Global Business Today Eleventh Edition Chapter 2
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National Differences in Political, Economic,
and Legal Systems
Table of Contents
Learning Objectives
Chapter Summary
Chapter Opening Activity
Chapter Outline
Opening Case: Transformation in Saudi Arabia
Introduction
Focus on Managerial Implications: The Macro Environment Influences Market
Attractiveness
End-of-Chapter Resources
Critical Thinking and Discussion Questions
globalEDGE™ Research Task
Closing Case: The Decline of Zimbabwe
Continuous Case Concept
Additional Readings and Sources of Information
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Learning Objectives
2-1 Understand how the political systems of countries differ.
2-2 Understand how the economic systems of countries differ.
2-3 Understand how the legal systems of countries differ.
2-4 Explain the implications for management practice of national difference in political
economy.
Chapter Summary
This chapter focuses on the different political, economic, and legal systems that are influential in
the world. It is made clear to the reader that these differences are significant and must be clearly
understood by the managers of international firms. The section focusing on legal systems
includes a discussion of intellectual property including patents, copyrights, and trademarks.
Protecting intellectual property is particularly challenging in international trade. Finally, the
chapter ends with a discussion of the managerial implications of differing political, economic,
and legal systems of a country.
Chapter Opening Activity
In this activity, students will research and reflect on legal and political systems in several
countries. Use globaledge.msu.edu to research the legal and representative political systems in
the United States, Canada, Britain, and other advanced economies. The basic tenet of the U.S.
system is preservation of individual rights, and this may be grounded in America’s passion with
individualism. Explain that the U.S. scores very high on Hofstede’s individualism versus
collectivism dimension of cultural differences (more on this in Chapter 4). Suggest that
individualistic cultures value:
• Individual responsibility for decisions
• Individual freedoms and achievement
Cultures including Russian, Chinese, and Indian may be more collectivist and may employ more
authoritarian political systems and planned economic systems. Suggest that collectivist cultures
value:
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• Group and shared responsibility for decisions
• Decisions may be slow, consensual, and consultative
• Group nurtures individual.
As students work through this chapter, ask them to research the evolution of political and legal
systems in a country they are familiar with (not the U.S.) by using globaledge.msu.edu. Some
traditionally authoritarian countries are transitioning towards representative governments:
suggest that this may be in response to changes driven by globalization and technology.
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Chapter Outline
Transformation in Saudi Arabia
opening case
Summary
The opening 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 country—reforms
designed to help better position the country in today’s world.
Discussion Questions
1. Evaluate the economic reforms Crown Prince Muhammad bin Salman has proposed for Saudi
Arabia. Do you agree with the vision he sees for his country? What are some of the challenges
that the country’s leaders will face as Muhammad bin Salman new vision is put into action?
2. Saudi Arabia has traditionally closely followed religious teachings, but now Crown Prince
Muhammad bin Salman is loosening the strict moral codes dictated by those teachings in favor
of a more open Islamic society. Discuss this notion. How might it change Saudi Arabia for
younger people? What will it mean to older generations?
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Teaching Tip: Students can explore Saudi Arabia’s political economy in greater detail at the
CIA’s World Factbook website at https://www.cia.gov/library/publications/the-world-
factbook/geos/sa.html.
Introduction
A) Different countries have different political, economic, and legal systems. Cultural practices
can vary dramatically from country to country, as can the education and skill level of the
population. All of these differences have major implications for the practice of international
business.
Political Systems
A) By political system, we mean the system of government in a nation. Political systems can be
assessed according to two related dimensions. The first is the degree to which they emphasize
collectivism as opposed to individualism. The second dimension is the degree to which they are
democratic or totalitarian.
COLLECTIVISM AND INDIVIDUALISM
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B) Collectivism refers to a system that stresses the primacy of collective goals over individual
goals. When collectivism is emphasized, the needs of the society as whole are generally viewed
as being more important than individual freedoms. Advocacy of collectivism can be traced to
Plato, in modern times the collectivist mantle has been picked up by socialists, and their
champion, Karl Marx.
D) While state-owned firms might have been intended to promote the public interest, experience
suggests that this is not always the case. In many countries, the performance of state-owned
companies has been poor. Consequently, a number of Western democracies voted social
democratic parties out of office and moved toward free market economies by selling state-owned
enterprises to private investors, a process known as privatization.
Individualism
E) Individualism refers to a political philosophy that an individual should have freedom over his
or her economic and political pursuits. In contrast to collectivism, individualism stresses that the
interests of the individual should take precedence over the interests of the state.
country FOCUS: Putin’s Russia
Summary
This feature explores the state of the Russian economy since the collapse of the USSR, and in
particular under the leadership of Vladimir Putin. While Russia’s economy has grown rapidly in
the so-called pseudo-democracy that now exists, the country is heavily dependent on oil and gas
exports—both industries that are still largely state controlled. Indeed, the presence of the
government remains an issue for the economy as a whole. Currently, roughly half of the total
economy is still controlled by the state, a situation that could hamper future growth. Even private
enterprises are dealing with considerable red tape and corrupt government officials. Freedom
House ranks Russia low for civil and political liberties, a ranking that was confirmed by Putin’s
2014 decision to annex the Crimea region of neighboring Ukraine.
Discussion Questions
1. Discuss the implications of corruption on the development and growth of a country. How can
Russia’s current political system best be described? What conclusions can you draw regarding
Russia’s economic prospects?
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2. Discuss the pros and cons of investing in Russia. As a CEO of a company in the oil industry
would you invest in Russia? How does a stable government affect a country’s ability to attract
investment?
Lecture Note: To extend the discussion of Russia’s economy under Vladimir Putin, consider
https://www.bloomberg.com/view/articles/2018-08-29/russia-s-economy-is-stuck-in-a-putin-
trap.
Additionally, our McGraw-Hill Education International Business Video Library at
http://bit.ly/MHEIBVideo provides an ongoing stream of updated video suggestions correlated
by key concept and major topic. Every new clip posted is supported by teaching notes and
discussion questions. Please feel free to leave comments in the library that you feel might be
helpful to your colleagues.
DEMOCRACY AND TOTALITARIANISM
G) Democracy and totalitarianism are at different ends of a political dimension. Democracy
refers to a political system in which government is by the people, exercised either directly or
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through elected representatives. 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.
Totalitarianism
I) Under totalitarianism, a single political party, individual, or group of individuals monopolize
the political power and do not permit opposition. There are four major forms of totalitarianism:
communist totalitarianism, (a form of totalitarianism that advocates achieving socialism
through totalitarian dictatorship), theocratic totalitarianism, (a form of totalitarianism in which
political power is monopolized by a party, group, or individual that governs according to
religious principles), tribal totalitarianism (a form of totalitarianism found mainly in Africa in
which a political party that represents the interests of a particular tribe monopolizes power),
right-wing totalitarianism (a form of totalitarianism in which individual economic freedom is
allowed but individual political freedom is restricted in the belief that it could lead to
communism). There has been a general trend away from communist and right-wing
totalitarianism and towards democracy.
Pseudo-Democracies
J) The political system in many nations of the world can best be described as imperfect or
pseudo-democracies—lying somewhere between a pure democracy and complete totalitarianism.
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.
Activity
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Class Discussion
Economic Systems
A) In countries where individual goals are given primacy over collective goals, a free market
system is more likely to exist. In contrast, in countries where collective goals are dominant,
enterprises may be state-owned, and markets may be restricted. Three broad types of economic
systems can be identified—a market economy, a command economy, and a mixed economy.
MARKET ECONOMY
COMMAND ECONOMY
C) In a pure command economy, the goods and services that a country produces, the quantity in
which they are produced, and the price at which they are sold are all planned by the government.
Resources are allocated “for the good of society.” The government owns most, if not all,
businesses.
MIXED ECONOMY
D) A mixed economy includes some elements of each.
Legal Systems
A) The legal system of a country refers to the rules, or laws, that regulate behavior, along with
the processes by which the laws of a country are enforced and through which redress for
grievances is obtained.
DIFFERENT LEGAL SYSTEMS
B) There are three main types of legal systems in use around the world: common law, civil law,
and theocratic law.
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Common Law
C) The common law system (based on tradition, precedent, and custom) evolved in England
over hundreds of years. It is now found in most of Great Britain’s former colonies, including the
United States.
DIFFERENCES IN CONTRACT LAW
F) Contract law is the body of law that governs contract enforcement. 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. The United Nations Convention on Contracts for the
International Sales of Goods (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.
PROPERTY RIGHTS AND CORRUPTION
G) Control over property rights (the bundle of 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 source) are very
important for the functioning of business. Property rights can be violated by either private
action (theft, piracy, blackmail, Russian Mafia) or public action (governmental bribery and
corruption, nationalization).
Private Action
H) Private action refers to theft, piracy, blackmail, and the like by private individuals or groups.
Public Action and Corruption
I) Public action to violate property rights occurs when public officials extort income or resources
from property holders using various legal mechanisms including excessive taxation, requiring
expensive licenses or permits from property holders, or taking assets into state ownership
without compensating the owners.
CONNECT
Click and Drag
Property Rights and Corruption
Summary
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This activity focuses on differences in legal systems. Firms need to understand the differences
between private actions such as blackmail and public actions such as corruption. While both pose
a threat to international businesses, how that threat is addressed depends on the action in
question.
Activity
country FOCUS: Corruption in Brazil
Summary
This country focus segment examines the extent of corruption in the country of Brazil. Even
though the country is the seventh-largest economy in the world and considered to be a
moderately free market economy, the corruption that exists in Brazil typically involves political
connections. This is reflected in the relatively high perception of corruption in international
surveys on the subject by Transparency International and the World Economic Forum. Known to
exist for decades, the mensalao (“monthly payoff”) and Petrobras scandals underscore the
pervasiveness of the problem in Brazil.
Discussion Questions
1. What is the nature of the mensalao scandal? How extensive was it? What was the reaction in
Brazil to its occurrence?
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2. What was the extent of the Petrobras scandal? Who did it impact? What made this case such a
problem for Brazil? Discuss why the scandal might help prevent further corrupt behavior by
government officials.
Teaching Tip: Students can explore past and present information concerning Transparency
International’s Corruption Perceptions Index at
http://www.transparency.org/research/cpi/overview.
Foreign Corrupt Practices Act
J) The Foreign Corrupt Practices Act makes it a violation of the United States law to bribe a
foreign government official in order to obtain or maintain business over which the foreign
official has authority and requires all publicly traded countries to keep detailed records so that it
is clear whether a violation of the act has occurred or not.
management FOCUS: Did Walmart Violate the Foreign Corrupt
Practices Act?
Summary
This feature explores corruption at Walmart’s Mexico division where managers allegedly bribed
Mexican government officials to obtain permission to build the San Juan Teotihuacan store in the
early 2000s. After leaders at Walmart’s headquarters were alerted of the situation, Walmart
launched an internal investigation. However, the investigation was turned over to Walmart
Mexico to complete and only after a 2012 New York Times article again raised questions about
the situation did Walmart reopen the investigation. Today, the company has spent more than
$612 million on legal fees and paid a $283 million settlement to the U.S. Department of Justice.
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Discussion Questions
Please see Critical Thinking Question #5 for discussion of this feature.
Did You Know Video Clip
The video clip asks: “Did you know that it’s illegal for Americans to bribe public officials to
gain business in a foreign country, even if bribery is commonplace in that nation?”
Discussion Questions
1. What does the FCPA prohibit U.S. business leaders from doing in other countries?
2. Do you agree with some people who say that that bribery is justified as normal compensation
in other countries for public officials who earn low wages?
3. Do you agree with people who say that bribery may be justified to grease the wheels so that
business can be done in some countries?