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CH2.pptxChapter 2
National Differences in Political, Economic, and Legal Systems
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Learning Objectives
LO 2-1 Understand how the political systems of countries differ.
LO 2-2 Understand how the economic systems of countries differ.
LO 2-3 Understand how the legal systems of countries differ.
LO 2-4 Explain the implications for management practice of national differences in political economy.
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Introduction
Political Economy
Political, economic, and legal systems of a country are interdependent
They influence each other
©Philimon Bulawayo/Reuters
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Political economy refers to the political, economic, and legal systems of a country.
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Political Systems 1 of 6
Learning Objective 2-1 Understand how the political systems of countries differ.
Political systems: refers to the system of government in a nation, economic, and legal systems of a country are interdependent.
Assessed according to
the degree to which the country emphasizes collectivism as opposed to individualism
Collectivism vs. individualism
2. the degree to which the country is democratic or totalitarian
Democratic vs. totalitarian
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Political system refers to the system of government in a nation.
You can think of political systems as having two dimensions:
First, the degree to which they emphasize collectivism as opposed to individualism, and second, the degree to which they are democratic or totalitarian.
Keep in mind that while we’re talking about these systems individually, they’re actually interrelated. Collectivistic systems tend to be more totalitarian and individualistic systems tend to be more democratic.
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Political Systems 2 of 6
Collectivism and Individualism
Collectivism: refers to a political system that stresses the primacy of collective goals over individual goals.
stresses the primacy of collective goals over individual goals
can be traced to the Greek philosopher, Plato (427-347 BC)
the needs of society as a whole are generally viewed as being more important than individual freedoms
Socialism : believe in public ownership of the means of production for the common good of society.
Today, collectivism is equated with socialists (Karl Marx 1818-1883)
advocate state ownership of the basic means of production, distribution, and exchange
manage to benefit society as a whole, rather than individual capitalists
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Collectivism refers to a political system that stresses the primacy of collective goals over individual goals.
Socialists believe in public ownership of the means of production for the common good of society.
In the early twentieth century, the socialist ideology split into two broad camps. The communists believed that socialism could be achieved only through violent revolution and totalitarian dictatorship, whereas the social democrats committed themselves to achieving socialism by democratic means, turning their backs on violent revolution and dictatorship. Both versions of socialism waxed and waned during the twentieth century.
Privatization is the sale of state-owned enterprises to private investors.
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Political Systems 3 of 6
Collectivism and Individualism continued
Individualism : is an emphasis on the importance of guaranteeing individual freedom and self-expression.
Philosophy that an individual should have freedom in his or her economic and political pursuits
can be traced to Greek philosopher, Aristotle (384-322 BC), who argued that individual diversity and private ownership are desirable
individual economic and political freedoms are the ground rules on which a society should be based
implies democratic political systems and free market economies
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Individualism is an emphasis on the importance of guaranteeing individual freedom and self-expression.
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Political Systems 4 of 6
Democracy Vs Totalitarianism
Democracy : refers to a political system in which government is by the people, exercised either directly or through elected representatives.
pure democracy is based on the belief that citizens should be directly involved in decision making
most modern democratic states practice representative democracy where citizens periodically elect individuals to represent them
Democracy and individualism go hand in hand, as do the communist version of collectivism and totalitarianism, with exceptions
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Democracy refers to 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 prohibits opposing political parties.
Let’s move on to the second dimension of political systems, the degree to which they are democratic or totalitarian.
You can think of these as being at opposite ends of a political dimension where at one end, democracy is a political system in which government is by the people, and is exercised either directly or through elected individuals, and at the other end, totalitarianism, where one person or political party exercises absolute control over all spheres of life, and opposing political parties are forbidden.
While we generally think of democracy as going hand-in-hand with individualism, and totalitarianism being associated with collectivism, gray areas do exist. For example, China is still under totalitarian rule, but has adopted free market policies that tend to be associated with individualism.
A pure democracy is based in the belief that people should be directly involved in decision making.
The most common form of democracy today is representative democracy, where elected representatives vote on behalf of constituents. This is the type of system that is present in the U.S.
Some of the characteristics of democracies include freedom of expression, free media, regular elections, a fair court system, and free access to state information. Of course, these freedoms do not exist in totalitarian systems.
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Political Systems 5 of 6
Democracy and Totalitarianism continued
Pseudo-democracies
Lie between pure democracies and complete totalitarianism systems
Authoritarian elements have captured some or much of the machinery of state and use this in an attempt to deny basic political and civil liberties
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Representative democracy is a political system in which citizens periodically elect individuals to represent them in government.
Communist totalitarianism is a version of collectivism advocating that socialism can be achieved only through a totalitarian dictatorship.
Theocratic totalitarianism is a political system in which political power is monopolized by a party, group, or individual that governs according to religious principles.
Tribal totalitarianism is a political system in which a party, group, or individual that represents the interests of a particular tribe (ethnic group) monopolizes political power.
Right-wing totalitarianism is a political system in which political power is monopolized by a party, group or individual that generally permits individual economic freedom but restricts individual political freedom, including free speech, often on the ground that it would lead to the rise of communism.
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Political Systems 6 of 6
Democracy and Totalitarianism continued
Totalitarianism : government in which one person or political party exercises control over all spheres of human life.
Communist totalitarianism – the communist party monopolizes power.
Theocratic totalitarianism - political power is monopolized by a party, group, or individual.
Right-wing totalitarianism - some individual economic freedom, but trap individual political freedom.
Tribal totalitarianism - found in states where a political party that represents the interests of a particular tribe monopolizes power
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As we said, in a totalitarian system, one person or political party exercises absolute control over all spheres of life, and opposing political parties are forbidden.
There are four major forms of totalitarianism:
Communist totalitarianism advocates achieving socialism through totalitarian dictatorship. While this form of totalitarianism is declining worldwide, countries like Vietnam, Cuba, and North Korea still follow the philosophy.
In a theocratic totalitarian system political power is monopolized by a party, group, or individual that governs according to religious principles. You can think of countries like Saudi Arabia or Iran when you think of this type of system. Both countries are greatly influenced by the principles of Islam, and both countries restrict political and religious freedom.
In a tribal totalitarian system a political party that represents the interests of a particular tribe monopolizes power. This type of system is present in some African nations like Zimbabwe and Tanzania.
A right-wing totalitarian system allows individual economic freedom, but individual political freedom is restricted because it might lead to communism. A nation’s military often backs this type of system. This type of system has been declining since 1980, but you might recall its presence in Germany and Italy during the 1930s and 1940s.
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Economic Systems 1 of 3
Learning Objective 2-2 Understand how the economic systems of countries differ.
Market Economy : All productive activities are privately owned , Production is determined by supply and demand.
Government encourages vigorous free and fair competition
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In the archetypal pure market economy, all productive activities are privately owned, as opposed to being owned by the state. Production is determined by the interaction of supply and demand and signaled to producers through the price system.
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Economic Systems 2 of 3
Command Economy
Government plans the good and services, quantity and price, then allocates them for “the good of society”
All businesses are state owned
Historically found in communist economies
No incentive for individuals to look for better ways to serve needs
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In a pure command economy, the government plans the goods and services that a country produces, the quantity in which they are produced, and the prices at which they are sold. Consistent with the collectivist ideology, the objective of a command economy is for government to allocate resources for “the good of society.” In addition, in a pure command economy, all businesses are state owned, the rationale being that the government can then direct them to make investments that are in the best interests of the nation as a whole rather than in the interests of private individuals.
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Economic Systems 3 of 3
Mixed Economy
Some sectors are privately owned, some are government owned
Once common in developed world, less so now
Government may aid troubled firms
U.S. helped Citigroup, General Motors
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Legal Systems 1 of 9
Learning Objective 2-3 Understand how the legal systems of countries differ.
Legal Systems : The rules, or laws, that regulate behavior along with the processes.
Rules or laws that regulate behavior
Process through which laws are enforced
Redress for grievances
Influenced by the prevailing political system
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The legal system of a country refers to the rules, or laws, that regulate behavior along with the processes by which the laws are enforced and through which redress for grievances is obtained.
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Legal Systems 2 of 9
Legal Systems continued
Different Legal Systems
Common Law
Based on tradition, precedent, custom
More flexible than other systems
Civil Law
based on detailed set of laws organized into codes
Theocratic Law
Based on religious teachings
Most common is Islamic law
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Now, let’s look at legal systems, or the rules that regulate behavior, along with the processes by which the laws of a country are enforced and through which redress for grievances is obtained.
Why is it important for international managers to be familiar with different legal systems?
It’s important because a country’s laws regulate business practice, define the manner in which business transactions are to be executed, and set down the rights and obligations of those involved in business transactions. So, the legal system impacts the attractiveness of a country as an investment or a potential target market.
Remember, a country’s legal system is influenced by its political system. So, countries that are collectivistic totalitarian states restrict private enterprise, while individualistic market economies are pro private enterprise and pro consumer.
There are three types of legal systems:
Common law is based on tradition, precedent, and custom. So, judges look at how previous cases have been treated to decide how to treat current cases. Then, as new precedents are made, laws can be amended if necessary. UK, US, Australia, New Zealand, Pakistan, India, Canada, and Hong Kong etc..
Civil law is based on a detailed set of laws organized into codes. This type of system, which is practiced in more than 80 countries including Germany, Japan, and Russia, is less adversarial than common law because under civil law, judges only have the power to apply the existing law, not interpret the law. France, Colombia, Italy, China, Denmark etc..
Theocratic law is based on religious teachings. You might already know that today, Islamic law is the most widely practiced theocratic law system in the world. In practice, Islamic jurors and scholars are struggling to apply the foundations of Islamic law to the modern world, and many Muslim countries today are actually practicing Islamic law combined with common law or civil law. Egypt, Iran, Morocco, Nigeria, Oman, Saudi Arabia, Sudan and Yemen etc…
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Legal Systems 3 of 9
Differences in Contract Law
A contract is a document that specifies the conditions under which an exchange is to occur and details the rights and obligations of the parties involved.
Contract law is the body of law that governs contract enforcement.
Under a common law system, contracts tend to be very detailed and more specific with all contingencies spelled out.
Under a civil law system, contracts tend to be much shorter and less specific because many issues are already covered in the civil code.
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A contract is a document that specifies the conditions under which an exchange is to occur and details the rights and obligations of the parties involved. Some form of contract regulates many business transactions. Contract law is the body of law that governs contract enforcement.
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Legal Systems 4 of 9
Differences in Contract Law continued
United Nations Convention on Contracts for the International Sale 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 their places of business in different nations
Applies automatically to all contracts for the sale of goods between different firms based in countries that have ratified the convention, unless the parties opt out
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United Nations Convention on Contracts for the International Sale of Goods (CISG) is a set of rules governing aspects of the making and performance of commercial contracts between sellers and buyers who have their places of business in different nations.
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Legal Systems 5 of 9
Property Rights and Corruption
Property rights refer to 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 is a resource that an individual or business owns
Land, buildings, equipment, capital, mineral rights, businesses, intellectual property
Most countries protect property rights
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Property rights refer to 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.
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Legal Systems 6 of 9
Property Rights and Corruption continued
Property Rights can be violated through:
Private action
Theft, piracy, blackmail
Public action - legally - ex. excessive taxation or illegally - ex. bribes or blackmailing
high levels of corruption reduce foreign direct investment, the level of international trade, and the economic growth rate in a country
Foreign Corrupt Practices Act (FCPA)
Illegal for U.S. companies to bribe a foreign government official to obtain or maintain business over which that foreign official has authority
Requires all publicly traded companies to keep detailed records that would reveal whether a violation of the act has occurred
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In terms of violating property rights, private action refers to theft, piracy, blackmail, and the like by private individuals or groups.
Public action to violate property rights occurs when public officials, such as politicians and government bureaucrats, extort income, resources, or the property itself from property holders.
Now, let’s talk about property rights and corruption. Property rights are the legal rights over the use to which a resource is put and over the use of any income that may be derived from that resource.
As you’ve probably already guessed, the laws on property rights differ across countries. In some countries, even though there are laws protecting property, the laws are not consistently enforced.
Property rights can be violated through private actions and through public actions.
Private violations like theft, piracy, or blackmail, are done by individuals. Keep in mind that this type of violation can take place in any country, but countries with weak legal systems like Russia have a much bigger problem with it.
When public officials like politicians and bureaucrats violate property rights, they might use legal mechanisms such as levying excessive taxes like Chavez did in Venezuela, or requiring special expensive licenses, or even simply taking assets into state control. Public violation can also be illegal. You might think of having to pay a bribe in order to get the right to operate in a certain country like companies had to do in the Philippines when Ferdinand Marcos was in power.
The United States passed the Foreign Corrupt Practices Act in the 1970s to make it illegal for companies to bribe government officials in foreign countries to obtain or maintain business over which the foreign official has authority.
Companies have to keep detailed records so that it’s clear whether a violation has taken place.
There are some exceptions to this law. Facilitating or expediting payments, which are also called grease payments, are still allowed. So a company can speed up the processing of routine paperwork, or obtain permits or licenses using grease payments. The U.S. argues that since these types of activities would be performed routinely anyway, speeding them is not a violation of the law.
The Organization for Economic Cooperation and Development, or OECD, has also adopted a convention that requires member states to make bribery of foreign public officials a criminal offense.
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Figure 2.1 Rankings of corruption by country, 2016
Jump to long description in appendix
Constructed by the author from raw data from Transparency International, Corruption Perceptions Index 2016.
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Check Corruption Index of a Country
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Legal Systems 7 of 9
Intellectual property - property that is the product of intellectual activity.
Can be protected using
Patents – exclusive rights for a defined period to the manufacture, use, or sale of that invention
Copyrights – the exclusive legal rights of authors, composers, playwrights.
Trademarks – design and names by which manufacturers designate and differentiate their products.
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Foreign Corrupt Practices Act is U.S. law regulating behavior regarding the conduct of international business in the taking of bribes and other unethical actions.
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Legal Systems 8 of 9
The Protection of Intellectual Property
Saudi Intellectual Property Authority
- مكتب براءات الاختراع بمجلس التعاون الخليجي
World Intellectual Property Organization
Paris Convention for the Protection of Industrial Property
To avoid piracy, firms can
stay away from countries where intellectual property laws are lax
file lawsuits
lobby governments for international property rights agreements and enforcement
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Intellectual property refers to property that is the product of intellectual activity, such as computer software, a screenplay, a music score, or the chemical formula for a new drug.
A patent grants the inventor of a new product or process exclusive rights for a defined period to the manufacture, use, or sale of that invention.
Copyrights are the exclusive legal rights of authors, composers, playwrights, artists, and publishers to publish and disperse their work as they see fit.
Trademarks are designs and names, officially registered, by which merchants or manufacturers designate and differentiate their products.
World Intellectual Property Organization is an international organization whose members sign treaties to agree to protect intellectual property.
Paris Convention for the Protection of Industrial Policy is an international agreement to protect intellectual property.
You might already know that the protection of intellectual property rights varies by country.
China and Thailand are currently among the world’s biggest violators of intellectual property rights. Pirated products like Rolex watches, Levi’s jeans, and computer software are widely available in both countries. In Latin America, about 68 percent of all software is pirated, and in China alone, 86 percent of software is pirated!
Nearly 200 countries have signed the Paris Convention for the Protection of Industrial Property to protect intellectual property rights, and are part of the World Property Organization, but enforcement of property regulations is still lax in many countries.
What can you do if your intellectual property is stolen?
You can lobby your government to take action. Many companies have done this already, and as a result this is one of the areas that the WTO is working on though the Trade Related Aspects of Intellectual Property Rights or TRIPS agreement. You can also file your own lawsuit. Starbucks was successful at doing this against a Chinese firm that opened stores that were virtually replicas of the traditional Starbucks store. You can learn more about the Starbucks case in the Management Focus in your text.
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Legal Systems 9 of 9
Product Safety and Product Liability
Product safety laws set certain standards to which a product must adhere.
Product liability its officers responsible when a product causes death or damage .
When product safety laws are stricter in a firm’s home country than in a foreign country, or when liability laws are more lax, the firm has to decide whether to adhere to home country or host country standards
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Product safety laws set certain safety 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.
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Focus on Managerial Implications
Learning Objective 2-4 Explain the implications for management practice of national differences in political economy.
Two broad implications
Political, economic, and legal systems of a country raise important ethical issues that have implications for international business.
Political, economic, and legal environments of a country clearly influence the attractiveness of that country as a market or investment site.
A country with democratic political institutions, market-based economic system, and strong legal system clearly more attractive to do business in.
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Appendix of Image Long Descriptions
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Appendix 1 Figure 2.1 Rankings of corruption by country, 2016
Corruption Index 100=clean; 0 = totally corrupt
Somalia 8
Venezuela 18
Vietnam 21
Nigeria 26
Russia 29
China 37
Columbia 37
India 48
Brazil 48
Turkey 42
Italy 44
South Africa 44
South Korea 56
Poland 62
France 70
United States 75
United Kingdom 81
Germany 81
Canada 83
Sweden 89
Denmark 91
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