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
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 economic
growth in Poland since the global recession.
Unlike many of its neighbors and the rest of
the world, Poland survived the recession
with little difficulty. The closing case
explores the reasons why Indonesia is
falling behind its Southeast Asian
neighbors. The country is plagued by high
levels of corruption and excessive red tape
making it difficult to attract foreign
investment.
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OUTLINE OF CHAPTER 2: NATIONAL DIFFERENCES IN POLITICAL
ECONOMY
Opening Case: The Polish Surprise
Introduction
Political Systems
Collectivism and Individualism
Democracy and Totalitarianism
Country Focus: Chavez’s Venezuela
Economic Systems
Market Economy
Command Economy
Mixed Economy
Legal Systems
Different Legal Systems
Differences in Contract Law
Property Rights and Corruption
The Protection of Intellectual Property
Product Safety and Product Liability
Country Focus: Corruption in Nigeria
Management Focus: Starbucks Wins Key Trademark Case in China
Implications for Managers
Critical Thinking and Discussion Questions
Closing Case: Indonesia – Asia’s Stumbling Giant
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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.
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.
OPENING CASE: The Polish Surprise
Summary
The opening 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
economic policy and a stable political system. The country has benefitted from its free
market and free trade policies as well as its efforts to privatize state-owned businesses.
Today, Poland is working to make the country even more attractive to foreign investors
by simplifying tax laws, reducing tax rates, and removing bureaucratic barriers to doing
business in the country. Discussion of the case can revolve around the following
questions:
1. How did Poland’s political and economic policies during the last decade help the
nation prosper during the recent global recession? What does this mean for existing and
potential investors in the country?
2. How important is Poland’s membership in the European Union to its current economic
success?
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3. What does Poland 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?
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 2-3-2-4 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.
Slides 2-5-2-7 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 2-8-2-10 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)
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Totalitarianism denies its citizens all of the constitutional guarantees asserted by
representative democracies.
Slide 2-11-2-14 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.
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,
A command economy is an economy in which the goods and services that a country
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.
Slide 2-15-2-16 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 2-17-2-18 Contract Law
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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 2-19-2-22 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.
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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}.
Slides 2-25-2-26 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.
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,
invent new products, etc., all in the hopes of accumulating additional personal capital and
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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
government officials engage in corruption, they subordinate the interest of their country
to their personal gain. They also reduce the level of transparency in business interactions.
QUESTION 4: You are the CEO of a company that has to choose between making a
$100 million investment in Russia or the Czech Republic. 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 the Czech Republic. The
political risk in Russia is still high but it is undergoing continual governmental changes
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QUESTION 5: Read the Country Focus on Chavez’s Venezuela, then answer the
following questions:
a. Under Chavez’s leadership, what kind of economic system is being put in place in
Venezuela? How would you characterize the political system?
b. How do you think that Chavez’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. Chavez claims to be a democratic socialist. During his 1998 presidential campaign,
Chavez blasted the notion of global capitalism. Most students will probably agree that
Chavez seems to have followed his ideals since winning the election in Venezuela.
Chavez has ensured that his powers as president are stronger than before, and he has
b. In the oil industry, which the country depends on for some 70 percent of its exports,
Chavez has pushed out foreign companies, and expanded the hold of the state run
company. Chavez announced in 2005 that the state would increase its royalties on oil
sales from 1 percent to 30 percent, and that in 2006, the tax rate of oil sales would also
c. Corruption in Venezuela is rampant. In 2011, Transparency International ranked the
country to 164 out of 178, making it one of the most corrupt countries in the world.
Government officials are permitted to demand bribes in return for permission to expand
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d. During the years when oil prices were rising, Venezuela, one of the world’s largest
producers of oil, became very rich. Chavez funded various social programs using the oil
profits. Most students will probably recognize that the recent drop in oil prices probably
e. A recent World Bank study puts Venezuela as being one of the most regulated
economies in the world. The move to take various enterprises under state control is also
impeding economic growth. In the oil industry, for example, Chavez has reduced the
CLOSING CASE: Indonesia – Asia’s Stumbling Giant
Summary
The closing case explores the reasons why Indonesia has failed to keep pace with other
Southeast Asian nations including China, Malaysia, and Thailand. Unemployment in
Indonesia remains high, the country’s infrastructure is poor, and perhaps most troubling
is that excessive red tape and high levels of corruption that are preventing foreign
investors from considering the country as an attractive destination for investment. A
discussion of the case can revolve around the following questions:
QUESTION 1: What political factors explain Indonesia’s poor economic performance?
What economic factors? Are these two related?
ANSWER 1: Indonesia’s economic growth has been hampered for decades, first because
of the dictatorship of former President Suharto and the massive debts that were
accumulated during his regime and more recently because of the country’s excessive red
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also mean that the country loses the jobs and the capital that could improve its economy
and infrastructure.
QUESTION 2: Why do you think foreign firms exited Indonesia in the early 2000s?
What are the implications for the country? What is required to reverse this trend?
ANSWER 2: In the early 2000s Indonesia experienced a significant drop in foreign
direct investment. Most students will probably suggest that foreign companies pulled out
of the country to avoid its red tape, corruption, and generally uncertain economic and
political future, and also to take advantage of higher labor productivity elsewhere.
QUESTION 3: Why is corruption so endemic in Indonesia? What are its consequences?
ANSWER 3: Some students may link Indonesia’s corruption problems to the low
salaries earned by government bureaucrats. Others may also contend that there is
QUESTION 4: What are the risks facing foreign firms that do business in Indonesia?
What is required to reduce these risks?
ANSWER 4: Most students will probably agree that the biggest risks facing foreign
investors in Indonesia are its problems with corruption, its excessive red tape, and its
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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: At G-20, Loose Goals Set For Trade Imbalances, U.S. Prods China On
Currency
Run Time: 9:28
Abstract: This video explores the issues on the agenda at the recent G-20 meeting and
the effort to set guidelines for the global economy.
Key Concepts: currency values, global competition, balance of trade, globalization,
national trade policy, trade agreements, exports, imports, current account, balance of
payments
Notes: The recent G-20 meeting in South Korea ended without any real resolutions to
the problems that have plagued the global economy for the last few years. The United
States had hoped to forge a free trade deal with South Korea that would open South
Korea’s market to U.S. beef and automobile exports. In addition, U.S. officials had
hoped to come to some agreement over trade imbalances, especially the country’s
enormous trade deficit with China, and get China to agree to allow its currency to
Obama had hoped to get countries to agree to limit the size of trade deficit or surplus any
country could run. The motivation for current account limits is to reduce the potential for
dangerously large build-ups of capital that could result in a financial crisis similar to the
one that occurred in 2008. China, which runs a large trade surplus with the United States,
was firmly against such limits, but did broadly agree that trade imbalances should be
brought under control. For now however, the country did not agree to any specific details
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For the moment, Obama has to be content with reassurances that the G-20 countries will
not engage in a trade war, that there will be more discussion on reducing trade
imbalances at some point in the future, and that there will be a move toward exchange
rates that are driven by market forces rather than government intervention. In all, a far
cry from the specific agreements the President had hoped to gain from the summit.
Indeed, while many countries support the U.S. position that China needs to allow its
currency to appreciate, they also criticized the United States for its recent decision to
inject billions of dollars into the U.S. economy. Obama defended the move arguing that
Discussion Questions:
1. Explain the relationship between the value of a currency and the trade balance of a
country. What is a trade deficit? What is a trade surplus?
2. How does a weak currency help China’s exporters? Why did President Obama make
the value of China’s currency a central issue at the G-20 meeting?
3. Why is the United States pushing for limits on trade imbalances? What would such
limits imply for countries that run trade surpluses? How would limits on trade
imbalances affect countries with trade deficits?
4. The United States came under fire at the G-20 meeting for its decision to inject billions
of dollars into the economy. Critics believe this is an effort to lower the value of the
U.S. dollar. Do you agree? Why or why not? How could a weaker dollar help the
United States?
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.
❖ Explore the growth of counterfeiting and why it is more rampant in some countries.
❖ Examine the implications of counterfeiting and product piracy on companies.
❖ Recognize why it is important for firms to protect their intellectual property and
identify how to limit the potential for product piracy.
Key Words
❖ Intellectual property
❖ Product piracy
❖ Counterfeiting
❖ Legal systems
❖ Globalization
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,
Ray Ban sunglasses, and more is booming. Today, the market in counterfeit goods is a
multi billion dollar international business that affects every industry and most products.
Caroline Joiner, an executive with the U.S. Chamber of Commerce claims that product
piracy and counterfeit goods is a $250 billion per year problem for the U.S. economy.
Furthermore since counterfeiters are focused on profits, and not the welfare of buyers, it
is an industry that can put consumers at risk. Joiner notes for example that today’s
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
crowded with confiscated products like fake Lipitor, fake surgical mesh, fake razor
blades, and even fake toothbrushes. While the counterfeit drugs look the same as the
real thing, they often lack
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active ingredients or are watered down versions of the real drug. These pirated products
can cause allergic reactions or worsen a patient’s medical condition. In some cases, they
are toxic.
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
tested in a lab. Identifying exactly which product is a fake and which is real can be
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 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 2
One way that experts analyze conditions in emerging markets is through the use of
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to compare emerging markets on a variety of dimensions. Provide a description of the
indicators used in the index. Which of the indicators would have greater importance for a
company that markets laptop computers? Considering the MPI rankings, which
developing countries would you advise such a company to enter first?
Answers to Exercise Questions
Exercise 1
The report can be accessed by search for the term “Freedom in the World” at
http://globaledge.msu.edu/ResourceDesk/. Using this search, the first link will lead the
user to the Freedom House website and to the Freedom in the World report. This resource
is found under the globalEDGE category “Research: Multi–Country”. Be sure to click on
the Resource Desk link to search this area of the globalEDGE website.
Exercise 2
The report can be accessed by searching for the term “Market Potential Index” at
http://globaledge.msu.edu/ResourceDesk/. Using this search, the link will lead the user to
this report. This resource is found under the globalEDGE category “Research: Rankings”.
Be sure to click on the Resource Desk link to search this area of the globalEDGE
website.