INTRODUCTION TO INTERNATIONAL BUSINESS

National Differences in Political Economy

Joseph Owusu, PhD

kboyowusu11@gmail.com
0244-880628
 Learning Objectives

 Describe political and legal environments in international

business.
 Understand how the political systems of countries differ.
 Understand how the economic systems of countries differ.
 Understand legal systems.
 Explain what determines the level of economic
 development of a nation.
Introduction
 International business is much more complicated than domestic
business because countries differ in many ways;
 Political
 Economic
 legal systems
 Economic development
 Cultural practices
 Education
 Skill level of the population.
 All these differences can and do have major implications for the
practice of international business
Political Economy
 The term political economy refers to political, economic
and legal systems of a country are interdependent; they
interact and influence each other, and in doing so they
affect the level of economic well-being.
Political System
 By political system we refer to the system of government
in a nation. OR
 A set of formal institutions that constitute a government.
 It includes legislative bodies, political parties, lobbying
groups, and trade unions.
Political System
 Four major types of political systems:

 Collectivisms/Socialism
 Capitalism / Individualism
 Democracy
 Totalitarianism/ Authoritarianism

 These categories are not mutually exclusive

 Political System
 Collectivisms/Socialism
Refers to a political system that stresses the primacy of collective goals
over individual goals. When collectivism is emphasized, the needs of
society as a whole are generally viewed as being more important than
individual freedoms. (Plato and Karl Max) (e.g., Western Europe, Brazil,
India).

 Capitalism / Individualism
Refers to a philosophy that an individual should have freedom in 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. (Aristotle, Adam Smith and John Stuart Mill)
Political System
 Democracy
Refers to a political system in which government is by the
people, exercised either directly or through elected
representatives.
Totalitarianism/ Authoritarianism
 Refers to a form of government in which one person or political
party exercises absolute control over all spheres of human life
and prohibits opposing political parties. Example Middle East
and Africa; Cuba, North Korea.
Examples of Countries Under Various Political
Systems
Functions of Political Systems

 Provide protection from external threats.

 Ensure stability based on laws.
 Govern the allocation of valued resources among the
members of a society.
 Define how society’s members interact with each other.
Economic System
 We can identify three broad types of economic systems
 A market economy
 A command economy
 A mixed economy

 Itshould be noted political ideology and economic

systems are connected.
 Market Economy
 Here all productive activities are privately 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 producers through the price system.
 If demand for a product exceeds supply, prices will rise, signaling
producers to produce more and vice versa.
 Command Economy
 In a command economy , the government plans the goods and
services that a country produces, the quantity in which they are
produced, and the prices at which they are sold.

 Consistent with the collectivist ideology, the objective of a

command economy is for government to allocate resources for
“the good of society.”

 All businesses are state owned, the rationale being that the
government can then direct them to make investments that are in
the best interests of the nation as a whole rather than in the
interests of private individuals
 Mixed Economy
 Between market economies and command economies can be found
mixed economies.

 In a mixed economy, certain sectors of the economy are left to

private ownership and free market mechanisms while other sectors
have significant state ownership and government planning.

 In mixed economies, governments also tend to take into state

ownership troubled firms whose continued operation is thought to
be vital to national interests. Example, the French automobile
company Renault.
 The Legal System
 The legal system refers to the rules, or laws, that regulate
behavior along with the processes by which the laws are
enforced and through which redress for grievances is obtained.

 The legal system of a country is important to international

business. Because a country’s laws regulate

 business practice
 define the manner in which business transactions are to be
executed
 set down the rights and obligations of those involved in
business transactions.
 Different Legal Systems
1. Common Law:

 The common law system evolved in England over hundreds of

years. (also known as case law).

 Common law is based on tradition, precedent and custom.

 Judges have significant power to interpret laws based on the

circumstances of individual cases. Thus, common law is relatively
flexible.
 Civil Law
 Found in France, Germany, Italy, Japan, Turkey, and much of Latin
America.
 Based on an all-inclusive system of laws that have been “codified”
- clearly written by legislative bodies.
 Laws are more “cast in stone” and not strongly subject to
interpretation by courts.

 Difference between Common Law and Civil Law

common law is mainly judicial in origin and based on court decisions,
whereas civil law is mainly legislative and based on laws passed by
national and state legislatures.
Theocratic /Religious Law
 A theocratic law system is one in which the law is based on religious
teachings. Islamic law is the most widely practiced theocratic legal system in
the modern world.
 In reality, many Muslim countries have legal systems that are a blend of
Islamic law and a common or civil law system.
Legal Systems: Theocratic/Religious Law
Strongly influenced by religious beliefs, ethical codes, and
moral values, viewed as mandated by a supreme being.
Most important religious legal systems are based on Hindu,
Jewish, and Islamic law.
 Islamic law spells out norms of behavior regarding politics,
economics, banking, contracts, marriage, and many other
social and business issues.
Dominant Legal Systems in Selected Countries
 Actors in Political and Legal Systems
The government, or the “public sector”, operating at
national and local levels.
International organizations such as the World Bank, World
Trade Organization, and the United Nations.
Regional trade organizations, such as the European
Union, and many others.
• Special interest groups such as labor unions and
environmental advocates.
• Local competing firms, which oppose foreign firms.
Country Risk Produced by Political Systems: Government
Takeover of Corporate Assets

 Confiscation: Seizure of corporate assets without

compensation.
 Expropriation: Asset seizure with compensation.
 Nationalization: Takeover of an entire industry, with or
without compensation.
Country Risk Produced by Political Systems:
Embargoes and Sanctions
 Governments may respond to offensive activities of foreign
countries by imposing embargoes and sanctions.
 Sanctions are bans on international trade, usually undertaken
by a country, or a group of countries, against another who is
judged to have jeopardized peace and security.
 Embargoes are bans on exports or imports that forbid trade in
specific goods with specific countries. Example: The U.S. has
enforced embargoes against Cuba, Iran, and North Korea,
labeled as state sponsors of terrorism.
Country Risk Produced by Political Systems:
Wars, Insurrection, and Violence
 War and insurrection - Indirect effects can be disastrous
for company activities.
 Terrorism: The threat or actual use of force or violence to
attain a political goal through fear and intimidation.
 Some terrorism is sponsored by national governments.
 Terrorism particularly affects certain industries - tourism,
hospitality, aviation, finance, retailing.
Types of Country Risk Produced by Legal Systems

Foreign investment laws

Controls on operating forms and practices
Marketing and distribution laws
Laws regarding income repatriation
Environmental laws
 Contract laws
• The Foreign Corrupt Practices Act (F C P A)
• Accounting and reporting laws
• Transparency in financial reporting
 Political Economy and Economic development
 political systems, economic systems and legal systems
collectively known as political economy influence the level of
economic development of a nation, and how attractive it is as a
place for doing business.
 This manifest in country’s
 Gross National Income (GNI) = is regarded as a yardstick for
the economic activity of a country; it measures the total annual
income received by residents of a nation.
 Human Development Index (HDI) to measure the quality of
human life in different nations. E.g. health care, educational
attainment, average income,dequate food, and Shelter
Overall Attractiveness
 The overall attractiveness of a country as a potential market
or investment site for an international business depends on
balancing the benefits costs risks associated with doing
business in that country.
Overall Attractiveness