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Chapter 2 - National Differences in Political Economy

What is political economy?
A country's political, economic, and legal systems
What is a political system?
the system of government in a nation
Two ways that political systems can be assessed:
1. degree of collectivism vs individualism
2. degree to which they are democratic or totalitarian
Name the 4 types of political systems:
1. Collectivism
2. Individualism
3. Democracy
4. Totalitarianism
stresses the primacy of collective goals over individual goals
suggests individuals should have freedom over their economic and political pursuits
government is by the people, exercised either directly or through elected representatives
one person or political party exercises absolute control over all spheres of human life, and opposing political parties are prohibited
Name the 3 types of economic systems:
1. the market economy
2. the command economy
3. the mixed economy
Market economy
the goods and services that a country produces, and the quantity in which they are produced is determined by supply and demand
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
Where is a free market system likely to occur?
in countries where individual goals are given primacy over collective goals
Where are state-owned enterprises and restricted markets common?
in countries where collective goals are dominant
Legal System
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
In business, laws:
1. regulate business practices
2. define the manner in which business transactions are to be executed
3. set down the rights and obligations of those involved in business transactions
3 main types of legal systems:
1. Common Law
2. Civil Law
3. Theocratic Law
Common Law
based on tradition, precedent, and custom
a. found in most of Great Britain's former colonies, including the United States
Civil Law
based on a very detailed set of laws organized into codes
a. found in over 80 countries, including Germany, France, Japan, and Russia
Theocratic Law
based on religious teachings
a. Islamic law is the most widely practiced
A country's level of economic development affects...
its attractiveness as a possible market or production location for firms
gross national income (GNI)
total annual income received by a nation's residents
purchasing power parity (PPP)
adjustment in GDP per capita to reflect differences in cost of living
GNI and PPP data provide:
a static picture of development, but do not consider growth rates
Amartya Sen
development should be assessed less by material output and more by the capabilities and opportunities that people enjoy
Human Development Index
measure of economic development based on life expectancy, education attainment, and whether average incomes are sufficient to meet the basic needs of life
a. gauges a country's economic development and likely future growth rate
3 factors that influence a country's rate of economic development
1. Innovation
2. Geography
3. Education Levels
new products, new processes, new organizations, new management practices, and new strategies
influences economic policy, and thus economic development
a. countries with favorable geography are more likely to engage in trade which can promote economic growth
Education Levels are important because...
countries that invest more in the education of their young people develop faster economically
Changes in political economy since the 1980's:
1. a wave of democratic revolutions has swept the world
2. many totalitarian regimes collapsed
3. countries have moved from centrally planned and mixed economies towards free markets
Democracy has spread to new countries because:
1. many totalitarian regimes failed to deliver economic progress to the majority of their population
2. new technologies have broken down the ability of the state to control access to uncensored information
3. economic advances have led to the emergence of prosperous middle and working classes who demand democratic reforms
3 things that must be present in the shift towards a market-based economic system:
1. Deregulation
2. Privatization
3. Legal System
removal of legal restrictions on the free play of markets, the establishment of private enterprises, and the manner in which private enterprises operate
transfers the ownership of state property into the hands of private investors
What are the implications of a changing economy for international firms?
1. Markets that were formerly off-limits to Western business are now open
a. China (population of 1.2 billion) could be a bigger market than the U.S., the EU, and Japan combined
b. India (population 1.1 billion) is also a potentially huge market
2. However, just as the potential gains are large, so are the risks
2 main implications of the political
economy for international firms:
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
3 types of risk that come about from doing business in foreign markets
1. Political Risk
2. Economic Risk
3. Legal 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 contract or expropriate property rights
The overall attractiveness of a country as a potential market/investment site depends on...
balancing the benefits, costs, and risks associated with doing business in that country
1. Costs and risks are lower in economically developed and politically stable markets
2. The potential for growth may be higher in less developed nations
document that specifies conditions under which an exchange is to occur, and details the rights and obligations of parties involved
Contract Law
body of law that governs contract enforcement
set of rules governing the making and performance of commercial contracts b/w sellers and buyers that operate in different nations
Property Rights
bundle of legal rights over the use to which a resource is put and over the use made of any income derived from that resource
2 ways property rights can be violated
1. Private action
2. Public action
Private action
The theft, piracy, blackmail, etc by private individuals or groups
Public action
Extortion of income or resources of property holders by public officials
Those who first commercialize innovations
Long-term economic growth is driven by:
innovation and entrepreneurship
Intellectual Property
products of the mind, such as computer software, a screenplay, a music score, or a chemical formula; can be protected by patents, copyrights and trademarks
grants the inventor of a new product or process exclusive rights for a defined period of time to the manufacture, use, or sale of that invention
the exclusive legal rights of authors, composers, playwrights, artists, and publishers to publish and disperse their work as they see fit
designs and names, often officially registered, by which merchants or manufacturers designate and differentiate their products
Product Liability
involves holding a firm and its officers responsible when a product causes injury, death or damage