Chapter 2:
International business = more complex than domestic (differences in political, economic,
legal, cultural systems).
Impacts: benefits, costs, risks, management, and strategy in international markets.
Key focus: understanding country differences in systems and their implications for business.
Countries at different economic stages.
Political economy = political, economic, legal systems interact.
Example: Hong Kong - China's control after 1997, affects business.
Culture and political economy are interconnected.
Political Systems:
• Political systems shape economic and legal systems.
• Assessed by collectivism vs individualism and democracy vs totalitarianism.
Collectivism and Individualism:
• Collectivism = prioritizing collective goals over individual freedoms.
• Plato and socialists advocate collectivism, emphasizing society's needs over
individual rights.
Socialism:
• Marx advocated state ownership of production to benefit workers.
• Split into communists (violent revolution) and social democrats (democratic means).
Individualism:
• Emphasizes individual freedom in economic and political pursuits over state
interests.
• Traced back to Aristotle, who advocated for private ownership as more productive
than communal property.
Democracy and Totalitarianism:
• Democracy = government by the people, either directly or through elected
representatives.
• Totalitarianism = absolute control by one person/party; opposing parties prohibited.
Democracy:
• Representative democracy: citizens elect representatives to make decisions.
• Safeguards include free media, regular elections, and freedom of expression.
Totalitarianism:
• Denies freedoms like free speech, media, and elections.
• Four types: communist, theocratic, tribal, and right-wing totalitarianism.
Economic Systems:
• Individual goals = free market systems; collective goals = state control of enterprises.
• Three types: market economy, command economy, mixed economy.
Market Economy:
• All productive activities are privately owned; production determined by supply and
demand.
• Government role: prevent monopolies and encourage competition to ensure
efficiency.
Command Economy:
• Government plans all production, pricing, and quantity; businesses are state-owned.
• Lack of competition leads to inefficiency, stagnation, and absence of innovation.
Mixed Economy:
• Combines private ownership with significant state ownership and government
planning in certain sectors.
• Governments may nationalize troubled firms vital to national interests (e.g., AIG,
Citigroup, Trans Mountain Pipeline).
Legal Systems:
• Legal systems regulate business practices, transactions, and rights/obligations,
differing across countries.
• Influenced by political systems and historical traditions, affecting business
attractiveness and legal frameworks.
Types of Legal Systems:
• Common Law: Based on tradition, precedent, and custom; offers flexibility in
interpretation (e.g., Canada outside Quebec).
• Civil Law: Based on detailed legal codes; less flexibility for judges (e.g., France,
Quebec).
• Theocratic Law: Based on religious teachings (e.g., Islamic law), often mixed with civil
or common law in modern states.
Contract Law:
• Common law contracts are detailed due to fewer predefined rules; civil law contracts
are shorter, relying on existing codes.
• International contract disputes may be resolved via CISG or arbitration courts (e.g.,
International Court of Arbitration in Paris).
Property Rights:
• Property rights involve legal ownership and income use of resources (land, buildings,
intellectual property).
• Violations can occur through private action (e.g., theft, piracy) or public action, often
worsened by weak legal systems.
Public Action and Corruption:
• Public officials may violate property rights via legal mechanisms (e.g., excessive
taxation) or illegal means (e.g., bribes).
• Corruption varies across countries; some have strong legal systems to curb it, while
others see corruption as widespread and accepted.
Deregulation:
• Removes legal restrictions on private enterprise operations and market functions.
• Involves abolishing price controls, easing foreign investment, and reducing trade
barriers (e.g., India).
Privatization:
• Transfers state-owned assets to private hands, promoting efficiency and productivity.
• Examples include Great Britain, Zambia, and post-communist countries like Russia
and Poland.
Legal Systems:
• Essential for protecting property rights and enforcing contracts in market economies.
• Former communist states still face challenges with property titles and weak contract
enforcement systems.
