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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.
