Chapter 2

National Differences
in Political Economy
 What Is A Political Economy?
ØPolitical economy of a nation - how the
political, economic, and legal systems of a
country are interdependent
Øthey interact and influence each other
Øthey affect the level of economic well-being in
the nation

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 What Is A Political System?
ØPolitical system - the system of
government in a nation
ØAssessed according to
Øthe degree to which the country emphasizes
collectivism as opposed to individualism
Øthe degree to which the country is democratic
or totalitarian

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 What Is A Political System?
Ø Collectivism stresses the primacy of collective
goals over individual goals
Ø Individualism – an individual should have
freedom in his own economic and political
pursuits
Ø Democracy - government is by the people,
exercised either directly or through elected
representatives
Ø Totalitarianism - one person or political party
exercises absolute control over all spheres of
human life and prohibits opposing political
parties

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 What Is An Economic System?
Ø 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

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 What Is An Economic System?
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?
Ø 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
Ø the system in a country is influenced by the
prevailing political system
Ø Legal systems are important for business
because they
Ø define how business transactions are executed
Ø identify the rights and obligations of parties involved
in business transactions

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 What Is A Legal System?
Ø There are three types of legal systems
1. Common law - based on tradition,
precedent, and custom
2. Civic law - based on detailed set of laws
organized into codes
3. Theocratic law - law is based on religious
teachings

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 How Are Property Rights
And Corruption Related?
Ø 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
Ø Property rights can be violated through
1. Private action – theft, piracy, blackmail
2. Public action - legally - ex. excessive taxation or
illegally - ex. bribes or blackmailing

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 How Are Property Rights
And Corruption Related?
Ø The Foreign Corrupt Practices Act makes it
illegal for U.S. companies to bribe foreign
government officials to obtain or maintain
business over which that foreign official has
authority
Ø facilitating or expediting payments to secure or
expedite routine government action are permitted

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 How Can Intellectual
Property Be Protected?
Ø Intellectual property - property that is the
product of intellectual activity
Ø 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

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 What Is Product Safety
And Liability?
Ø Product safety laws set certain standards to
which a product must adhere
Ø Product liability involves holding a firm and its
officers responsible when a product causes
injury, death, or damage
Øliability laws tend to be less extensive in less
developed nations

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 Why Is Product Safety And
Product Liability Important?
ØQuestion: Does the high cost of liability
insurance in the U.S. make American companies
less competitive?
ØQuestion: Is it ethical to follow host country
standards when product safety laws are stricter
in a firm’s home country than in a foreign country?
ØQuestion: Is it ethical to follow host country
standards when liability laws are more lax in the
host country?

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 How Can Managers Determine A
Market’s Overall Attractiveness?
Ø The overall attractiveness of a country as a
potential market and/or investment site for an
international business depends on balancing the
benefits, costs, and risks associated with doing
business in that country
Ø other things being equal, more attractive countries
have democratic political institutions, market based
economies, and strong legal systems that protect
property rights and limit corruption

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Chapter 3

Political Economy and

Economic Development
 What Determines A Country’s
Level Of Economic Development?
Ø Gross national income (GNI) per person
measures the total annual income
received by residents of a nation
Ø Japan, Sweden, Switzerland, and the U.S.
have high GNI
Ø China and India have low GNI
Ø GNI can be misleading because it does
not consider differences in the cost of
living
Ø need to adjust GNI figures using purchasing
power parity (PPP)

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 What Determines A Country’s
Level Of Economic Development?
Ø Nobel-prize winner Amartya Sen - economic
development should be seen as a process of
expanding the real freedoms that people
experience
Ø the removal of major impediments to freedom like
poverty, tyranny, and neglect of public facilities
Ø the presence of basic health care and basic
education
Ø Amartya Sen also claims that economic
progress requires the democratization of
political communities to give citizens a voice

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 What Determines A Country’s
Level Of Economic Development?
Ø The United Nations used Sen’s ideas to
develop the Human Development Index
(HDI) which is based on
Ø life expectancy at birth
Ø educational attainment
Ø 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?
Ø Innovation and entrepreneurship are the engines
of long-run economic growth
Ø innovation includes new products, new processes,
new organizations, new management practices, and
new strategies
Ø entrepreneurs commercialize innovative new products
and processes
Ø Innovation and entrepreneurship
Ø help increase economic activity by creating new
markets and products that did not previously exist
Ø require a market economy and strong property rights

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 How Does Geography Influence
Economic Development?
Ø 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
Ø Jeffrey Sachs studied economic growth rates
between 1965 and 1990 and found that
Ø landlocked countries grew more slowly than coastal
economies
Ø being totally landlocked reduced a country’s growth
rate by 0.7% per year
Ø tropical countries grew more slowly than countries in
temperate zones

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How Does Education Influence
Economic Development?
ØCountries that invest in education have
higher growth rates because the workforce
is more productive
Øcountries in Southeast Asia have offset their
geographical disadvantages by investing in
education
ØIndonesia, Malaysia, and Singapore

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 How Is The Political
Economy Changing?
Ø Trend 1: Democracy has spread over the last
two decades
Ø many totalitarian regimes failed to deliver economic
progress to the vast bulk of their populations
Ø new information and communication technologies
have broken down the ability of the state to control
access to uncensored information
Ø economic advances of the last 25 years have led to
increasingly prosperous middle and working classes
who have pushed for democratic reforms

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 How Is The Political
Economy Changing?
Ø Trend 2: The spread of market-based
systems
Ø more countries have moved away from
centrally planned and mixed economies
toward the market-based model
Ø Command and mixed economies failed
to deliver the sustained economic growth
achieved in market-based countries

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 What Is The Nature Of
Economic Transformation?
ØThe shift toward a market-based system
involves
Øderegulation – removing legal restrictions to
the free play of markets, the establishment of
private enterprises, and the manner in which
private enterprises operate
Øprivatization - transfers the ownership of state
property into the hands of private investors
Øthe creation of a legal system to safeguard
property rights

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 What Are The Implications Of Political
Economy Differences For Managers?
Ø The risks of doing business in a country are a
function of
Ø 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
Ø 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
Ø Legal risk - the likelihood that a trading partner will
opportunistically break a contract or expropriate
property rights

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 How Can Managers Determine A
Market’s Overall Attractiveness?
Ø The overall attractiveness of a country as a
potential market and/or investment site for an
international business depends on balancing the
benefits, costs, and risks associated with doing
business in that country
Ø Other things being equal, the benefit-cost-risk
trade-off is likely to be most favorable in
politically stable developed and developing
nations that have free market systems and no
dramatic upsurge in either inflation rates or
private sector debt

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How Can Managers Determine A
Market’s Overall Attractiveness?
Country Attractiveness

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Chapter 4

Differences
in Culture
 How Do Cultural Differences
Affect International Business?
Ø Understanding and adapting to the local cultural
is important international companies
Ø cross-cultural literacy - an understanding of how
cultural differences across and within nations can
affect the way in which business is practiced
Ø A relationship may exist between culture and the
costs of doing business in a country or region
Ø MNEs can be agents of cultural change

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 What Is Culture?
Ø Culture - a system of values and norms that are
shared among a group of people and that when
taken together constitute a design for living
where
Ø values are abstract ideas about what a group believes
to be good, right, and desirable
Ø norms are the social rules and guidelines that
prescribe appropriate behavior in particular situations
Ø Society - a group of people who share a
common set of values and norms

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 How Are Culture, Society,
And The Nation-State Related?
ØThe relationship between a society and a
nation state is not strictly one-to-one
ØNation-states are political creations
Øcan contain one or more cultures
ØA culture can embrace several nations
Øthe values and norms of a culture evolve over
time

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What Determines Culture?
Determinants of Culture

2-32
 What Is A Social Structure?
Ø Social structure - a society’s basic social
organization
Ø A group is an association of two or more people
who have a shared sense of identity and who
interact with each other in structured ways on
the basis of a common set of expectations about
each other’s behavior
Ø individuals are involved in families, work groups,
social groups, recreational groups, etc.

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 What Is Social Stratification?
Ø All societies are stratified on a hierarchical
basis into social categories, or social strata
1. Social mobility - the extent to which individuals can
move out of the strata into which they are born
Ø caste system
Ø class system
2. The significance attached to social strata in business
contacts
Ø class consciousness

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 How Do Religious And
Ethical Systems Differ?
Ø Religion - shared beliefs and rituals that are
concerned with the realm of the sacred
1. Christianity
2. Islam
3. Hinduism
4. Buddhism
5. Confucianism influences behavior and culture
Ø Ethical systems - a set of moral principles, or
values, that are used to guide and shape
behavior

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 What Is The Role
Of Language In Culture?
Ø Language - the spoken and unspoken
(nonverbal communication such as facial
expressions, personal space, and hand gestures)
means of communication
Ø Chinese is the mother tongue of the largest number of
people
Ø English is the most widely spoken language in the
world and is also becoming the language of
international business
Ø but, knowledge of the local language is still beneficial,
and in some cases, critical for business success
Ø failing to understand the nonverbal cues of another
culture can lead to communication failure

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 What Is The Role
Of Education In Culture?
Ø Formal education is the medium through which
individuals learn many of the language,
conceptual, and mathematical skills that are
indispensable in a modern society
Ø important in determining a nation’s competitive
advantage
ØJapan’s postwar success can be linked to its
excellent education system
Ø general education levels can be a good index for the
kinds of products that might sell in a country
Øex. impact of literacy rates

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 How Does Culture
Impact The Workplace?
Ø Hofstede’s dimensions of culture:
1. Power distance - how a society deals with the
fact that people are unequal in physical and
intellectual capabilities
2. Uncertainty avoidance - the relationship
between the individual and his fellows
3. Individualism versus collectivism - the extent to
which different cultures socialize their
members into accepting ambiguous situations
and tolerating ambiguity
4. Masculinity versus femininity -the relationship
between gender and work roles

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 How Does Culture
Impact The Workplace?
Work-Related Values for 20 Countries

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 How Does Culture
Impact The Workplace?
ØHofstede later expanded added a fifth
dimension called Confucian dynamism or
long-term orientation
Øcaptures attitudes toward time, persistence,
ordering by status, protection of face, respect
for tradition, and reciprocation of gifts and
favors
ØJapan, Hong Kong, and Thailand scored high on
this dimension
Øthe U.S. and Canada scored low

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 Does Culture Change?
ØCulture evolves over time
Øchanges in value systems can be slow and
painful for a society
ØSocial turmoil - an inevitable outcome of
cultural change
Øas countries become economically stronger,
cultural change is particularly common
Øeconomic progress encourages a shift from
collectivism to individualism
Øglobalization also brings cultural change

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 What Do Cultural Differences
Mean For Managers?
1. It is important to develop cross-cultural literacy
Ø companies that are ill informed about the practices
of another culture are unlikely to succeed in that
culture
2. There is a connection between culture and
national competitive advantage
Ø suggests which countries are likely to produce the
most viable competitors
Ø has implications for the choice of countries in which
to locate production facilities and do business

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