course: international business chapter 02

7/27/2019 Course: International Business Chapter 02

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Course: International Business

Chapter 2: National Differences in Political

Economy

Course Teacher: Dr. H. M. Mosarof Hossain

ProfessorDepartment of Finance

University of Dhaka


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Chapter 2: National Differences in Political Economy

Introduction: International business is much morecomplicated than domestic business becausecountries differ in many ways. Countries have

different political, economic and legal systems.Cultural practices can vary dramatically as can theeducation and skill level of the population, andcountries are at different stages of economic

development. All these differences can and do havemajor implications for the practice of internationalbusiness.


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Chapter 2: National Differences in Political Economy

They have a profound impact on the benefits, costs

and risks associated with doing business in different

countries; the way in which operations in different

countries should be managed; and the strategy

international firms should pursue in different

countries. There is significance of country differences

in political systems, economic systems, legal systemsand national cultures for the practice of international

business.

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Political System

By political system, we mean the system ofgovernment in a nation. Political systems can beassessed according to two dimensions. The first is

the degree to which they emphasize collectivismas opposed to individualism and the second is thedegree to which they are democratic ortotalitarian. These dimensions are interrelated;

systems that emphasize collectivism tend towardtotalitarianism, whereas those that plays a highvalue on individualism tend to be democratic.

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Collectivism and Individualism

Collectivism refers to a political system thatstresses the primacy of collective goals over

individual goals. When collectivism isemphasized the needs of society as a wholeare generally viewed as being more importantthan individual freedoms. In such

circumstances, an individuals right to dosomething may be restricted on the groundthat it runs counter to the good ofsociety orto commongood.

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Individualism refers to a philosophy that anindividual should have freedom in his or hereconomic and political pursuits. It stresses that theinterest of the individual should take precedence overthe interest of the state. In a society individualdiversity and private ownership are desirable.Individualism is built on two central issues/tenets.The first is an emphasis on the importance of

guaranteeing individual freedom and self-expressionand second one is that the welfare of society is bestserved by letting people pursue their own economicself interest.

Collectivism and Individualism

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Democracy and Totalitarianism

Democracy and Totalitarianism are at different endsof a political dimension. Democracy refers to a

political system in which government is by the

people, exercised either directly or through electedrepresentatives. Totalitarianism is a form ofgovernment in which one person or political partyexercises absolute control over all spheres of humanlife and prohibits opposing political parties. The

democratic-totalitarian dimension is not independentof the collectivism-individualism dimension.Democracy and individualism go hand in hand, as dothe communist version of collectivism andtotalitarianism.

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Economic Systems

Political ideology and economic systems areconnected. In countries where individual goals

are given primacy over collective goals, weare more likely to find free market economicsystems. In contrast, in countries wherecollective goals are given preeminence, the

state may have taken control over manyenterprises; markets in such countries arelikely to be restricted rather than free.

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In a pure market economy all productive activities areprivately owned, as opposed to being owned by the state.The goods and services that a country produces are not

planned by anyone. Production is determined by the

interaction of supply and demand and signaled to producersthrough the price system. If demand for a product exceedssupply, prices will rise, signaling producers to producemore. If supply exceeds demand, prices will fall, signaling

producers to produce less. In this system consumers aresovereign. The purchasing patterns of consumers, assignaled to producers through the mechanism of the pricesystem, determined what is produced and in what quantity.

1. Market Economy

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2. Command Economy

In a pure command economy, the government plans thegoods and services that a country produces, the quantityin which they are produced, and the prices at which they

are sold. Consistent with the collectivist ideology, theobjective of a command economy is for government toallocate resources forthe good ofsociety. In addition,in a pure command economy, all businesses are stateowned, the rationale being that the government can thendirect them to make investments that are in the bestinterest of the nation as a whole rather than in theinterests of private individuals.

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3. Mixed Economy

In a mixed economy, certain sectors of the

economy are left to private ownership and

free market mechanisms where other sectors

have significant state ownership and

government planning. Mixed economies were

once common throughout much of the world,although they are becoming much less so.

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Legal System

The legal system of a country refers to the rules, orlaws that regulates behavior along with the processes

by which the laws are enforced and through whichredress for grievance is obtained. The legal system ofa country is of immense importance to international

business. A countrys laws regulate business

practice, define the manner in which businesstransactions are to be executed, and set down therights and obligations of those involved in businesstransactions.

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The legal system is influenced by the prevailingpolitical system (although it is also stronglyinfluenced by historical tradition). The government

of a country defines the legal framework within inwhich firms do business- and often the laws thatregulate business reflect the rulers dominant

political ideology. For example, collectivist inclinedtotalitarian states tend to enact laws that severelyrestrict private enterprise whereas the laws enacted

by governments in democratic states whereindividualism is the dominant political philosophytend to be pro-private enterprise and pro-consumer.

Legal System

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1. Common Law

Common law is based on tradition, precedence, andcustom. Tradition refers to a countrys legal history,

precedence to cases that have come before the court

in the past, and custom to ways in which laws areapplied in specific situations. Judges in a commonlaw system have the power to interpret the law sothat it applies to the unique circumstances of an

individual case. In turn, each new interpretation setsa precedence that may be followed in future cases.As new precedence arise, laws may be altered,clarified, or amended to deal with new situations.

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A civil law system is based on a detail set of

laws organized into codes. When law courts

interpret civil law, they do so with regard tothese codes. A civil law system tends to be

less adversarial that a common law system,

since the judges rely upon detail legal codes

rather than interpreting traditions, precedence

and custom.

2. Civil Law

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3. Theocratic Law

A theocratic law system is one in which thelaw is based on religious teachings. Islamiclaw is the most widely practiced theocratic

legal system in the modern world. Islamic lawis primarily a moral rather than a commerciallaw and is intended to govern all aspects oflife. The foundation for Islamic law is the

holy book of Islam, the Quran, along with theSunnah, or decisions and sayings of theProphet Mohammad (S),

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3. Theocratic Law

and the writings of islamic scholars who havederived rules by analogy from the principlesestablished in the Quran and the Sunnah.

Because the Quran and the Sunnah are holydocuments, the basic foundation of islamiclaw cannot be changed. However, in practiceislamic jurists and scholars are constantly

debating the application of islamic law to themodern world. In reality, many muslimcountries have legal systems that are a blendof islamic law and a common or civil law

system.

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Property Rights and Corruption

The term property refers to a resource over which an

individual or business hold a legal title; that is, a

resource that it owns. Resources include land,

buildings, equipments, capital, mineral rights,businesses, and intellectual property. Property rights

refer to the legal right over the use to which a

resource is put and over the use made of any income

that may be derived from that resource. Countries

differ in the extent to which their legal systems

define and protect property right.

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1. Private action: It refers to threat, privacy,

blackmail, and the like by private individuals

or groups. Although threat occurs in allcountries, a weak legal system allows for a

much higher levels of criminal action in some

than in others.

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2. Public action and corruption: Public action to violetproperty rights occurs when public officials, such as

politicians and governments bureaucratic, extort

income, resources, or the property itself from property

holder. This can be done through legal mechanism such

as levying excessive taxation, requiring expensive

licensee or permits from property holders, taking assets

into state ownership without compensating the owners

or redistributing assets without compensating the prior

owner. It can also be done through legal means, or

corruption,.

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by demanding bribes from business in return for the

rights to operate in a country, industry, or location. The

rule of law minimizes corruption. Corruption is seen

and treated as legal, and when discovered, violators arepunished by the full force of the law. In other countries,

the rule of law is weak and corruption by bureaucrats

and politicians is rife. Corruption is so endemic in some

countries that politicians and bureaucrats regard it as a

park of office and openly flout and loss against

corruption.

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The determinants of economic development

The political, economic, and legal systems of

a country can have a profound impact on the

level of economic development and hence on

the attractiveness of a country as a possiblemarket or production location for a firm. The

level of economic development is measured

through gross national income and humandevelopment index.

course: international business chapter 02

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