978-1259578113 Chapter 2 Lecture Notes

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Chapter 02 – National Differences in Political, Economic, and Legal Systems

National Differences in Political, Economic,

and Legal Systems

Learning objectives

Understand how the political systems of countries differ.

Understand how the economic systems of countries differ.

Understand how the legal systems of countries differ.

Explain the implications for management practice of national differences in

political economy.

This chapter discusses differences in national political, economic, and legal systems,

highlighting the ways in which managers in global settings need to be sensitive to these

differences.

Political differences are described along two dimensions: collectivist vs. individualist

and democratic vs. totalitarian. Economic systems are explored in terms of market

characteristics: market economies, command economies, and mixed economies. Legal

systems are discussed in terms of the protections they offer for business: intellectual

property, product safety, liability and contracts.

The opening case describes the effect of widespread political and economic corruption

in Brazil. Once considered one of the world’s most promising developing economies,

Brazil has been rocked by a number of bribery and corruption scandals that have led to

political instability and recession. The closing case explores the political and economic

climate in Russia under President Putin and how this climate has affected foreign

investment.

OUTLINE OF CHAPTER 2: NATIONAL DIFFERENCES IN POLITICAL

ECONOMY

Opening Case: Corruption in Brazil

Chapter 02 – National Differences in Political, Economic, and Legal Systems

Introduction

Political Systems

Collectivism and Individualism

Country Focus: Venezuela under Hugo Chávez, 1999–2013

Democracy and Totalitarianism

Economic Systems

Market Economy

Command Economy

Mixed Economy

Legal Systems

Different Legal Systems

Differences in Contract Law

Property Rights and Corruption

Country Focus: Corruption in Nigeria

Management Focus: Did Walmart Violate the Foreign Corrupt Practices

Act?

The Protection of Intellectual Property

Management Focus: Starbucks Wins Key Trademark Case in China

Product Safety and Product Liability

Focus on Managerial Implications

Critical Thinking and Discussion Questions

Closing Case: Putin’s Russia

CLASSROOM DISCUSSION POINT

Ask students to think about the two dimensions used to describe political systems:

Collectivist-Individualist and Democratic-Totalitarian. Begin by drawing the following

scale on the board:

______________________________________________________

Individualist Collectivist

______________________________________________________

Democratic Totalitarian

Then ask students to provide some examples of what might describe a collectivist

system —where does Canada’s national healthcare system put it, which countries might

be considered democratic, where should China be placed, and so on.

Finally, move to a discussion of how differences in political economy present both

opportunities and threats for business. Managers must analyze each national market

that they participate in and identify specific ways in which the political economy of that

nation could support or threaten the company’s business model.

Chapter 02 – National Differences in Political, Economic, and Legal Systems

If there are foreign students in the class or students with foreign experience, you might

draw on their observations of differences these dimensions impose on the practice of

business.

LECTURE OUTLINE

This lecture outline follows the Power Point Presentation (PPT) provided along with

this instructor’s manual. The PPT slides include additional notes that can be viewed by

clicking on “view,” then on “notes.” The following provides a brief overview of each

Power Point slide along with teaching tips, and additional perspectives.

Slides 2-3 and 2-4 Political Economy

The political, economic, and legal infrastructure of a nation has a major influence on the

way managers make decisions. Political systems have two dimensions: the degree of

collectivism versus individualism, and the degree of democracy versus totalitarianism.

These dimensions are interrelated; systems that emphasize collectivism tend towards

totalitarianism, while systems that place a high value on individualism tend to be

democratic.

However, a large gray area exists in the middle. It is possible to have democratic

societies that emphasize a mix of collectivism and individualism. Similarly, it is possible

to have totalitarian societies that are not collectivist.

Slides 2-5 through 2-7 Collectivism and Individualism

Collectivism refers to a political system that stresses the primacy of collective goals

over individual goals. Advocacy of collectivism can be traced to the ancient Greek

philosopher Plato. In modern times the collectivist system is largely the domain of

nations that have embraced socialism.

Individualism is the direct opposite of collectivism. Its central tenet is that individual

economic and political freedoms are the ground rules on which society is based.

Slides 2-8- through 2-10 Democracy and Totalitarianism

Democracy, as originally practiced by several city-states in ancient Greece, is based on

a belief that citizens should be directly involved in decision making. Most modern

democratic states practice representative democracy in which citizens periodically

elect individuals to represent them. Totalitarianism is a form of government in which

one person or political party exercises absolute control over all spheres of human life

and opposing political parties are prohibited (Communist, theocratic, tribal, right

wing).

Totalitarianism denies its citizens all of the constitutional guarantees asserted by

representative democracies.

Slide 2-11 through 2-14 Economic Systems

There is a connection between political ideology and economic systems. In countries

where individual goals are given primacy over collective goals, we are more likely to

find free market economic systems. In contrast, in countries where collective goals are

Chapter 02 – National Differences in Political, Economic, and Legal Systems

given preeminence, the state may have taken control over many enterprises, while

markets in such countries are likely to be restricted rather than free.

There are three broad types of economic systems: the market economy, the command

economy, and the mixed economy.

A market economy is an economy in which all productive activities are privately

owned, as opposed to being owned by the state. Production is determined by the

interaction of supply and demand and signaled to producers through the price system.

A command economy is an economy in which the goods and services that a country

produces, the quantity in which they are produced, and the prices at which they are sold

are all planned by the government.

A mixed economy is an economy in which certain sectors of the economy are left to

private ownership and free market mechanisms while other sectors have significant state

ownership and government planning. India has a mixed economy.

Mixed economies were once very common throughout much of the world, although they

are becoming much less so. There was a time not too long ago when Great Britain,

France, and Sweden were mixed economies, but extensive privatization has reduced

state ownership of businesses in all three.

Slide 2-15 and 2-16 Legal Systems

Legal systems are the systems of rules or laws that regulate behavior along with the

processes by which the laws are enforced and through which redress for grievances is

obtained.

There are three main types of legal systems – or legal traditions – in use around the

world: common law, civil law, and theocratic law. Common law is based on tradition,

precedent, and custom. Civil law is based on a very detailed set of laws organized into

codes. Theocratic law is based on religious teachings.

Slides 2-17 and 2-18 Contract Law

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.

Since common law tends to be relatively ill specified, contracts drafted under a common

law framework tend to be very detailed with all contingencies spelled out. In civil law

systems, contracts tend to be much shorter and less specific because many of the issues

typically covered in a common law contract are already covered in a civil code.

When contract disputes arise in international trade, there is always the question of

which country’s laws apply. Many countries including the United States have ratified

the United Nations Convention on Contracts for the International Sale of Goods

(CIGS). 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.

Chapter 02 – National Differences in Political, Economic, and Legal Systems

Another Perspective: The United Nations Commission on International Trade Law

provides a detailed overview of the United Nations Convention on Contracts for the

International Sale of Goods at

{http://www.uncitral.org/uncitral/en/uncitral_texts/sale_goods/1980CISG.html}.

Slides 2-19 through 2-22 Property Rights

Property rights refer to a resource over which an individual or business holds a legal

title; that is, a resource that they own.

These rights can be violated through private or public action. Private action refers to

theft, piracy, blackmail, and the like by private individuals or groups. Public action

violations occur when public officials, such as politicians and government bureaucrats,

extort income or resources from property holders.

Another Perspective: The U.S government’s web page on intellectual property rights,

{http://www.uspto.gov}, contains a wealth of information on intellectual property rights

including information on international intellectual property rights treaties and protecting

trademarks.

In the United States the Foreign Corrupt Practices Act makes bribing a foreign

government official in order to obtain or maintain business over which that foreign

official has authority a violation of United States law, and requires all publicly traded

companies to keep audit records.

Slides 2-23 and 2-24 Intellectual Property Rights

Intellectual property is property that is the product of intellectual activity, such as

computer software, a screenplay, a music score, or the chemical formula for a new drug.

Ownership rights over intellectual property are established through patents, copyrights,

and trademarks.

Another Perspective: The World Intellectual Property Organization’s web site contains

extensive information on various treaties and agreements between countries regarding

the protection of intellectual property. The site is

{http://www.wipo.int/portal/index.html.en}.

Another Perspective: The World Intellectual Property Organization offers suggestion on

how exporters can avoid common pitfalls when exporting intellectual property. More

details can be found at

{http://www.wipo.int/sme/en/documents/wipo_magazine/9_2004.pdf}.

Slide 2-25 Think Like a Manager: Open-Source Software

Slides 2-26 and 2-27 Product Safety and Liability

Product safety laws set safety standards for products and manufacturing processes.

Product liability involves holding a firm and its officers responsible for product safety

standards.

Slide 2-28 Determining a Market’s Overall Attractiveness

All else being equal, countries with democratic political institutions, market-based

economies, and legal systems that protect property rights and limit corruption will be

more attractive than nations that lack these characteristics.