International Business (Chapter - 2)

Global Business Today
8e
by Charles W.L. Hill
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document
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Chapter 2
National Differences
in Political Economy
2-2
Introduction
Question: What is the political economy of a

country?
• A country’s political economy refers to its

political, economic, and legal systems
• These systems are interdependent, and
interact and influence each other
• A country’s political system has major
implications for the practice of international
business
2-3
Political Systems
Question: What is a political system?
• A political system is the system of

government in a nation
• Political systems can be assessed:
• In terms of the degree to which they emphasize
collectivism as opposed to individualism
• In terms of the degree to which they are
democratic or totalitarian
2-4
Political Systems
 Collectivism - stresses the primacy of collective goals

over individual goals
 Individualism - suggests individuals should have
freedom over their 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 opposing political parties are prohibited
2-5
Economic Systems
Question: What is an economic system?
• There are three types of economic systems: the

market economy, the command economy, and
the mixed economy
• A free market system is likely in countries where
individual goals are given primacy over
collective goals
• State-owned enterprises and restricted markets
are common in countries where collective goals
are dominant
2-6
Economic Systems
 In a pure market economy the goods and

services that a country produces, and the
quantity in which they are produced is
determined by supply and demand
 In a pure command economy the goods and
services that a country produces, the quantity in
which they are produced, and the price at which
they are sold are all planned by the government
 A mixed economy includes some elements of a
market economy and some elements of a
command economy
2-7
Legal Systems
Question: What is a legal system?
Legal system - the rules, or laws, that regulate

behavior, along with the processes by which the
laws of a country are enforced and through
which redress for grievances is obtained
Laws:
 Regulate business practice
 Define the manner in which business transactions
are to be executed
 Set down the rights and obligations of those involved
in business transactions
2-8
Legal Systems
There are three main types of legal systems:

1. Common law - based on tradition, precedent,
and custom
2. Civil law - based on a very detailed set of
laws organized into codes
3. Theocratic law - based on religious teachings
2-9
Differences in Contract Law
Question: In a contract dispute, which country’s

laws should apply?
Answer:
 The United Nations Convention in Contracts for
the International Sales of Goods (CIGS)
establishes a uniform set of rules governing
certain aspects of the making and performance
of everyday commercial contracts between
sellers and buyers who have their places of
business in different nations
2-10
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 by:
 Private action (theft, piracy, blackmail, and the like
by private individuals or groups)
 Public action (public officials extort income or
resources from property holders)
2-11
Foreign Corrupt Practices Act
The Foreign Corrupt Practices Act limits

corruption in the U.S
It is illegal to bribe a foreign government official
in order to obtain or maintain business over
which the foreign official has authority
All publicly traded companies must keep detailed
records so that it is clear whether a violation of
the act has occurred
Facilitating or expediting payments to secure the
performance of routine government actions are
permitted
2-12
The Protection of
Intellectual Property
Intellectual property - property that is the
product of intellectual activity
Intellectual property rights include:
 Patents - give the inventor exclusive rights to the
manufacture, use, or sale of that invention
 Copyrights - exclusive legal rights of authors,
composers, playwrights, artists, and publishers to
publish and dispose of their work as they see fit
 Trademarks - designs and names, often officially
registered, by which merchants or manufacturers
designate and differentiate their products
2-13
The Protection of
Intellectual Property
The protection of intellectual property rights
differs greatly from country to country
Paris Convention for the Protection of Industrial
Property - agreement signed by 170 countries to
protect intellectual property rights
Trade Related Aspects of Intellectual Property
Rights (TRIPS) - requires WTO members to
grant and enforce patents lasting at least 20
years and copyrights lasting 50 years
2-14
Product Safety and
Product Liability
Product safety laws set certain safety 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 are usually least extensive in less
developed countries
 Firms must decide whether to adhere to the
standards of the home country or to the standards of
the host country
2-15
Implications for Managers
Question: What are the implications of the political

economy for international firms?
There are two main implications:

1. The political, economic, and legal systems of a country
raise important ethical issues that have implications
for the practice of international business
2.The political, economic, and legal environment of a
country clearly influences the attractiveness of that
country as a market and/or investment site
2-16

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Global Business Today

by Charles W.L. Hill

Question: What is the political economy of a

• A country’s political economy refers to its

Question: What is a political system?

• A political system is the system of

 Collectivism - stresses the primacy of collective goals

Question: What is an economic system?

• There are three types of economic systems: the

 In a pure market economy the goods and

Question: What is a legal system?

Legal system - the rules, or laws, that regulate

There are three main types of legal systems:

Question: In a contract dispute, which country’s

Property rights - the legal rights over the use to

The Foreign Corrupt Practices Act limits

Question: What are the implications of the political

There are two main implications:

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