National Differences in Political Economy

National Differences in Political EconomyHow do political, economic, legal systems of a country:Differ among countries?Influence economic progress?Change during our times?Influence benefits, costs, risks of business?What are ethical issues that arise from doing business internationally?

National Differences in Political EconomyPolitical System: System of National GovernmentVaries by country on the basis of values and beliefs aboutCollectivism and IndividualismDemocracy and Totalitarianism

CollectivismPrimacy of collectivist over individual goalsEmphasis: good of society, common goodPlato,427-347 BC, to Socialists, Marx, 1818 - 83Communists-revolution, Social Democrats-democratic outlook

IndividualismIndividual freedom over economic and political actionIndividual diversity and private ownership are desirablePrivate property is more productive whereas communal property receives little care

Without private property, no man will be seen to be liberal and no man will ever do any act of liberality; for only in the use of money is liberality made effective -- Aristotle, 384-322 BC

An individual who intends his own gain is led by an invisible hand to promote an end which was no part of his intention. Nor is it always worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who effect to trade for the public good -- Adam Smith, 1723-1790

Democracy: - Government is by the people, exercised either directly or through elected representatives- Safeguards hold elected representatives accountableTotalitarianism: One person/party exercises absolute control over all spheres of human lifeCommunist totalitarianism (PRC, Vietnam, Laos, N. Korea,Cuba)Theocratic totalitarianism (Iran, S. Arabia)Tribal totalitarianism (Zimbabwe, Tanzania)Right wing totalitarianism

Economic SystemsMarket economy: what is produced in what quantity determined by supply/demand and through a price systemCommand economy: planned by governmentMixed economy: a balance of both of the aboveState-Directed economy: state directly influences investment activities of private enterprise through industrial policy.

National Differences in Political EconomyA Legal System is:rules - laws - that regulate behaviorprocess through which laws are enforcedgrievances are redressedBusinesses must observeHome country lawsHost country lawsInternational Laws and TreatiesDifferent Legal SystemsCommon LawCivil LawTheocratic LawDispute resolutionWhere to arbitrate? Mediate?Validity of contracts and decisions

Contract Law A contract specifiesconditions under which an exchange will happenrights/obligations of partiesIt is based on a countrys legal system. Systems differ based on legal traditioncommon law systemcivil law system

Legal Systems Disputes need to be resolved based on a particular legal systemWhich countrys? Home? Host?UN Convention on Contracts for the International Sale of Goods (GIGS)International Court of Arbitration of the International Chamber of Commerce in Paris, France

Legal Systems and International BusinessProperty rightsuse of a resourceuse made of income from resourceenforcement issuesPublic vs private action violations

Legal Systems and International BusinessProtection of Intellectual Propertypatent: inventors exclusive rights to manufacture, use, sell an inventioncopyright: same for authors, composers, artists, publisherstrademark: unique design and name, often officially registeredParis Convention for the Protection of Industrial Property (96 countries)WTO/GATT

Public Action and CorruptionPublic Action can violate property rightsLegal mechanismsIllegal means: corruptionCorruption across countries is tracked by Transparency InternationalHigh corruption levels reduce Foreign Direct Investment and economic growth

Public Action and CorruptionUS foreign corrupt practices act: illegal for US managers to bribe government officialsOECD Convention on Bribery of Foreign Public Officials in International Business transactions

Legal Systems and International BusinessProtection of intellectual propertyPatents, copyrights, trademarksParis convention for the Protection of Industrial PropertyTRIPS (WTO)Trade Related Aspects of Intellectual PropertyProduct safety and product liabilityProduct safety lawsCriminal / civil liability

Differences of Economic DevelopmentGDP per capita: does not factor cost of living differencesPurchasing Power Parity (PPP) index: adjusts per capita GDP by cost-of-livingHuman Development Index: life expectancy, literacy, PPP based average incomes

Broader Conceptions of DevelopmentAmartya Sen: developmentShould be assessed by material output measuresIs an economic AND a political process that requires democratizationHuman Development Index (HDI) = f{life expectancy, educational attainment, PPP based annual incomes sufficient to meet basic needs}

Political Economy and Economic ProgressInnovation >> Engine for Growth (products, processes, strategies, organizations, management practices) Innovation requires:market economystrong property rightsthe right political systemEconomic progress is related to democracy

States in TransitionDemocratic systems spread in the 80s and 90sTotalitarian regimes failed to deliver economic progressSpread of information trough new communication technologiesEmergence of prosperous middle classes

States in Transition: Universal or Clashing CivilizationsNew realities: Russian reemergence, Zimbabwean racial unrest, Chinas resurgenceNew world order and terrorismFukuyama: the end of history and harmonious existenceHuntington: new conflicts, e.g., Islamic fundamentalism

States in Transition: Spread of Market-Based SystemsNature of economic transformationDeregulation: legal changesPrivatization: transfer of state property/industries to private individualsAuctionsIPOsEvolution of legal systemsThe road of transformation is rocky

Implications for International BusinessCountrys political, economic, and legal environmentinfluence attractivenessraise ethical IssuesCountry attractivenessbalance long-term risks with short-term benefits for businessbenefits depend on: size, wealth, future economic growthfirst mover advantagesidentify star future economiescosts are affected by: economic sophistication (may be more costly to operate in LDCs, no infrastructure)legal framework impact on costs political payoffs