Global Business Today 10e
by Charles W.L. Hill
and G. Tomas M. Hult
©McGraw-Hill Education. 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 Education.
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Lecture Script 6-1
National Differences
Chapter 2: National Differences in Political, Economic, and Legal Systems
Source: © Hoang Dinh Nam/Getty Images
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Listening to changing customer demands and monitoring your environment allow you and the firm to identify potential growth opportunities.
2
Main Learning Objectives
Disciplinary:
Identify how political economies differ and influence, positively or negatively, how you can business abroad
Essential:
Explain the implications, as international business managers, of how you could leverage the differences in the global political economies
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Learning Objectives
LO 2-1 Understand how the political systems of countries differ.
LO 2-2 Understand how the economic systems of countries differ.
LO 2-3 Understand how the legal systems of countries differ.
LO 2-4 Explain the implications for management practice of national differences in political economy.
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Opening Case: Economic Transformation in Vietnam
Moving from centrally planned socialist economy to a more market-oriented system
In 1986, Vietnam one of poorest countries in the world
Agricultural land privatized; state farm collectives dismantled
Farm productivity surged, price controls removed, barriers to FDI lowered
Today, living standards have surged
State-owned enterprises now only 40% of total output
Country too-dependent on commodity exports
Communist party still in power
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To compound matters, corruption is rampant in Vietnam. Transparency International, a nongovernmental organization that evaluates countries based on perceptions of how corrupt they are, ranks Vietnam 112 out of the 167 countries it ranks. Corruption is not a new problem in Vietnam.
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Lecture Script 6-5
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Introduction
International business more complicated than domestic
Countries vary in economic development
Cultural, education, and skill levels vary
The political, economic, and legal systems are known as the political economy
Societal culture affects the political economy and the political economy shapes societal culture
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Political Systems 1 of 9
Political system: the system of government in a nation
Political systems can be assessed in terms of the degree to which they:
Emphasize collectivism as opposed to individualism
Are democratic or totalitarian
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Lecture Script 6-8
LO 2-1 Understand how the political systems of countries differ.
Political Systems 2 of 9
Collectivism and Individualism
Collectivism: a system that stresses the primacy of collective goals over individual goals
Today, socialists support collectivism
When collectivism is emphasized, the needs of the society as whole are generally viewed as being more important than individual freedoms
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Lecture Script 6-9
What About Peoples Future Rights?
Individualism versus collectivism is a century-old debate topic and an inherently interesting issue. For example, does an individuals life belong to him or her or to the community, society, or country in which he or she resides? Most people have a direct and immediate answer, but there is no consensus on which answer depending on which country you reside in or which personal compass you subscribe to. Everyone has tendencies toward being both individualistic and collectivistic but prefers one way more than the other. So, which of these ideas individualism or collectivismdo you think is correct, and which cultural belief do you prefer and why?
Source: Objective Standard, March 3, 2014. www.theobjectivestandard.com
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Political Systems 3 of 9
Collectivism and Individualism continued
Socialism
Modern socialists trace their roots to Karl Marx
Advocated state ownership of the basic means of production, distribution, and exchange
The state then manages the enterprises for the benefit of society as a whole
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Lecture Script 6-11
Political Systems 4 of 9
Collectivism and Individualism continued
In the early 20th century, socialism split into communists and social democrats:
Communists – socialism could only be achieved though revolution and totalitarian dictatorship
Social democrats worked to achieve the same goals by democratic means
Many state-owned enterprises (SOEs) failed to succeed, and many nations implemented privatization programs (i.e. China, Vietnam, Laos)
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Lecture Script 6-12
Political Systems 5 of 9
Collectivism and Individualism continued
Individualism: suggests individuals should have freedom over their economic and political pursuits
Individualism stresses:
Individual freedom and self-expression
Letting people pursue their own self-interests to achieve the best overall good for society
Democratic systems and free markets
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Lecture Script 6-13
Country Focus: Putins Russia
Summary
The modern Russian state was born in 1991 after the dramatic collapse of the Soviet Union. Early in the post-Soviet era, Russia embraced ambitious policies designed to transform a communist dictatorship with a centrally planned economy into a democratic state with a market-based economic system. The policies, however, were imperfectly implemented. Fast-forward to 2016, and Russia still has a long way to go before it resembles a modern democracy with a functioning free marketbased economic system. On the other hand, the economy is overly dependent on commodities, particularly oil and gas. This was exposed in mid-2014 when the price of oil started to tumble as a result of rapidly increasing supply from the United States. On the political front, Russia is becoming less democratic with every passing year. Freedom House, which produces an annual ranking tracking freedom in the world, classifies Russia as not free and gives it low scores for political and civil liberties. Freedom House notes that in the March 2012 presidential elections, Putin benefited from preferential treatment by state-owned media, numerous abuses of incumbency, and procedural irregularities during the vote count.
Sources: Putins Russia: Sochi or Bust, The Economist, February 1, 2014; Russias Economy: The S Word, The Economist, November 9, 2013; Freedom House, Freedom in the World 2015: Russia, www.freedomhouse.org; K. Hille, Putin Tightens Grip on Legal System, Financial Times, November 27, 2013.
Political Systems 6 of 9
Democracy and Totalitarianism
Democracy: political system in which government is by the people, exercised either directly or through elected representatives
Most common form today is representative democracy- elected representatives vote on behalf of constituents
Totalitarianism: 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
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Lecture Script 6-14
Political Systems 7 of 9
Democracy and Totalitarianism continued
In most totalitarian regimes:
There is widespread political repression
There are no free and fair elections
Media is censored
Basic civil liberties are denied
Challenges to the regime are prohibited
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Lecture Script 6-15
Political Systems 8 of 9
Democracy and Totalitarianism continued
Four major forms of totalitarianism today:
Communist totalitarianism: advocates achieving socialism through totalitarian dictatorship
Theocratic totalitarianism: political power is monopolized by a party, group, or individual that governs according to religious principles
Tribal totalitarianism: a political party that represents the interests of a particular tribe monopolizes power
Right wing totalitarianism: individual economic freedom is allowed but individual political freedom is restricted in the belief that it could lead to communism
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Lecture Script 6-16
Political Systems 9 of 9
Pseudo-Democracies
Many nations lie between pure democracy and complete totalitarianism
Authoritarian elements capture much of the machinery of state and use this in an attempt to deny basic political and civil liberties
Russia under Vladimir Putin
Venezuela under Nicolas Maduro
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Lecture Script 6-17
Economic Systems 1 of 4
Political ideology and economic systems are connected
There are three types of economic systems: the market economy, the command economy, and the mixed economy
A market-based economic system is 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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Lecture Script 6-18
LO 2-2 Understand how the economic systems of countries differ.
Economic Systems 2 of 4
Market Economy
In a pure market economy the goods and services that a country produces, and the quantity in which they are produced is determined by supply and demand
Supply must not be restricted by monopolies
The role of government is to encourage free and fair competition between private producers
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Lecture Script 6-19
Economic Systems 3 of 4
Command Economy
In a pure command economy the goods and services that a country produces, the quantity in which they are produced, and the price at which they are sold are all planned by the 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
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Lecture Script 6-20
North Koreas Command Economy
Kim Jong-un, the leader of the Democratic People’s Republic of Korea, inspecting a factory. North Korea functions as a centralized, single party, and tightly controlled dictatorial command economy.
Source: © AFP/Getty Images
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Economic Systems 4 of 4
Mixed Economy
A mixed economy includes some elements of a market economy and some elements of a command economy
Governments take over troubled firms considered vital to national interests
The number of mixed economies in the world today is falling Or, its not ?
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Lecture Script 6-22
Collectivism and Individualism (continued from Slide 2-8)
Would you do business in a Collectivistic system? Why or why not?
23
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Lecture Script 6-23
Note: In recent years that has been some movement back toward socialist ideals in several Latin American countries including Venezuela, Bolivia, and Paraguay, and also in Russia.
Country Focus: Venezuela under Hugo Chavez, 1999-2013
Summary
This feature explores the political and economic situation in Venezuela under Hugo Chavez. When Chavez, who was elected president in 1998, ran on a platform against corruption and economic mismanagement, Venezuelas economy was in a deep recession. Once in office, Chavez consolidated his hold over the government by drafting a new constitution that put him in power until 2012. Chavez died in 2013, but during his presidency Venezuela was considered to be only partly free. Economically, things were also difficult for Venezuela. Chavez did achieve some gains. Unemployment, though still high, fell to 7.6 percent in 2013 from its high of 14.5 percent in 1998. Similarly, poverty remained a problem despite falling from 50 percent to 28 percent in 2012. Yet, corruption was rampant, and there was a move to take certain industries into state ownership, with the oil industry being a particular target.
Suggested Discussion Questions
Please see Critical Thinking Question 5 for discussion of this feature.
Lecture Note: Since Chavezs death in 2013, the situation in Venezuela has become extremely uncertain. To learn more, consider {http://www.businessweek.com/news/2014-08-12/venezuela-sees-chavez-friends-rich-after-his-death-amid-poverty} and {http://www.businessweek.com/news/2014-05-03/chavez-food-utopia-withers-as-development-plans-left-unfulfilled}.
Legal Systems 1 of 11
The legal system of a country refers to the rules, or laws, that regulate behavior, along with the processes by which the laws of a country are enforced and through which redress for grievances is obtained
A countrys legal system is important because laws:
Regulate business practice
Define the manner in which business transactions are to be executed
Set down the rights and obligations of those involved in business transactions
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Lecture Script 6-24
LO 2-3 Understand how the legal systems of countries differ.
Legal Systems 2 of 11
Different Legal Systems
Common law: based on tradition, precedent, and custom
Found in most of Great Britains former colonies, including the United States
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 the most widely practiced
Which one do you choose?
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Lecture Script 6-25
Tradition refers to a countrys legal history, precedent to cases that have come before the courts in the past, and custom to the ways in which laws are applied in specific situations.
Legal Systems 3 of 11
Differences in Contract Law
They approach contract law (the body of law that governs contract enforcement) differently
A contract specifies the conditions under which an exchange is to occur and details the rights and obligations of the parties involved
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 (i.e. less expensive )
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Lecture Script 6-26
2-27
Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
©McGraw-Hill Education.
Legal Systems 4 of 11
Differences in Contract Law continued
The 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 their places of business in different nations
Countries that adopt CISG signal to other nations that they will treat the Conventions rules as part of their law
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Lecture Script 6-28
Legal Systems 5 of 11
Property Rights and Corruption
Property rights: the 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
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
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Lecture Script 6-29
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 laws against corruption.
Legal Systems 6 of 11
Property Rights and Corruption continued
Corruption is present in all countries to some degree, however when a country has a high level of corruption:
Foreign direct investment falls
International trade falls
Economic growth falls
What is the least corrupt country in the world?
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Lecture Script 6-30
Country Focus: Corruption in Nigeria
Summary
This feature describes the corruption that has characterized Nigerias economy over the last 50 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, the 2012 United Nations Human Development Index ranked the country 153 out of 187 nations, noting that Nigeria suffers from extreme poverty, illiteracy, and high debt. Several factors have been blamed for Nigerias troubles including political instability and corruption. Furthermore, in 2013 Transparency International still ranked Nigeria one of the most corrupt countries in the world.
Suggested Discussion Questions
1. What is meant by corruption? Explain how a corrupt political system affects the well being of a country. What are the implications of corruption for Nigeria?
Discussion Points: Corruption in Nigeria involves open and systematic plundering of the nations state treasury. Bribery is also a regular part of business. In fact, the situation in Nigeria is so dismal that Transparency International ranked Nigeria one of the most corrupt countries in the world in 2013. When a country experiences this sort of activity, returns on business investments are lower, and there is less incentive for inward foreign direct investment. Most students will recognize that this then negatively affects economic growth.
2. With its huge oil reserves and large population, Nigeria was expected to emerge as a major player in Africa. Yet today the country is extremely poor with little expectation for an economic turnaround any time in the near future. Explain how Nigeria came to be in such a sad state.
Discussion Points: Studies show that countries with high levels of corruption have lower inward foreign direct investment, lower levels of international trade, and poor levels of economic growth. Nigeria is a perfect example of this type of country. Political strife resulting from in-fighting between the various tribes and ethnic groups within the nation has led to instability and questionable legitimacy in the government. Military dictatorships were inept and corrupt. Because the country is viewed so poorly thanks to its level of corruption and political instability, investors are reluctant to bring in the kinds of funds that could help the economy grow.
3. Clearly, Nigerias corrupt government has been a major factor in the countrys demise. In contrast, other countries including Finland and Canada expressly prohibit corruption. In your opinion, would Nigeria be better off following the example of countries like Finland and Canada? Why or why not?
Discussion Points: Many students will probably suggest that even if Nigeria explicitly prohibits corrupt behavior, it is unlikely to have little effect on the real way of doing business in the country. Other students however, may note that Nigerias newly elected president, Goodluck Jonathon, has promised to put an end to corruption in the country, and is being seen by voters as a force for the future.
Teaching Tip: The CIAs World Factbook on Nigeria {https://www.cia.gov/library/publications/the-world-factbook/geos/ni.html} provides a wealth of information on the country.
Teaching Tip: To learn more about Transparency Internationals corruption ranking of Nigeria and general perspective of the country go to {http://www.transparency.org/country}.
Figure 2.1 Rankings of Corruption by Country
Source: Constructed by the author from raw data from Transparency International, Corruption Perceptions Index 2015.
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Legal Systems 7 of 11
The Foreign Corrupt Practices Act limits corruption in the U.S
It is 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 that it is clear whether a violation of the act has occurred
Facilitating or expediting payments to secure the performance of routine government actions are permitted
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Lecture Script 6-32
Management Focus: Did Walmart Violate the Foreign Corrupt Practices Act?
Summary
This feature explores corruption at Walmarts Mexico division where managers allegedly bribed Mexican government officials to obtain permission to build the San Juan Teotihuacan store in the early 2000s. After leaders at Walmarts headquarters were alerted of the situation, Walmart launched an internal investigation. However, the investigation was turned over to Walmart Mexico to complete and only after a 2012 New York Times article again raised questions about the situation did Walmart reopen the investigation. Today, the company has spent more than $300 million on lawyers looking into the issue and Walmart is also facing scrutiny by the SEC and the U.S. Department of Justice.
Suggested Discussion Questions
Please see Critical Thinking Question 6 for discussion of this feature.
Did You Know?
Did you know that it’s illegal for Americans to bribe public officials to gain business in a foreign country, even if bribery is commonplace in that nation?
Click to play video
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Legal Systems 8 of 11
The Protection of Intellectual Property
Intellectual property: property that is the product of intellectual activity
Patents: give the 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
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Lecture Script 6-35
Internet Extra: National Intellectual Property Rights Coordination Center is the U.S governments web page on intellectual property rights. The site is at {http://www.iprcenter.gov/}.
Legal Systems 9 of 11
The Protection of Intellectual Property continued
The protection of intellectual property rights differs greatly from country to country
185 nations are members of the 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 in China (it is changing ) and Thailand
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How Important are Intellectual Property Rights?
Burundi is a landlocked country in the Great Lake region of Eastern Africa. Neighboring countries include Rwanda, Tanzania, and the Democratic Republic of the Congo. Burundi is hilly and mountainous, with access to Lake Tanganyika. The government system is a republic, with the chief of state and head of government being the president. Burundi has a traditional economic system in which the allocation of available resources is made on the basis of primitive methods, and many citizens engage in subsistence agriculture. At the same time, Burundi was last of the 131 countries ranked in the 2013 International Property Rights Index (IPRI). The IPRI is conducted by a partnership of 74 international organizations. The IPRI takes into account legal and political environment, physical property rights, and intellectual property rights. How much should companies focus on intellectual property rights in deciding where to (1) produce their products and (2) sell their products? Does it differ if you produce or sell in the country?
Source: www.internationalpropertyrightsindex.org.
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Legal Systems 10 of 11
The Protection of Intellectual Property continued
Response 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
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Lecture Script 6-38
Management Focus: Starbucks Wins Key Trademark Case in China
Summary
This feature focuses on intellectual property laws in China. When Starbucks entered China in 1999, the company was quickly challenged by a look-alike competitor, Shanghai Xing Ba Ke Coffee Shop. Not only did the name Xing Ba Ke mimic the Starbucks name, but Xing Ba Kes 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 U.S.
Suggested Discussion Questions
1. Discuss the concept of property rights protection and why it is so important to companies. What does the court ruling against Xing Ba Ke mean for other companies that are already doing business in China, or are considering entering the market?
Discussion Points: Most students will recognize that firms that depend on proprietary property such a brand name or technology for their competitive advantage probably also rely on property rights protection to ensure that competitors cannot benefit from their efforts. The finding against Xing Ba Ke is a symbol that property rights protection should be taken seriously, and that blatant violations of property rights will not be tolerated.
2. How important is the Chinese market to Starbucks? Does the presence of look-alike companies like Xing Ba Ke deter firms from entering the market?
Discussion Points: With its growing middle class, the potential in the Chinese market is vast. Some students might argue that the presence of Xing Ba Ke is actually a positive force for Starbucks in that the coffee shop helps to promote the idea of coffee consumption in the Starbucks way. Most students however, will probably suggest that companies like Xing Ba Ke are a nuisance because they could potentially damage the reputation of Starbucks if customers have a negative experience at the stores, and because they require constant monitoring, are a drain on profits.
Lecture Note: To extend this discussion, consider {http://www.businessweek.com/articles/2014-04-03/starbuckss-howard-schultz-on-mobile-payments-china-and-oprah} and {http://www.businessweek.com/news/2014-09-24/starbucks-expanding-into-russia-s-urals-even-as-sanctions-mount}.
Teaching Tip: To explore Starbucks in more depth, go to the companys web site at {http://www.starbucks.com/}. Click on International to explore individual country sites.
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