National Differences in Political Economy (Political,

Economical & Legal Environment)

Introduction

 International Business is much more complicated than domestic

business in a way of different political, economical and legal
systems.
 They can have impact on firm’s profit, Costs, Risks associated with
the business in different countries.
National Differences in Political Economy (Political
Economical & Legal Environment)
Introduction

 In 1989 Poland was ruled by a Communist regime. *

 Over the past two decades all this has changed.
 Now it is one of the most dynamic and successful states.
 Having embraced a democratic political system and market-based
economic ideals, the country privatized many state-owned
businesses, deregulated its economy, and welcomed foreign direct
investment.
National Differences in Political Economy
(Political System)
 The political system of a country shapes its economic and legal
systems.
 By political system we mean the system of government in a nation.
 Political systems can be assessed according to two dimensions
 1. collectivism and individualism.
 2. democratic and totalitarian.
National Differences in Political Economy (Political System)
1. Collectivism and Individualism

 Collectivism refers a political system that stresses the primacy of

collective goals over individual goals. When collectivism is
emphasized, the needs of society as a whole are generally viewed as
being more important than individual freedoms.
 The opposite of collectivism, individualism refers to a philosophy
that an individual should have freedom in his or her economic and
political pursuits.
National Differences in Political Economy (Political System)
2. Democracy and Totalitarianism

 Democracy refers to a political system in which government is by

the people, exercised either directly or through elected
representatives.
 Totalitarianism is a form of government in which one person or
political party exercises absolute control over all spheres of human
life.
National Differences in Political Economy (Political System)
The gray area between two extremes

 it is possible to have a democratic state in which collective values

predominate,
 and it is possible to have a totalitarian state that is hostile to
collectivism and in which some degree of individualism-particularly
in the economic sphere-is encouraged. For example, China
National Differences in Political Economy
(Global Economical System)
 Businesses operate according to the economic system
of their home country.
 Today the world’s major economic systems fall into
two broad categories:
 Capitalism / free market
 Planned economies (Communism & Socialism)
 National Differences in Political Economy
(Global Economical System)
 In reality many countries use a mixed market system that
incorporates elements from more than one economic
system.
 National Differences in Political Economy
(Global Economical System) Capitalism
 In recent years, more countries have shifted toward free-
market economic systems and away from planned
economies
 Capitalism, also known as the private enterprise system,
 businesses buy and sell products freely in the marketplace.
 National Differences in Political Economy
(Global Economical System) Capitalism
 all the factors of production are owned privately,
 government does not try to set prices or coordinate
economic activity.
 The main incentive in this system is profit, which
encourages entrepreneurship. (Process of DLR)
 Companies try to produce their goods and services at the
lowest possible cost and sell them at the highest possible
price.
 National Differences in Political Economy
(Global Economical System) Capitalism
 When profits are high, more businesses enter the market to
seek a share of those profits.
 The resulting competition among companies tends to
lower prices.
 National Differences in Political Economy
(Global Economical System) Communism
 The complete opposite of capitalism is communism.
 In a communist economic system, the Govt. owns all
resources and controls all markets.
 Economic decision-making is centralized:
 Govt. decide what will be produced and where it will be
produced, how much will be produced, what the prices
will be.
 National Differences in Political Economy
(Global Economical System) Communism
 North Korea and Cuba are the best remaining examples of
communist economic systems.
 National Differences in Political Economy
(Global Economical System) Socialism
 Socialism is an economic system in which the basic
industries are owned by the government or by the private
sector under strong government control.
 A socialist state controls critical, large-scale industries
such as transportation, communications, and utilities.
 National Differences in Political Economy
(Global Economical System) Socialism
 Smaller businesses and those considered less critical, such
as retail, may be privately owned.
 Socialist countries typically provide their citizens with a
higher level of services, such as health care and
unemployment benefits, than do most capitalist countries.
 As a result, taxes and unemployment may also be higher
in socialist countries.
 National Differences in Political Economy (Global
Economical System)
Mixed Economic System
 Pure capitalism and communism are extremes; real-world
economies fall somewhere between the two.
 Canada, Sweden, and the UK, among others, are also
called mixed economies;
 Few factor of production owned by Govt. postal service
and water resources.
National Differences in Political Economy (Legal
System)
 The legal system of a country refers to the rules, or laws.
 A country's laws regulate business practice, define the manner in
which business transactions are to be executed and the rights of each
other involve in business transactions.
National Differences in Political Economy (Legal
System)
 Like the Economic system of a country, the legal system is
influenced by the prevailing political system.
 For example, collectivist-inclined totalitarian states tend to enact
laws that severely restrict private enterprise, whereas the laws
enacted by governments in democratic states where individualism
is the dominant political philosophy tend to be pro-private
enterprise and pro-consumer.
National Differences in Political Economy (Legal
System)
 Quiz No. 2
 Write down the different legal Systems.
 Common Law
 Civil Law
 Theocratic Law