International Business

By Charles W.L. Hill

Chapter 2

National Differences in Political Economy

Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

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What Is A Political Economy?

The political economy of a nation refers to how the political, economic, and legal systems of a country are interdependentthey interact and influence each otherthey affect the level of economic well-being in

the nation

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What Is A Political System?

Political system refers to the system of government in a nation

Assessed according tothe degree to which the country emphasizes

collectivism as opposed to individualism the degree to which the country is democratic

or totalitarian

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What Is Collectivism?

Collectivism stresses the primacy of collective goals over individual goals

Today, collectivism is equated with socialists (Karl Marx 1818-1883) advocate state ownership of the basic means of

production, distribution, and exchangemanage to benefit society as a whole, rather

than individual capitalists

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How Does Modern-Day Socialism Look?

In the early 20th century, socialism split into1. Communism – socialism can only be achieved

through violent revolution and totalitarian dictatorship in retreat worldwide by mid-1990s

2. Social democrats – socialism is achieved through democratic means retreating as many countries move toward free

market economies state-owned enterprises have been privatized

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What Is Individualism?

Individualism refers to philosophy that an individual should have freedom in his own economic and political pursuits

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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What Is Democracy?

Democracy refers to a political system in which government is by the people, exercised either directly or through elected representativesusually associated with individualism pure democracy is based on the belief that citizens

should be directly involved in decision makingmost modern democratic states practice

representative democracy where citizens periodically elect individuals to represent them

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What Is An Economic System? There are three types of economic systems1. Market economies - all productive activities are privately

owned and production is determined by the interaction of supply and demand

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

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

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What Is A Legal System? The legal system of a country refers to the rules

that regulate behavior along with the processes by which the laws are enforced and through which redress for grievances is obtained

There are three types of legal systems1. Common law - based on tradition, precedent,

and custom2. Civic law - based on detailed set of laws

organized into codes3. Theocratic law - law is based on religious

teachings

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Which Countries Are Most Corrupt?

Rankings of Corruption by Country 2008

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How Can Intellectual Property Be Protected?

Intellectual property - property that is the product of intellectual activity

Can be protected using1. Patents – exclusive rights for a defined period to the

manufacture, use, or sale of that invention2. 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

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How Can Intellectual Property Be Protected?

Protection of intellectual property rights differs from country to country World Intellectual Property Organization Paris Convention for the Protection of Industrial

PropertyTo avoid piracy, firms can

stay away from countries where intellectual property laws are lax

file lawsuitslobby governments for international property rights

agreements and enforcement

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What Determines A Country’s Level Of Economic Development?

Two ways to measure levels of economic development are

1. Gross national income (GNI) per person

2. Purchasing power parity (PPP) involves adjusting GNI by purchasing power

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What Determines A Country’s Level Of Economic Development?

The United Nations used Sen’s ideas to develop the Human Development Index (HDI) which is based on

life expectancy at birth educational attainment whether average incomes are sufficient to

meet the basic needs of life in a country

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How Does Political Economy Influence Economic Progress?

Innovation and entrepreneurship are the engines of long-run economic growth

Innovation and entrepreneurship require a market economy and strong property rights

Democratic regimes are probably more conducive to long-term economic growth than dictatorships, even the benevolent kind

Subsequent economic growth leads to the establishment of democratic regimes

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How Do Geography And Education 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

Countries that invest in education have higher growth rates because the workforce is more productive

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How Free Are Countries Politically?

Political Freedom in 2008

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How Free Are Countries Economically?

Distribution of Economic Freedom in 2008

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What Is The Nature Of Economic Transformation?

The shift toward a market-based system involvesderegulation – 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

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What Does The Changing Economy Mean For Managers?

Managers must consider1. 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

2. 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

3. Legal risk - the likelihood that a trading partner will opportunistically break a contract or expropriate property rights

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Review Question

A political system that stresses the primacy of

collective goals over individual goals is called

a) individualism

b) collectivism

c) a democracy

d) a market economy

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Review Question

_____ believe(s) that socialism can only beachieved through violent revolution andtotalitarian dictatorship.

a) social democrats b) communistsc) social republicansd) Plato

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Review Question

In which type of economic system are all

productive activities privately owned?

a) a mixed economy

b) a command economy

c) a representative economy

d) a market economy

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Review Question

Which type of law is based on tradition,

precedent, and custom?

a) civil law

b) common law

c) theocratic law

d) contract law

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Review Question

Which country is not among the most corrupt

countries in the world?

a) Haiti

b) Indonesia

c) Malaysia

d) Nigeria

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Review Question

Design and names by which merchants ormanufacturers designate and differentiatetheir products are called

a) trademarksb) copyrightsc) patentsd) name brands

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Review Question

Which is not a primary determinant of anation’s rate of economic development?

a) its political systemb) its economic systemc) its geographyd) its currency