Chapter 02 – National Differences in Political, Economic, and Legal Systems
National Differences in Political, Economic,
and Legal Systems
Learning Objectives
• LO2-1: Understand how the political
systems of countries differ.
• LO2-2: Understand how the
economic systems of countries differ.
• LO2-3: Understand how the legal
systems of countries differ.
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
2
Chapter 02 – National Differences in Political, Economic, and Legal Systems
OUTLINE OF CHAPTER 2: NATIONAL DIFFERENCES IN
POLITICAL, ECONOMIC, AND LEGAL SYSTEMS
Opening Case: Kenya: An African Lion
Introduction
Political Systems
Collectivism and Individualism
Democracy and Totalitarianism
Country Focus: Putin’s Russia
Economic Systems
Market Economy
Command Economy
Mixed Economy
Focus on Managerial Implications
The Macro Environment Influences Market Attractiveness
Chapter Summary
Chapter 02 – National Differences in Political, Economic, and Legal Systems
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
OPENING CASE: Kenya: An African Lion
Summary
Kenya can be viewed as an economic and political success in sub-Saharan Africa. Acting as
the economic, financial, and transportation hub in East Africa, Kenya boasts a range of
industries including agriculture, mining, manufacturing, tourism, communications, and
financial services. Kenya’s assent to its position as a top economy in the region has been
decades in the making. Following its independence from Great Britain in 1963, Kenya
adopted African Socialism and a policy of large public investment in infrastructure by state-
owned companies and the promotion of smallholder agricultural production. During this time,
Kenya also adopted an import substitution policy to promote domestic production. In 1993,
Chapter 02 – National Differences in Political, Economic, and Legal Systems
the country’s thriving economy and stable democracy. Discussion of the case can begin with
the following questions:
QUESTION 1: Following its independence from Britain in 1963, Kenya embraced African
Socialism. Why did the country choose this path? Discuss the benefits and drawbacks of this
choice.
ANSWER 1: African Socialism promotes the notion of what it means to be African, the
avoidance of social classes within society, and social development encouraged through a large
public sector. Some students may suggest that because at the time of its independence in 1963,
ethnic divisions were creating conflict in Kenya and one large group held a disproportionate
QUESTION 2: How did economic and political reforms in the early 1990s help Kenya
achieve its position as the economic, financial, and transportation hub in sub-Saharan Africa?
ANSWER 2: By the early 1990s, it became increasingly clear that the policies Kenya had
adopted following its independence from Britain in 1963 were no longer working. In 1993,
Kenya implemented a series of economic and political reforms designed to get the country
back on track. The country worked to remove price controls, lower barriers to trade and
investment, and be more fiscally responsible. In addition, political power was decentralized to
47 semiautonomous regions and holding free and fair elections was made a key focus for the
country. Today, the success of Kenya’s political and economic reforms is evident. The
QUESTION 3: What long-term economic, political, and legal challenges does Kenya face
going forward?
ANSWER 3: Despite the economic and political reforms that have helped Kenya become a
strong player in sub-Saharan Africa, Kenya continues to face several challenges. One
challenge is the country’s complicated bureaucratic process, which makes it difficult for
companies to establish new businesses. This, combined with ongoing corruption, could slow
Chapter 02 – National Differences in Political, Economic, and Legal Systems
optimistic about the future of Kenya, noting that its growing middle class, well-educated
young workforce, diversified industrial base, and position as regional leader will all be
important to the future of Kenya.
LECTURE OUTLINE
This lecture outline follows the PowerPoint Presentation (PPT) provided along with this
instructor’s manual. The following provides a brief overview of each PowerPoint slide along
with teaching tips and additional perspectives.
Slide 2-3 Political Economy
The political, economic, and legal systems of a nation have a major influence on the way
managers make decisions.
Slides 2-4 – 2-10 Political Systems
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 toward 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.
Chapter 02 – National Differences in Political, Economic, and Legal Systems
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.
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.
CONNECT
Click and Drag
Differences in Political Systems
Summary
This activity focuses on differences in political systems. Political systems can be assessed according to
two dimensions: the degree to which they emphasize collectivism as opposed to individualism; and the
degree to which they are democratic or totalitarian. International businesses need to be aware of the
differences in political systems and appreciate the significance of these national differences.
Slides 2-11 – 2-13 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 given
preeminence, the state may have taken control over many enterprises, while markets in such
countries are likely to be restricted rather than free.
Chapter 02 – National Differences in Political, Economic, and Legal Systems
Market 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.
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.
Slides 2-14 – 2-23 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.
Differences in 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.
Chapter 02 – National Differences in Political, Economic, and Legal Systems
2-8
everyday commercial contracts between sellers and buyers who have their places of business
in different nations.
CONNECT
Video Case
Javabucks in China
Summary
This activity focuses on differing legal systems and specifically on intellectual property rights and
their enforcement. From a legal perspective, the term property refers to a resource over which an
individual or business holds a legal title—that is, a resource that it owns. Intellectual property refers to
property that is the product of intellectual activity. Patents, copyrights, and trademarks establish
ownership right over intellectual property.
Property Rights and Corruption
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.
In the United States, the Foreign Corrupt Practices Act (FCPA) makes bribing a foreign
government official in order to obtain or maintain business over which that foreign official
Chapter 02 – National Differences in Political, Economic, and Legal Systems
has authority a violation of United States law and requires all publicly traded companies to
keep audit records.
The Protection of Intellectual Property
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.
Enforcement of intellectual property regulations is lax in many countries, even in many of
those that have committed to the World Intellectual Property Organization and the Paris
Convention for the Protection of Industrial Property.
Product Safety and Product 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.
CONNECT
Video Case
Turmoil in Venezuela
Summary
This activity focuses on the political and legal situation in Venezuela where an unpopular president is
failing to adequately address the needs of the country. Many foreign companies have left the troubled
country as doing business there has become increasingly challenging.
Activity
Students are asked to watch a video on the political and legal situation in Venezuela and then respond
to a series of questions related to the video.
Chapter 02 – National Differences in Political, Economic, and Legal Systems
Slide 2-24 Focus on Managerial Implications
The Macro Environment Influences Market 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.
CONNECT
Video Case
Did You Know? Venezuela Drops to One of the Worst Performing Economies in the World
Summary
This activity focuses on how the benefits, costs, and risks associated with doing business in a country
are influenced by the country’s political, economic, and legal systems. As a result of widespread
corruption, limited property rights protection, and a lack of democratic institutions, Venezuela has
gone from an attractive market to a highly risky one.
Class Discussion
A country’s economic, legal, and political systems can have important implications for international
businesses and how they do business in that country. Discuss how, if at all, U.S. companies can
operate in a country where bribery is part of everyday business, where property rights are unclear, and
where democratic institutions have seemingly ceased to exist.
CRITICAL THINKING AND DISCUSSION QUESTIONS
QUESTION 1: Free market economies stimulate greater economic growth, whereas state-
directed economies stifle growth. Discuss.
ANSWER 1: In a market economy, private individuals and corporations are permitted to own
property and other assets. This right of ownership provides a powerful incentive for people to
work hard, introduce new products, develop better advertising campaigns, invent new
products, etc., all in the hopes of accumulating additional personal capital and wealth. Indeed,
Chapter 02 – National Differences in Political, Economic, and Legal Systems
QUESTION 2: A democratic political system is an essential condition for sustained
economic progress. Discuss.
ANSWER 2: This question should generate some debate among students, especially as they
consider economic progress in China. Many students, however, will likely agree that although
QUESTION 3: What is the relationship between corruption in a country (i.e., government
officials taking bribes) and economic growth? Is corruption always bad?
ANSWER 3: Most students will agree that in general, corruption does not lead to positive
economic outcomes. Many countries including the United States have laws against bribery
and corruption although it continues to occur. Some countries including France, Germany, and
Japan see certain types of bribes as a regular part of business. Students should recognize
QUESTION 4: You are the CEO of a company that has to choose between making a $100
million investment in Russia or Poland. Both investments promise the same long-run return,
so your choice is driven by risk considerations. Assess the various risks of doing business in
each of these nations. Which investment would you favor and why?
ANSWER 4: When assessing the risks of investment, one should consider the political,
economic, and legal risks of doing business in both Russia and Poland. The political risk in
Russia is still high but it is undergoing continual governmental changes under Putin’s
leadership, and courting foreign investment. Relatively, Poland is more stable, but it may have
QUESTION 5: Read the Management Focus “Did Walmart Violate the Foreign Corrupt
Practices Act?” What is your opinion? If you think it did, what do you think the consequences
will be for Walmart?
ANSWER 5: Responses to this question will vary by student, but many will probably agree
that Walmart did indeed violate the Foreign Corrupt Practices Act when its executives bribed
local officials to redraw zoning maps so that the company could gain approval to build a new
store in Mexico. Many students will suggest that the attempts by Walmart’s corporate
CLOSING CASE: Transformation in Saudi Arabia
Summary
The closing case explores the political economy of Saudi Arabia. For decades, Saudi Arabia’s
political system has relied on religious teaching for direction. The state controls much of the
country’s economic activity, and while per capita income is not unlike that of the United
States, its distribution is uneven, unemployment is relatively high, and the potential for social
unrest is a concern. The country saw some changes recently when King Salman bin Abd al-
Aziz Al Saud came to power following the death of his brother. The new king immediately
gave his son, Muhammad bin Salman, significant power. Crown Prince Muhammad bin
Salman is using his new power to undertake significant economic and political reforms in the
QUESTION 1: What long-term economic and political problems does Saudi Arabia face?
ANSWER 1: At first glance, Saudi Arabia, with its high GDP per capita, appears to be a
strong economy, not dissimilar to the United States. Yet greater scrutiny reveals a very
different picture. With unemployment rates around 12 percent and some 80 percent of the
labor force being low-paid foreign workers, it becomes apparent that Saudi Arabia has some
challenges. In addition to its high unemployment rates, the country is over-dependent on a
Chapter 02 – National Differences in Political, Economic, and Legal Systems
long term, Saudi Arabia’s economy could face significant challenges if its economy cannot
grow and diversify, creating new job across a range of industries.
QUESTION 2: How might the reforms proposed by Muhammad bin Salman potentially
address these problems? Who will gain from these reforms? Who might object and push back
against them?
ANSWER 2: Muhammad bin Salman has proposed a number of economic and political
reforms as part of his Vision 2030 for Saudi Arabia. One key goal is to reduce dependence on
oil and to privatize the huge state-run oil company, Aramco. Bin Salman also wants to reduce
subsidies that result in low energy and water prices and grow the private sector. While there is
support for many of these reforms, other reforms have been met with significant resistance
such as the imposition of a value added tax and moves to loosen the country’s strict moral
QUESTION 3: Current plans for Saudi Aramco call for the state-owned oil company to be
privatized. An initial public offering (IPO) is tentatively scheduled for 2021. What are the
potential benefits to Saudi Arabia of privatizing Saudi Aramco? Is there a downside?
ANSWER 3: Privatizing Saudi Arabia’s enormous state-run oil company, Aramco, could
result in several benefits. Many students will likely focus on efficiency gains that could be
achieved as a result of privatization. Other students may note that privatization would
generate new capital—capital that could be used to improve the company’s operations and
support industries, and even attract capital to other sectors. While privatization would allow
QUESTION 4: Is it morally correct for international businesses to invest in a country that
denies basic rights to women?
ANSWER 4: In the era of Me Too, many students will be appalled by the treatment of women
in Saudi Arabia and recommend that companies steer clear of the country. Other students,
though, may caution against quickly judging the country and instead focus on the gains that
this perspective may note that under bin Salman, women have gained the right to drive, a right
Chapter 02 – National Differences in Political, Economic, and Legal Systems
QUESTION 5: Is it morally correct for international businesses to invest in an autocratic
country where the current leader has been implicated in ordering the murder of one of his
critics?
ANSWER 5: This question is likely to generate significant debate among students. The
murder of Jamal Khoshoggi, a writer for the Washington Post and a critic of the Saudi regime,
was loudly condemned across the world. While the crown prince has denied involvement,
many are skeptical about his claims and continue to demand answers. As with the previous
question, students are likely to be divided between those who argue against investment in a
MHE INTERNATIONAL BUSINESS VIDEO LIBRARY
INCORPORATING globalEDGE™ EXERCISES
Exercise 1
The definition of words and political ideas can have different meanings in different contexts
worldwide. In fact, the Freedom in the World survey published by Freedom House evaluates
Chapter 02 – National Differences in Political, Economic, and Legal Systems
Exercise 2
As the chapter discusses, differences in political, economic, and legal systems have
considerable impact on the benefits, costs, and risks of doing business in countries around the
world. It also has a considerable impact on how easy it is to do business in these countries.
Answers to Exercises
Exercise 1 Answer
Search phrase: Freedom in the World or Freedom House
Additional Info:
Published annually since 1972, the survey ratings and narrative reports on 195 countries
provide insight into an assessment of global political rights and civil liberties in each country.
Political rights ratings are based on an evaluation of three subcategories: electoral process,
political pluralism and participation, and functioning of government. Civil liberties ratings are
based on an evaluation of four subcategories: freedom of expression and belief, associational
and organizational rights, rule of law, and personal autonomy and individual rights.
Exercise 2 Answer
Search phrase: World Bank Doing Business Indicators
Additional Info:
The World Bank’s Doing Business Project provides objective measures of business
regulations and their enforcement across 189 economies and selected cities at the subnational
and regional level. To construct the indicators, two types of data are utilized: First, the