National Differences in Political Economy

Political Systems

•         Political Systems: system of government in a country

•         Differentiated along two related dimensions

–        Emphasis on collectivism versus individualism

–        Degree of democracy versus totalitarianism

•         Collectivism:  stresses collective goals over individual goals (Plato and Marx)

–        Socialism:  communists and social democrats

•         Individualism:  stresses individual freedom in economic and political pursuits (Aristotle, Smith, Stuart Mill) advocates individual political and economic freedoms

•         Democracy:  citizens directly involved in decision-making

–        representative democracy

•         Totalitarianism:  one person or political party exercises absolute control

–        communist totalitarianism

–        theocratic totalitarianism (religion based political power)

–        tribal totalitarianism (monopoly of power)

–        right-wing totalitarianism (economic freedom without political freedom)

Economic Systems

•         Market Economy:  market mechanisms determines resource allocation

•         Command economy:  goods and services produced, their mix, and the prices are planned by the government

•         Mixed Economy:  hybrid arrangement where certain sectors are left to the private sector (within restrictions), while some deemed to be of national importance are state-owned and operated

Changing Political Economy 1985-95

 Legal Systems

•         Systems of rules and laws that regulate behavior, processes by which laws are enforced, and redress mechanisms

•         Legal Systems

–        Common Law System (tradition based)

–        Civil Law System (codified)

–        Theocratic Law System (e.g., Islamic Law)

•         International Law (Bilateral and Multilateral treaties)

Issues in International Legal Environment

•         Property rights:  legal rights over use to which a resource is put and income derived

•         Intellectual Property Rights:  patents, copyrights, trademarks:  major bone of contention especially in info-based economies

•         Product safety and liability:  standards protecting consumers

•         Enforcement of national and international laws

Implications for Business

•         Political, economic, and legal systems impact the attractiveness of a country

•         Country attractiveness:

–        Benefits:  the issue of first mover advantages

–        Costs:  bribes, inadequate infrastructure (McDonald’s in Russia), inadequate and stringent laws (different impacts)

–        Risks:

•         Political Risk

•         Economic Risk

•         Legal Risks

Political Risk Assessment

Likelihood the business environment will change in a way that encompasses

·         Discontinuities

·         Uncertainty    

·         Political forces

·         Business impact         

·         Macro risk

·         Micro risk

Sources of Political Risk

I.  Home Country Political Risk

•         National Security Goals

•         Foreign Policy Goals

II.  Host Country Political Risk

•         Xenophobia

•         Social Unrest/disorder

•         Internal rebellion

•         Armed conflicts between nations

•         Local business groups

Political Risk Assessment and Market Entry

Historic FDI emphasis

3 assumptions

            1. Only investors risk assets

            2. Only FDI is integral to firm’s strategy

            3. Actions against investors are politically     

            based; actions against exporters are based on economic considerations

Evidence from Iran-US Tribunal (1980s)

Political Risk Assessment/Management

•         Can we predict the next revolution?

•         Managing political risk

•         Financing

•         Insurance