NATIONAL DIFFERENCES IN POLITICAL,

ECONOMIC, AND LEGAL SYSTEMS

 INTRODUCTION

International business more complicated than domestic

✔ Cultural, education, and skill levels vary
✔ Political, economic, and legal systems (known as the political
economy)
✔ Countries are at different stages of economic development
✔ Political economy of a country are interdependent; interact and
influence each other, and in doing so they affect the level of
economic well-being
✔ These differences have 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
 POLITICAL SYSTEMS
▪ Political system: system of government in a nation
▪ Assessed on 2 dimensions- in terms of the degree to which they:
✔ Emphasize collectivism or individualism
✔ Are democratic or totalitarian
✔ These dimensions are interrelated; systems that emphasize
collectivism tend towards totalitarianism, whereas those that
place a high value on individualism tend to be democratic

▪ However, possible to have democratic societies that emphasize a mix

of collectivism and individualism
▪ Similarly, it is possible to have totalitarian societies that are not
collectivist
 COLLECTIVISM AND INDIVIDUALISM

Collectivism Individualism
• Refers to a political system that stresses • Refers to the philosophy that an
the primacy of collective goals over individual should have freedom in his
individual goals or her economic and political pursuits
• Stresses that the interests of the
• Needs of the society viewed as being individual should take precedence
more important than individual freedom- over the interests of the state
an individual’s right to do something may be
restricted on the grounds that it runs counter • Can be traced to an ancient Greek
to “the good of society” or to “the common philosopher, in this case Plato’s disciple
good.” Aristotle (384– 322 BC) argued that
individual diversity and private ownership
• Can be traced to the ancient Greek
are desirable
philosopher Plato (427–347 BC) argued that
individual rights should be sacrificed for the • Stresses letting people pursue their
good of the majority and that property own self-interests to achieve the best
should be owned in common ,believed overall good for society
society should be stratified into classes,
with those best suited to rule
• Democratic systems and free markets

• Modern times, the collectivist mantle has been

picked up by socialists
 CONTD..SOCIALISM
Modern socialists trace their roots to Karl Marx
Advocated state ownership of the basic means of production,
distribution, and exchange and state manages the enterprises for
the benefit of society as a whole
In the early 20th century, socialism split into
✔Communists – believed socialism could only be achieved though violent
revolution and totalitarian dictatorship ( a political system in which
the state owns and controls all factories, farms, services, etc.
and aims to treat everyone equally)
✔Social democrats worked to achieve the same goals by democratic
means (a government system that has similar values to socialism,
but within a capitalist framework ,where people have a say in
government actions, supports a competitive economy with
money while also helping people whose jobs don't pay a lot )
 DEMOCRACY AND TOTALITARIANISM
Democracy Totalitarianism
• Refers to a political system in • A form of government in which one person or
which government is by the political party exercises absolute control over
people, exercised either all spheres of human life and prohibits
directly or through elected opposing political parties or ideologies
representatives • Notable examples of totalitarian states include Italy
under Benito Mussolini ,the Soviet Union under
Joseph Stalin ,Nazi Germany under Adolf Hitler ,the
People's Republic of China under the influence of
Mao Zedong (1949–76), and North Korea under the
Kim dynasty, Taliban in Afghanisatan
Features of a Totalitarian Government
• Dictatorship ,ruling through fear ,censorship of
media, prohibits criticism of the state ,mandatory
military sign up,secret police forces ,controlling
reproduction of the population (either in hopes to
increase or to decrease) ,targeting of specific
religious or political populations,development of a
 CONTD. TOTALITARIAN – 4 MAJOR FORMS

Communist totalitarianism: Theocratic totalitarianism:

• Advocates achieving socialism through
totalitarian dictatorship Political power is monopolized by a
• In decline worldwide, and most of Communist party, group, or individual that
Party dictatorships have collapsed since 1989. governs according to religious
Exceptions to this trend (so far) are China, principles
Vietnam, Laos, North Korea, and Cuba, although all
these states exhibit clear signs that the • Most common form of theocratic
Communist Party’s monopoly on political power is totalitarianism is based on Islam and is
retreating
exemplified by states such as Iran and
• In many respects, the governments of China, Saudi Arabia
Vietnam are communist in name only since
those nations now adhere to market-based • These states limit freedom of
economic reforms (In modern China, Marxism is political and religious expression
modified as the political ideology by the Chinese
Communist Party to govern the party and the
with laws based on Islamic principles
nation)
• They remain, however, totalitarian states
that deny many basic civil liberties to their
populations
 CONTD….

Tribal totalitarianism: Right wing totalitarianism:

• a political party that • Individual economic freedom is allowed
represents the interests of a but individual political freedom is
restricted in the belief that it could lead
particular tribe (and not
to communism
always the majority tribe)
monopolizes power • Many right-wing totalitarian governments
are backed by the military, and in some
• Has arisen from time to time in cases the government may be made up of
African countries such as military officers (fascist regimes that ruled
Zimbabwe, Tanzania, Uganda, and Germany and Italy in the 1930s and 1940s,
Kenya ( borders of most African were right- wing totalitarian states. Until the
states reflect administrative early 1980s, right-wing dictatorships, many of
which were military dictatorships, were
boundaries drawn by old European
common throughout Latin America,also found
colonial powers rather than tribal
in several Asian countries, particularly South
realities) Korea, Taiwan, Singapore, Indonesia, and the
Philippines.
 CONTD..,.
Imperfect or Pseudo-Democracies

✔ Many nations lie between pure democracy and complete

totalitarianism

✔ Authoritarian elements have captured much of the machinery of

state and use this in an attempt to deny basic political and civil
liberties

✔ Eg. Russia under Vladimir Putin (elections still held, however

Putin has used his position to systematically limit political and civil
liberties of opposition communist groups )
 ECONOMIC SYSTEMS
▪ Political ideology and economic systems are connected

▪ In countries where individual goals are given primacy over

collective goals- more likely to have market- based economic
systems

▪ Where collective goals are given preeminence ,state takes control

over many enterprises, markets likely to be restricted than free

3 types of economic systems

▪ market economy
▪ command economy
▪ mixed economy
Market Economy Command economy

• All productive activities are • Goods and services that a country

privately owned, as opposed to produces, the quantity in which they are
being owned by state produced, and the price at which they
are sold are all planned by the
• Goods and services that a country
government
produces, and the quantity in which
they are produced is determined by
supply and demand • All businesses are state-owned, and have
• If demand for a product exceeds supply, little incentive to control costs and be efficient
prices will rise, signaling producers to
produce more
• Because there is no private ownership, there
• If supply exceeds demand, prices will fall, is little incentive to better serve consumer
signaling producers to produce less needs
• Role of government is to encourage
free and fair competition between
• Dynamism and innovation are absent
private producers

• Eg. North Korea

•
 ECONOMIC SYSTEMS CONTD..
▪ Mixed Economy
✔ Includes some elements of a market economy and some elements
of a command 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
✔ Mixed economies were once common throughout much of the world,
although they are becoming much less so eg. Great Britain, France, and
Sweden were mixed economies, but extensive privatization has reduced
state ownership of businesses in all three nations
✔ A similar trend occurred in many other countries where there was once
a large state sector, such as Brazil, Italy, and India
 LEGAL SYSTEMS
▪ Legal system of a country refers to the rules, or laws, that
regulate behavior, along with the processes by which the laws of
a country are enforced and through which redress for grievances
is obtained
▪ Influenced by prevailing political system –govt. defines legal
framework within which firms do business, often laws that regulate
business reflect rulers’ dominant political ideology
▪ Eg. Collectivist-inclined totalitarian state tends to enact laws that
severely restrict private enterprise whereas in democratic states where
individualism is dominant political philosophy tend to be pro- private and
pro- consumer
▪ Legal environments of countries differ- affects the attractiveness
of a country as an investment or market
 DIFFERENT LEGAL SYSTEMS

▪ A country’s legal system is important because 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

▪ Common law
▪ Civil law
▪ Theocratic law
 COMMON LAW

✔ Common law system evolved in England over hundred of

years
✔ Now found in most Great Britain’s former colonies including United
States, Canada, Australia, India, and in Africa, particularly Ghana,
Kenya, Nigeria, as well as South Africa
✔ Based on tradition (country’s legal histroy), precedent (cases
that have come before the courts in the past ), and
customs( ways in which laws are applied in specific
situations )
✔ A system of unwritten laws based on recorded judicial
precedents, when a court makes a decision about a case,
that decision becomes a part of the law of the country
✔ Has a degree of flexibility that other systems lack
 CIVIL LAW

✔ Detailed set of laws organized into codes- based on legislation –

general, written laws made by the government ,decisions of
judges do not affect the laws of a country (Found in more than 80
countries, including Germany, France, Japan, and India)

✔ Judges rely on detailed legal codes rather than interpreting

tradition, precedent and custom

✔ Judges have less flexibility but also have the power to apply the
law (judges in common law have power to intepret the law )
India has a hybrid legal system that includes laws (common,
criminal, civil and statutory) inside a legal framework inherited from
the colonial era and many legislations initially adopted by the British
 THEOCRATIC LAW

▪ Based on religious teachings (Islamic law most widely

practiced theocratic legal system , usage of Hindu law
perssited into the 20th century
▪ Islamic law is primarily a moral rather than a commerial
law, inteneded to govern all aspects of life (debates are
happening on the application of it to modern world)
▪ Many Muslm countries have legal systems that are a
blend of Islamic law and common or civil law sytem
 EXAMPLE- DIFFERENCES IN CONTRACT LAW
✔ Differences in appproach between common and civl law
systems to contract

✔ A contract specifies the conditions under which an exchange is

to occur and details the rights and obligations of the parties
involved – regulates many business transactions -Contract law
is the body of law that governs contract enforcement

✔ Common law : contracts are very detailed, with all contingencies

spelled out, expensive to draft , resolving disputes adversarial , but
flexible as allow judges to interpret disputes in light of the prevaling
situation

✔ Civil law : contracts shorter, less specific as many issues are already
coverd in civil code
 CONTD..

✔ When disputes arise in international trade, which country’s laws

to apply!!!
✔ United Nations Convention on Contracts for the International Sales
of Goods (CISG) establishes a uniform set of rules governing certain
aspects of the making and performance of everyday commercial contracts
between sellers and buyers who have their places of business in different
nations
✔ Countries that adopt CISG signal to other nations that they will
treat the Convention’s rules as part of their law (but only 95
countries have ratified , considers it incomplete and not
comprehensive,does not relate to issues related to validity of a contract
like fraud, illegality, or misrepresentation, India has not )
✔ When firms do not accept CISG, opt for arbitration by a recogniosed
 CONTD…
The Protection of Intellectual Property
✔ Intellectual property: property that is the product of intellectual
activity
▪ Patents: give the inventor exclusive rights to the manufacture, use, or sale of that
invention
▪ Copyrights: exclusive legal rights of authors, composers, playwrights, artists, and
publishers to publish and dispose of their work as they see fit
▪ Trademarks: designs and names, often officially registered, by which merchants or
manufacturers designate and differentiate their products
✔ The protection of intellectual property rights differs greatly from
country to country
✔ 193 nations are members of the World Intellectual Property
Organization
✔ Enforcement is lax in many nations especially in China and
Thailand !!!!!
 CONTD….
Product Safety and Product Liability
✔ Product safety laws set certain safety standards to which a product
must adhere (eg to sell children’s products in the US, need Child Product
Certificate CPC – after checking in Lab for content)
✔ Product liability involves holding a firm and its officers responsible
when a product causes injury, death, or damage (eg dog food – if the dog
gets unwell/death after consuming, can sue manufactures/sellers , candle holder
–candle not held properly-leading to fire in the house- can sue, McDonald’s case
of coffee spilling on a customer in US in 90s)

▪ Liability laws are usually least extensive in less developed countries

✔ Firms must decide whether to adhere to the standards of the home

country or the standards of the host country
 ECONOMIC DEVELOPMENT

• Political, economic, and legal systems of a country

can have a profound impact on the level of
economic development

• A country’s level of economic development affects

its attractiveness as a possible market or
production location for firms
 DIFFERENCES IN ECONOMIC DEVELOPMENT
COUNTRIES AND ECONOMIES

▪ A common measure is gross national income (GNI) - regarded as a

yardstick for the economic activity of a country; measures the
total annual income received by residents of a nation from
anywhere in the world (including foreign investments) -can be
misleading as doesn’t consider differences in the cost of living
Eg. although the 2023 GNI per capita of Switzerland, at $90080 exceeded
that of US, which was $ 82190 , higher cost of living in Switzerland
meant that U.S. citizens could actually afford more goods and
services than Swiss citizens
▪ To account for differences in the cost of living, GNI per capita is
adjusted by purchasing power, referred as purchasing power parity
(PPP) adjustment, allows for a more direct comparison of living
standards in different countries- base for the adjustment is the
cost of living in the United States https://data.worldbank.org/
 ECONOMIC PROGRESS

Innovation and Entrepreneurship are the Engines of Growth

For a country to sustain long term economic growth, the business environment
needs to be conducive to innovation and entrepreneurial activity
Innovation - new products, new processes, new organizations, new
management practices, and new strategies – help increase economic
activity by creating new products and markets that did not exist previosly Eg.
Development of mass – market online retailing by Amazon
Entrepreneurs commercialize innovative new products and processes,
and entrepreneurial activity provides a boost to the economy Eg. TUS
economy benefitted from high level entrepreneurial activity eg. Google,
Facebook, Amazon, Dell, Microsoft
Requires a market economy – free competition among market
participants,individuals are free to start new business,existing businesses free to
improve operations through innovation, both can reap rewards in the form of high
profits (eg. US, England, Japan, Hong Kong)
 ECONOMIC DEVELOPMENT CONTD.

Broader Conceptions of Development

✔ Amartya Sen , economist - development should be assessed
less by material output and more by the capabilities and
opportunities that people enjoy

✔ The UN created the Human Development Index based on life

expectancy, education attainment, and whether average
incomes are sufficient to meet the basic needs of life in a
country
 NATURE OF ECONOMIC TRANSFORMATION
A market based economic system entails a number of steps :
▪ Deregulation Removing legal restrictions to the free play of
markets
✔ Establishment of private enterprises in many sectors of the economy
(open to FDI) eg. In India, defence, mining, agri- processing (India -
mixed economy, partially free )
✔ Removing price controls, allowing prices to be set by the demand and
supply
▪ Privatization Transfers ownership of state property into the
hands of private individuals (privatisation of companies like Air
India(2022), Shipping Corporation of India, NMDC Steel Ltd, HLL Lifecare,
Container Corporation of India and RINL or Vizag Steel, (by 2024)
▪ Legal Systems Laws protecting private property rights and providing
mechanisms for contract enforcement, adequate court capacity,
COUNTRY ATTRACTIVENESS
 MANAGERIAL IMPLICATIONS

The overall attractiveness of a country depends upon the balance

between the likely benefits of doing business in that country against
the likely costs and risks
Benefits -Function of market size, and current and future consumer
purchasing power

Costs - include the cost of paying bribes or lobbying for favorable or fair
treatment ,economic costs including the infrastructure and supporting
businesses,legal costs, workplace, and pollution standards etc

Country Risks Analysis -Political risk and economic risk - adversely

affects profit and other goals of a business enterprise ,Legal risk -
likelihood that a trading partner will opportunistically break a contract or
expropriate intellectual property rights
 COUNTRY RISK ANALYSIS

▪ Country risk involves the potentially adverse impact of a country’s

environment on an MNC’s cash flows, international projects
▪ E
valuation of possible risks and rewards from business experienc
es in a country
- process of determining a nation's ability to transfer payments
▪ Identifies imbalances that increase the
risks in a cross-border investments - essential for the international
creditors and investors
▪ Used to survey countries to avoid those with excessive risk
▪ Represents potentially adverse impact of a country’s environment on the
MNC’s cash flows and probability of loss due to exposure to the
political, economic, and social upheavals in a foreign country
 TYPES OF RISKS

▪ Economic risk — important change in the economic structure/fundamental economic

policy goals (fiscal, monetary, international, or wealth distribution or creation)
that produces a change in the expected return of an investment (tariffs, restrictions,
tax laws ,recession etc) Economic risks stem from a country's financial condition and ability to
repay debts
▪ Some indicators are :
▪ Stability and solvency of banks
▪ Short-, medium- and long-term outlook for country’s GDP and GNP
▪ Debt-to-GDP ratio (ratio between how much a country owes/debts and how much it produces
to pay off the debt (GDP), a reliable indicator on how capable a country is in paying its debts.
Generally, a low debt-to-GDP ratio is a measure of a healthy economy that produces and sells
goods and services without accumulating future debts
▪ Unemployment rate
▪ Overall government finances
▪ Monetary policy and currency stability
▪ Currency exchange rates etc
▪ Political risk — risk of loss caused due to change in
the political structure or in the politics of country where the investment
is made (Eg. War, corruption, terrorism, excessive bureaucracy /red tapism
etc
Factors to be considered
▪ Government stability
▪ Information access and transparency
▪ Terrorism, violence and crime
▪ Regulatory and policy environment
▪ Workforce freedom and mobility
▪ Government assistance programs for businesses
▪ Immigration and employment laws
▪ Attitudes toward foreign investment
▪ Location risk (neighborhood risk)- includes effects caused by problems
in a region or in trading partner of a country or in countries with similar
characteristics, creating turmoil in the foreign market or putting pressure on
local lenders and businesses
▪ Exchange risk — Any predicted loss created by sudden changes in
exchange rate ,a form of risk that arises from the change in price of
one currency against another (caused by a wide variety of factors such as
economic and political factors ,interest rates ,inflation , issues with foreign
currency exchange such as shortage in certain currencies or a devaluation of the
exchange rate etc)
▪ Structural assessment : Is the country’s infrastructure able to support efficient
transportation, telecommunications technology, and banking and financial
services? Are current and future demographic trends and health and educational
systems likely to support a strong labour force? Eg. if you launch operations or
partner with a country with an aging population that has not invested enough in
its education and health care systems, may have trouble finding a readily
available skilled workforce
 EXAMPLES

• A recession in a country that reduces the revenues of

exporters to that nation is a realization of country risk.
• Labour strikes by a country’s dockworkers, truckers, and
transit workers that disrupt production and distribution of
products, thus lowering profits, also qualify as country
risks.
• Clashes between religious groups that prevent people in
a country from shopping can also be considered country
risks.
 EXAMPLES

▪ Ukraine-Russia war has given rise to country risk, making the

nations in trading relationships with both countries doubtful of
their ability to tackle their financial obligations ( survey in April
2023 found approx 92% of the participating companies faced
financial challenges in 2022 due to the political risks that
surrounded the two nations) global economy enduring the
consequences — crunched supplies of grain, fertilizer and energy
along with more inflation and economic uncertainty

▪ Recent Canada- India ???? Possibility of affecting business in future

??? 2022-23 Indian exports to Canada (USD 4.1 billion)
include pharmaceuticals, gems and jewellery, textiles, and
machinery, while imports (USD 4.06 billion) include pulses, timber,
 GETTING HELP IN ASSESSING COUNTRY RISK

▪ Some international organizations evaluate the country risk on behalf

of their member nations
▪ Organisation for Economic Co-Operation and Development (OECD),
publishes an updated list of countries and their associated risks
▪ Major credit rating agencies—Standard & Poor's (S&P), Moody's, and
Fitch—all have their own lists of sovereign ratings, which also
analyze fundamentals such as effectiveness of institutions and
government, economic structure, growth prospects, external
finances, and fiscal and monetary flexibility
▪ Large investment-management firms also rate country risk in their
specific business lines. BlackRock Inc., for example, publishes the
BlackRock Sovereign Risk Index (BSRI), a quarterly sovereign risk
index that tracks current risk levels and trends for various countries
and regions
 ATLAS OF ECONOMIC COMPLEXITY

▪ A data visualization tool that allows to explore global

trade flows across markets, track these dynamics over
time and discover new growth opportunities for every
country ( powered by Harvard Growth Lab)
Helps answer questions such as:
▪ What does a country or region import and export?How has its
trade evolved over time? What are the drivers of export
growth? Which new industries are likely to emerge in a given
location? Which are likely to disappear? What are the GDP
growth prospects of a given country in the next 5-10 years,
based on its productive capabilities?
▪ Used worldwide by policymakers, investors, entrepreneurs,
 CONTD..

▪ The Atlas analyzes foreign trade of 128 countries on basis of quantity

and complexity of exported goods and frequency of exports
▪ Sets up an economic growth ranking based on Economic Complexity
Index (ECI)- a measure of the productive capabilities of large
economic systems, usually cities, regions, or countries (society’s
productive knowledge )
▪ + A rank of countries based on how diversified and complex their
export basket is calculated based on the diversity of exports a country
produces and their ubiquity, or the number of the countries able to
produce them
▪ Captures the level of economic sophistication in terms of knowledge,
innovation, technology, and export diversification, which can affect
economic productivity
▪ Prosperous societies are those that have the knowledge to make a
 ROLE OF PRODUCTIVE KNOWLEDGE : ANALOGY

Highly ranked countries have

• A high diversity of exported
products
• Sophisticated and unique
exported products (i.e. few
other countries produce similar
products)
• Countries improve ECI by
increasing the number and
complexity of products they
successfully export (eg.high
ECI - Japan, Switzerland, South
Korea, Germany, India (40th )
Muhammed Yildirim, Harvard University,
Ranking hinges on the concept of
NOT ALL EXPORTS ARE CREATED EQUAL

• Agricultural and extractive

industries tend to score
lower on the complexity
scale
• Machinery can be highly
complex to produce and
connected to many facets
of the global economy

a unique perspective beyond

big GDP !!
https://
atlas.cid.harvard.edu/
Links to the Atlas
▪ https://atlas.cid.harvard.edu/
▪ https://atlas.cid.harvard.edu/glossary#:~:text=p%E2%80%B2%E2%80%8
B%E2%80%8B-,Economic%20Complexity,a%20country%20produces%20
and%20their
▪ https://oec.world/en/profile/country/ind#:~:text=Overview%20In%2020
21%2C%20India%20was,Economic%20Complexity%20Index%20(ECI)%2
0

▪ https://oec.world/en/profile/country/ind#:~:text=Economic%20Comple
xity%20Ranking,-%23permalink%20to%20section&text=During%20the%
20last%2020%20years,according%20to%20the%20HS96%20classificatio
n
THANK YOU