Chapter 2
National Differences
in Political Economy
International Business
Political Economy of a Country refers to…
A country’s political economy
refers to its political, economic,
and legal systems
These systems are interdependent,
and interact and influence each
other
A country’s political system has
major implications for the
practice of international business
Political System
A political system is 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
Political Systems
Collectivism refers to a system that stresses the primacy of
collective goals over individual goals
Individualism is a political philosophy that suggests
individuals should have freedom over their economic and
political pursuits
Democracy is a political system in which government is by
the people, exercised either directly or through elected
representatives
Totalitarianism is a 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
Economic System
There are three types of economic systems
the market economy
the command economy
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
Economic Systems
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
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
A mixed economy includes some
elements of a market economy and
some elements of a command economy
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 country’s 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
Legal Systems
There are three main types of legal systems
Common law
(based on tradition, precedent, and custom)
Civil law
(based on a very detailed set of laws
organized
into codes)
Theocratic law
(based on religious teachings)
The Determinants of economic development
A country’s level of economic development affects its
attractiveness as a possible market or production location for firms
One common measure of economic development is a country’s
gross national income (GNI) per head of population
A purchasing power parity (PPP) adjustment allows for a more
direct comparison of living standards in different countries
There is broad agreement among experts that innovation (new
products, new processes, new organizations, new management
practices, and new strategies) and entrepreneurship are the engines
of long-run economic growth
Geography can influence economic policy, and thus economic
development
Education levels also influence economic development
States in Transition
Democracy has spread to new countries because
many totalitarian regimes failed to deliver economic progress to the
majority of their population
new information and communication technologies have broken down
the ability of the state to control access to uncensored information
economic advances of the last quarter century have led to the emergence
of increasingly prosperous middle and working classes who have pushed
for democratic reforms
The changes in the political and economic systems have significant
implications for international firms
Markets that were formerly off-limits to Western business are now open
China (population of 1.2 billion) could be a bigger market than the
U.S., the EU, and Japan combined
India (population 1.1 billion) is also a potentially huge market
However, just as the potential gains are large, so are the risks
Implications for Managers
There are two main implications of
political economy in International
Business
1. the political, economic, and legal
systems of a country raise important
ethical issues that have implications for
the practice of international business
2. the political, economic, and legal
environment of a country clearly
influences the attractiveness of that
country as a market and/or investment
site
Implications for Managers
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
Implications for Managers
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
Questions…
