#4:LO 2-1: Understand how the political systems of countries differ.
Political systems have two dimensions: the degree of collectivism versus individualism, and the degree of democracy versus totalitarianism.
These dimensions are interrelated; systems that emphasize collectivism tend towards totalitarianism, while systems that place a high value on individualism tend to be democratic.
However, a large gray area exists in the middle. It is possible to have democratic societies that emphasize a mix of collectivism and individualism. Similarly, it is possible to have totalitarian societies that are not collectivist.
The Opening Case: Corruption in Brazil describes the effect of widespread political and economic corruption in Brazil. Once considered one of the world’s most promising developing economies, Brazil has been rocked by a number of bribery and corruption scandals that have led to political instability and recession.
#5:Collectivism refers to a political system that stresses the primacy of collective goals over individual goals. The needs of society as a whole are generally viewed as being more important than individual freedoms. In such circumstances, an individual’s right to do something may be restricted on the grounds that it runs counter to “the good of society” or to “the common good.”
#7:Country Focus: Venezuela under Hugo Chávez, 1999–2013 explores the political and economic situation in Venezuela since the election of Chavez as president in 1998. Chavez, who ran on a platform against corruption and economic mismanagement, faced a country mired in recession. His strategy involved drafting a new constitution that kept him in power until 2013, and reconfiguring the Supreme Court. As a result, Venezuela is now considered to be only “partly free.” Today, unemployment remains high, and poverty continues to rise, corruption is rampant, and there is a move to privatize certain industries, with the oil industry being a particular target. It remains to be seen how the country will fare with a new leader after Chávez’s death in 2013.
#8:Democracy, as originally practiced by several city-states in ancient Greece, is based on a belief that citizens should be directly involved in decision making.
Most modern democratic states practice representative democracy in which citizens periodically elect individuals to represent them. These elected representatives then form a government, whose function is to make decisions on behalf of the electorate and it is assumed that if elected representatives fail to perform this job adequately, they will be recalled, impeached or voted down at the next election.
#9:Totalitarianism is a 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 (Communist, theocratic, tribal, right wing).
#10:Totalitarianism denies its citizens all of the constitutional guarantees asserted by representative democracies.
#11:The democratic–totalitarian dimension is not independent of the collectivism–individualism dimension. Democracy and individualism go hand in hand, as do the communist version of collectivism and totalitarianism.
However, gray areas exist; it is possible to have a democratic state where collective values predominate, and it is possible to have a totalitarian state that is hostile to collectivism and in which some degree of individualism—particularly in the economic sphere—is encouraged. For example, China has seen a move toward greater individual freedom in the economic sphere, but the government is still a totalitarian dictatorship.
#12:LO 2-2: Understand how the economic systems of countries differ.
A market economy is an economy in which all productive activities are privately owned, as opposed to being owned by the state. Production is determined by the interaction of supply and demand and signaled to producers through the price system.
For a market to work in this manner there must be no restrictions on supply. A restriction on supply occurs when a market is monopolized by a single firm. In such circumstances, rather than increase output in response to increased demand, a monopolist might restrict output and let prices rise.
#13:A command economy is an economy in which the goods and services that a country produces, the quantity in which they are produced, and the prices at which they are sold are all planned by the government.
Consistent with the collectivist ideology, the objective of a command economy is for government to allocate resources for “the good of society.” In addition, in a pure command economy, all businesses are state owned.
#14:A mixed economy is an economy in which certain sectors of the economy are left to private ownership and free market mechanisms while other sectors have significant state ownership and government planning. India has a mixed economy.
Mixed economies were once very common throughout much of the world, although they are becoming much less so. There was a time not too long ago when Great Britain, France, and Sweden were mixed economies, but extensive privatization has reduced state ownership of businesses in all three.
#15:LO 2-3: Understand how the legal systems of countries differ.
Legal systems are the systems of rules or laws that regulate behavior along with the processes by which the laws are enforced and through which redress for grievances is obtained.
The legal system of a country is of immense importance to international business. A country’s laws regulate business practice, define the manner in which business transactions are to be executed, and set down the rights and obligations of those involved in business transactions.
#16:There are three main types of legal systems – or legal traditions – in use around the world: common law, civil law, and theocratic law.
Common law evolved in England over hundreds of years. It is now found in most of Great Britain’s former colonies, including the United States. Common law is based on tradition, precedent, and custom. When law courts interpret common law, they do so with regard to these characteristics. This gives a common law system a degree of flexibility that other systems lack because it allows the judge to interpret the law.
Civil law is based on a very detailed set of laws organized into codes. When law courts interpret civil law, they do so with regard to these codes. Over 80 countries, including Germany, France, Japan, and Russia, operate with a civil law system. A civil law system tends to be less adversarial that a common law system, since the judges rely upon detailed legal codes rather than tradition, precedent and custom which they interpret. Judges under a civil law system have less flexibility than those under a common law system.
Theocratic law is based on religious teachings. Islamic law is the most widely practiced theocratic legal system in the modern world, although usage of both Hindu and Jewish law persisted into the twentieth century.
#17:A contract is a document that specifies the conditions under which an exchange is to occur and details the rights and obligations of the parties involved.
Contract law is the body of law that governs contract enforcement.
The parties to an agreement normally resort to contract law when one party feels the other has violated either the letter or the spirit of an agreement.
Since 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, contracts tend to be much shorter and less specific because many of the issues typically covered in a common law contract are already covered in a civil code.
This suggests that it is more expensive to draw up contracts in a common law jurisdiction, and that resolving contract disputes can be a very adversarial process in common law systems.
#19:Property rights refer to a resource over which an individual or business holds a legal title; that is, a resource that they own.
Resources include land, buildings, equipment, capital, mineral rights, businesses, and intellectual property (such as patents, copyrights and trademarks).
Countries differ significantly in the extent to which their legal system protects property rights.
#20:Countries differ significantly in the extent to which their legal system protects property rights.
These rights can be violated through private or public action.
Private action refers to theft, piracy, blackmail, and the like by private individuals or groups. Public action violations occur when public officials, such as politicians and government bureaucrats, extort income or resources from property holders.
This can be done through a number of legal mechanisms such as levying excessive taxation, requiring expensive licenses or permits from property holders, or taking assets into state ownership without compensating the owners, or through illegal means—corruption--by demanding bribes from businesses in return for the rights to operate in a country, industry, or location.
#21:In the United States the Foreign Corrupt Practices Act was passed during the 1970s following revelations that U.S. companies had bribed government officials in foreign countries in an attempt to win lucrative contracts.
This law makes bribing a foreign government official in order to obtain or maintain business over which that foreign official has authority a violation of United States law, and requires all publicly traded companies to keep audit records.
The Act allows facilitating or expediting payments ("grease payments") to expedite or to secure the performance of a routine governmental action. The rationale for this exception is that grease payments are distinguishable from bribes used to obtain or maintain business, since they merely facilitate performance of duties that the recipients are already obligated to perform. The Management Focus box on whether Walmart violated the Foreign Corrupt Practices Act in Mexico provides a class discussion opportunity.
#22:Country Focus: Corruption in Nigeria describes the corruption that has characterized Nigeria’s economy over the last 40 years. When the country initially gained its independence from Britain in 1960, expectations were high that Nigeria would become an economic heavyweight in Africa. With abundant natural resources and a large population, it seemed the stage was set for success. However, despite extensive revenues from the sale of oil, the country still suffered from extreme poverty, illiteracy, and high debt. Several factors have been blamed for Nigeria’s troubles including political instability and corruption.
#23:Management Focus: Starbucks Wins Key Trademark Case in China focuses on intellectual property laws in China. When Starbucks entered China in 1999, the company was quickly challenged by a look-alike competitor, Xing Ba Ke. Not only did the name Xing Ba Ke mimic the Starbucks name, but Xing Ba Ke’s stores were virtual replicas of those operated by Starbucks. In 2003, Starbucks sued Xing Ba Ke for trademark violations. In 2006, Starbucks won its case, and Xing Ba Ke was fined $62,000 and ordered to stop using its name. The case was seen as a break through of sorts, a signal that China was finally caving to pressure from other nations and the World Trade Organization to respect intellectual property rights. Today, Starbucks operates over 400 stores in China and expects the market to become second only to the United States.
#26:Product safety laws set safety standards for products and manufacturing processes. Product liability involves holding a firm and its officers responsible for product safety standards.
There are both civil and criminal product liability laws. Civil laws call for payment and monetary damages. Criminal liability laws result in fines or imprisonment. Both civil and criminal liability laws are probably more extensive in the United States than in any other country.
#27:Country differences in product safety and liability laws raise an important ethical issue for firms doing business abroad. When product safety laws are tougher in a firm’s home country than in a foreign country and/or when liability laws are more lax, should a firm doing business in that foreign country follow the more relaxed local standards or should it adhere to the standards of its home country?
#28:LO 2-4: Explain the implications for management practice of national differences in political economy.
