International Business Management (MGT 520) VU

Lesson 9

International Business: NATIONAL DIFFERENCES IN

POLITICAL ECONOMY
Learning Objectives
Describe how the variation of political systems of countries often follows 'collectivist vs.
individualist' and 'democratic vs. totalitarian' dimensions. That tendency can be best
visualized by looking at the degree of economic and political freedom enjoyed by a
country's citizens.

2. Explain the differences in economic systems between countries. Examining specifically

the characteristics of market economies, command economies, mixed economies, and
state-directed economies achieves that objective.

3. Examine the differences in the economic development of different countries. The

chapter presents and describes economic development measures like GDP, purchasing
power, and human development indices.

4. When considering international expansion, suggest that the potential for future
economic growth and the growth rate may be as or more important than static
measures of economic development.

5. Explain how differences in the legal systems of countries can dramatically affect the
attractiveness and ease of doing business in different countries. The chapter highlights
differences in protections of intellectual property (patents, copyrights, and trademarks),
product safety and liability, and contract law to suggest how legal systems affect the
conduct of international business.

6. Show how changes in the world order in the 1980s and 1990s affected countries in
Europe, Asia, Latin America, and Africa, and how these changes present both great
new opportunities and risks for international business.

7. Summarize issues that affect the attractiveness of doing business in different countries,
including the benefits, costs, and risks determined by the political economy of nations.

8. Present some ethical concerns of doing business in countries that have different
standards, political ideologies, economic systems, and patterns of acceptable and
expected behavior (i.e. bribes).

Lecture Outlines
THE CHANGING POLITICAL ECONOMY OF INDIA
INTRODUCTION
POLITICAL SYSTEMS
Collectivism and Individualism
Democracy and Totalitarianism
ECONOMIC SYSTEMS
Market Economy
Command Economy
Mixed Economy
State-Directed Economy
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International Business Management (MGT 520) VU
LEGAL SYSTEMS
Property Rights
Country Focus: Forty Years of Corruption in Nigeria
The Protection of Intellectual Property
Management Focus: Drug Patents and the AIDS Epidemic in South Africa
Product Safety and Product Liability
Contract Law
THE DETERMINANTS OF ECONOMIC DEVELOPMENT
Differences in Economic Development
Broader Concepts of Development: Amartya Sen
Political Economy and Economic Progress
Geography, Education and Economic Development
STATES IN TRANSITION
The Spread of Democracy
The New World Order?
The Spread of Market-Based Systems
The Nature of Economic Transformation
Country Focus: Privatization in Brazil
Implications
IMPLICATIONS FOR BUSINESS
Attractiveness
Ethical Issues

THE IMPACT OF THE POLITICAL SYSTEM ON MANAGEMENT

DECISIONS
A. Political Risk

Political risk occurs when there is a possibility that the political climate in a
foreign country will change in such a way that the operations of international
companies in that country will deteriorate.

1. Types and causes of political risk. Types of political risk include

government takeovers of property, operating restrictions, and agitation that
damages the company’s performance. Such problems can be caused by
changing opinions of political leadership, civil disorder, and changes in
external relations (such as animosity between the home and host country
governments.

2. Macro and micro political risks. If political actions are aimed only at
specific foreign investments (e.g., a single foreign company), they are
considered micro political risks. If they are aimed at a broad spectrum of
foreign investors (e.g., when all foreign-owned private property was taken
over by Cuba), they are considered macro political risks.

B. Government Intervention in the Economy

Some governments adopt an “individualistic paradigm” and keep intervention

in the economy at a minimum. Others adopt a “communitarian paradigm”
wherein the government plays a larger role in the economy. They thrive on a
respected, centralized bureaucracy with a stable political party or coalition in
power. If a U.S. firm moves from the United States (individualistic) to
Germany, Japan, or South Korea (communitarian), it may have to develop new

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International Business Management (MGT 520) VU
strategies for its relationships with government, suppliers, customers, and
competitors.

IV. FORMULATING AND IMPLEMENTING POLITICAL

STRATEGIES:
There are certain steps that a company must follow if it wants to establish an
appropriate political strategy in its countries of operation. The steps include: 1) Identify
the issue (what is the specific issue facing the firm—trade barriers, workers’ rights?); 2)
Define the political aspect of the issue (is it something that can be dealt with outside of
politics?); 3) Assess the potential political action of other companies; 4) Identify
important institutions and key individuals; 5) Formulate strategies (what are your firm’s
objectives and alternatives for reaching them?); 6) Determine the impact implementing
the strategies (how will it affect the firm’s image?); 7) Select the appropriate strategy and
implement.

Economic Systems
1. There are four broad types of economic systems: market, command, mixed, and state-
directed. In reality almost all are mixed to some extent, for even the most market
oriented systems have some governmental controls on business and even the most
command based systems either explicitly allow some free markets to exist or have black
markets for some goods and services. Yet all countries can be considered to be at some
point on a continuum between pure market and pure command.
2. In a pure market economy, the goods and services that a country produces, and the
quantity in which they are produced, is not planned by anyone. Rather price and
quantity are determined by supply and demand. For a market economy to work, there
must be no restrictions on either supply or demand - no monopolistic sellers or buyers.
The recent legal battle with the federal government and Microsoft is an example of an
attempt by government to remove from Microsoft what it perceived to be business
restrictions that resulted in monopolistic operations.
3. In a pure command economy, the government plans what goods and services a country
produces, the quantity in which they are produced, and the price at which they are sold.
Resources are allocated “for the good of society.” The government owns most, if not
all, businesses, including even small businesses like the bread bakery and the local farm.
4. A mixed economy includes some elements of each. In Canada, for example, while
most business is privately owned and operated under market principles, health care,
electrical power, and liquor distribution are run by state owned enterprises in most
provinces. Over the past few decades France has chosen to inefficiently operate many
business enterprises “for the good of workers and the country,” and complains
vigorously to the EU when more efficient private firms from other EU countries seek
to encroach on the markets these enterprises poorly serve.
5. In a state-directed economy, the government plays a significant role in directing the
investment activities of private enterprises through “industrial policy.” Both Japan and
South Korea are often cited as examples of state-directed economies. In both
situations the government has played a significant role in directing investment. This
direction has helped in the creation of some leading international firms. For a state-
directed economy to work well, state bureaucrats must make better decisions than
capital markets on the allocation of resources. While state bureaucrats may be able to
take a longer-term perspective than capital markets, they may also prove to be
intransigent and resistant to making necessary changes. The difficulties many South
East Asian countries faced in 1997-98 highlight some of the limitations of a state-
directed economy. Resisting whims of the market has both its good and bad points.

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