Because learning changes everything.

Week 3
Chapter 2 (Part 2)
National Differences in Political,
Economic and Legal Systems

Dr/Ghada Mohamed Abdel Fattah

e-mail: ghada.abdelfattah@alexu.edu.eg

Class Link:
https://connect.mheducation.com/class/g-mohamed-abdelfattah-management-2022
 Because learning changes everything. ®

Chapter 2_Part 2
National Differences in
Political, Economic, and
Legal Systems

naqiewei/DigitalVision Vectors/Getty Images

© 2022 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.
 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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 II- Economic Systems 1

Political Ideology and Economic Systems Are Connected

Three types of economic systems:
1- Market economy,
2- Command economy, and
3- Mixed economy.

• Market-based economic system 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

1- Market Economy
Goods and services a country produces and the quantity in which
they are produced is determined by supply and demand.
• Supply must not be restricted by monopolies.

• Government encourages free and fair competition between private

producers.

• Constant incentive to improve products and processes

• Given the dangers inherent in monopoly, one role of government in a

market economy is to encourage vigorous free and fair competition
between private producers.
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 Economic Systems 3

2- Command Economy
Goods and services a country produces, the quantity in which they are
produced, and the price at which they are sold are planned by 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.

Since the demise of communism in the late 1980s, the number of command economies has
fallen dramatically. Some elements of a command economy were also evident in a number of
democratic nations led by socialist-inclined governments. France and India both experimented
with extensive government planning and state ownership, although government planning has
fallen into disfavor in both countries.

Reason: While the objective of a command economy is to mobilize economic resources for
the public good, the opposite often seems to have occurred.
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 North Korea’s Command Economy
North Korean leader Kim Jong-un visiting a factory.

© McGraw Hill AFP/Getty Images 7

 Economic Systems 4

3- Mixed Economy
Includes some elements of market economies and some elements
of command economies.
• Governments take over troubled firms considered vital to national
interests.

• Number of mixed economies becoming less common.

China currently operates with a mixed economy. Mixed economies

were once common throughout much of the developed world,
although they are becoming less so. Until the 1980s, 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-owned sector, such as Brazil,
Italy, and India (although there are still state-owned enterprises in
all of these nations).

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 III- Legal Systems 1

Legal System
Refers to rules, or laws, that regulate behavior, along with
processes by which laws are enforced and through which redress
for grievances is obtained.

A country’s legal system is important because laws:

• Regulate business practice.

• Define manner in which business transactions are executed.

• Set rights and obligations of those involved in business transactions.

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 Legal Systems 2

Different Legal Systems

Common law: based on tradition, precedent, and custom.
• Found in most of Great Britain’s former colonies, including the U.S.

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 most widely practiced.

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 Legal Systems 2

Different Legal Systems (continued)

• In common law, tradition refers to a country’s legal history, precedent
refers to cases that have come before the courts in the past, and
custom refers to the ways in which laws are applied in specific
situations.

• A civil law system tends to be less adversarial than a common law

system because the judges rely on detailed legal codes rather than
interpreting tradition, precedent, and custom.

• In practice, Islamic jurists and scholars are constantly debating the

application of Islamic law to the modern world. In reality, many Muslim
countries have legal systems that are a blend of Islamic law and a
common or civil law system.

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 Legal Systems 3

Differences in Contract Law

Common law and civil law systems approach contract law—body
of law that governs contract enforcement—differently.
• A contract specifies conditions under which an exchange is to occur
and details rights and obligations of parties.

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.

Because common law tends to be relatively ill specified, contracts

drafted under a common law framework tend to be very detailed
with all contingencies spelled out. In civil law systems, however,
contracts tend to be much shorter and less specific because many
of the issues are already covered in a civil code.
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 Legal Systems 4

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 places of
business in different nations.
• Countries that adopt CISG signal to other nations they treat the
Convention’s rules as part of their law.

• The CISG applies automatically to all contracts for the sale of goods
between different firms based in countries that have ratified the convention,
unless the parties to the contract explicitly opt out. One problem with the
CISG, however, is that as of 2020, only 93 nations had ratified the
convention (the CISG went into effect in 1988). Some of the world’s
important trading nations, including India and the United Kingdom, have not
ratified the CISG.
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 Legal Systems 5

Property Rights and Corruption

• Property rights: legal rights over the use to which a resource is
put and over the use made of any income 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.

• There are systematic differences in the extent of corruption. In some countries, the rule
of law minimizes corruption. Corruption is seen and treated as illegal, and when
discovered, violators are punished 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 perk of office
and openly flout (make fun of) laws against corruption.

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 Legal Systems 6

Corruption is present in all countries to some degree, but countries

with a high level of corruption face:
• Foreign direct investment falls.
• International trade falls.
• Economic growth falls.

• By siphoning off profits, corrupt politicians and bureaucrats reduce the

returns to business investment and, hence, reduce the incentive of
both domestic and foreign businesses to invest in that country. The
lower level of investment that results hurts economic growth. Thus, we
would expect countries with high levels of corruption such as
Indonesia, Nigeria, and Russia to have a lower rate of economic
growth than might otherwise have been the case.

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 Figure 2.1 Rankings of Corruption by
Country, 2019

Access the text alternative for slide images.

© McGraw Hill Source: Constructed by the author from raw data from Transparency International, Corruption Perceptions Index 2019.. 16
 Legal Systems 7

Foreign Corrupt Practices Act (FCPA).

• Makes it 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 it is clear
whether a violation has occurred.
• Facilitating or expediting payments to secure performance of routine
government actions are permitted.

• In 1997, trade and finance ministers from the member states of the
Organization for Economic Co-operation and Development (OECD),
an association of 34 major economies including most Western
economies (but not Russia, India, or China), adopted the Convention
on Combating Bribery of Foreign Public Officials in International
Business Transactions obliging member-states to make the bribery of
foreign public officials a criminal offense.

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 Legal Systems 8

The Protection of Intellectual Property

Intellectual property: property that is the product of intellectual
activity.
• Patents: give 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 philosophy behind intellectual property laws is to reward the

originator of a new invention, book, musical record, clothes design,
restaurant chain, and the like for his or her idea and effort. Such laws
stimulate innovation and creative work. They provide an incentive for
people to search for novel ways of doing things, and they reward
creativity.

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 Legal Systems 9

Protection of intellectual property rights differs greatly from country to

country.
185 nations are members of World Intellectual Property Organization.
• Paris Convention for the Protection of Industrial Property:
agreement signed by 170+ countries to protect intellectual property
rights.
• Enforcement is lax in many nations, especially China and Thailand.

The computer software industry is an example of an industry that

suffers from lax enforcement of intellectual property rights. A study
published in 2012 suggested that violations of intellectual property
rights cost personal computer software firms revenues equal to $63
billion a year. According to the study’s sponsor, the Business
Software Alliance, a software industry association, some 42 percent
of all software applications used in the world were pirated.

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 Legal Systems 10

Responses 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.

• Firms also need to be on the alert to ensure that pirated copies of

their products produced in countries with weak intellectual property
laws don’t turn up in their home market or in third countries. For
example, a few years ago U.S. computer software giant Microsoft
discovered that pirated Microsoft software, produced illegally in
Thailand, was being sold worldwide as the real thing.

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 Legal Systems 11

Product Safety and Product Liability

Product safety laws set certain safety standards to which a
product must adhere.
Product liability holds 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 standards of home

country or host country.

While the ethical thing to do is undoubtedly to adhere to home-

country standards, firms have been known to take advantage of
lax safety and liability laws to do business in a manner that would
not be allowed at home.

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 360° View: Managerial Implications
The Macro Environment Influences Market
Attractiveness
• Political, economic, and legal systems of a country raise
important ethical issues that have implications for practicing
international business.
• Political, economic, and legal environments of a country clearly
influence attractiveness of country as a market and/or
investment site.
• A democratic country with a market-based economy, protection
of property rights, and limited corruption is a more attractive
place to do business.

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 Summary
In this chapter, we have
• Understood how political systems of countries differ.
• Understood how economic systems of countries differ.
• Understood how legal systems of countries differ.
• Explained implications for management practice of national
differences in political economy.

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 Because learning changes everything. ®

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© 2022 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.