IB. Chap 02

Chapter 2
National Differences
in Political Economy
MSc. Pham Thi Phuong
Email: phamthiphuong@vnu.edu.vn
Tel: +84 986 030 195
MSc.Pham Thi Phuong – phamthiphuong@vnu.edu.vn

Your Company Name Country Differences?
WHAT IS A POLITICAL ECONOMY?
The political economy of a nation refers to how the political,
economic, and legal systems of a country are interdependent
Ø they interact and influence each other
Ø they affect the level of economic well-being in the nation

CONTENTS
1. Political Systems
2. Economic Systems
3. Legal Systems
4. The Determinants of Economic

Development
5. States in Transition
5
REFERENCES
Hill, Charles WL. Global business

Chapter
today, 10th Edition, New York:
02
McGraw-Hill Irwin, 2011.
6 MSc.Pham Thi Phuong – phamthiphuong@vnu.edu.vn

01
POLITICAL SYSTEMS

POLITICAL
SYSTEMS
“
Refers to the system of
Assessed according to 2 dimensions:
o the degree to which the country emphasizes
government in a nation
“ collectivism as opposed to individualism
o the degree to which the country is
democratic or totalitarian
8
What Is Collectivism?
Stresses the primacy of collective goals over individual goals
Socialism
Karl Marx (1818-1883)
• Advocate state ownership of the basic means

of production, distribution, and exchange
Collectivism
• Manage state-owned firms to benefit society
Plato (427-347 BC) as a whole, rather than individual capitalists

How Does Modern-Day Socialism Look?
Communism Socialism Social

The early 20th century Democracy
o Achieved through democratic means

o Only achieved through violent revolution
o Democratic Western nations, including Australia,
and totalitarian dictatorship France, Germany, Great Britain, Norway, Spain,
o Late 1970s, a dominant force in the world and Sweden; India, Brazil,..
o The former Soviet Union, Eastern European o Retreating as many countries move toward free
countries, China, Vietnam, Cuba,... market economies
o In retreat worldwide by mid-1990s o State-owned enterprises have been privatizedà

Privatization
What Is Individualism?
Stresses the interests of the individual over the interests of the state
20th century:
17th -18th century
Several Nobel Prize–
winning economists:
16th century Milton Friedman and
British philosophers: Friedrich von Hayek,
Adam Smith, David James Buchanan
Hume, John Stuart
The Protestant Mill
trading nations of
England and the
Aristotle Netherlands
(384-322 BC)

INDIVIDUALISM
based on 2 concepts: The central message

Individual economic and political
Ø Individual freedom and self-
freedom are the ground rules on which
expression are guaranteed
a society should be based
Ø People are allowed to pursue their International business

own self-interest in order to achieve
An advocacy for democratic political
the best overall good for society.
systems and free market economics à
a favorable business environment
12
Democracy Totalitarianism
“ A political system in which government
is by the people, exercised either
A form of government in which one
person or political party exercises
directly or through elected “ absolute control over all spheres of
representatives human life and prohibits opposing
political parties
Your Company Name 13

Democracy Totalitarianism
Ø Usually associated with individualism Ø Communist totalitarianism – found in states where
the communist party monopolizes power
Ø Pure democracy is based on the belief that Ø Theocratic totalitarianism - found in states where
citizens should be directly involved in decision political power is monopolized by a party, group, or
individual that governs according to religious
making principles
Ø Most modern democratic states practice Ø Tribal totalitarianism - found in states where a
political party that represents the interests of a
representative democracy where citizens particular tribe monopolizes power
periodically elect individuals to represent them
Ø Right-wing totalitarianism - permits some
individual economic freedom, but restricts
individual political freedom

02
ECONOMIC SYSTEMS

ECONOMIC SYSTEMS
Market Economies Command Economies Mixed Economies
• All productive activities • All businesses are state-owned, and • Certain sectors are left to
are privately owned and governments allocate resources for private ownership and free
production is determined “the good of society” market mechanisms while
by the interaction of other sectors have significant
• Government plans the goods and
supply and demand state ownership and
services that a country produces, the
government planning
• Encourages free and fair quantity and the price
competition between • Governments tend to own
• Little incentive to control costs and
private producers firms important to national
be efficient à tend to stagnate
security
Your Company Name
03
LEGAL SYSTEMS

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
How can legal system affect

international business?
The attractiveness of a country

as an investment or a potential target market
What Is a Legal System?
Common law Civil law Theocratic law
based on based on
based on
tradition, detailed set of
religious
precedent, and laws organized
teachings
custom into codes

Differences in Contract Law
Ø A contract is a document that specifies the conditions under which an
exchange is to occur and details the rights and obligations of the
parties involved
Ø Contract law is the body of law that governs contract enforcement
Common law system Civil law system

contracts tend to be much
contracts tend to be very
shorter and less specific
detailed with all contingencies
because many issues are already
spelled out
covered in the civil code

Civil law Common law
Which law should apply?

When contract disputes arise in international trade,
which country’s laws to apply???
United Nations Convention on Contracts A recognized

for the International Sale of Goods (CIGS) arbitration court
A set of rules governing certain aspects of the making The International Court of
and performance of commercial contracts between Arbitration of the
sellers and buyers who have their places of business in International Chamber of
different nations. Commerce

Property
Can be violated through
Rights • Private action – theft, piracy, blackmail
“
• Public action
refer to the legal rights over the
use to which a resource is put q legally: excessive taxation, expensive licenses
or permits, taking assets into state ownership
and over the use made of any
income that may be derived “ q illegally : ex. Corruption - bribes or blackmailing
from that resource à high levels of corruption reduce FDI, the level of
international trade, and the economic growth rate in a
country


Intellectual
Property
“ property that is the

Patents Copyrights Trademarks
product of Exclusive rights for a defined exclusive legal rights of design and names by
period to the manufacture, authors, composers, which merchants or
intellectual activity use, or sale of that invention playwrights, artists, and manufacturers designate
“ publishers to publish and and differentiate their
disperse their work as they products
see fit

The Protection of Intellectual Property

The Protection of Intellectual Property

Product Product
safety laws liability
“ set certain standards to

When product safety laws are
stricter in a firm’s home country “ involves holding a firm
than in a foreign country, or when and its officers
which a product must
liability laws are more lax, the firm responsible when a
adhere has to decide whether to adhere
“ product causes injury,
to home country or host country “
death, or damage
standards

CASE STUDY
Starbucks Wins Key
Trademark Case in China
1. Discuss the concept of property rights protection and why it is so important to

companies. What does the court ruling against Xing Ba Ke mean for other companies
that are already doing business in China, or are considering entering the market?
2. How important is the Chinese market to Starbucks? Does the presence of look-alike
companies like Xing Ba Ke deter firms from entering the market?

04
THE DETERMINANTS
OF ECONOMIC DEVELOPMENT

Differences in Economic Development
• 2 ways to measure levels of economic development are
Ø Gross national income (GNI) per person
Ø Purchasing power parity (PPP) involves adjusting GNI by purchasing power
à compare the living standards
• Nobel-prize winner Amartya Sen argues 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

Differences in Economic Development
v The United Nations used Sen’s ideas to develop the
Human Development Index (HDI) which is based on
v life expectancy at birth
v educational attainment
v whether average incomes are sufficient to meet the basic

needs of life in a country

Economic Data for Select Countries

The Determinants of Economic Development
Political Economy influence Economic

Progress
Geography And Education Influence

Economic Development

Political Economy
influence Economic Progress
v Innovation and entrepreneurship are the engines of long-run economic
growth
v Innovation and entrepreneurship require a market economy and strong

property rights
v Democratic regimes are probably more conducive to long-term economic

growth than dictatorships, even the benevolent kind
v Subsequent economic growth leads to the establishment of democratic

regimes
Geography And Education
Influence Economic Development
v 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
v Countries that invest in education have higher growth rates because

the workforce is more productive

05
STATES IN TRANSITION

How Is The Political Economy Changing?
Since the late 1980s, two trends have emerged
The Spread of Democracy
The Spread of
Market-based Systems

Political Freedom in 2009

Distribution of Economic Freedom in 2015

The Nature of Economic Transformation
The shift toward a market-based system involves 3 steps:
A strong
Deregulation Privatization
legal system
removing legal restrictions transfers the ownership to safeguard property

to the free play of markets, of state property into the rights and provide
the establishment of private hands of private contract enforcement
enterprises, and the manner investors
in which private enterprises
operate

Implications of Changing Political Economy
Benefits
Size of economy Costs
Likely economic growth Corruption
First-mover advantages Lack of infrastructure
Establish loyalty and Legal costs
experience in a country
Overall
Attractiveness
Risks
Political risks: social unrest/anti-business trends
Economic risks: economic mismanagement
Legal risks: failure to safeguard property rights

REVIEW QUESTION

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

REVIEW QUESTION
_____ believe(s) that socialism can only be achieved through
violent revolution and
totalitarian dictatorship.
A) Communists
B) Social Democrats
C) Social Republicans
D) Plato

REVIEW QUESTION
A form of government in which one person or political party
exercises complete control over all spheres of human life
and prohibits opposing political parties is
A) A Democracy
B) A Representative Democracy
C) Totalitarianism
D) Socialism

REVIEW QUESTION
______ is found in states where political power is
monopolized by a party according to religious principles.
A) Tribal Totalitarianism
B) Right-wing Totalitarianism
C) Theocratic Totalitarianism
D) Communist Totalitarianism

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

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

REVIEW QUESTION
Which country is not among the most corrupt
countries in the world?
A) Haiti
B) Indonesia
C) Malaysia
D) Nigeria

REVIEW QUESTION
Design and names by which merchants or manufacturers
designate and differentiate their products are called
A) Trademarks
B) Copyrights
C) Patents
D) Name Brands

REVIEW QUESTION
Which is not a primary determinant of a nation’s rate of
economic development?
A) Its Political System
B) Its Economic System
C) Its Geography
D) Its Currency

THE END

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Chapter 2

MSc.Pham Thi Phuong – phamthiphuong@vnu.edu.vn

The political economy of a nation refers to how the political,

economic, and legal systems of a country are interdependent

Ø they interact and influence each other

Ø they affect the level of economic well-being in the nation

MSc.Pham Thi Phuong – phamthiphuong@vnu.edu.vn

4. The Determinants of Economic

Hill, Charles WL. Global business

6 MSc.Pham Thi Phuong – phamthiphuong@vnu.edu.vn

MSc.Pham Thi Phuong – phamthiphuong@vnu.edu.vn

o the degree to which the country emphasizes

o the degree to which the country is

• Advocate state ownership of the basic means

MSc.Pham Thi Phuong – phamthiphuong@vnu.edu.vn

Communism Socialism Social

o Achieved through democratic means

o In retreat worldwide by mid-1990s o State-owned enterprises have been privatizedà

MSc.Pham Thi Phuong – phamthiphuong@vnu.edu.vn

based on 2 concepts: The central message

Ø People are allowed to pursue their International business

Your Company Name 13

Your Company Name 14

MSc.Pham Thi Phuong – phamthiphuong@vnu.edu.vn

MSc.Pham Thi Phuong – phamthiphuong@vnu.edu.vn

How can legal system affect

The attractiveness of a country

Common law Civil law Theocratic law

MSc.Pham Thi Phuong – phamthiphuong@vnu.edu.vn

Ø Contract law is the body of law that governs contract enforcement

Common law system Civil law system

MSc.Pham Thi Phuong – phamthiphuong@vnu.edu.vn

Civil law Common law

Which law should apply?

United Nations Convention on Contracts A recognized

MSc.Pham Thi Phuong – phamthiphuong@vnu.edu.vn

MSc.Pham Thi Phuong – phamthiphuong@vnu.edu.vn

MSc.Pham Thi Phuong – phamthiphuong@vnu.edu.vn

“ property that is the

Your Company Name 26

MSc.Pham Thi Phuong – phamthiphuong@vnu.edu.vn

MSc.Pham Thi Phuong – phamthiphuong@vnu.edu.vn

“ set certain standards to

Your Company Name 48

1. Discuss the concept of property rights protection and why it is so important to

MSc.Pham Thi Phuong – phamthiphuong@vnu.edu.vn

MSc.Pham Thi Phuong – phamthiphuong@vnu.edu.vn

MSc.Pham Thi Phuong – phamthiphuong@vnu.edu.vn

v whether average incomes are sufficient to meet the basic

MSc.Pham Thi Phuong – phamthiphuong@vnu.edu.vn

MSc.Pham Thi Phuong – phamthiphuong@vnu.edu.vn

Political Economy influence Economic

Geography And Education Influence

MSc.Pham Thi Phuong – phamthiphuong@vnu.edu.vn

v Innovation and entrepreneurship require a market economy and strong

v Democratic regimes are probably more conducive to long-term economic

v Subsequent economic growth leads to the establishment of democratic

v Countries with favorable geography are more likely to engage in