Chapter 2&3

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

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

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

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

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 Legal System
 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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 Property Rights
And Corruption
 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
 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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 Intellectual
Property Be Protected
 Intellectual property - property that is the
product of intellectual activity
 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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 Product Safety
And Liability?

 Product safety laws set certain standards to

which a product must adhere

 Product liability involves holding a firm and its

officers responsible when a product causes
injury, death, or damage
liability laws tend to be less extensive in less
developed nations

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

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

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Education Influence Economic
Development
 Countries that invest in education have
higher growth rates because the workforce
is more productive
countries in Southeast Asia have offset their
geographical disadvantages by investing in
education
Indonesia, Malaysia, and Singapore

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 How Is The Political
Economy Changing?
 Trend 1: Democracy has spread over the last
two decades

 many totalitarian regimes failed to deliver economic

progress to the vast bulk of their populations
 new information and communication technologies
have broken down the ability of the state to control
access to uncensored information
 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?
 Trend 2: The spread of market-based
systems
 more countries have moved away from
centrally planned and mixed economies
toward the market-based model
 Command and mixed economies failed
to deliver the sustained economic growth
achieved in market-based countries

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

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 What Are The Implications Of Political
Economy Differences For Managers?
 The risks of doing business in a country are a
function of
 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

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