Chapter 02 – National Differences in Political Economy
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National Differences in Political Economy
Learning objectives
• Understand how the
political systems of
countries differ.
• 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.
characteristics: market economies,
command economies, and mixed
economies. Legal systems are discussed in
growth in the East African nation of Ghana
over the last decade. In 2011, Ghana
became Africa’s newest middle-income
nation, thanks to the global demand for two
of its major exports—gold and cocoa—as
2
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OUTLINE OF CHAPTER 2: NATIONAL DIFFERENCES IN POLITICAL
ECONOMY
Opening Case: Ghana: An African Dynamo
Introduction
Country Focus: Venezuela under Hugo Chávez, 1999–2013
Economic Systems
Market Economy
Command Economy
Mixed Economy
Country Focus: Corruption in Nigeria
Management Focus: Did Walmart Violate the Foreign Corrupt Practices Act?
Management Focus: Starbucks Wins Key Trademark Case in China
Chapter 02 – National Differences in Political Economy
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: Ghana: An African Dynamo
Summary
The East African nation of Ghana has emerged as one of the fastest-growing countries in
sub-Saharan Africa over the last decade, becoming the continent’s newest middle-income
nation. Driving this growth has been the strong demand for two of the country’s major
1. How did the political and economic policies implemented over the last 20 years help
Ghana prosper? What does this mean for existing and potential investors in the country?
2. How important is the privatization of state-owned enterprises to the country’s booming
economy?
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3. What does Ghana need to do to ensure that it continues to prosper? What steps should
the country take to make it a more attractive destination for investment and economic
partnerships?
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
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
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
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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 given
preeminence, the state may have taken control over many enterprises, while markets in
such countries are likely to be restricted rather than free.
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.
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
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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.
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.
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.
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Slides 2-25 and 2-26 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 2-27 Determining a Market’s Overall Attractiveness
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 allowed 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,
Chapter 02 – National Differences in Political Economy
QUESTION 2: A democratic political system is an essential condition for sustained
economic progress. Discuss.
ANSWER 2: Although you can always find examples of totalitarian regimes that have
achieved rapid economic growth, it seems fair to say that sustained, decades-long periods
QUESTION 3: What is the relationship between corruption in a country (i.e., bribe–
taking by government officials) and economic growth? Is corruption always bad?
ANSWER 3: In the United States we show public contempt for the practice of bribery
although evidence suggests that bribery is not uncommon in the United States. When
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
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QUESTION 5: Read the Country Focus on Venezuela under the leadership of Hugo
Chávez, then answer the following questions:
a. Under Chávez’s leadership, what kind of economic system was put in place in
Venezuela? How would you characterize the political system?
b. How do you think that Chávez’s unilateral changes to contracts with foreign oil
companies will impact upon future investment by foreigners in Venezuela?
c. How will the high level of public corruption in Venezuela impact future growth rates?
d. Currently Venezuela is benefitting from a boom in oil prices. What do you think might
happen if oil prices retreat from their current high level?
e. In your estimation, what is the long run prognosis for the Venezuelan economy? Is this
a country that is attractive to international businesses?
ANSWER 5:
a. Chávez claimed to be a democratic socialist. During his 1998 presidential campaign,
Chávez blasted the notion of global capitalism. Most students will probably agree that
Chávez followed his ideals since winning the election in Venezuela. Chávez ensured
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Another Perspective: The U.S. Department of State maintains a web site covering the
QUESTION 6: Read the Management Focus feature: Did Walmart violate the Foreign
Corrupt Practices Act? What is your opinion? If you think they did, what do you think the
consequences will be for Walmart?
ANSWER 6: Student opinions will vary on this topic. Despite spending more than $230
CLOSING CASE: Poland’s Economy
Summary
The closing case describes Poland’s economic success story. Poland, unlike most
countries in Europe, weathered the recent global recession better than most countries.
Decisions made early in the decade and during the 1990s helped Poland develop a stable
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QUESTION 1: How was Poland able to avoid the worst effects of the economic crisis
that gripped most of Europe during 2008–2009?
ANSWER 1: In 1989, Poland elected its first democratic government after more than four
decades of Communist rule. Since then, like other Eastern European countries, Poland
QUESTION 2: What lessons can be derived from the Polish experience during 2008–
2009?
ANSWER 2: In addition to maintaining a strong export business during the crisis, Poland
has also maintained a fiscally conservative government, keeping public debt in check,
QUESTION 3: From the perspective of international business, what is attractive about
the Polish economy? What are the weaknesses and risks associated with doing business
there?
ANSWER 3: Poland’s transition from a Communist country to a democratic one is a
work in progress. Steps are being taken to simplify tax laws, reduce tax rates, and remove
QUESTION 4: Even though Poland has been committed to liberalizing its economy since
the collapse of communism in 1989, significant vestiges of the old system still remain.
Why do you think it has taken Poland so long to transform its economic, political, and
legal system?
ANSWER 4: Even after 20 years, Poland’s transition from a socialist economy to a
market-based system is not complete. The government continues to dismantle the
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INTEGRATING iGLOBES
There are several iGLOBE video clips that can be integrated with the material presented
in this chapter. In particular, you might consider the following:
Title: Fate of Eurozone: Back on the Brink?
Run Time: 4:55
Abstract: This video explores the potential fate of the euro as voters in Greece reject
Key Concepts: globalization, European Union, euro, economic development,
protectionism, global capital markets, national trade policy, currency values
Notes: European markets are in turmoil once again thanks to the growing realization that
the trillion euros injected into European banks by the European Central Bank in an effort
For some time, Greece in particular has struggled to get its economy back on track, yet so
far its efforts have had little effect. Now, its problems are at the forefront of the issues
threatening the longevity of the euro, and indeed the viability of the European Union in
general. Voters in Greece made their preferences regarding the situation overwhelmingly
known at the country’s recent elections where those who supported the current austerity
program were soundly defeated by those who do not. In fact, additional elections are
Chapter 02 – National Differences in Political Economy
austerity policies, but others like the French, believe that there may be better alternatives.
Regardless, there is a common belief that something needs to be done to get the region
back on track.
Discussion Questions and Answers
1. Discuss the impact of the recession in Europe on the U.S. economy. What do the
European Union’s troubles mean for the United States?
Answer: A number of countries within the European Union are on the edge of economic
chaos. Students may note for example, that in addition to Greece, other countries
2. Reflect on the economic and monetary discord in Europe. Should U.S. companies be
concerned? Does your response change if a company does not have any direct interests
in Greece? Why or why not?
Answer: When the financial crisis that began in the United States in 2008 swept around
the world its impact was also felt in Europe where the economy declined in a similar way
to the U.S. economy. Today, the United States is clinging to a weak economic rebound,
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3. Why are voters in Greece and in some other countries so opposed to the austerity
programs that have been put in place to help restore the bloc’s economic stability? How,
if at all, do the conservative fiscal policies affect other European Union countries?
Answer: Recently, voters in Greece overwhelming rejected those who believed that the
current economic austerity program should continue. These voters are gaining additional
4. Consider the threats to the future of the euro and the role of Greece in particular. What
might European leaders learn from the current situation? How might this affect future
members of the European Union?
Answer: Most students will probably suggest that the current challenges to the future of
the euro and monetary union in Europe will prove to be helpful to leaders as they
INTEGRATING VIDEOS
There are also several longer video clips that can be integrated with the material
presented in this chapter. In particular, you might consider the following from
International Business DVD Volume 6:
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Title: Counterfeiting
Learning Objectives
The purpose of this video is to help you:
❖ Understand the nature of intellectual property.
Key Words
❖ Intellectual property
Synopsis
Shoppers in New York City’s Canal Street or Santee Alley in Los Angeles have their
choice of a host of designer goods all at rock bottom prices. The only problem is that the
goods are all fakes. Business in counterfeit goods like Coach purses, Louis Vuitton bags,
piracy costs the company about $1 billion per year.
The pharmaceutical industry has also been a frequent target for counterfeiters. Fake
drugs are being sold over the Internet and have even made their way into mainstream
outlets like pharmacies. The World Drug Organization estimates that about 10 percent of
all drugs sold worldwide are counterfeit. At a government warehouse, shelves are
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Counterfeiters have even infiltrated markets for everyday household products. Products
like electrical cords and surge protectors are readily available, but like counterfeit drugs,
they can be dangerous. A counterfeit iron for example burst into flames when it was
Discussion Questions
1. Discuss the explosive growth of the counterfeit goods industry in recent years. What
factors have facilitated its expansion?
2. Reflect on the implications of product piracy for companies. How can companies
protect themselves from counterfeiters?
3. Consider the challenges involved in stopping product piracy. Why is it so difficult for
countries to crack down on counterfeiters?
4. Product piracy is especially prevalent in the global pharmaceutical industry. Reflect
on why intellectual property rights are so important to pharmaceutical companies.
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 the state of political rights and civil liberties around the world. Provide a
description of this survey and a ranking (in terms of “freedom”) of the world’s leaders
and laggards. What factors are taken into consideration in this survey?
Exercise 1 Answer
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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
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
Exercise 2 Answer
Search phrase: World Bank Doing Business Indicators
Resource Name: World Bank: Doing Business Indicators