INTERNATIONAL BUSINESS
10E
By Charles W.L. Hill
CHAPTER 2 & 3
National Differences in
Political Economy &
Economic Development
WHAT IS A POLITICAL ECONOMY?
• Political economy of a nation - how the political, economic,
and legal systems of a country are interdependent
• they interact and influence each other
• they affect the level of economic well-being in the nation
• A country’s political economy plays a HUGE role in international business, for
several reasons: Political and economic systems differ widely across countries,
making it difficult to make generalizations or have a uniform strategy.
• Countries, represented by their governments, are sovereign entities.
WHAT IS A POLITICAL SYSTEM?
• Political system - the system of government in a
nation
• Assessed according to
• the degree to which the country emphasizes collectivism as opposed to
individualism
• the degree to which the country is democratic or totalitarian
WHAT IS A POLITICAL SYSTEM?
• Collectivism stresses the primacy of collective goals over
individual goals. The needs of society as a whole are generally
viewed as being more important than individual freedoms.
Supports Socialism, which had two wings – communists & social democrats
Communist believed socialism could be achieved only through violent revolution and totalitarian
dictatorship. E.g. former Soviet Union, Poland, Czechoslovakia, Hungary, China, Cambodia, Laos,
Vietnam, Angola, Mozambique, Cuba, and Nicaragua.
Social democrats
• Individualism – an individual should have freedom in his own
economic and political pursuits.
It
supports free market system.
Based on two tenets – guaranteeing individual freedom and self expression, and social
welfare through letting individuals pursue their own economic self interest
WHAT IS A POLITICAL SYSTEM?
• Democracy - government is by the people, exercised either directly
or through elected representatives
Ideal democracy has a number of safeguards –
1. An individual’s right to freedom of expression, opinion, and organization
2. A free media
3. Regular elections in which all eligible citizens are allowed to vote
4. Universal adult suffrage
5. Limited terms for elected representatives
6. An independent and fair court system
7. A nonpolitical state bureaucracy
8. A nonpolitical police force and armed services
9. Relatively free access to state information
WHAT IS A POLITICAL SYSTEM?
• Totalitarianism - one person or political party exercises absolute
control over all spheres of human life and prohibits opposing
political parties.
• Four major totalitarianism exist in the world today.
1. Communist Totalitarianism
2. Theocratic Totalitarianism
3. Tribal Totalitarianism
4. Right-wing Totalitarianism
WHAT IS AN ECONOMIC SYSTEM?
There are three types of economic systems
1. Market economies - all productive activities are privately owned and production
is determined by the interaction of supply and demand
Supply must not be restricted, otherwise there would be a monopoly
Private ownership is encouraged
New products development, efficient production process, better marketing and after sales service –
ensure greater competition, positive impact on economic growth
2. Command economies - government plans the goods and services that a country
produces, the quantity that is produced, and the prices as which they are sold
Businesses are state owned, so that government can ensure best interest of a nation
3. Mixed economies - certain sectors of the economy are left to private ownership
and free market mechanisms while other sectors have significant state
ownership and government planning
WHAT IS A LEGAL SYSTEM?
• Legal system - the rules that regulate behavior along with the
processes by which the laws are enforced and through which
redress for grievances is obtained
• the system in a country is influenced by the prevailing political system
• Legal systems are important for business because they
• define how business transactions are executed
• identify the rights and obligations of parties involved in business transactions
WHAT IS A LEGAL SYSTEM?
There are three types of legal systems
1. Common law - based on tradition, precedent, and custom
• E.g. United States
2. Civil law - based on detailed set of laws organized into codes
• E.g. Japan, Germany, France
3. Theocratic law - law is based on religious teachings
• Saudi Arabia, Pakistan
4. Mixed Legal System
HOW ARE PROPERTY RIGHTS AND
CORRUPTION RELATED?
• Property rights - the legal rights over the use to which a
resource is put and over the use made of any income that may
be derived from that resource
• Property rights can be violated through
1. Private action – theft, piracy, blackmail
2. Public action - legally - e.g. excessive taxation or illegally - e.g.
bribes or blackmailing
WHICH COUNTRIES ARE MOST CORRUPT?
Rankings of Corruption by Country 2018
Source: Transparency International, 2018
HOW CAN INTELLECTUAL PROPERTY BE
PROTECTED?
Intellectual property - property that is the product of intellectual
activity
• Can be protected using
1. Patents – exclusive rights for a defined period to the manufacture, use,
or sale of that invention
2. Copyrights – the exclusive legal rights of authors, composers,
playwrights, artists, and publishers to publish and disperse their work
as they see fit
3. Trademarks – design and names by which merchants or manufacturers
designate and differentiate their products
WHAT IS PRODUCT SAFETY AND LIABILITY?
• Product safety laws set certain standards to which a product must
adhere
• Product liability involves holding a firm and its officers
responsible when a product causes injury, death, or damage
Both civil and criminal product laws exist. Civil laws call for
payment and monetary damage. Criminal laws result in fines and
imprisonment.
WHAT DETERMINES A COUNTRY’S LEVEL OF
ECONOMIC DEVELOPMENT?
Gross national income (GNI) per person measures the total
annual income received by residents of a nation
Japan, Sweden, Switzerland, and the U.S. have high GNI
China and India have low GNI
GNI can be misleading because it does not consider
differences in the cost of living
need to adjust GNI figures using purchasing power parity
(PPP)
HOW DO COUNTRIES COMPARE ON GNI?
Economic Data for Selected Countries
WHAT DETERMINES A COUNTRY’S LEVEL OF
ECONOMIC DEVELOPMENT?
• Official figures can also be misleading because they do not
account for black economy transactions
• In addition, GNI and PPP data are static and do not consider
economic growth rates
• So, while China and India are currently categorized as being poor they are
growing more rapidly than many developed nations and are expected to become
among the largest economies in the world
HOW DOES POLITICAL ECONOMY
INFLUENCE ECONOMIC PROGRESS?
• Innovation and entrepreneurship are the engines of long-run
economic growth
• innovation includes new products, new processes, new organizations, new
management practices, and new strategies
• entrepreneurs commercialize innovative new products and processes
• Innovation and entrepreneurship help increase economic activity
by creating new markets and products that did not previously exist
• innovation in production and business processes result in more productive labor and
capital further boosting economic growth rates
HOW DOES POLITICAL ECONOMY
INFLUENCE ECONOMIC PROGRESS?
• Innovation and entrepreneurship require a market economy
• there is little incentive to develop new innovations in planned economies because the
state owns all means production and therefore, the gains
• There is a strong relationship between economic freedom and
economic growth
• the six countries with the highest ratings of economic freedom from 1975 to 1995
were also among the highest for economic growth
• Hong Kong, Switzerland, Singapore, the United States, Canada, and Germany
HOW DOES POLITICAL ECONOMY INFLUENCE
ECONOMIC PROGRESS?
• Innovation and entrepreneurship require strong property rights
• without strong property rights, individuals and businesses risk having their innovations and potential
profits stolen
• Economist Hernando de Soto claims that inadequate property protection in many
developing nations limits economic growth
• Democratic regimes are probably more conducive to long-term economic growth than
dictatorships, even the benevolent kind
• property rights are only secure in well-functioning, mature democracies
• Subsequent economic growth leads to the establishment of democratic regimes
• South Korea
• Taiwan
HOW DOES GEOGRAPHY INFLUENCE ECONOMIC
DEVELOPMENT?
• Countries with favorable geography are more likely to engage in
trade, and so, be more open to market-based economic systems,
and the economic growth they promote
• Jeffrey Sachs studied economic growth rates between 1965 and
1990 and found that
• landlocked countries grew more slowly than coastal economies
• being totally landlocked reduced a country’s growth rate by 0.7% per year
• tropical countries grew more slowly than countries in temperate zones
WHAT IS THE NATURE OF ECONOMIC
TRANSFORMATION?
• The shift toward a market-based system involves
• deregulation – removing legal restrictions to the free play of markets,
the establishment of private enterprises, and the manner in which
private enterprises operate
• privatization - transfers the ownership of state property into the hands
of private investors
• the creation of a legal system to safeguard property rights
