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International Business ADM3318 > Session 4: Country Differences in Political Economy > Flashcards

Session 4: Country Differences in Political Economy Flashcards

1
Q

Opening Case: Hong Kong Protests
Why is the Hong Kong case ideal to appreciate differences between countries’ political systems and economies?

A
  • 1841
  • 1984: declaration returning the territory in 1997
  • 1997
  • one country, 2 systems promise
  • In 2019, Hong Kong’s Security Bureau, proposed amendments that allowed to extradite criminal suspects to mainland China
  • Hong Kong civil society reacted with mass protests demanding the repeal of the law and the resignation of the executive chief
  • The beginning of 2020 marked another wave or protests, focused on wider democratic reforms, culminating with the dismissal of Wang Zhimin, Beijing’s liaison officer for the territory, and the appointment of a provincial Communist Party secretary
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2
Q

Political Systems (6)

A
  1. Collectivism
  2. Socialism
  3. Individualism
  4. Democracy
  5. Totalitarianism
  6. Semi-totaltarianism / Fragile democracies
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3
Q

Collectivism

A
  • Political system that stresses the primacy of collective goals over individual goals.
  • Plato (427-347 BC) - Individual rights should be sacrificed for the good of society
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4
Q

Socialism

A

Roots: Karl Marx (1818 – 83)
* Communism – revolution and totalitarian dictatorships
* Social Democrats – socialism by democratic means

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5
Q

Individualism

A
  • Political system that focuses on the interests of the individual over the interests of the state.
  • Aristotle (384 – 322 BC) – Private property is more highly productive than communal property and will thus stimulate progress

Individualism has two central tenets:
1. Individual Freedom and self-expression – John Stuart Mill
2. Let people pursue their own economic self interest – Adam Smith

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6
Q

Democracy (6 demands)

A
  • Political system in which the people elect representatives to form the government.

Democracy demands:
1. Freedom of expression
2. Free media
3. Regular elections
4. Limited terms for representatives
5. Fair court system
6. Non political – police and army

“Democracy is the worst form of government – except for all the others that have been tried” W. Churchill

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7
Q

Totalitarianism (4 forms)

A
  • All the constitutional guarantees on which representative democracies are built are denied to the citizens.
  • In most totalitarian states, political repression is widespread and those who question the right of the rulers to rule find themselves imprisoned or worse.
    There are four major forms of totalitarianism:
    ✓ Communist totalitarianism
    ✓ Theocratic totalitarianism
    ✓ Tribal totalitarianism
    ✓ Right-wing (Fascist) totalitarianism
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8
Q

Semi-Totalitarism / Fragile Democracies

A
  • Countries are not always clear-cut democracies or totalitarism
  • Hybrid forms exist
  • Political systems are not static entities: Countries are often in transition toward more totalitarian or more democratic regimes. E.g.:
    ✓ Post-communist countries in Eastern Europe
    ✓ Many Latin-American countries’ drift toward Fascist/Communist regimes in the aftermath of economic crises, loss of a leader (e.g.: Venezuela, Chile, Argentina)
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9
Q

Economic Systems (3)

A
  1. Market economy
  2. Command economy
  3. Mixed economy
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10
Q

Market economy

A
  • All productive activities are privately owned;
  • Supply and demand determines price and production
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11
Q

Command Economy

A

The government determines the allocation of resources including the determination of production and prices

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12
Q

Mixed economy

A
  • Some sectors are left to private ownership and free market mechanism;
  • Others have significant government ownership and government planning.
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13
Q

What’s a legal system?

A

Legal system refers to a system of rules that regulates behavior and the processes by which the laws of a country are enforced and through which redress of grievances is obtained.

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14
Q

Different Legal Systems (3)

A
  1. Common law
  2. Civil law
  3. Theocratic law
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15
Q

Common Law

A

System of law based on tradition, precedent, and custom. When law courts interpret common law, they do so with regard to these characteristics.

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16
Q

Civil Law

A

Law based on a very detailed set of written laws and codes.

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17
Q

Theocratic Law

A

System of law based on religious teachings.

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18
Q

Definition of Contract

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.
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19
Q

Contract Law

A
  • Contract law is the body of law that governs contract creation and enforcement
  • Parties to an agreement invoke contract law when there is belief there was violation of the agreement
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20
Q

International Trade and Contract Disputes

A
  • United Nations Convention of Contacts for the International Sale of Goods (CISG);
  • By adopting the CISG, a nation accepts to treat the convention rules as part of its law.
  • 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
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21
Q

Property

A
  • Refers to a resource over which an individual or business holds a legal title, meaning it owns the resource.
  • Resources include:
    ✓ Land & real estate; Equipment; Capital
    ✓ Mineral rights; Businesses; Intellectual property (patents, copyrights and trademarks)
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22
Q

Property rights

A
  • Bundle of 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.
    ✓ Essentially, “people own stuff and can use it”
23
Q

Private Action

A

Private Action is an action by private individuals or groups against property holders including actions such as:
* Theft
* Piracy
* Blackmail
* Any criminal activity against property rights

24
Q

Public Action and Corruption

A

Public Action violates property rights when public officials extort income from property holders, including actions such as:
* Bribes
* Levying excessive taxation
* Requiring expensive licenses or permits from property holders
* or taking assets into state ownership without compensating the owners

25
Q

The Protection of Intellectual Property

A

Intellectual Property refers to property that is the product of intellectual activity such as computer software, music, formulas etc.

Ownership rights are established through:
* Patents
* Copyrights
* Trademarks

26
Q

Paris Convention for the Protection of Industrial Property

A

International agreement signed by 96 nations to protect
intellectual property

27
Q

Trade Related Aspects of Intellectual Property Rights (TRIPS) Agreement (1995)

A

Agreement amongst member states of the World Trade Organization (WTO) to oversee the enforcement of stricter intellectual property regulations

28
Q

What are the provisions’ of China’s foreign ownership laws?

A

→ Foreign firms must form joint ventures with Chinese companies to access the Chinese market
→ The joint venture entails transferring technology to the domestic companies
→ Exposition to risk of intellectual property theft

29
Q

Determinants of Economic Development. Why does it matter for International Business?

A

Economic development is the central goal shaping countries’ policies affecting private sectors’ operations.

30
Q

Determinants of Economic Development (4)

A
  1. The political, economic, and legal systems can have a profound impact on a country’s economic development.
  2. Broader Conceptions of Development: Amartya Sen
  3. Political Economy and Economic Progress
  4. Geography, Education, and Economic Development
31
Q

The political, economic, and legal systems can have a profound impact on a country’s economic development. GNI and PPP definitions:

A
  • Gross National Income (GNI): Total income of all citizens of a country.
  • Purchasing Power Parity (PPP): Adjustment in gross domestic product per capita for a comparison of living standards in different countries.
32
Q

Broader Conceptions of Development: Amartya Sen. Human Development Index (HDI) definition

A
  • Human Development Index (HDI) measures the quality
    of human life in different countries
  • The Nobel prize-winning economist Amartya Sen has argued that development should be assessed less by material output measures, such as GNP per capita, and more by the capabilities and opportunities that people enjoy.
  • According to Sen, development should be seen as a process of expanding the real freedoms that people experience.
  • In Sen’s view, development is not just an economic process, but it is a political one too, and to succeed requires the “democratization” of political communities.
33
Q

HDI Measures quality of human life in different countries in terms of 3 things:

A
  1. Life expectancy at birth (which is a function of health care)
  2. Education attainment (which is measured by a combination of the adult literacy rate and enrolment in primary, secondary, and tertiary education),
  3. Average incomes, based on PPP estimates, are sufficient to meet the basic needs of life in a country (adequate food, shelter, and health care).
34
Q

Innovation and Entrepreneurship: An engine of growth

A
  • Innovation and entrepreneurial activity are the engines of long- run economic growth.
  • Innovation definition broadly to include not just new products, but also new processes, new organizations, new management practices, and new strategies.
35
Q

Innovation and Entrepreneurship require a Market Economy

A
  • Economic freedom associated with a market economy creates greater incentives for innovation and entrepreneurship than either a planned or a mixed economy.
  • In a planned economy, the state owns all means of production: Entrepreneurial individuals have little economic incentive to develop valuable new innovations, since it is the state, rather than the individual, that captures most of the gains
36
Q

Innovation and Entrepreneurship require strong property rights:

A
  • Both individuals and businesses must be given the opportunity to profit from innovative ideas
  • Without strong property rights protection, businesses and individuals run the risk that the profits from their innovative efforts will be expropriated, either by criminal elements or by the state
37
Q

The “Required” Political System

A
  • There is a great deal of debate as to the kind of political system that best achieves a functioning market economy with strong protection for property rights.
  • Four of the fastest-growing economies of the past 30 years— South Korea, Taiwan, Singapore, and Hong Kong—had one thing in common at the start of their economic growth: undemocratic governments.
38
Q

Economic Progress Begets Democracy

A
  • While it is possible to argue that democracy is not a necessary precondition for a free market economy in which property rights are protected, subsequent economic growth often leads to establishment of a democratic regime.
  • Several of the fastest-growing Asian economies adopted more democratic governments during the past two decades, including South Korea and Taiwan.
39
Q

Geography, Education, and Economic Development

A
  • Other factors also matter for economic development, especially Geography
  • Harvard’s Jeff Sachs: “by virtue of favourable geography, certain societies were more likely to engage in trade than others and were thus more likely to be open to and to develop market-based economic systems”
  • Education also key to guarantee more productivity.
40
Q

States in Transition (2 trends)

A

The political economy of many of the world’s nation-states has changed radically since the late 1980s.
1. During the late 1980s and early 1990s, a wave of democratic revolutions swept the world.
- Totalitarian governments collapsed and were replaced by democratically elected governments
2. There has been a strong move away from centrally planned and mixed economies and toward a more free market economic model.

41
Q

The New Order?

A
  • The end of the Cold War and the “new world order” that followed the collapse of communism in Eastern Europe and the former Soviet Union, taken together with the collapse of many authoritarian regimes in Latin America, have given rise to intense speculation about the future shape of global geopolitics.
  • Author Francis Fukuyama has argued that: “we may be witnessing . . . the end of history as such: that is, the end point of mankind’s ideological evolution and the universalization of Western liberal democracy as the final form of human government”
  • Huntington theorizes that modernization in non-Western societies can result in a retreat toward the traditional, such as the resurgence of Islam in many traditionally Muslim societies: The Islamic resurgence is both a product of and an effort to come to grips with modernization
  • In contrast to Fukuyama, Huntington sees a world that is split into different civilizations, each of which has its own value systems and ideology
42
Q

The Spread of Market-Based Systems

A
  • In general, command and (to an extent) mixed economies failed to deliver the kind of sustained economic performance achieved by countries adopting market-based systems, such as the United States, Switzerland, Hong Kong, and Taiwan.
  • However…. Keep in mind that sustained economic performance is not always corresponded by equal improvements in the quality of life…
43
Q

1990-2020: Key global trends in Political Economies.
Deregulation definition

A

Deregulation involves removing legal restrictions to the free play of markets, to the establishment of private enterprises, and to the manner in which private enterprises operate

44
Q

Privatization definition

A

Transfers the ownership of state property into the hands of private individuals, frequently by the sale of state assets through an auction.

45
Q

Implications of the Changing Political Economy (4)

A
  1. Attractiveness
  2. Costs
  3. Risks of doing business
  4. Ethics, human rights, and regulations
46
Q

Implications for business

A
  • The implications for business are enormous.
  • For the best part of 50 years, half of the world was off-limits to Western businesses.
  • Now all that is changing. Many of the national markets of Eastern Europe, Latin America, Africa, and Asia may still be undeveloped and impoverished, but they are potentially enormous.
47
Q

Attractiveness

A
  • Economic development of a country tied to its attractiveness to foreign investors and firms.
  • The long-run monetary benefits of doing business in a country (vs a different country) are a function of:
  • the size of the market,
  • the present wealth (purchasing power) of consumers in that market,
  • and the likely future wealth of consumers
  • Being an early entrant in a growing market represents an advantage that accrues over time.
48
Q

Costs

A
  • A number of political, economic, and legal factors determine the costs of doing business in a country.
  • With regard to political factors, the costs of doing business in a country can be increased by a need to pay off the politically powerful to be allowed by the government to do business.
  • One of the most important variables is the sophistication of a country’s economy.
  • It may be more costly to do business in relatively primitive or undeveloped economies because of the lack of infrastructure and supporting businesses
49
Q

3 types of risk of doing business

A
  1. Political risk
  2. Economic risk
  3. Legal risk
50
Q

Political risk definition

A

has been defined as the likelihood that political forces
will cause drastic changes in a country’s business environment that adversely affect the profit and other goals of a particular business enterprise.

51
Q

Economic risk definition

A

can be defined as the likelihood that economic mismanagement will cause drastic changes in a country’s business environment that adversely affect the profit and other goals of a particular business enterprise

52
Q

Legal risk definition

A

might be defined as the likelihood that a trading partner will opportunistically break a contract or expropriate property rights

53
Q

Ethics, Human Rights, and Regulations

A
  • One major ethical dilemma facing firms from democratic nations is whether they should do business in totalitarian countries
  • Some argue that investing in totalitarian countries provides comfort to dictators and can help prop up repressive regimes that abuse basic human rights
  • A second important ethical issue is whether an international firm should adhere to the same standards of product safety, work safety, and environmental protection that are required in its home country
  • This is of particular concern to many firms based in Western nations

International Business ADM3318 (11 decks)

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