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National Differences
in Political,
Economic, and Legal
Systems
Chapter 2
© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw Hill.
© McGraw Hill
Learning Objectives
2-1 Understand how the political systems of countries
differ.
2-2 Understand how the economic systems of countries
differ.
2-3 Understand how the legal systems of countries differ.
2-4 Explain the implications for management practice of
national differences in political economy.
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Introduction
Political Economy
• Political, economic, and legal systems of a country.
• These systems are interdependent.
• They influence each other.
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Political Systems 1
The system of government in a nation is called the
political system.
• Assessed according to two dimensions:
• Emphasis on collectivism or individualism.
• Degree to which they are democratic or totalitarian.
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Political Systems 2
Collectivism and Individualism
• Collectivism:
• The needs of society as a whole are generally viewed as being more
important than individual freedoms.
• Socialism:
• Public ownership of the means of production for the common good.
• Karl Marx: The few benefit at the expense of the many in a capitalist
society where individual freedoms are not restricted.
• Communists versus social democrats.
• Privatization.
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Political Systems 3
Collectivism and Individualism continued
• Individualism:
• An individual should have freedom in economic and political pursuits.
• The interests of the individual should take precedence over the
interests of the state.
• Two tenets:
• Guarantee of individual freedom and self-expression.
• Welfare of society best served by letting people pursue their own economic selfinterest.
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Political Systems 4
Democracy and Totalitarianism
• Democracy: government is by the people, exercised either
directly or through elected representatives.
• Totalitarianism: one person or political party exercises
absolute control over all spheres of human life and
prohibits opposing political parties.
• Democracy and individualism go hand in hand, as do the
communist version of collectivism and totalitarianism.
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Political Systems 5
Democracy and Totalitarianism continued
• Democracy:
• Representative democracy: citizens periodically elect individuals to
represent them.
• Includes a multitude of safeguards that are typically based in
constitutional law, including:
• Freedom of expression.
• Free media.
• Universal adult suffrage.
• Fair court system.
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Political Systems 6
Democracy and Totalitarianism continued
• Totalitarianism:
• Communist totalitarianism: socialism can be achieved only through a
totalitarian dictatorship.
• Theocratic totalitarianism: monopolized by a party, group, or
individual that governs according to religious principles.
• Tribal totalitarianism: a party, group, or individual that represents the
interests of a particular tribe monopolizes political power.
• Right-wing totalitarianism: generally permits individual economic
freedom but restricts individual political freedom, including free
speech, on the ground that it would lead to the rise of communism.
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Political Systems 7
Democracy and Totalitarianism continued
• Pseudo-democracies:
• Lie between pure democracies and complete totalitarianism
systems.
• Authoritarian elements have captured some or much of the
machinery of state and use this to deny basic political and civil
liberties.
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Economic Systems 1
Market Economy
• All productive activities are privately owned.
• Production is determined by supply and demand.
• To work, supply must not be restricted.
• Role of government is to encourage vigorous free and fair
competition.
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Economic Systems 2
Command Economy
• Government plans the goods and services, quantity and
price, then allocates them for “the good of society.â€
• All businesses are state owned.
• Historically found in communist countries.
• No incentive for individuals to look for better ways to
serve needs.
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Economic Systems 3
Mixed Economy
• Some sectors are privately owned, some are government
owned.
• Once common in developed world, less so now.
• Government may aid troubled firms whose operations are
vital to national interests.
• U.S. helped Citigroup, General Motors.
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Legal Systems 1
Legal systems of a country refer to:
• Rules or laws that regulate behavior.
• Process through which laws are enforced.
• Process through which redress for grievances is obtained.
• Influenced by the prevailing political system.
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Legal Systems 2
Different Legal Systems
• Common law:
• Based on tradition, precedent, custom.
• More flexible than other systems.
• Civil law:
• Based on detailed laws organized into codes.
• Less adversarial than a common law system.
• Theocratic law:
• Based on religious teachings.
• Most common is Islamic law.
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Legal Systems 3
Differences in Contract Law
• Contract: specifies conditions under which an exchange is
to occur, and details rights of parties involved.
• Contract law: body of law that governs contract
enforcement.
• Under common law:
• Contracts are very detailed with all contingencies spelled out.
• More expensive and can be adversarial.
• Under civil law:
• Contracts tend to be much shorter and less specific.
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Legal Systems 4
Differences in Contract Law continued
• United Nations Convention on Contracts for the
International Sale 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.
• Applies automatically to all contracts for the sale of goods between
different firms based in countries that have ratified the convention,
unless the parties opt out.
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Legal Systems 5
Property Rights and Corruption
• Property: a resource that an individual or business owns.
• Land, buildings, equipment, capital, mineral rights, businesses,
intellectual property.
• Property rights: 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.
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Legal Systems 6
Property Rights and Corruption continued
• Private action:
• Theft, piracy, blackmail by private individuals or groups.
• Public action and corruption:
• Public officials extort income, resources, or property.
• Can be done legally by levying excessive taxation, requiring licenses or permits
from property holders, taking assets into state ownership without compensating
owners, redistributing assets without compensating prior owners.
• Can be done illegally through corruption, demanding bribes.
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Figure 2.1 Rankings of corruption by country, 2018
Access the text alternative for slide images.
Source: Constructed by the author from raw data from Transparency International, Corruption Perceptions Index 2018.
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Legal Systems 7
Property Rights and Corruption continued
• Foreign Corrupt Practices Act (FCPA):
• Illegal to bribe a foreign government official to obtain or maintain
business over which that foreign official has authority.
• Requires all publicly traded companies to keep detailed records that
would reveal whether a violation of the act has occurred.
• Convention on Combating Bribery of Foreign Public
Officials in International Business Transactions (1997):
• Bribery of a foreign public official is a criminal offense.
• Allows for facilitating or expediting payments.
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Legal Systems 8
The Protection of Intellectual Property
• Refers to property that is the product of intellectual activity,
such as computer software, a screenplay, a music score.
• Patent: inventor’s exclusive rights for a defined period.
• Copyrights: exclusive legal rights of authors, composers,
playwrights, artists, and publishers.
• Trademarks: officially registered designs and names used to
differentiate products.
• World Intellectual Property Organization.
• Paris Convention for the Protection of Industrial Property.
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Legal Systems 9
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.
• Can be much greater if a product does not conform to safety
standards.
• Criminal and civil laws apply.
• Raises ethical issues when doing business abroad.
© McGraw Hill
Focus on Managerial Implications
The Macro Environment Influences Market
Attractiveness
• Two broad implications:
• Political, economic, and legal systems of a country raise important
ethical issues that have implications for international business.
• Political, economic, and legal environments of a country clearly
influence the attractiveness of that country as a market or investment
site.
• A country with democratic political institutions, market-based economic system, and
strong legal system clearly more attractive to do business in.
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© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw Hill.
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