goods (CISG) establishes a uniform set of rules governing certain aspects of the making and performance of everyday commercial contracts between sellers and buyers who have places of business in different nations • Countries that adopt CISG signal to other nations they treat the Convention’s rules as part of their law ©McGraw-Hill Education Legal Systems 5 Property Rights and Corruption • Property rights: legal rights over use to which a resource is put and over use made of any income derived from that resource • Private action: theft, piracy, blackmail, and the like by private individuals or groups • Public action: public officials extort income or resources from property holders • Excessive taxation, requiring expensive licenses or permits from property holders, or taking assets into state ownership without compensating the owners ©McGraw-Hill Education Legal Systems 6 Property Rights and Corruption continued • Corruption is present in all countries to some degree, but countries with a high level of corruption face: • Foreign direct investment falls • International trade falls • Economic growth falls ©McGraw-Hill Education Figure 2.1 Rankings of Corruption by Country, 2017 ©McGraw-Hill Education Access the text alternative for these images. Source: Constructed by the author from raw data from Transparency International, Corruption Perceptions Index 2017. Legal Systems 7 Property Rights and Corruption continued • Foreign Corrupt Practices Act • Makes it illegal to bribe a foreign government official in order to obtain or maintain business over which the foreign official has authority • All publicly traded companies must keep detailed records so it is clear whether a violation has occurred • Facilitating or expediting payments to secure performance of routine government actions are permitted ©McGraw-Hill Education Did You Know? Did you know that it's illegal for Americans to bribe public officials to gain business in a foreign country, even if bribery is commonplace in that nation? Click to play video ©McGraw-Hill Education Legal Systems 8 The Protection of Intellectual Property • Intellectual property: property that is the product of intellectual activity • Patents: give inventor exclusive rights to the manufacture, use, or sale of that invention • Copyrights: exclusive legal rights of authors, composers, playwrights, artists, and publishers to publish and dispose of their work as they see fit • Trademarks: designs and names, often officially registered, by which merchants or manufacturers designate and differentiate their products ©McGraw-Hill Education Legal Systems 9 The Protection of Intellectual Property continued • The protection of intellectual property rights differs greatly from country to country • 185 nations are members of World Intellectual Property Organization • Paris Convention for the Protection of Industrial Property: agreement signed by 170+ countries to protect intellectual property rights • Enforcement is lax in many nations especially in China and Thailand ©McGraw-Hill Education How Important Are Intellectual Property Rights? Burundi is a landlocked country in the Great Lake region of Eastern Africa. Neighboring countries include Rwanda, Tanzania, and the Democratic Republic of the Congo. Burundi is hilly and mountainous, with access to Lake Tanganyika. The government system is a republic, with the chief of state and head of government being the president. Burundi has a traditional economic system in which the allocation of available resources is made on the basis of primitive methods, and many citizens engage in subsistence agriculture. At the same time, Burundi was last of the 131 countries ranked in the 2013 International Property Rights Index (IPRI). The IPRI is conducted by a partnership of 74 international organizations. The IPRI takes into account legal and political environment, physical property rights, and intellectual property rights. How much should companies focus on intellectual property rights in deciding where to (1) produce their products and (2) sell their products? Does it differ if you produce or sell in the country? Source: www.internationalpropertyrightsindex.org. ©McGraw-Hill Education Legal Systems 10 The Protection of Intellectual Property continued • Responses to violations of intellectual property • Lobbying governments for better laws and enforcement of those laws • Trade Related Aspects of Intellectual Property Rights (TRIPS) – requires WTO members to grant and enforce patents lasting at least 20 years and copyrights lasting 50 years • Filing lawsuits • Avoiding countries with poor intellectual property laws ©McGraw-Hill Education Legal Systems 11 Product Safety and Product Liability • Product safety laws set certain safety standards to which a product must adhere • Product liability holds a firm and its officers responsible when a product causes injury, death, or damage • Liability laws are usually least extensive in less developed countries • Firms must decide whether to adhere to standards of home country or of host country ©McGraw-Hill Education Focus on Managerial Implications The Macro Environment Influences Market Attractiveness • Political, economic, and legal systems of a country raise important ethical issues that have implications for practicing international business • Political, economic, and legal environments of a country clearly influence attractiveness of country as a market and/or investment site • A democratic country with a market-based economy, protection of property rights, and limited corruption is a more attractive place to do business ©McGraw-Hill Education Summary In this chapter, we have • Understood how political systems of countries differ. • Understood how economic systems of countries differ. • Understood how legal systems of countries differ. • Explained implications for management practice of national differences in political economy. ©McGraw-Hill Education Research Terms - Chapter 2 • • • • • • • • • • • • • • • • • • • • • • • • • • • • Political Economy Political System Collectivism Modern Socialists Communists Social Democrats Individualism Representative Democracy Theocratic Totalitarianism Tribal Totalitarianism Right-Wing Totalitarianism Pseudo-Democracies Market Economy Command Economy Mixed Economy Common Law Civil Law Theocratic Law Contract Law United Nations Convention on Contracts for the International Sale of Goods (CISG) Property Rights Private Action Public Action Foreign Corrupt Practices Act (FCPA) Intellectual property (patents, copyrights, and trademarks) World Intellectual Property Organization Product Safety Laws Product Liability Research Terms - Chapter 3 • • • • • • • • • • • • • • Gross National Income (GNI) Purchasing Power Parity (PPP) Black Economy or Shadow Economy Human Development Index (HDI) Geography, Education, and Economic Development The New World Order and Global Terrorism Deregulation Privatization First Mover Advantage Late Mover advantage Doing Business Internationally – Costs Doing Business Internationally – Political Risks Doing Business Internationally – Economic Risks Doing Business Internationally – Legal Risks
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