SESSION 3
THE EXTERNAL ENVIRONMENT OF INTERNATIONAL BUSINESS
WHAT IS A POLITICAL ECONOMY?
Political economy of a nation - how the political,
economic, and legal systems of a country are
interdependent
they interact and influence each other
they affect the level of economic well-being in the
nation
WHAT IS A POLITICAL SYSTEM?
Political system - the system of government in a
nation
Assessed according to
the degree to which the country emphasizes
collectivism as opposed to individualism
the degree to which the country is democratic or
totalitarian
WHAT IS COLLECTIVISM?
Collectivism stresses the primacy of collective goals over
individual goals
can be traced to the Greek philosopher, Plato (427-347 BC)
Today, collectivism is equated with socialists (Karl Marx
1818-1883)
advocate state ownership of the basic means of production,
distribution, and exchange
manage to benefit society as a whole, rather than individual
capitalists
HOW DOES MODERN-DAY SOCIALISM LOOK?
In the early 20th century, socialism split into
[Link] – socialism can only be achieved through
violent revolution and totalitarian dictatorship
in retreat worldwide by mid-1990s
[Link] democrats – socialism is achieved through
democratic means
retreating as many countries move toward free market economies
state-owned enterprises have been privatized
WHAT IS INDIVIDUALISM?
Individualism refers to philosophy that an individual
should have freedom in his own economic and political
pursuits
can be traced to Greek philosopher, Aristotle (384-322 BC)
individual diversity and private ownership are desirable
individual economic and political freedoms are the ground rules
on which a society should be based
implies democratic political systems and free market economies
WHAT IS DEMOCRACY?
Democracy - a political system in which government is by the
people, exercised either directly or through elected
representatives
usually associated with individualism
pure democracy is based on the belief that citizens should be
directly involved in decision making
most modern democratic states practice representative democracy
where citizens periodically elect individuals to represent them
WHAT IS TOTALITARIANISM?
Totalitarianism - form of government in which one
person or political party exercises absolute control
over all spheres of human life and prohibits
opposing political parties
WHAT IS TOTALITARIANISM?
Four major forms of totalitarianism exist today
[Link] totalitarianism – found in states where the
communist party monopolizes power
[Link] totalitarianism - found in states where political power
is monopolized by a party, group, or individual that governs
according to religious principles
[Link] totalitarianism - found in states where a political party that
represents the interests of a particular tribe monopolizes power
[Link]-wing totalitarianism - permits some individual economic
freedom, but restricts individual political freedom
WHAT IS THE LINK BETWEEN POLITICAL IDEOLOGY AND ECONOMIC
SYSTEMS?
Political ideology and economic systems are
connected
countries that stress individual goals are likely to have
market based economies
in countries where state-ownership is common,
collective goals are dominant
WHAT IS AN ECONOMIC SYSTEM?
There are three types of economic systems
[Link] economies - all productive activities are
privately owned and production is determined by
the interaction of supply and demand
government encourages free and fair competition
between private producers
WHAT IS AN ECONOMIC SYSTEM?
[Link] economies - government plans the goods and
services that a country produces, the quantity that is
produced, and the prices as which they are sold
all businesses are state-owned, and governments
allocate resources for “the good of society”
because there is little incentive to control costs and be
efficient, command economies tend to stagnate
[Link] economies - certain sectors of the economy
are left to private ownership and free market
mechanisms while other sectors have significant
state ownership and government planning
governments tend to own firms that are considered
important to national security
WHAT IS A LEGAL SYSTEM?
Legal system - the rules that regulate behavior along with
the processes by which the laws are enforced and
through which redress for grievances is obtained
the system in a country is influenced by the prevailing political
system
Legal systems are important for business because they
define how business transactions are executed
identify the rights and obligations of parties involved in business
transactions
WHAT ARE THE
DIFFERENT LEGAL SYSTEMS?
There are three types of legal systems
[Link] law - based on tradition, precedent, and custom
[Link] law - based on detailed set of laws organized into codes
[Link] law - law is based on religious teachings
HOW ARE CONTRACTS ENFORCED IN DIFFERENT LEGAL SYSTEMS?
Contract - document that specifies the conditions under which
an exchange is to occur and details the rights and obligations of
the parties involved
Contract law is the body of law that governs contract
enforcement
under a common law system, contracts tend to be very detailed with all
contingencies spelled out
under a civil law system, contracts tend to be much shorter and less
specific because many issues are already covered in the civil code
WHICH COUNTRY’S LAWS SHOULD APPLY IN A CONTRACT DISPUTE?
The United Nations Convention on Contracts for the
International Sale of Goods (CIGS)
establishes a uniform set of rules governing certain aspects of the
making and performance of everyday commercial contracts between
buyers and sellers who have their places of business in different
nations
Ratified by the U.S. and about 70 countries
but, many larger trading nations including Japan and the U.K. have not
agreed to the provisions of CIGS and opt for arbitration instead
HOW ARE PROPERTY RIGHTS
AND CORRUPTION RELATED?
Property rights - the legal rights over the use to which a resource is put
and over the use made of any income that may be derived from that
resource
Property rights can be violated through
[Link] action – theft, piracy, blackmail
[Link] action - legally - ex. excessive taxation or illegally - ex.
bribes or blackmailing
high levels of corruption reduce foreign direct investment, the level of
international trade, and the economic growth rate in a country
WHICH COUNTRIES ARE MOST CORRUPT?- 2022 CORRUPTION INDEX
RANKINGS
HOW CAN INTELLECTUAL
PROPERTY BE PROTECTED?
Intellectual property - property that is the product of intellectual activity
Can be protected using
[Link] – exclusive rights for a defined period to the manufacture, use, or sale of
that invention
[Link] – the exclusive legal rights of authors, composers, playwrights, artists,
and publishers to publish and disperse their work as they see fit
[Link] – design and names by which merchants or manufacturers
designate and differentiate their products
HOW CAN INTELLECTUAL
PROPERTY BE PROTECTED?
Protection of intellectual property rights differs from country
to country
World Intellectual Property Organization
Paris Convention for the Protection of Industrial Property
To avoid piracy, firms can
stay away from countries where intellectual property laws are lax
file lawsuits
lobby governments for international property rights agreements
and enforcement
WHAT IS PRODUCT SAFETY
AND LIABILITY?
Product safety laws set certain standards to which a
product must adhere
Product liability involves holding a firm and its officers
responsible when a product causes injury, death, or
damage
liability laws tend to be less extensive in less
developed nations
WHY IS PRODUCT SAFETY AND PRODUCT LIABILITY IMPORTANT?
Question:
Does the high cost of liability insurance make home
companies less competitive?
Question:
Is it ethical to follow host country standards when
product safety laws are stricter in a firm’s home country
than in a foreign country?
Question:
Is it ethical to follow host country standards when
liability laws are more lax in the host country?
HOW CAN MANAGERS DETERMINE A MARKET’S OVERALL
ATTRACTIVENESS?
The overall attractiveness of a country as a potential
market and/or investment site for an international
business depends on balancing the benefits, costs, and
risks associated with doing business in that country
Other things being equal, more attractive countries have
democratic political institutions, market based economies, and
strong legal systems that protect property rights and limit
corruption
WHAT DETERMINES A COUNTRY’S LEVEL
OF ECONOMIC DEVELOPMENT?
Gross national income (GNI) per person measures
the total annual income received by residents of a
nation
Japan, Sweden, Switzerland, and the U.S. have high GNI
China and India have low GNI
GNI can be misleading because it does not consider
differences in the cost of living
need to adjust GNI figures using purchasing power parity
(PPP)
WHAT DETERMINES A COUNTRY’S LEVEL
OF ECONOMIC DEVELOPMENT?
Official figures can also be misleading because
they do not account for black economy transactions
In addition, GNI and PPP data are static and do not
consider economic growth rates
So, while China and India are currently categorized as
being poor they are growing more rapidly than many
developed nations and are expected to become among
the largest economies in the world
WHAT DETERMINES A COUNTRY’S LEVEL
OF ECONOMIC DEVELOPMENT?
The United Nations used Sen’s ideas to develop
the Human Development Index (HDI) which is
based on
life expectancy at birth
educational attainment
whether average incomes are sufficient to meet the
basic needs of life in a country
HOW DOES POLITICAL ECONOMY INFLUENCE ECONOMIC PROGRESS?
Innovation and entrepreneurship are the engines of long-run
economic growth
innovation includes new products, new processes, new organizations,
new management practices, and new strategies
entrepreneurs commercialize innovative new products and processes
Innovation and entrepreneurship help increase economic
activity by creating new markets and products that did not
previously exist
innovation in production and business processes result in more
productive labor and capital further boosting economic growth rates
HOW DOES POLITICAL ECONOMY INFLUENCE ECONOMIC PROGRESS?
Innovation and entrepreneurship require a market economy
there is little incentive to develop new innovations in planned
economies because the state owns all means production and
therefore, the gains
There is a strong relationship between economic freedom
and economic growth
the six countries with the highest ratings of economic freedom from
1975 to 1995 were also among the highest for economic growth
Hong Kong, Switzerland, Singapore, the United States, Canada, and
Germany
HOW DOES POLITICAL ECONOMY INFLUENCE ECONOMIC PROGRESS?
Innovation and entrepreneurship require strong
property rights
without strong property rights, individuals and businesses
risk having their innovations and potential profits stolen
Economist Hernando de Soto claims that
inadequate property protection in many developing
nations limits economic growth
HOW DOES POLITICAL ECONOMY INFLUENCE ECONOMIC PROGRESS?
Democratic regimes are probably more conducive to long-term
economic growth than dictatorships, even the benevolent kind
property rights are only secure in well-functioning, mature
democracies
Subsequent economic growth leads to the establishment of
democratic regimes
South Korea
Taiwan
HOW DOES GEOGRAPHY INFLUENCE ECONOMIC DEVELOPMENT?
Countries with favorable geography are more likely to
engage in trade, and so, be more open to market-based
economic systems, and the economic growth they promote
Jeffrey Sachs studied economic growth rates between 1965
and 1990 and found that
landlocked countries grew more slowly than coastal economies
being totally landlocked reduced a country’s growth rate by 0.7%
per year
tropical countries grew more slowly than countries in temperate
zones
HOW DOES EDUCATION INFLUENCE ECONOMIC DEVELOPMENT?
Countries that invest in education have higher
growth rates because the workforce is more
productive
countries in Southeast Asia have offset their
geographical disadvantages by investing in education
Indonesia, Malaysia, and Singapore
HOW IS THE POLITICAL
ECONOMY CHANGING?
Since the late 1980s, two trends have emerged
[Link] revolution (late 1980s and early 1990s)
democratically elected governments replaced totalitarian
regimes
more committed to free market capitalism
2.A move away from centrally planned and mixed
economies
more countries have shifted toward the market-based model
HOW IS THE POLITICAL
ECONOMY CHANGING?
Trend 1: Democracy has spread over the last two decades
many totalitarian regimes failed to deliver economic progress to
the vast bulk of their populations
new information and communication technologies have broken
down the ability of the state to control access to uncensored
information
economic advances of the last 25 years have led to increasingly
prosperous middle and working classes who have pushed for
democratic reforms
HOW IS THE POLITICAL
ECONOMY CHANGING?
Author Francis Fukuyama argues that the new world order
will be characterized by democratic regimes and free
market capitalism
But, political scientist Samuel Huntington argues that while
many societies are modernizing they are not becoming
more Western
predicts a world split into different civilizations
these civilizations will be in conflict with each other
HOW IS THE POLITICAL
ECONOMY CHANGING?
Trend 2: The spread of market-based systems
more countries have moved away from centrally
planned and mixed economies toward the market-
based model
Command and mixed economies failed to deliver
the sustained economic growth achieved in
market-based countries
WHAT IS THE NATURE OF
ECONOMIC TRANSFORMATION?
The shift toward a market-based system involves
deregulation – removing legal restrictions to the free play
of markets, the establishment of private enterprises, and
the manner in which private enterprises operate
privatization - transfers the ownership of state property
into the hands of private investors
the creation of a legal system to safeguard property rights
WHAT DOES THE CHANGING
ECONOMY MEAN FOR MANAGERS?
Markets that were formerly off-limits to Western business
are now open
firms need to explore opportunities in these markets
Despite being underdeveloped and poor, some markets
have huge potential
China -1.2 billion people
India – 1.1 billion people
Latin America – 400 million potential consumers
WHAT DOES THE CHANGING
ECONOMY MEAN FOR MANAGERS?
However, the potential risks are large
will democracy thrive especially in difficult economic
times?
will totalitarian regimes return?
will a multi-polar world of different civilizations
emerge?
will China’s financial system be stable?
WHAT ARE THE IMPLICATIONS OF POLITICAL ECONOMY DIFFERENCES
FOR MANAGERS?
Countries with democratic regimes, market based
economic policies, and strong property rights protection
are more likely to have higher sustained rates of
economic growth
these markets are more attractive to international businesses
the benefits, costs, and risks of doing business in a country are
a function of the country’s political, economic, and legal systems
WHAT ARE THE IMPLICATIONS OF POLITICAL ECONOMY DIFFERENCES
FOR MANAGERS?
The benefits of doing business in a country are a function of
the market’s size
the purchasing power of its consumers
their likely future wealth
By identifying and investing early in potential future
economic stars, firms may be able to gain first mover
advantages (advantages that accrue to early entrants into a
market) and establish loyalty and experience in a country
China
WHAT ARE THE IMPLICATIONS OF POLITICAL ECONOMY DIFFERENCES
FOR MANAGERS?
The costs of doing business in a country are a function of
its
political system
is it necessary to pay bribes to get market access?
economic level
are the necessary supporting business and infrastructure in place?
legal system
it can be more costly to do business in countries with dramatically
different product, workplace, and pollution standards, or where there
is poor legal protection for property rights
WHAT ARE THE IMPLICATIONS OF POLITICAL ECONOMY DIFFERENCES
FOR MANAGERS?
The risks of doing business in a country are a function of
Political risk - the likelihood that political forces will cause drastic
changes in a country's business environment that adversely
affects the profit and other goals of a business enterprise
Economic risk - the likelihood that economic mismanagement
will cause drastic changes in a country's business environment
that adversely affects the profit and other goals of a business
enterprise
Legal risk - the likelihood that a trading partner will
opportunistically break a contract or expropriate property rights
HOW DO CULTURAL DIFFERENCES AFFECT INTERNATIONAL
BUSINESS?
Understanding and adapting to the local cultural is important
international companies
cross-cultural literacy - an understanding of how cultural differences
across and within nations can affect the way in which business is practiced
cross-cultural literacy is important for business success
A relationship may exist between culture and the costs of doing
business in a country or region
MNEs can be agents of cultural change
McDonald’s
WHAT IS CULTURE?
Culture - a system of values and norms that are shared among a group
of people and that when taken together constitute a design for living
• where
values are abstract ideas about what a group believes to be good, right, and
desirable
norms are the social rules and guidelines that prescribe appropriate behavior
in particular situations
Society - a group of people who share a common set of values and
norms
WHAT ARE VALUES AND NORMS?
Values provide the context within which a society’s
norms are established and justified and form the
bedrock of a culture
Norms include
folkways - the routine conventions of everyday life
mores - norms that are seen as central to the
functioning of a society and to its social life
HOW ARE CULTURE, SOCIETY,
AND THE NATION-STATE RELATED?
The relationship between a society and a nation
state is not strictly one-to-one
Nation-states are political creations
can contain one or more cultures
A culture can embrace several nations
WHAT DETERMINES CULTURE?
The values and norms of a culture evolve over time
Determinants include
religion
political and economic philosophies
education
language
social structure
WHAT IS A SOCIAL STRUCTURE?
Social structure - a society’s basic social
organization
Consider
the degree to which the basic unit of social
organization is the individual, as opposed to the group
the degree to which a society is stratified into classes
or castes
HOW ARE INDIVIDUALS
AND GROUPS DIFFERENT?
In Western societies, there is a focus on the individual
individual achievement is common
dynamism of the U.S. economy
high level of entrepreneurship
But, creates a lack of company loyalty and failure to gain
company specific knowledge
competition between individuals in a company instead of than team
building
less ability to develop a strong network of contacts within a firm
HOW ARE INDIVIDUALS
AND GROUPS DIFFERENT?
In many Asian societies, the group is the primary
unit of social organization
discourages job switching between firms
encourages lifetime employment systems
leads to cooperation in solving business problems
But, might also suppress individual creativity and
initiative
WHAT IS SOCIAL STRATIFICATION?
All societies are stratified on a hierarchical basis
into social categories, or social strata
individuals are born into a particular stratum
Must consider
[Link] between strata
[Link] significance placed on social strata in business
contexts
WHAT IS SOCIAL STRATIFICATION?
[Link] mobility - the extent to which individuals can move out
of the strata into which they are born
caste system - closed system of stratification in which social
position is determined by the family into which a person is born
change is usually not possible during an individual's lifetime
class system - form of open social stratification
position a person has by birth can be changed through
achievement or luck
WHAT IS SOCIAL STRATIFICATION?
[Link] significance attached to social strata in
business contacts
class consciousness - a condition where people tend to
perceive themselves in terms of their class background, and
this shapes their relationships with others
an antagonistic relationship between management and labor
raises the cost of production in countries with significant
class differences
HOW DO RELIGIOUS AND
ETHICAL SYSTEMS DIFFER?
Ethical systems - a set of moral principles, or
values, that are used to guide and shape behavior
Religion and ethics are often closely intertwined
ex. Christian or Islamic ethics
HOW DOES CULTURE
IMPACT THE WORKPLACE?
Hofstede’s dimensions of culture:
[Link] distance - how a society deals with the fact that people are unequal in
physical and intellectual capabilities
[Link] avoidance - the relationship between the individual and his fellows
[Link] versus collectivism - the extent to which different cultures socialize
their members into accepting ambiguous situations and tolerating ambiguity
[Link] versus femininity -the relationship between gender and work roles
HOW DOES CULTURE IMPACT THE WORKPLACE?
DOES CULTURE CHANGE?
Culture evolves over time
changes in value systems can be slow and painful for a society
Social turmoil - an inevitable outcome of cultural change
as countries become economically stronger, cultural change is
particularly common
economic progress encourages a shift from collectivism to
individualism
globalization also brings cultural change
