National Differences in Political, Economic, and Legal Systems
National Differences in Political, Economic, and Legal Systems
National Differences in Political, Economic, and Legal Systems
10e
by Charles W.L. Hill
and G. Tomas M. Hult
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• National Differences
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• Learning Objectives
LO 2-1Understand how the political systems of countries differ.
LO 2-2Understand how the economic systems of countries
differ.
LO 2-3Understand how the legal systems of countries differ.
LO 2-4Explain the implications for management practice of
national differences in political economy.
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• Opening Case:
Economic Transformation in Vietnam
Moving from centrally planned socialist economy to a more
market oriented system
In 1986, Vietnam one of poorest countries in the world
Agricultural land privatized; state farm collectives dismantled
Farm productivity surged, price controls removed, barriers to
FDI lowered
Today, living standards have surged
State-owned enterprises now only 40% of total output
Country too-dependent on commodity exports
Communist party still in power
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• Introduction
International business more complicated than domestic
Countries vary in economic development
Cultural, education, and skill levels vary
The political, economic, and legal systems are known as
the political economy
Societal culture affects the political economy and the
political economy shapes societal culture
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• Political Systems 1 of 9
Political system: the system of government in a
nation
Political systems can be assessed in terms of the
degree to which they:
Emphasize collectivism as opposed to individualism
Are democratic or totalitarian
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• Political Systems 2 of 9
Collectivism and Individualism
Collectivism: a system that stresses the primacy of
collective goals over individual goals
Can be traced to the Greek philosopher Plato
Today, socialists support collectivism
When collectivism is emphasized, the needs of the society
as whole are generally viewed as being more important
than individual freedoms
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• What About People’s Future Rights?
Individualism versus collectivism is a century-old debate topic
and an inherently interesting issue. For example, does an
individual’s life belong to him or her or to the community,
society, or country in which he or she resides? Most people
have a direct and immediate answer, but there is no consensus
on which answer depending on which country you reside in or
which personal “compass” you subscribe to. Everyone has
tendencies toward being both individualistic and collectivistic
but prefers one way more than the other. So, which of these
ideas— individualism or collectivism—do you think is correct,
and which cultural belief do you prefer and why?
Source: Objective Standard, March 3, 2014. www.theobjectivestandard.com
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• Political Systems 3 of 9
Collectivism and Individualism continued
Socialism
Modern socialists trace their roots to Karl Marx
Advocated state ownership of the basic means of production,
distribution, and exchange
The state then manages the enterprises for the benefit of society
as a whole
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• Political Systems 4 of 9
Collectivism and Individualism continued
In the early 20th century, socialism split into communists
and social democrats:
Communists - socialism could only be achieved though revolution
and totalitarian dictatorship
Social democrats worked to achieve the same goals by democratic
means
Many state-owned enterprises failed to succeed, and many
nations implemented privatization programs
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• Political Systems 5 of 9
Collectivism and Individualism continued
Individualism: suggests individuals should have freedom
over their economic and political pursuits
Can be traced to Aristotle who argued that individual diversity and
private ownership are desirable
Individualism stresses:
Individual freedom and self-expression
Letting people pursue their own self-interests to achieve the best
overall good for society
Democratic systems and free markets
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• Political Systems 6 of 9
Democracy and Totalitarianism
Democracy: political system in which government is by the
people, exercised either directly or through elected
representatives
Most common form today is representative democracy- elected
representatives vote on behalf of constituents
Totalitarianism: form of government in which one person
or political party exercises absolute control over all spheres
of human life, and opposing political parties are prohibited
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• Political Systems 7 of 9
Democracy and Totalitarianism continued
In most totalitarian regimes:
There is widespread political repression
There are no free and fair elections
Media is censored
Basic civil liberties are denied
Challenges to the regime are prohibited
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• Political Systems 8 of 9
Democracy and Totalitarianism continued
Four major forms of totalitarianism today:
1. Communist totalitarianism: advocates achieving socialism through
totalitarian dictatorship
2. Theocratic totalitarianism: political power is monopolized by a party,
group, or individual that governs according to religious principles
3. Tribal totalitarianism: a political party that represents the interests of
a particular tribe monopolizes power
4. Right wing totalitarianism: individual economic freedom is allowed
but individual political freedom is restricted in the belief that it could
lead to communism
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• Political Systems 9 of 9
Pseudo-Democracies
Many nations lie between pure democracy and complete
totalitarianism
Authoritarian elements capture much of the machinery of state
and use this in an attempt to deny basic political and civil liberties
Russia under Vladimir Putin
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• Economic Systems 1 of 4
Political ideology and economic systems are
connected
There are three types of economic systems: the
market economy, the command economy, and the
mixed economy
A market-based economic system is likely in countries
where individual goals are given primacy over collective
goals
State-owned enterprises and restricted markets are
common in countries where collective goals are dominant
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• Economic Systems 2 of 4
Market Economy
In a pure market economy the goods and services that a
country produces, and the quantity in which they are
produced is determined by supply and demand
Supply must not be restricted by monopolies
The role of government is to encourage free and fair competition
between private producers
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• Economic Systems 3 of 4
Command Economy
In a pure command economy the goods and services that
a country produces, the quantity in which they are
produced, and the price at which they are sold are all
planned by the government
All businesses are state-owned, and have little incentive to control
costs and be efficient
Because there is no private ownership, there is little incentive to
better serve consumer needs
Dynamism and innovation are absent
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• North Korea’s Command Economy
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• Economic Systems 4 of 4
Mixed Economy
A mixed economy includes some elements of a market
economy and some elements of a command economy
Governments take over troubled firms considered vital to national
interests
The number of mixed economies in the world today is
falling
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• Legal Systems 1 of 11
The 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
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
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• Legal Systems 2 of 11
Different Legal Systems
Common law: based on tradition, precedent, and custom
Found in most of Great Britain’s former colonies, including the
United States
Civil law: based on detailed set of laws organized into
codes
Found in more than 80 countries, including Germany, France,
Japan, and Russia
Theocratic law: based on religious teachings
Islamic law is the most widely practiced
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• Legal Systems 3 of 11
Differences in Contract Law
They approach contract law (the body of law that governs
contract enforcement) differently
A contract specifies the conditions under which an exchange is to
occur and details the rights and obligations of the parties involved
In a common law state, contracts are very detailed with all
contingencies spelled out
In a civil law state, contracts are shorter and much less
specific
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• Legal Systems 4 of 11
Differences in Contract Law continued
The 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
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• Legal Systems 5 of 11
Property Rights and Corruption
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
Private action: theft, piracy, blackmail, and the like by
private individuals or groups
Public action: public officials extort income or resources
from property holders
Excessive taxation, requiring expensive licenses or permits from
property holders, or taking assets into state ownership without
compensating the owners
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• Legal Systems 6 of 11
Property Rights and Corruption continued
Corruption is present in all countries to some degree,
however when a country has a high level of corruption:
Foreign direct investment falls
International trade falls
Economic growth falls
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Source: Constructed by the author from raw data from Transparency International, Corruption Perceptions Index 2015.
of
n by
Country
Rankings
Corruptio
• Figure 2.1
• Legal Systems 7 of 11
The Foreign Corrupt Practices Act limits corruption in
the U.S
It is illegal to bribe a foreign government official in order to
obtain or maintain business over which the foreign official
has authority
All publicly traded companies must keep detailed records
so that it is clear whether a violation of the act has
occurred
Facilitating or expediting payments to secure the
performance of routine government actions are permitted
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• Did You Know?
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• Legal Systems 8 of 11
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• Legal Systems 9 of 11
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• How Important are Intellectual Property Rights?
Burundi is a landlocked country in the Great Lake region of Eastern Africa.
Neighboring countries include Rwanda, Tanzania, and the Democratic
Republic of the Congo. Burundi is hilly and mountainous, with access to Lake
Tanganyika. The government system is a republic, with the chief of state and
head of government being the president. Burundi has a traditional economic
system in which the allocation of available resources is made on the basis of
primitive methods, and many citizens engage in subsistence agriculture. At
the same time, Burundi was last of the 131 countries ranked in the 2013
International Property Rights Index (IPRI). The IPRI is conducted by a
partnership of 74 international organizations. The IPRI takes into account legal
and political environment, physical property rights, and intellectual property
rights. How much should companies focus on intellectual property rights in
deciding where to (1) produce their products and (2) sell their products?
Does it differ if you produce or sell in the country?
Source: www.internationalpropertyrightsindex.org.
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• Legal Systems 10 of 11
The Protection of Intellectual Property continued
Response to violations of intellectual property
Lobbying governments for better laws and enforcement of those
laws
Trade Related Aspects of Intellectual Property Rights (TRIPS) -
requires WTO members to grant and enforce patents lasting at
least 20 years and copyrights lasting 50 years
Filing lawsuits
Avoiding countries with poor intellectual property laws
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• Legal Systems 11 of 11
Product Safety and Product Liability
Product safety laws set certain safety 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 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
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• Focus on Managerial Implications
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• Summary
In this chapter we have
Explored how the political systems of countries
differ.
Explored how the economic systems of countries
differ.
Explored how the legal systems of countries differ.
Explained the implications for management
practice of national differences in political
economy.
©McGraw-Hill Education.