Chapter 02

National Differences in Political

Economy

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 Lesson Outline
2

• Political Economy

• Political System

• Economic System

• Legal System

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 Political Economy
3

• Interdisciplinary studies drawing upon economics, political

science, law, history, sociology and other disciplines in
explaining the crucial role of political factors in determining
economic outcomes.

• The study of production and trade and their links with custom,
government and law.

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 Political Economy
4

• 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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 Political Economy
5

• Political System
• Economic System
• Legal System

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 What Is A Political System?
6

• Political system
• The system of government in a nation
• Assessed according to (connectivity collect to total, invidual to demo)
• 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?
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• Collectivism
• Stresses the primacy of collective goals over individual goals
• The needs of society as a whole are generally viewed as being more important
than individual freedoms
• Example: China, Vietnam, Japan

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 What Is A Political System?
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• Individualism
• An individual should have freedom in his own economic and political pursuits
• Emphasizes the primacy of individual freedom, self-expression, and personal
independence
• Shape their marketplace with the idea of laissez-faire
• Example: Australia, Canada, Netherlands, New Zealand, the United States, and
the United Kingdom

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 What Is A Political System?
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• Individualism
• Individualism is built on two central tenets.
• Emphasis on the importance of guaranteeing individual freedom and self-expression.
• The welfare of society is best served by letting people pursue their own economic self-
interest, as opposed to some collective body (such as government) dictating what is in
society's best interest

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 What Is A Political System?
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• Democracy
• Government is by the people, exercised either directly or through elected
representatives
• An ideal representative democracy has a number of safeguards that are
1. An individual's right to free­dom of expression, opinion, and organization
2. A free media
3. Regular elections in which all eligible citizens are allowed to vote
4. Universal adult suffrage
5. Limited terms for elected representatives
6. A fair court system that is independent from the political system
7. A nonpolitical state bureaucracy
8. A nonpolitical police force and armed service; and
9. Relatively free access to state information

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 What Is A Political System?
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• Totalitarianism
• One person or political party exercises absolute control over all spheres of human
life and prohibits opposing political parties
• Four major forms of totalitarianism
• Communist totalitarianism (China, Cuba)
• Theocratic totalitarianism (Iran and Saudi Arabia)
• Tribal totalitarianism (Tanzania, Uganda, and Kenya)
• Right-wing totalitari­anism (South Korea, Taiwan, and the Philippines) – no political power
but individual economic freedom exist

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 Political Risk (Daniels-149)
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• The threat that decisions or events in a country will negatively

affect the profitability and sustainability of an investment

• The risk that political decisions, events, or conditions will affect

a country’s business environment in ways that force investors to
accept lower rates of return, cost them some or all of the value of
their investment, or threaten the sustainability of their operation.

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 Political Risk
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• Classification of Political Risk

o Systemic Political Risk

o Procedural Political Risk

o Distributive Political Risk

o Catastrophic Political Risk

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 Political Risk
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• Classification of Political Risk

o Systemic Political Risk (affect all business, reason-govt change, corruption,

opposite example-Vietnam privatized)

 Change in macro business environment

o Procedural Political Risk (the flexibility of local operations hamper, )

 Impediments that constrain the procedural transaction

o Distributive Political Risk

 Gradual elimination of the local property rights of foreign companies

o Catastrophic Political Risk

 Political events those devastate companies and countries

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 Political Risk
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Financial Anomalies
Competing Perspectives
Unilateral Breach of Contract
Tax Discrimination
Restrictions on Profit Repatriation
Destructive Government Actions
Harmful Action Against People
Expropriation/Nationalization
Civil Strife, Insurrection, War
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 Managing Political Risk
16

• https://www.youtube.com/watch?v=xeSFxXlLnZg&t=39s

• Be a good corporate citizen

 Participate in development projects, literacy etc.

• Expand business relationships through Joint venture, licensing etc.

• Study government attitude and participate government incentive

programs

• Maintain good relationship with political allies, other embassies in

the country
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 What Is An Economic System?
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• Three types of economic systems

• Market Economy
• Command Economy
• Mixed Economy

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 What Is An Economic System?
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• Market Economy
• All productive activities are privately owned
• Production is determined by the interaction of supply and demand and
signaled to producers through the price system
• Supply must not be restricted
• Encouraging free and fair competition and private ownership
• Hong Kong, Singapore, New Zealand, Switzerland.

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 What Is An Economic System?
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• Command Economy
• Government plans the goods and services that a
country produces, the quantity that is produced, and
the prices as which they are sold
• Objective is to allocate resources for "the good of
society”.
• All businesses are state owned
• State-owned enterprises have little incentive to
control costs and be efficient
• No incentive for individuals to look for better
ways to serve consumer needs ( Cuba, North Korea)
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 What Is An Economic System?
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• Mixed Economy
• Certain sectors of the economy are left to private ownership and free market
mechanisms while other sectors have significant state ownership and government
planning. For eg Sweden, France, BD.

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 What Is A Legal System?
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• Legal system
• The rules or laws that regulate behavior along with the processes by which
the laws are enforced and through which redress for grievances is obtained
• Legal system in a country can be influenced by the prevailing political
system
• Laws that regulate business may reflect the rulers’ dominant political
ideology

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 What Is A Legal System?
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• 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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 What Is A Legal System?
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• There are three types of legal systems

• Common Law

• Civil Law

• Theocratic Law

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 What Is A Legal System?
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• Common Law (Britain and US, BD)

• Based on tradition, precedent, and custom
• Tradition refers to a country's legal history

• Precedent to cases that have come before the courts in the past

• Custom to the ways in which laws are applied in specific situations

• Judges have the power to interpret the law

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 What Is A Legal System?
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• Civil Law (France and Germany)

• Based on detailed set of Roman laws organized into codes
• Less adversarial than a common law system
• Judges have less flexibility
• Judges have the power only to apply the law

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 What Is A Legal System?
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• Theocratic law (Saudi Arabia, Iran)

• Law is based on religious teachings
• Islamic law is the most widely practiced theocratic legal system

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 Differences In Contract Law
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• A contract is a document that specifies the condi­tions under

which an exchange is to occur and details the rights and
obligations of the parties involved.

• Contract law is the body of law that governs contract enforcement.

• The parties to an agreement normally resort to contract law when

one party feels the other has violated either the letter or the spirit
of an agreement.

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 Differences In Contract Law (dispute
settlement)
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• United Nations Convention on Contracts for the International

Sale of Goods (CIGS)
o The 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.

• International Court of Arbitration of the International Chamber

of Commerce
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 The Basis of Rule (Daniels)
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• What is the basis of rule in a given country? (totalitarianism vs

individualism)
o The Rule of Man

 Ultimate authority resides in a person whose word and

whim, no matter how unfair or unjust, is law.
o The Rule of Law

 No individual is above laws that are clearly specified,

commonly understood, and fairly enforced.
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How Are Property Rights And Corruption Related?
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• Property
• A resource over which an individual or business holds a legal title, that is, a
resource that it owns.

• Resources include land, buildings, equipment, capital, mineral rights, businesses,

and intellectual property (ideas, which are protected by patents, copyrights, and
trademarks)

• Property Rights (use & income)

• 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

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How Are Property Rights And Corruption Related?
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• Property rights can be violated through

1. Private action
• Theft, piracy, blackmail, and the like by private individuals or groups
• A weak legal system allows for a much higher level of criminal action

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How Are Property Rights And Corruption Related?
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2. Public action
• Public officials, such as politicians and government bureaucrats,
extort income, resources, or the property itself from property holders.
• Legal mechanisms such as levying excessive taxation, requiring
expensive licenses or permits from property holders, taking assets
into
state ownership without compensating the owners, or redistributing
assets without compensating the prior owners.
• Illegal means, or corruption, by demanding bribes from businesses in
return for the rights to operate in a country, industry, or location.

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How Can Intellectual Property Be Protected?
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• 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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How Can Intellectual Property Be Protected?
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• The philosophy behind intellectual property laws is to rewarding the

originator
• Providing an incentive for people to search for novel ways of doing
things
• World Intellec­tual Property Organization (intellectual property rights
differs, 183)
• Trade Related Aspects of Intellectual Property Rights ( TRIPS) –
agreement done among wto members

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What Is Product Safety And Liability?
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• Product Safety Laws

• Setting certain standards to which a product must
adhere
• Product Liability
• Holding a firm and its officers responsible when a
product causes injury, death, or damage

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What Is Product Safety And Liability?
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• Product liability can be much greater if a product does not conform to

required safety standards
• Both civil and criminal product liability laws exist.
• Civil laws call for payment and monetary damages.
• Criminal liability laws result in fines or imprisonment.
• Liability laws tend to be less extensive in less developed nations
• Country differences in product safety and liability laws raise an
important ethical issue for firms doing business abroad

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In Conclusion
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• The benefits, costs, and risks associated with doing business in a

country are a function of that country's political, economic, and
legal systems.
• 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, more attractive countries have democratic
political institutions, market based economies, and strong legal systems
that protect property rights and limit corruption.

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