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Course: International Business
Chapter 2: National Differences in Political
Economy
Course Teacher: Dr. H. M. Mosarof Hossain
ProfessorDepartment of Finance
University of Dhaka
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Chapter 2: National Differences in Political Economy
Introduction: International business is much morecomplicated than domestic business becausecountries differ in many ways. Countries have
different political, economic and legal systems.Cultural practices can vary dramatically as can theeducation and skill level of the population, andcountries are at different stages of economic
development. All these differences can and do havemajor implications for the practice of internationalbusiness.
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Chapter 2: National Differences in Political Economy
They have a 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. There is significance of country differences
in political systems, economic systems, legal systemsand national cultures for the practice of international
business.
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Political System
By political system, we mean the system ofgovernment in a nation. Political systems can beassessed according to two dimensions. The first is
the degree to which they emphasize collectivismas opposed to individualism and the second is thedegree to which they are democratic ortotalitarian. These dimensions are interrelated;
systems that emphasize collectivism tend towardtotalitarianism, whereas those that plays a highvalue on individualism tend to be democratic.
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Collectivism and Individualism
Collectivism refers to a political system thatstresses the primacy of collective goals over
individual goals. When collectivism isemphasized the needs of society as a wholeare generally viewed as being more importantthan individual freedoms. In such
circumstances, an individuals right to dosomething may be restricted on the groundthat it runs counter to the good ofsociety orto commongood.
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Individualism refers to a philosophy that anindividual should have freedom in his or hereconomic and political pursuits. It stresses that theinterest of the individual should take precedence overthe interest of the state. In a society individualdiversity and private ownership are desirable.Individualism is built on two central issues/tenets.The first is an emphasis on the importance of
guaranteeing individual freedom and self-expressionand second one is that the welfare of society is bestserved by letting people pursue their own economicself interest.
Collectivism and Individualism
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Democracy and Totalitarianism
Democracy and Totalitarianism are at different endsof a political dimension. Democracy refers to a
political system in which government is by the
people, exercised either directly or through electedrepresentatives. Totalitarianism is a form ofgovernment in which one person or political partyexercises absolute control over all spheres of humanlife and prohibits opposing political parties. The
democratic-totalitarian dimension is not independentof the collectivism-individualism dimension.Democracy and individualism go hand in hand, as dothe communist version of collectivism andtotalitarianism.
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Economic Systems
Political ideology and economic systems areconnected. In countries where individual goals
are given primacy over collective goals, weare more likely to find free market economicsystems. In contrast, in countries wherecollective goals are given preeminence, the
state may have taken control over manyenterprises; markets in such countries arelikely to be restricted rather than free.
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In a pure market economy all productive activities areprivately 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 producersthrough the price system. If demand for a product exceedssupply, prices will rise, signaling producers to producemore. If supply exceeds demand, prices will fall, signaling
producers to produce less. In this system consumers aresovereign. The purchasing patterns of consumers, assignaled to producers through the mechanism of the pricesystem, determined what is produced and in what quantity.
1. Market Economy
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2. Command Economy
In a pure command economy, the government plans thegoods and services that a country produces, the quantityin which they are produced, and the prices at which they
are sold. Consistent with the collectivist ideology, theobjective of a command economy is for government toallocate resources forthe good ofsociety. In addition,in a pure command economy, all businesses are stateowned, the rationale being that the government can thendirect them to make investments that are in the bestinterest of the nation as a whole rather than in theinterests of private individuals.
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3. Mixed Economy
In a mixed economy, certain sectors of the
economy are left to private ownership and
free market mechanisms where 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.
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Legal System
The legal system of a country refers to the rules, orlaws that regulates behavior along with the processes
by which the laws are enforced and through whichredress for grievance is obtained. The legal system ofa country is of immense importance to international
business. A countrys laws regulate business
practice, define the manner in which businesstransactions are to be executed, and set down therights and obligations of those involved in businesstransactions.
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The legal system is influenced by the prevailingpolitical system (although it is also stronglyinfluenced by historical tradition). The government
of a country defines the legal framework within inwhich firms do business- and often the laws thatregulate business reflect the rulers dominant
political ideology. For example, collectivist inclinedtotalitarian states tend to enact laws that severelyrestrict private enterprise whereas the laws enacted
by governments in democratic states whereindividualism is the dominant political philosophytend to be pro-private enterprise and pro-consumer.
Legal System
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1. Common Law
Common law is based on tradition, precedence, andcustom. Tradition refers to a countrys legal history,
precedence to cases that have come before the court
in the past, and custom to ways in which laws areapplied in specific situations. Judges in a commonlaw system have the power to interpret the law sothat it applies to the unique circumstances of an
individual case. In turn, each new interpretation setsa precedence that may be followed in future cases.As new precedence arise, laws may be altered,clarified, or amended to deal with new situations.
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A civil law system is based on a detail set of
laws organized into codes. When law courts
interpret civil law, they do so with regard tothese codes. A civil law system tends to be
less adversarial that a common law system,
since the judges rely upon detail legal codes
rather than interpreting traditions, precedence
and custom.
2. Civil Law
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3. Theocratic Law
A theocratic law system is one in which thelaw is based on religious teachings. Islamiclaw is the most widely practiced theocratic
legal system in the modern world. Islamic lawis primarily a moral rather than a commerciallaw and is intended to govern all aspects oflife. The foundation for Islamic law is the
holy book of Islam, the Quran, along with theSunnah, or decisions and sayings of theProphet Mohammad (S),
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3. Theocratic Law
and the writings of islamic scholars who havederived rules by analogy from the principlesestablished in the Quran and the Sunnah.
Because the Quran and the Sunnah are holydocuments, the basic foundation of islamiclaw cannot be changed. However, in practiceislamic jurists and scholars are constantly
debating the application of islamic law to themodern world. In reality, many muslimcountries have legal systems that are a blendof islamic law and a common or civil law
system.
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Property Rights and Corruption
The term property refers to a resource over which an
individual or business hold a legal title; that is, a
resource that it owns. Resources include land,
buildings, equipments, capital, mineral rights,businesses, and intellectual property. Property rights
refer to the legal right over the use to which a
resource is put and over the use made of any income
that may be derived from that resource. Countries
differ in the extent to which their legal systems
define and protect property right.
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Property Rights and Corruption
1. Private action: It refers to threat, privacy,
blackmail, and the like by private individuals
or groups. Although threat occurs in allcountries, a weak legal system allows for a
much higher levels of criminal action in some
than in others.
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Property Rights and Corruption
2. Public action and corruption: Public action to violetproperty rights occurs when public officials, such as
politicians and governments bureaucratic, extort
income, resources, or the property itself from property
holder. This can be done through legal mechanism such
as levying excessive taxation, requiring expensive
licensee or permits from property holders, taking assets
into state ownership without compensating the owners
or redistributing assets without compensating the prior
owner. It can also be done through legal means, or
corruption,.
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Property Rights and Corruption
by demanding bribes from business in return for the
rights to operate in a country, industry, or location. The
rule of law minimizes corruption. Corruption is seen
and treated as legal, and when discovered, violators arepunished by the full force of the law. In other countries,
the rule of law is weak and corruption by bureaucrats
and politicians is rife. Corruption is so endemic in some
countries that politicians and bureaucrats regard it as a
park of office and openly flout and loss against
corruption.
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The determinants of economic development
The political, economic, and legal systems of
a country can have a profound impact on the
level of economic development and hence on
the attractiveness of a country as a possiblemarket or production location for a firm. The
level of economic development is measured
through gross national income and humandevelopment index.