International Business Management (MGT 520) VU

Lecture 8

International Business: NATIONAL DIFFERENCES IN

POLITICAL ECONOMY

Learning Objectives
Describe how the variation of political systems of countries often follows 'collectivist vs.
individualist' and 'democratic vs. totalitarian' dimensions. That tendency can be best
visualized by looking at the degree of economic and political freedom enjoyed by a
country's citizens.

2. Explain the differences in economic systems between countries. Examining specifically

the characteristics of market economies, command economies, mixed economies, and
state-directed economies achieves that objective.

3. Examine the differences in the economic development of different countries. The

chapter presents and describes economic development measures like GDP, purchasing
power, and human development indices.

1. When considering international expansion, suggest that the potential for future
economic growth and the growth rate may be as or more important than static
measures of economic development.

5. Explain how differences in the legal systems of countries can dramatically affect the
attractiveness and ease of doing business in different countries. The chapter highlights
differences in protections of intellectual property (patents, copyrights, and trademarks),
product safety and liability, and contract law to suggest how legal systems affect the
conduct of international business.

6. Show how changes in the world order in the 1980s and 1990s affected countries in
Europe, Asia, Latin America, and Africa, and how these changes present both great
new opportunities and risks for international business.

7. Summarize issues that affect the attractiveness of doing business in different countries,
including the benefits, costs, and risks determined by the political economy of nations.

8. Present some ethical concerns of doing business in countries that have different
standards, political ideologies, economic systems, and patterns of acceptable and
expected behavior (i.e. bribes).

Lecture Outlines
THE CHANGING POLITICAL ECONOMY OF INDIA
INTRODUCTION
POLITICAL SYSTEMS
Collectivism and Individualism
Democracy and Totalitarianism
ECONOMIC SYSTEMS
Market Economy
Command Economy
Mixed Economy
State-Directed Economy

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LEGAL SYSTEMS
Property Rights
Country Focus: Forty Years of Corruption in Nigeria
The Protection of Intellectual Property
Management Focus: Drug Patents and the AIDS Epidemic in South Africa
Product Safety and Product Liability
Contract Law
THE DETERMINANTS OF ECONOMIC DEVELOPMENT
Differences in Economic Development
Broader Concepts of Development: Amartya Sen
Political Economy and Economic Progress
Geography, Education and Economic Development
STATES IN TRANSITION
The Spread of Democracy
The New World Order?
The Spread of Market-Based Systems
The Nature of Economic Transformation
Country Focus: Privatization in Brazil
Implications
IMPLICATIONS FOR BUSINESS
Attractiveness
Ethical Issues

Introduction
1. As it can be pointed out in this chapter, and indeed in almost every chapter to follow,
the issues that face international businesses are entirely different from those that face
domestic firms. This is a point that I frequently repeat with many chapters: whether the
subject is political differences, cultural differences, trade and tariff issues or even
corporate makeup, the major issues of international business are issues that simply do
not occur in domestic businesses. One cannot expect to understand international
business by learning the tenants of domestic business and then superimposing them on
an international scene. Differences between countries are profound, and they have a
profound affect on how managers and firms work and act internationally. In this
chapter we look at the political, economic, and legal infrastructures of different
countries, while in the next chapter we will consider differences in culture, religion, and
education.

2. The opening case on the political economy of India shows the difficulty nations may
experience when they attempt to move from a largely state-driven economy to one of
privatization. Even when change appears to be merited, the results of a particular
change can be mixed and inconclusive. Changing political views on the ownership of
business enterprises can have dramatic effects on economic efficiency and foreign
investment.

Political Systems
1. There are two separate polarities to consider when discussing political systems:
collectivism vs. individualism and democracy vs. totalitarianism.

2. The general premise of collectivism is that the state must manage enterprises if they are
to benefit society. Democratic Socialism sees itself as part of the historical trend toward
democracy and universal enfranchisement that has taken place worldwide since the
1700s. In fact, it sees socialism as the ultimate democracy-- putting faith in the common
person's ability not only to vote on Election Day, but also to govern his and her
workplace and community.
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According to philosopher Jonathan Kandell, “What distinguishes Democratic Socialists
from more radical communist groups is the unwavering belief that socialism must come
through democratic means or not at all (along with all the standard individual rights to
free speech and assembly). Democratic Socialists distinguish themselves from Liberals
in that they feel the basic structure of capitalism is inherently biased against a large
group of people and must be structurally rectified, instead of just tiny tinkerings. The
government must take an active, radical stance in favor of workers, equality, basic
human needs, workplace democracy, and against greed, capital and property rights.”

Communists generally believed that state control could only be achieved though
revolution and totalitarian dictatorship, while Social Democrats worked to achieve the
same goals by democratic means. Examples of communism include the Soviet Union,
most Eastern European nations from 1950 to 1989, Cuba, and China. China remains
the only major country in the world today still under communist rule. Social
Democratic nations include Sweden, Germany, France, and Norway, although Social
Democratic parties have not always held power in these nations. Don’t be surprised if
your students have only a vague idea about Communism. I find that many students are
shocked to believe that a country could hope to control the ideology of its people by
building a wall around a city (Berlin). In this day of rapid, instantaneous exchange of
electronic information, the concept of a government trying to create physical barriers to
control the flow of information is often difficult for them to grasp.

3. The inefficiencies of government are well known, and students can often offer many
examples. (The $100 hammer, for instance.) State owned firms promoting the public
interest have had a poor track record. The reasons are often obvious: state owned firms
are often protected from competition and are poorly motivated to achieve any financial
self-sufficiency. Often their major purpose is to perpetuate their existence, rather than
bringing anything positive to the country they are supposed to serve. Thus, both former
communist and Western European countries have privatized enterprises that were
previously state owned.

4. While advocated by Aristotle, individualism, in modern days was encouraged by David

Hume, Adam Smith, John Stuart Mill, and most recently, Hayek and Milton Friedman.
Individualism focuses on i) guaranteeing individual freedom and self-expression, and ii)
letting people pursue their own economic self-interest in order to achieve the best
overall good for society. The US Declaration of Independence and the Bill of Rights
embody the spirit of individualism, but more familiar to today’s students are forces like
MTV, which encourage people the world over to vote for their favorite video—even in
countries where voting in elections is impossible and the concept of voting is not
understood.

5. Collectivism advocates the good of the collective group over the individual;
individualism asserts the opposite. This ideological difference shapes much of recent
history and especially the Cold War.

[An interesting digression one can take here (at the risk of getting sidetracked) is to
discuss environmentalism, in the context of collectivism vs. individualism. While one
might expect that countries with a collectivist approach would have much higher
environmental standards "for the common good" than individualist countries where
“anyone can do what they want on their own land,” the record is less clear. While the
Social Democratic countries of Norway and Sweden have some of the best overall
environmental records, the pollution problems in many of the former communist states
are horrendous. And the US has an environmental record similar to many other social
democratic countries in Western Europe. In fact, as we will see in later discussions on

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GATT and NAFTA, different countries’ environmental standards are becoming an
increasingly important issue in international trade negotiations.]

6. Democracy and totalitarianism are at different ends of a political dimension. The

democratic vs. totalitarian dimension is not independent of the collectivism vs.
individualism dimension. Democracy and individualism go hand in hand, as do the
communist version of collectivism and totalitarianism. However, gray areas also exist; it
is possible to have a democratic state where collective values predominate, and it is
possible to have a totalitarian state that is hostile to collectivism and in which some
degree of individualism - particularly in the economic sphere - is encouraged.

7. Democracy in its pure state, with each individual voting on every issue, has generally
been replaced by representative democracy, where elected representatives vote on
behalf of constituents. Yet in Switzerland many issues are decided by referendum, and
in many US states referendums decided directly by voters on Election Day are
becoming increasingly common. (A recent example in your state can help illustrate this
point. If it is something that directly affects businesses, then an analogy can be drawn
to how referendums in different countries could affect business operations and
decisions.)

8. 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, theocratic, tribal, right wing (often military).
There has been a general trend away from communist and right wing totalitarianism
and towards democracy in the 1980s and 1990s. Issues relating to theocratic and tribal
totalitarianism are presently at the root of some unrest in Asia and Africa.

9. A good way to discuss countries’ relative political and economic freedom is to draw a
diagram with political freedom on one dimension and economic freedom on the other.
You can then ask students to relatively position different countries on the dimensions
of economic and political freedom. (If students are assigned the “country
characteristics” exercise described later, the relative positioning of firms can be a part of
the exercise.)

10. The political environment of a country matters because 1) when economic freedoms
are restricted so may be the ability of an international business to operate in the most
efficient manner, and 2) when political freedoms are restricted there are both ethical
and legal risks concerns that have to be considered.

Political Spectrum
Forms of government range from Democracy to Totalitarianism.

• Democracy. Since democracies usually have economic freedom and legal rules that safeguard
individual (and corporate) rights, they are often preferred by MNCs. Contemporary democratic
political systems tend to have the following six characteristics: 1) freedom of opinion,
expression, press, and freedom to organize; 2) elections in which voters decide who is to
represent them; 3) limited terms for elected officials; 4) an independent and fair court system
with high regard for individual rights and property; 5) a nonpolitical bureaucracy and defense
infrastructure, and; 6) an accessibility to the decision-making process. Winston Churchill
referred to democracy as the worst form of government—except for all others.
• Political rights and civil liberties. Political rights include fair elections and power being
conferred on the people’s representatives. Civil liberties include a free press, equality under the
law for individuals, and personal freedom.

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• Stability in democracies. Many new democracies around the world are not yet stable. Few
political parties and corruption threaten the system’s survival. However, 75% of all people in
democracies strongly feel it is the best form of government.

• Totalitarianism. Forms of totalitarianism include fascism (Mussolini’s Italy), authoritarianism

(Chile under Pinochet), and communism. Communists believe in the equal distribution of
wealth, which entails total government ownership and control of resources.

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