North South University

School of Business & Economics (SBE)

BUS 685 International Business

Fall Semester, 2021
Lecture 3
 Recap
oUnderstand what is meant by the term
globalization.
oPhases of globalization.
oRecognize the main drivers of globalization.
oDescribe the changing nature of the global
economy.
oExplain the main arguments in the debate over the
impact of globalization.
oUnderstand how the process of globalization is
creating opportunities and challenges for
management practice.
 National Differences
in
Political, Economic, and Legal Systems
 Today’s Learning objectives
❑Understand how the political systems of countries
differ.
❑Understand how the economic systems of countries
differ.
❑Understand how the legal systems of countries
differ.
❑Explain the implications for management practice
of national differences in political economy.
National Differences
 National Differences
oInternational business is much more complicated
than domestic business because countries differ in
many ways.
oCountries have different political, economic, & legal
systems. They vary significantly in their level of
economic development & future economic growth
trajectory.
oSo it is important to focus on country differences in
political systems, economic systems, legal systems,
economic development, & societal culture.
 What is political economy?
oPolitical economy, branch of social science that
studies the relationships between individuals
& society & between markets and the state,
using a diverse set of tools & methods drawn
largely from economics, political science,
and sociology.
oIt can be understood as the study of how a
country—the public’s household—is managed
or governed, taking into account both political
& economic factors.
 What is political economy?
oThe political, economic, & legal systems
collectively constitutes the political economy
of a country.
oThe term political economy indicates that the
political, economic, & legal systems of a
country are interdependent; they interact with
& influence each other, & in doing so, they
affect the level of economic well-being.
Political systems
 Political systems
oThe political system of a country shapes its
economic and legal systems.
oIt is the system of government in a nation.
oIt can be assessed according to two
dimensions.
oThe first is the degree to which they
emphasize collectivism as opposed to
individualism.
oThe second is the degree to which they are
democratic or totalitarian.
 Political systems
Collectivism and Democratic or Totalitarian
oThese dimensions are interrelated.
oCollectivism tend to lean toward totalitarianism,
whereas those that place a high value on
individualism tend to be democratic.
oA large gray area exists in the middle.
oIt is possible to have democratic societies that
emphasize a mix of collectivism and individualism.
oIt is possible to have totalitarian societies that are
not collectivist.
 Political systems
COLLECTIVISM AND INDIVIDUALISM
Collectivism
o A political system that stresses the primacy of
collective goals over individual goals.
o The needs of society as a whole are viewed as being
more important than individual freedoms.
o An individual’s right to do something may be
restricted on the grounds that it runs counter to
“the good of society” or to “the common good.”
 Political systems
COLLECTIVISM AND INDIVIDUALISM
Collectivism
o Collectivism came from Greek philosopher Plato
(427–347 BC). argued that
o (in The Republic) Individual rights should be sacrificed
for the good of the majority & that property should
be owned in common.
o Society should be stratified into classes, with those
best suited to rule (philosophers and soldiers)
administering society for the benefit of all.
o In modern times, the collectivist mantle has been
picked up by socialists.
 Political systems
COLLECTIVISM AND INDIVIDUALISM
Socialism
o Roots of Modern socialists …Karl Marx (1818–1883) (elements
of it can be traced to Plato).
o The motivating force of capitalism is in the exploitation of
labor, whose unpaid work is the ultimate source of surplus
value.
o While successful capitalists accumulate considerable
wealth, the wages earned by the majority of workers in a
capitalist society would be forced down to subsistence
levels.
o The pay of workers does not reflect the full value of their
labor.
 Political systems
COLLECTIVISM AND INDIVIDUALISM
Socialism
o Marx: advocated state ownership of the basic
means of production, distribution, & exchange (i.e.,
businesses).
o Marx: If the state owned the means of production,
the state could ensure that workers were fully
compensated for their labor.
o Marx: the idea is to manage state-owned enterprise
(SOEs) to benefit society as a whole, rather than
individual capitalists.
 Political systems
COLLECTIVISM AND INDIVIDUALISM
Individualism
o The opposite of collectivism, individualism refers to
a philosophy that an individual should have
freedom in his or her economic and political
pursuits.
o Individualism stresses…the interests of the
individual should take precedence over the interests
of the state.
o Individualism came from Greek philosopher, Plato’s
disciple Aristotle (384–322 BC).
 Political systems
COLLECTIVISM AND INDIVIDUALISM
Individualism
o Aristotle: individual diversity and private ownership
are desirable.
o Private property is more highly productive than
communal property & will thus stimulate progress.
o Communal property receives little care, whereas
property that is owned by an individual will receive
the greatest care and therefore be most productive.
 Political systems
DEMOCRACY AND TOTALITARIANISM
o Democracy and totalitarianism are at different ends
of a political dimension.
oDemocracy is a political system in which
government is by the people, exercised either
directly or through elected representatives.
o 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.
 Political systems
DEMOCRACY AND TOTALITARIANISM
o The democratic–totalitarian dimension is not
independent of the individualism–collectivism
dimension.
o Democracy and individualism go hand in hand, as do
the communist version of collectivism and
totalitarianism.
o It is possible to have a democratic state in which
collective values predominate.
o It is possible to have a totalitarian state that is hostile to
collectivism & in which some degree of individualism,
particularly in the economic sphere is encouraged.
 Political systems
DEMOCRACY AND TOTALITARIANISM
Democracy
o The pure form of democracy (practiced by several city-
states in ancient Greece), is based on a belief that
citizens should be directly involved in decision making.
o In modern day, this is impractical.
o Most modern democratic states practice representative
democracy.
o Citizens periodically elect individuals to represent
them.
o Elected representatives….form a government…make
decisions on behalf of the electorate.
 Political systems
DEMOCRACY AND TOTALITARIANISM
Democracy
o Elected representatives who fail to perform this job
adequately will be voted out of office at the next
election.
o Elected representatives can be held accountable for
their actions by the electorate.
o An ideal representative democracy has a number of
safeguards that are typically enshrined in
constitutional law.
 Political systems
DEMOCRACY AND TOTALITARIANISM
Democracy
1. An individual’s right to freedom of expression, opinion, &
organization.
2. A free media.
3. Regular elections in which all eligible citizens are allowed to
vote.
4. Universal adult suffrage.
5. Limited terms for elected representatives.
6. A fair court system that is independent from the political
system.
7. A nonpolitical state bureaucracy.
8. A nonpolitical police force & armed service.
9. Relatively free access to state information.
 Political systems
DEMOCRACY AND TOTALITARIANISM
Totalitarianism
o In a totalitarian country, all the constitutional
guarantees on which representative democracies are
built—an individual’s right to freedom of expression
and organization, a free media, & regular elections—
are denied to the citizens.
o Political repression is widespread, free & fair
elections are lacking, media are heavily censored,
basic civil liberties are denied, & those who question
the right of the rulers to rule find themselves
imprisoned or worse.
 Political systems
DEMOCRACY AND TOTALITARIANISM
Totalitarianism
o Four major forms of totalitarianism exist.
o The most widespread was communist
totalitarianism (collapsed since 1989).
o Exceptions are China, Vietnam, Laos, North Korea,
& Cuba (however, clear signs that the Communist Party’s
monopoly on political power is eroding).
o China, Vietnam, & Laos have adopted wide-ranging,
market-based economic reforms. However, they
remain totalitarian states that deny many basic civil
liberties to their populations.
 Political systems
DEMOCRACY AND TOTALITARIANISM
Totalitarianism
o On the other hand, there are signs of a swing back
toward communist totalitarian ideas in some states,
such as Venezuela, where the government of the
late Hugo Chavez displayed totalitarian tendencies.
o The same is true in Russia, where the government
of Vladimir Putin has become increasingly
totalitarian over time.
 Political systems
DEMOCRACY AND TOTALITARIANISM
Totalitarianism
o A second form of totalitarianism might be labeled
theocratic totalitarianism.
o It is found in states where political power is
monopolized by a party, group, or individual that
governs according to religious principles.
o The most common form is based on Islam (such as
Iran & Saudi Arabia). These states limit freedom of
political & religious expression with laws based on
Islamic principles.
 Political systems
DEMOCRACY AND TOTALITARIANISM
Totalitarianism
o A third form is tribal totalitarianism.
o It has arisen from time to time in African countries
(such as Zimbabwe, Tanzania, Uganda, and Kenya).
o A typical African country contains a number of
tribes (in Kenya there are more than 40 tribes).
o It occurs when a political party that represents the
interests of a particular tribe (& not always the
majority tribe) monopolizes power.
o In Kenya, politicians from the Kikuyu tribe long
dominated the political system.
 Political systems
DEMOCRACY AND TOTALITARIANISM
Totalitarianism
o A fourth major form of totalitarianism might be
described as right-wing totalitarianism.
o It permits some individual economic freedom but
restricts individual political freedom, frequently on
the grounds that it would lead to the rise of
communism.
o A common feature of many right-wing dictatorships
is an overt hostility to socialist or communist ideas.
 Political systems
DEMOCRACY AND TOTALITARIANISM
Totalitarianism
o Backed by the military, & in some cases, the
government may be made up of military officers.
o The fascist regimes that ruled Germany and Italy in
the 1930s and 1940s were right-wing totalitarian
states.
o Until the early 1980s, right-wing dictatorships,
many of which were military dictatorships, were
common throughout Latin America (e.g., Brazil was
ruled by a military dictatorship between 1964 & 1985).
 Political systems
DEMOCRACY AND TOTALITARIANISM
Totalitarianism
o They were also found in several Asian countries
(South Korea, Taiwan, Singapore, Indonesia, & the
Philippines).
o This form of government has been in retreat (early
1980s).
o Most Latin American countries are now genuine
multiparty democracies.
o South Korea, Taiwan, & the Philippines have all
become functioning democracies, as has Indonesia.
 Political systems
DEMOCRACY AND TOTALITARIANISM
Pseudo-Democracies
o Many of the world’s nations are neither pure
democracies nor iron-clad totalitarian states.
o Lie between pure democracies & complete
totalitarian systems of government.
o Described as imperfect or pseudo-democracies,
where authoritarian elements have captured some
or much of the machinery of state & use this in an
attempt to deny basic political and civil liberties.
 Political systems
DEMOCRACY AND TOTALITARIANISM
Pseudo-Democracies
o In the Russia, elections are still held, people
compete through the ballot box for political office,
& the independent press does not always tow the
official line.
o Putin has systematically limit the political & civil
liberties of opposition groups (However, voices
opposing Putin are still heard in Russia, & in theory,
elections are still contested).
Economic systems
 Economic systems
oPolitical ideology & economic systems are
connected.
oIn countries where individual goals are given
primacy over collective goals, we are more likely to
find market-based economic systems.
oIn countries where collective goals are given
preeminence, the state may have taken control over
many enterprises; markets in such countries are
likely to be restricted rather than free.
oWe can identify three broad types of economic
systems: a market economy, a command economy,
and a mixed economy.
 Economic systems
MARKET ECONOMY
o Market economy, all productive activities are privately
owned.
o Private ownership encourages vigorous competition &
economic efficiency.
o Entrepreneurs have a right to the profits generated by
their own efforts.
o The goods & services that a country produces are not
planned by anyone.
o Production is determined by the interaction of supply &
demand & signaled to producers through the price
system.
o In this system, consumers are sovereign.
 Economic systems
MARKET ECONOMY
o The purchasing patterns of consumers, as signaled to
producers through the mechanism of the price system,
determine what is produced and in what quantity.
o For a market to work in this manner, supply must not
be restricted.
o One role of government in a market economy is to
encourage vigorous free & fair competition between
private producers.
o Governments do this by banning restrictive business
practices designed to monopolize a market (antitrust
laws).
 Economic systems
COMMAND ECONOMY
oCommand economy, the government plans the goods
& services that a country produces, the quantity in
which they are produced, & the prices at which they
are sold.
oConsistent with the collectivist ideology.
oObjective: government to allocate resources for “the
good of society.”
oAll businesses are state owned, so government can
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.
 Economic systems
COMMAND ECONOMY
o Dynamism & innovation are absent from command
economies.
o No incentive for individuals to look for better ways
to serve consumer needs.
o Command economies were found in communist
countries where collectivist goals were given
priority over individual goals (late 1980s, has fallen).
o However, socialist-inclined governments, like France
& India both experimented with extensive
government planning & state ownership (but has
fallen).
 Economic systems
MIXED ECONOMY
o Mixed economies can be found between market
and command economies.
o Certain sectors of the economy are left to private
ownership & free market mechanisms, while other
sectors have significant state ownership &
government planning.
o Mixed economies were once common throughout
much of the developed world, although they are
becoming less so.
 Economic systems
MIXED ECONOMY
o Until the 1980s, Great Britain, France, & Sweden were
mixed economies, but extensive privatization has
reduced state ownership of businesses in all three
nations.
o A similar trend occurred in many other countries where
there was once a large state-owned sector, such as
Brazil, Italy, & India (although there are still state-owned
enterprises in all of these nations).
o Governments tend to take into state ownership
troubled firms whose continued operation is thought to
be vital to national interests.
Legal systems
 Legal systems
legal system
o The legal system of a country is of immense importance
to international business.
o Like the economic system of a country, the legal system
is influenced by the prevailing political system.
o 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.
o A country’s laws regulate business practice, define the
manner in which business transactions are to be
executed, & set down the rights & obligations of those
involved in business transactions.
 Legal systems

DIFFERENT LEGAL SYSTEMS

o There are three main types of legal systems—or
legal traditions—in use around the world:
1. Common law,
2. Civil law, and
3. Theocratic law.
 Legal systems
Common Law
o The common law system evolved in England over
hundreds of years (now found in most of Great Britain’s
former colonies).
o It is based on tradition, precedent, & custom.
o Tradition refers to a country’s legal history,
precedent to cases that have come before the
courts in the past, and custom to the ways in which
laws are applied in specific situations.
 Legal systems
Common Law
o Common law system has a degree of flexibility that
other systems lack.
o Judges in a common law system have the power to
interpret the law so that it applies to the unique
circumstances of an individual case.
o Each new interpretation sets a precedent that may
be followed in future cases.
o As new precedents arise, laws may be altered,
clarified, or amended to deal with new situations.
 Legal systems
Civil Law
o A civil law system is based on a detailed set of laws
organized into codes.
o When law courts interpret civil law, they do so with
regard to these codes.
o More than 80 countries ( like Germany, France, Japan,
Russia) operate with a civil law system.
o It tends to be less adversarial than a common law
system because the judges rely on detailed legal
codes rather than interpreting tradition, precedent,
and custom.
 Legal systems
Theocratic Law
o A theocratic law system is one in which the law is based
on religious teachings.
o Islamic law is the most widely practiced theocratic legal
system in the modern world, although usage of both
Hindu & Jewish law persisted into the twentieth
century.
o Islamic law is primarily a moral rather than a
commercial law & is intended to govern all aspects of
life.
o Many Muslim countries have legal systems that are a
blend of Islamic law & a common or civil law system.
 Legal systems
Theocratic Law
o In practice, Islamic jurists & scholars are constantly
debating the application of Islamic law to the modern
world.
o It has been extended to cover certain commercial activities.
o Payment or receipt of interest is considered usury &
outlawed. This is not just a matter of theology; in several
Islamic states, it has also become a matter of law.
o Late 2000s, there were some 500 Islamic financial
institutions in the world, & they collectively managed more
than $1 trillion in assets (in 2014).
o Islamic financial institutions are found in many of the Gulf
states, Egypt, Malaysia, & Iran.
 Legal systems
DIFFERENCES IN CONTRACT LAW
o A contract is a document that specifies the
conditions under which an exchange is to occur &
details the rights & obligations of the parties
involved. Some form of contract regulates many
business transactions.
o Contract law is the body of law that governs
contract enforcement.
o The parties to an agreement normally resort to
contract law when one party feels the other has
violated either the letter or the spirit of an
agreement.
 Legal systems
DIFFERENCES IN CONTRACT LAW
oWhen contract disputes arise in international trade,
there is always the question of which country’s laws
to apply. To resolve this issue, a number of countries
have ratified the United Nations Convention on
Contracts for the International Sale of Goods (CISG).
oThe CISG establishes a uniform set of rules
governing certain aspects of the making &
performance of everyday commercial contracts
between sellers & buyers who have their places of
business in different nations.
 Legal systems
DIFFERENCES IN CONTRACT LAW
o When firms do not wish to accept the CISG, they
often opt for arbitration by a recognized arbitration
court to settle contract disputes.
o The most well known of these courts is the
International Court of Arbitration of the
International Chamber of Commerce in Paris, which
handles more than 500 requests per year from
more than 100 countries.
o As of 2020, it has been ratified by 94 countries,
representing two-thirds of world trade.
 Legal systems
PROPERTY RIGHTS AND CORRUPTION
o Property refers to a resource over which an individual
or business holds a legal title. Resources include land,
buildings, equipment, capital, mineral rights,
businesses, & intellectual property (ideas, which are
protected by patents, copyrights, & trademarks).
o Property rights refer to the legal rights over the use to
which a resource is put & over the use made of any
income that may be derived from that resource.
o Countries differ in the extent to which their legal
systems define & protect property rights. Almost all
countries now have laws on their books that protect
property rights.
 Legal systems
Private Action
o Private action refers to theft, piracy, blackmail, &
the like by private individuals or groups
o “Russian Mafia” (1990s, after the collapse of
communism in Russia-successful business owners in
Russia often had to pay “protection money” ).
o The United States (Mafia…Chicago in the 1930s).
o In Japan (Mafia, known as the “Yakuza”).
o Many other countries from time to time have had
problems similar to or even greater.
 Legal systems
Public Action and Corruption
o Public action to violate property rights occurs when
public officials, such as politicians & government
bureaucrats, extort income, resources, or the
property itself from property holders.
o This can be done through legal mechanisms such as
levying excessive taxation, requiring expensive
licenses or permits from property holders, taking
assets into state ownership without compensating
the owners, or redistributing assets without
compensating the prior owners.
 Legal systems
Public Action and Corruption
o It can also be done through illegal means, or
corruption, by demanding bribes from businesses in
return for the rights to operate in a country,
industry, or location.
o Corruption has been well documented in every
society, from the banks of the Congo River to the
palace of the Dutch royal family, from Japanese
politicians to Brazilian bankers, and from
government officials in Zimbabwe to the New York
City Police Department.
 Legal systems
Public Action and Corruption
o High levels of corruption significantly reduce the
foreign direct investment (FDI), level of
international trade (IT), & economic growth rate in
a country.
o The lower level of investment that results hurts
economic growth.
o Can expect countries with high levels of corruption
to have a lower rate of economic growth.
 Legal systems
Public Action and Corruption
oNo society is immune to corruption.
oIn some countries, the rule of law minimizes
corruption.
oIn other countries, the rule of law is weak &
corruption by bureaucrats & politicians is rife.
oAccording to Transparency International (TI)
(dedicated to exposing and fighting corruption),
businesses & individuals spend some $400 billion a
year worldwide on bribes related to government
procurement contracts alone.
Figure: Rankings of corruption by country, 2020.
Source: Transparency International, Corruption Perceptions Index 2020.
 Legal systems
Foreign Corrupt Practices Act
o The United States passed the Foreign Corrupt
Practices Act (FCPA) following revelations that U.S.
companies had bribed government officials in
foreign countries in an attempt to win lucrative
contracts.
o This law makes it illegal to bribe a foreign
government official to obtain or maintain business
over which that foreign official has authority, and it
requires all publicly traded companies to keep
detailed records that would reveal whether a
violation of the act has occurred.
 Legal systems
Foreign Corrupt Practices Act
o In 1997, the member states of the Organisation for
Economic Co-operation and Development (OECD),
an association of 34 major economies, adopted the
Convention on Combating Bribery of Foreign Public
Officials in International Business Transactions.
o Both the U.S. law & OECD convention include
language that allows exceptions known as
facilitating or expediting payments (also called grease
payments or speed money), the purpose of which is to
expedite or to secure the performance of a routine
governmental action.
 Legal systems
The Protection of Intellectual Property
o 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.
o Patents, copyrights, & trademarks establish
ownership rights over intellectual property.
o 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.
 Legal systems
The Protection of Intellectual Property
o Copyrights are the exclusive legal rights of authors,
composers, playwrights, artists, & publishers to
publish & disperse their work as they see fit.
o Trademarks are designs & names, officially
registered, by which merchants or manufacturers
designate & differentiate their products.
o Intellectual property has become an increasingly
important source of economic value for businesses.
o The protection of intellectual property rights differs
greatly from country to country.
 Legal systems
The Protection of Intellectual Property
o 185 countries are now members of the World
Intellectual Property Organization, have signed
international treaties designed to protect
intellectual property, including the oldest such
treaty, the Paris Convention for the Protection of
Industrial Property, which dates to 1883 and has
been signed by more than 170 nations.
o Weak enforcement encourages the piracy (theft) of
intellectual property (China & Thailand have often been
among the worst offenders in Asia).
 Legal systems
Product Safety and Product Liability
oProduct safety laws set certain safety standards to
which a product must adhere.
oProduct liability involves holding a firm & its officers
responsible when a product causes injury, death, or
damage.
oProduct liability can be much greater if a product
does not conform to required safety standards.
oBoth civil & criminal product liability laws exist.
oCivil laws call for payment & monetary damages.
oCriminal liability laws result in fines or imprisonment.
 Legal systems
Product Safety and Product Liability
o Country differences in product safety & liability laws
raise an important ethical issue for firms doing
business abroad.
o When product safety laws are tougher in a firm’s
home country than in a foreign country or when
liability laws are more lax, should a firm doing
business in that foreign country follow the more
relaxed local standards or should it adhere to the
standards of its home country?
o Liability laws are typically the least extensive in less
developed nations.