Political Economy and Global Business

Political Economy
and Global
Business
Our political economy

topics
1. Political-economic systems of the developed world
2. Ways of classifying, analyzing political systems
3. Ways of classifying, analyzing economic systems
4. Legal systems
5. The corruption problem
6. Levels of economic development
7. The spread of freedom, democracy, and markets
8. Managing your relationship with government
Portions (c) 2007-2013 McGraw-Hill Companies Inc.
government and
politics
But the U.S. and other developed
countries have important safeguards in
their constitutions
Safeguards of Successful Representative

Democracy
Individuals right to freedom of expression, opinion and organization
Free media
Regular elections
Adult suffrage
Limited terms for elected representatives
A fair court system that is independent from the political system
A non-political state bureaucracy
Non-political force and armed service
Relatively free access to state information
The rich countries almost all belong to a

group called the Organization for
Economic Cooperation and Development
(OECD)
To join, a country must be guaranteeing
these rights to its people
Business benefits in
mature democracy
Constitutions limit what government can
take
and what other changes governments can
make
Legal systems enforce contracts

between businesspeople
between businesspeople and customers
Political systems
provide the written rules of the game
(institutions) in a nation that allow
people to
govern themselves and
work together
To do business, you have to know the rules

Sometimes
the written rules arent followed
there are no agreed rules to say whether
what you want is OK
2 key dimensions of difference

Political systems as they are designed can be
assessed according to two dimensions
Degree to which they are democratic or
totalitarian
Degree to which they emphasize individualism
as opposed to collectivism
Democracy versus totalitarianism

Democracy
Government is by the
people, exercised either
directly or through elected
representatives
(representative
democracy)
Elected representatives
are held accountable
through safeguards
Totalitarianism
One person/party
exercises absolute control
over all spheres of human
life (competing political
parties are banned)
Communist totalitarianism
Theocratic totalitarianism
Tribal totalitarianism
Right wing totalitarianism
Collectivism and Individualism

Individualism
Collectivism
Central tenet is that
Collective goals are
individual economic
and political freedoms
are the ground rules on
which society is based
Is the direct opposite of
collectivism
more important than

individual goals
Individual rights are
sacrificed for the good
of the majority
In the modern world
collectivism is
expressed through
socialism
official principles
dont tell everything
Perhaps we should have an additional
classification of political systems
More mature (e.g., the rich countries
systems usually)
Less mature (many systems in poorer
countries)
Are some of the rich countries turning their
systems into less mature ones?
Classifying Economic Systems

Market economy: what is produced & in what
quantity is determined by supply/demand and
signaled to producers through a price system
Hong Kong is closest
Command economy: planned by government

rare today North Korea, Cuba
Mixed economy: a balance of both of the above

most countries, but degree of mixture varies
Individualism vs. Collectivism

in Economic Systems
There is a connection between political ideology
and economic systems
In countries where individual goals are given primacy
free market economic systems are fostered
Countries where collective goals are given primacy there
is marked state control of markets
In any new country, consider whether

rules are real
Many poor countries have what used to be called a
soft state
Powerful people can break or change the rules
when they want
People dont follow the rules (take bribes, etc.)
Even in many rich countries (Japan), the rules may

tilt in favor of local people
Legal Systems
Rules, laws, and
processes that enforce
them regulate behavior
Processes through which
grievances are addressed
All countries have legal

systems, but they may work
very differently
Property Rights
A bundle of legal rights over the use to which a
resource is put and over the use made of any
income from that resource
Can be violated through

Private action (e.g., theft)
Public (government) action
Corruption
Contract Law
Contracts specify conditions under which an exchange is to
occur
Detail rights and obligations of parties
Contract law is the body of law that enforces a contract

Dispute resolution is often complex
Where to sue, where to arbitrate - whose laws apply?
Validity of contracts and decisions
The United Nations has a Convention on Contracts for the

International Sale of Goods (CIGS)
Intellectual Property Rights

Intellectual property refers to property that is the
product of intellectual activity
Intellectual property laws are believed very

important stimulus to innovation and creative work
Protection of intellectual property rights varies

greatly from country to country
There are international rules, and the U.S. is
struggling to get them enforced
Piracy of Intellectual Property
Product Safety and Liability

Product safety laws set safety standards for products
and manufacturing processes
Product liability laws hold the firm and its officers

responsible for product safety standards
Environmental standards limit pollution etc.

Laws differ radically from country to country
The corruption
problem
Many (most?) traditional codes of
behavior require people to do things that
in developed countries are called
corruption
For example, in most traditional
societies, a key obligation is taking care
of your extended family
But doing this often contradicts laws of
both capitalist and socialist societies
Transparency International produces good

measures of corruption for nations
Which Countries Are

Most Corrupt?
Rankings of Corruption by Country 2010
Differences in Economic Development

Different countries have dramatically different
levels of economic development
Two common measurements of economic

development
Gross National Income (GNI)
superseded Gross National Product or GNP
the sum of all income received by residents of a nation
Gross National Income at Purchasing Power Parity

(PPP), which accounts for differences in the cost of living
To estimate how big a market a country

is, look at GNI
U.S. GNI for 2011 was $15.2 trillion.
Chinas GNI was $7.3 trillion.
Indias was $1.9 trillion.
To gauge how rich the

country is, look at GNI
per capita
Large GNI does not prove a country is rich
China has the second highest GNI in the world,
but many of its people are very poor
GNI per capita is GNI per head: Total GNI

divided by population
This is called nominal GNI per capita
because it is not adjusted for price

differences
U.S. nominal GNI per capita in 2011 was
$48,328
Chinas nominal GNI per capita was $5,417
Indias nominal GNI per capita was $1,514
Differences in
Economic Development
GNI per Capita, 2006
The single best measure of the wealth of the people of a country

is GNI per capita at purchasing power parity (GNI PPP)
Agencies calculating GNI at purchasing power parity take
GNI and population calculated by governments
Then they make an adjustment based on price indexes for
different countries
Differences in
GNI PPP per Capita, 2006
Differences in
Growth Rate in GDP per Capita, 1997 - 2006
Broader Conceptions of Development:

Amartya Sen
Sen says development should be measured less by
material output measures, such as GNP per capita,
and more by the capabilities and opportunities
that people enjoy.
His Human Development Index (HDI) measures

quality of life in different nations
Based on life expectancy, educational attainment,

and GNI at PPP average incomes
Broader Conceptions of Development:

Amartya Sen
States in Transition
The political economy of the world has changed
radically since the late 1980s
Two trends
A wave of democratic revolutions swept the world
There has been a strong move away from centrally
planned and mixed economies toward a free market
model
The Spread of Democracy
The Spread of Democracy

Three main reasons account for the spread of
democracy
Totalitarian regimes failed to deliver economic progress

New information and communication technologies, including
shortwave radio, satellite television, fax machines, desktop

publishing, and most importantly, the Internet, have broken
down the ability of the state to control access to information
The economic advances of the past quarter century have led to
the emergence of increasingly prosperous middle and
working classes who have pushed for democratic reforms
The Spread of Market-Based Systems
What does this mean

for businesspeople?
Political economy often tells you how
attractive a country is for business
When operating in a country, understand the

political economic situation to know
what you can do in the country
how to address political problems
You have to plan how youll address the

differences between your home system and
the ones you enter
You will face major ethical issues

Political risks
Political risk is the danger that
political forces will cause drastic
changes or unexpected behaviors in a
country that adversely affect profit or
other business goals.
Many kinds of change can alter a

business position in a country.
Homework assignment 1
The homework task

Pick one company that operates internationally
Many people will be able to do this easily
If you need help, flip through issues of Fortune or Economist
magazine, look at www.Fortune.com, or check out the Wall St.
Journal or NY Times (or their web pages)
List at least 3 countries where the firm operates

Its OK to guess
Describe at least five political risks the firm faces in these

countries
Plan on writing at least one sentence about each risk to

describe it
Its OK if the risks all come from 1 country

But include a diverse group of risks
You dont have to write a lot to get

a good grade
But you do have to describe 5 risks clearly and accurately
Students who get less than C- will be required to re-write

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Political Economy

Our political economy

Portions (c) 2007-2013 McGraw-Hill Companies Inc.

Portions (c) 2007-2013 McGraw-Hill Companies Inc.

Safeguards of Successful Representative

Portions (c) 2007-2013 McGraw-Hill Companies Inc.

The rich countries almost all belong to a

Portions (c) 2007-2013 McGraw-Hill Companies Inc.

Legal systems enforce contracts

Portions (c) 2007-2013 McGraw-Hill Companies Inc.

To do business, you have to know the rules

2 key dimensions of difference

Portions (c) 2007-2013 McGraw-Hill Companies Inc.

Democracy versus totalitarianism

Portions (c) 2007-2013 McGraw-Hill Companies Inc.

Collectivism and Individualism

Central tenet is that

Collective goals are

more important than

Portions (c) 2007-2013 McGraw-Hill Companies Inc.

Portions (c) 2007-2013 McGraw-Hill Companies Inc.

Portions (c) 2007-2013 McGraw-Hill Companies Inc.

Classifying Economic Systems

Command economy: planned by government

Mixed economy: a balance of both of the above

Individualism vs. Collectivism

Portions (c) 2007-2013 McGraw-Hill Companies Inc.

In any new country, consider whether

Even in many rich countries (Japan), the rules may

Portions (c) 2007-2013 McGraw-Hill Companies Inc.

Portions (c) 2007-2013 McGraw-Hill Companies Inc.

All countries have legal

Can be violated through

Portions (c) 2007-2013 McGraw-Hill Companies Inc.

Contract law is the body of law that enforces a contract

The United Nations has a Convention on Contracts for the

Intellectual Property Rights

Intellectual property laws are believed very

Protection of intellectual property rights varies

Piracy of Intellectual Property

Portions (c) 2007-2013 McGraw-Hill Companies Inc.

Product Safety and Liability

Product liability laws hold the firm and its officers

Environmental standards limit pollution etc.

Portions (c) 2007-2013 McGraw-Hill Companies Inc.

Portions (c) 2007-2013 McGraw-Hill Companies Inc.

Transparency International produces good

Which Countries Are

Portions (c) 2007-2013 McGraw-Hill Companies Inc.

Differences in Economic Development

Two common measurements of economic

Gross National Income at Purchasing Power Parity

To estimate how big a market a country

Portions (c) 2007-2013 McGraw-Hill Companies Inc.

To gauge how rich the

GNI per capita is GNI per head: Total GNI

This is called nominal GNI per capita