Chapter 02 - National Differences in Political Economy

National Differences in Political Economy

Chapter Outline
OPENING CASE: Inia!s "ransformation
IN"#OD$C"ION
PO%I"ICA% S&S"E'S
Collecti(ism an Ini(iualism
Democracy an "otalitarianism
ECONO'IC S&S"E'S
'ar)et Economy
Comman Economy
'i*e Economy

%EGA% S&S"E'S
Different %e+al Systems
Differences in Contract %a,
Property #i+hts an Corruption
Country Focus: Corruption in Nigeria
"he Protection of Intellectual Property
Management Focus: Starbucks Wins Key Trademark Case in China
Prouct Safety an Prouct %ia-ility

".E DE"E#'INAN"S O/ ECONO'IC DE0E%OP'EN"
Differences in Economic De(elopment
1roaer Conceptions of De(elopment: Amartya Sen
Political Economy an Economic Pro+ress
Country Focus: Emerging Property Rights in China
Geo+raphy2 Eucation2 an Economic De(elopment
2-3
Chapter 02 - National Differences in Political Economy
S"A"ES IN "#ANSI"ION
"he Sprea of Democracy
"he Ne, 4orl Orer an Glo-al "errorism
"he Sprea of 'ar)et-1ase Systems
"he Nature of Economic "ransformation
Dere+ulation
Pri(ati5ation
%e+al Systems
Implications of Chan+in+ Political Economy
/OC$S ON 'ANAGE#IA% I'P%ICA"IONS
1enefits
Costs
#is)s
O(erall Attracti(eness
S$''A#&
C#I"ICA% ".IN6ING AND DISC$SSION 7$ES"IONS
C%OSING CASE: Cha(e5!s 0ene5uela
%earnin+ O-8ecti(es
39 $nerstan ho, the political systems of countries iffer9
29 $nerstan ho, the economic systems of countries iffer9
:9 $nerstan ho, the le+al systems of countries iffer9
;9 1e a-le to e*plain ,hat etermines the le(el of economic e(elopment of a nation9
<9 Discuss the macro-political an economic chan+es ta)in+ place ,orl,ie9
=9 Descri-e ho, transition economies are mo(in+ to,ars mar)et -ase systems9
>9 Articulate the implications for mana+ement practice of national ifference in political economy9
2-2
Chapter 02 - National Differences in Political Economy
Chapter Summary
"his chapter focuses on ho, political2 economic2 an le+al systems collecti(ely influence a
country!s a-ility to achie(e meanin+ful economic pro+ress9 "he first half of the chapter focuses on
the ifferent political2 economic2 an le+al systems that are influential in the ,orl9 It is mae clear
to the reaer that these ifferences are si+nificant2 an must -e clearly unerstoo -y the mana+ers
of international firms9 "he section that focuses on le+al systems inclues a iscussion of intellectual
property2 incluin+ patents2 copyri+hts2 an traemar)s9 Protectin+ intellectual property is a
particularly pro-lematic issue in international trae9 "he secon half of the chapter focuses on the
eterminants of economic e(elopment9 "he author ma)es the point that a country!s political2
economic2 an le+al systems ha(e a irect impact on its economic potential9 "he importance of
inno(ation2 alon+ ,ith the types of systems that facilitate inno(ation2 is iscusse9 Ne*t2 the author
iscusses the parts of the ,orl that are transition from one political-economic ieolo+y to another9
/inally2 the chapter ens ,ith a iscussion of the mana+erial implications of ifferin+ political2
economic2 an le+al systems of a country9
Openin+ Case: Inia!s "ransformation
Summary
"he openin+ case e*plores escri-es the chan+es in Inia!s political economy since the country
+aine inepenence from 1ritain in 3?;>9 $ntil the early 3??0s2 Inia follo,e a mi*e economy
system that ,as characteri5e -y a lar+e num-er of state-o,ne enterprises2 centrali5e plannin+2
an su-siies9 "he system faile to eli(er si+nificant +ro,th an in 3??3 Inia!s +o(ernment
implemente a series of reforms esi+ne to foster increase pri(ati5ation2 in,ar in(estment2 an
e*ports9 4hile initially successful2 economic reform stalle -y the later 3??0s2 an po(erty ,as
,iesprea9 Discussion of the case can re(ol(e aroun the follo,in+ @uestions:
Su++estion Discussion 7uestions
7$ES"ION 3: 4hat ma)es Inia an attracti(e estination for forei+n firmsA
ANS4E# 3: Inia has an enormous2 untappe potential as a mar)et for forei+n firms9 "he
country!s mile class is +ro,in+2 an the country!s economy is e*panin+ at a-out ? percent per
year9 In aition2 ,ith its ,ell eucate2 -ut ine*pensi(e ,or)force2 the country is an attracti(e
estination for companies see)in+ a cheap ,hite-collar ,or)force9
2-:
Chapter 02 - National Differences in Political Economy
7$ES"ION 2: Since its reform pro+ram -e+an in 3??32 Inia has seen a si+nificant turnaroun in
its economy9 4hat factors mi+ht threaten this turnarounA
ANS4E#: 4hile Inia appears to -e on the ri+ht path to,ar economic prosperity2 issues still
remain ,ith the country!s protectionist policies9 Employers2 employees2 an politicians ha(e all
e*presse concerns that if import -arriers are remo(e2 Chinese imports ,ill spell isaster for the
country9 In aition2 archaic la-or la,s are threatenin+ the a-ility of firms to operate efficiently2
an the country!s pri(ati5ation pro+ram has run into some challen+es9
7$ES"ION :: Despite its recent +ro,th Inia still la+s other e(elopin+ countriesA 4hyA
ANS4E# :: /rom 3??; to 200;2 Inia!s economy +re, at a-out = percent per year9 'ore
recently2 from 200< to 200>2 that +ro,th rate has 8umpe to a-out ? percent per year9 Still2 Inia
la+s other e(elopin+ economies in economic +ro,th9 Inia continues to -e hea(ily re+ulate2 an
much of the country!s economic acti(ity is conucte -y inefficient state-run or+ani5ations9 'ost
e*perts -elie(e that this must chan+e if the country is to Bcatch-upC ,ith other countries9

"eachin+ "ip: Information on oin+ -usiness in Inia is a(aila-le at
Dhttp:EE,,,9inianem-assy9or+Ene,siteEDoin+F-usinessFInFIniaE/DIFPolicyFProceures9aspG9

Chapter Outline ,ith %ecture Notes2 0ieo Notes2 an "eachin+ "ips
IN"#OD$C"ION
AH Different countries ha(e ifferent political systems2 economic systems2 an le+al systems9
Cultural practices can (ary ramatically from country to country2 as can the eucation an s)ill le(el
of the population9 All of these ifferences ha(e ma8or implications for the practice of international
-usiness9

1H "his chapter e*plores ho, the political2 economic2 an le+al systems of countries iffer9
"o+ether these systems are )no,n as the poitica economy of a country9
CH "he openin+ case on Inia!s efforts to transform its economy illustrates ho, economic +ro,th in
a country can -e affecte -y its politics9 Inia has ha a emocratic +o(ernment since 3?;>2 yet
economic +ro,th in the country has -een constraine for much of that time -y policies that limit
free enterprise an restrict in(estment -y forei+n companies9 Inia has only recently -e+un to see
si+nificant economic +ro,th2 than)s to efforts in the 3??0s to ere+ulate the economy9 "he country
still has a lon+ ,ay to +o2 an much of the country!s economic acti(ity is still hanle -y state-
o,ne enterprises9 Companies consierin+ in(estin+ in Inia must stuy the implications of Inia!s
political economy -efore ma)in+ an in(estment9
2-;
Chapter 02 - National Differences in Political Economy
PO%I"ICA% S&S"E'S
AH 1y poitica system ,e mean the system of +o(ernment in a nation9 Political systems can -e
assesse accorin+ to t,o relate imensions9 "he first is the e+ree to ,hich they emphasi5e
collecti(ism as oppose to ini(iualism9 "he secon imension is the e+ree to ,hich they are
emocratic or totalitarian9
Collecti(ism an Ini(iualism
1H Coecti!ism refers to a system that stresses the primacy of collecti(e +oals o(er ini(iual
+oals9 4hen collecti(ism is emphasi5e2 the nees of the society as ,hole are +enerally (ie,e as
-ein+ more important than ini(iual freeoms9 A(ocacy of collecti(ism can -e trace to Plato2 in
moern times the collecti(ist mantle has -een pic)e up -y sociaists2 an their champion2 6arl
'ar*9
Socialism
CH Communists +enerally -elie(e that this coul only -e achie(e thou+h re(olution an
totalitarian ictatorship2 ,hile socia democrats ,or)e to achie(e the same +oals -y emocratic
means9
DH 4hile state o,ne firms mi+ht ha(e -een intene to promote the pu-lic interest2 e*perience
su++ests that this isnIt al,ays the case9 In many countries the performance of state o,ne
companies has -een poor9 Protecte from si+nificant competition -y their monopoly position2 an
+uarantee +o(ernmental financial assistance2 many state o,ne enterprises -ecame increasin+ly
inefficient9 Conse@uently2 a num-er of 4estern emocracies (ote social emocratic parties out of
office an mo(e to,ar free mar)et economies -y sellin+ state-o,ne enterprises to pri(ate
in(estors2 a process )no,n as pri!ati"ation9
Ini(iualism
EH #ndi!iduaism refers to a political philosophy that an ini(iual shoul ha(e freeom o(er his or
her economic an political pursuits9 In contrast to collecti(ism2 ini(iualism stresses that the
interests of the ini(iual shoul ta)e preceence o(er the interests of the state9
/H Ini(iualism2 ,hile a(ocate -y Aristotle2 in moern ays ,as encoura+e -y Da(i .ume2
Aam Smith2 John Stuart 'ill2 an most recently2 .aye) an 'ilton /rieman9 Ini(iualism
focuses on iH +uaranteein+ ini(iual freeom an self-e*pression2 an iiH lettin+ people pursue their
o,n self-interest in orer to achie(e the -est o(erall +oo for society9 "he $9S9 Declaration of
Inepenence an the 1ill of #i+hts em-oy the spirit of ini(iualism9
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Chapter 02 - National Differences in Political Economy
GH 4hile collecti(ism asserts the primacy of the collecti(e o(er the ini(iual2 ini(iualism asserts
the opposite9 "his ieolo+ical ifference shapes much of recent history an the Col 4ar9
Ini(iualism is usually associate ,ith emocratic political systems an free mar)ets9
Democracy an "otalitarianism
.H Democracy an totalitarianism are at ifferent ens of a political imension$ %emocracy refers
to a political system in ,hich +o(ernment is -y the people2 e*ercise either irectly or throu+h
electe representati(es9 Totaitarianism is a form of +o(ernment in ,hich one person or political
party e*ercises a-solute control o(er all spheres of human life2 an opposin+ political parties are
prohi-ite9 "here are four ma8or forms of totalitarianism in the ,orl toay9

Democracy
IH Democracy in its pure state2 ,ith each ini(iual (otin+ on e(ery issue2 has +enerally -een
replace -y representati!e democracy2 ,here electe representati(es (ote on -ehalf of
constituents9
0ieo Note: A central theme in Presient Geor+e 1ush!s aministration is a focus on spreain+
emocracy aroun the +lo-e9 "o learn more a-out this2 consier the iGlo-e Experts Discuss
Global Democracy.
"otalitarianism
JH $ner totalitarianism2 a sin+le political party2 ini(iual2 or +roup of ini(iuals monopoli5e the
political po,er an o not permit opposition9 "here are four ma8or forms of totalitarianism:
communist totaitarianism2 Kform of totalitarianism that a(ocates achie(in+ socialism throu+h
totalitarian ictatorshipH2 theocratic totaitarianism2 Kform of totalitarianism in ,hich political
po,er is monopoli5e -y a party2 +roup2 or ini(iual that +o(erns accorin+ to reli+ious
principlesH2 triba totaitarianism Kform of totalitarianism foun mainly in Africa in ,hich a
political party that represents the interests of a particular tri-e monopoli5es po,erH2 right &ing
totaitarianism Kform of totalitarianism in ,hich ini(iual economic freeom is allo,e -ut
ini(iual political freeom is restricte in the -elief that it coul lea to communismH9 "here has
-een a +eneral tren a,ay from communist an ri+ht ,in+ totalitarianism an to,ars emocracy9
ECONO'IC S&S"E'S
AH "here is a connection -et,een political ieolo+y an economic systems9 In countries ,here
ini(iual +oals are +i(en primacy o(er collecti(e +oals2 a free mar)et system is more li)ely to e*ist9
In contrast2 in countries ,here collecti(e +oals are ominant2 enterprises may -e state-o,ne2 an
mar)ets may -e restricte9 "hree -roa types of economic systems can -e ientifie-a mar)et
economy2 a comman economy2 an a mi*e economy9
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Chapter 02 - National Differences in Political Economy
'ar)et Economy
1H In a pure market economy the +oos an ser(ices that a country prouces2 an the @uantity in
,hich they are prouce2 is not planne -y anyone9 #ather price an @uantity are etermine -y
supply an eman9 /or a mar)et economy to function2 there must -e no restrictions on either
supply or eman - no monopolistic sellers or -uyers9
Comman Economy
CH In a pure command economy the +oos an ser(ices that a country prouces2 the @uantity in
,hich they are prouce2 an the price at ,hich they are sol are all planne -y the +o(ernment9
#esources are allocate Lfor the +oo of societyL9 "he +o(ernment o,ns most2 if not all2
-usinesses9
'i*e Economy
DH A mi'ed economy inclues some elements of each9 $ntil recently2 Great 1ritain2 /rance2 an
S,een ,ere all consiere mi*e economies9 "oay2 ho,e(er2 as a result of e*tensi(e
pri(ati5ation2 these countries function as mar)et economies9
%EGA% S&S"E'S
AH "he ega system of a country refers to the rules2 or la,s2 that re+ulate -eha(ior2 alon+ ,ith the
processes -y ,hich the la,s of a country are enforce an throu+h ,hich reress for +rie(ances is
o-taine9
1H "he le+al en(ironment of a country is of immense importance to international -usiness -ecause a
countryIs la,s re+ulate -usiness practice2 efine the manner in ,hich -usiness transactions are to -e
e*ecute2 an set o,n the ri+hts an o-li+ations of those in(ol(e in -usiness transactions9
Differences in the structure of la, can ha(e an important impact upon the attracti(eness of a
country as an in(estment site anEor mar)et9
"eachin+ "ip: "he Encyclopeia of Corporate Go(ernance is a site that contains a -roa -ase of
information a-out international la, an the le+al systems of the countries of the ,orl9 "his site is
a(aila-le at Dhttp:EE,,,9encyco+o(9comE13;IntCorpGo(9aspG9
Different %e+al Systems
CH "he common a& system K-ase on traition2 preceent2 an customH e(ol(e in En+lan o(er
hunres of years9 It is no, foun in most of Great 1ritain!s former colonies2 incluin+ the $nite
States9
2->
Chapter 02 - National Differences in Political Economy
DH A ci!i a& system is -ase on a (ery etaile set of la,s or+ani5e into coes9 O(er M0
countries2 incluin+ Germany2 /rance2 Japan2 an #ussia2 operate ,ith a ci(il la, system9
EH Islamic la, is the most ,iely practice theocratic a& system K-ase on reli+ious teachin+sH in
the moern ,orl9
Differences in Contract %a,
/H Contract a& is the -oy of la, that +o(erns contract enforcement9 A contract is a ocument
that specifies the conitions uner ,hich an e*chan+e is to occur an etails the ri+hts an
o-li+ations of the parties in(ol(e9 "he (nited Nations Con!ention in Contracts )or the
#nternationa Saes o) *oods +C#*S, esta-lishes a uniform set of rules +o(ernin+ certain aspects
of the ma)in+ an performance of e(eryay commercial contracts -et,een sellers an -uyers ,ho
ha(e their places of -usiness in ifferent nations9 1y aoptin+ CIGS2 a nation si+nals to other
nations that it ,ill treat the Con(ention!s rules as part of its la,9
Property #i+hts an Corruption
GH Control o(er property rights Kthe -unle of le+al ri+hts o(er the use to ,hich a resource is put
an o(er the use mae of any income that may -e eri(e from that sourceH are (ery important for
the functionin+ of -usiness9 Property ri+hts can -e (iolate -y either pri!ate action Ktheft2 piracy2
-lac)mail2 'afiaH or pubic action K+o(ernmental -ri-ery an corruption2 nationali5ationH9
Pri(ate Action
.H Pri(ate action refers to theft2 piracy2 -lac)mail2 an the li)e -y pri(ate ini(iuals or +roups9
Pu-lic Action an Corruption
IH Pu-lic action to (iolate property ri+hts occurs ,hen pu-lic officials e*tort income or resources
from property holers usin+ (arious le+al mechanisms incluin+ e*cessi(e ta*ation2 re@uirin+
e*pensi(e licenses or permits from property holers2 or ta)in+ assets into state o,nership ,ithout
compensatin+ the o,ners9

JH In some countries2 corruption is )ept to a minimum ,hile in other corruption is rampant9
/orei+n Corrupt Practices Act
6H "he Foreign Corrupt Practices -ct ma)es it a (iolation of the $nite States la, to -ri-e a
forei+n +o(ernment official in orer to o-tain or maintain -usiness o(er ,hich the forei+n official
has authority2 an re@uires all pu-licly trae countries to )eep etaile recors so that it is clear
,hether a (iolation of the act has occurre or not9
2-M
Chapter 02 - National Differences in Political Economy
Country Focus: Corruption in Nigeria
Summary
"his feature escri-es the corruption that has characteri5e Ni+eria!s economy o(er the last ;0
years9 4hen the country initially +aine its inepenence from 1ritain in 3?=02 e*pectations ,ere
hi+h that Ni+eria ,oul -ecome an economic hea(y,ei+ht in Africa9 4ith a-unant natural
resources an a lar+e population2 it seeme the sta+e ,as set for success9 .o,e(er2 espite
earnin+s of more than N<00 -illion from oil sales urin+ the perio 3?>0 to 200>2 the country still
suffere from e*treme po(erty2 illiteracy2 an hi+h e-t9 Se(eral factors ha(e -een -lame for
Ni+eria!s trou-les incluin+ political insta-ility an corruption9 /urthermore2 in 200>2 "ransparency
International ran)e Ni+eria one of the most corrupt countries in the ,orl2 an the .uman
De(elopment Ine* ran)e the country a ismal 3<? out of 3>>9

Su++este Discussion 7uestions
39 4hat is meant -y corruptionA E*plain ho, a corrupt political system affects the ,ell -ein+ of a
country9
Discussion Points: Corruption in Ni+eria in(ol(e open an systematic plunerin+ of the nation!s
state treasury9 1ri-ery ,as also a re+ular part of -usiness9 In fact2 the situation in Ni+eria is so
ismal that "ransparency International ran)e Ni+eria one of the most corrupt countries in the
,orl9 4hen a country e*periences this sort of acti(ity2 returns on -usiness in(estments are
lo,er2 an there is less incenti(e for in,ar forei+n irect in(estment9 'ost stuents ,ill reco+ni5e
that this then ne+ati(ely affects economic +ro,th9
29 4ith its hu+e oil reser(es an lar+e population2 Ni+eria ,as e*pecte to emer+e as a ma8or
player in Africa9 &et toay the country is e*tremely poor ,ith little e*pectation for an economic
turnaroun any time in the near future9 E*plain ho, Ni+eria came to -e in such a sa state9
Discussion Points: Stuies sho, that countries ,ith hi+h le(els of corruption ha(e lo,er in,ar
forei+n irect in(estment2 lo,er le(els of international trae2 an poor le(els of economic +ro,th9
Ni+eria is a perfect e*ample of this type of country9 Political strife resultin+ from in-fi+htin+
-et,een the country!s (arious tri-es an ethnic +roups le to insta-ility an @uestiona-le le+itimacy
in the +o(ernment9 'ilitary ictatorships ,ere inept an corrupt9 1ecause the country is (ie,e so
poorly than)s to its le(el of corruption an political insta-ility2 in(estors are reluctant to -rin+ in the
)ins of funs that coul help the economy +ro,9

2-?
Chapter 02 - National Differences in Political Economy
:9 Clearly2 Ni+eria!s corrupt +o(ernment has -een a ma8or factor in the country!s emise9 In
contrast2 other countries incluin+ /inlan an Canaa e*pressly prohi-it corruption9 In your
opinion2 ,oul Ni+eria -e -etter off follo,in+ the e*ample of countries li)e /inlan an CanaaA
4hy or ,hy notA
Discussion Points: 'any stuents ,ill pro-a-ly su++est that e(en if Ni+eria e*plicitly prohi-its
corrupt -eha(ior2 it is unli)ely to ha(e little effect on the real ,ay of oin+ -usiness in the country9
In fact2 they ,ill pro-a-ly point out that Ni+eria!s current presient2 Oluse+un O-asan8o2 promise
to put an en to corruption in the country2 -ut so far has only succeee in lo,erin+ it9 Other
stuents ho,e(er2 mi+ht see his efforts as a startin+ point2 an (ie, the future more optimistically9
"eachin+ "ip: "he CIA!s 4orl /act-oo) on Ni+eria
Dhttps:EE,,,9cia9+o(EciaEpu-licationsEfact-oo)E+eosEni9htmlG pro(ies a ,ealth of information on
the country9
"eachin+ "ip: "o learn more a-out "ransparency International!s corruption ran)in+ of Ni+eria2 an
+eneral perspecti(e of the country +o to Dhttp:EE,,,9transparency9or+EG9
"he Protection of Intellectual Property
%H #nteectua property refers to property2 such as computer soft,are2 a screenplay2 or the
chemical formula for a ne, ru+ that is the prouct of intellectual acti(ity9 Intellectual property
ri+hts inclue patents Kocuments +i(in+ the in(entor of a ne, prouct or process e*clusi(e ri+hts
to the manufacture2 use2 or sale of that in(entionHO copyrights Ke*clusi(e le+al ri+hts of authors2
composers2 play,ri+hts2 artists2 an pu-lishers to pu-lish an ispose of their ,or) as they see fitHO
an trademarks Kesi+ns an names2 often officially re+istere2 -y ,hich merchants or
manufacturers esi+nate an ifferentiate their prouctsH9
"eachin+ "ip: /or information on intellectual property ri+hts incluin+ information on international
intellectual property ri+hts treaties an protectin+ traemar)s +o to the $9S9 +o(ernment!s ,e-
pa+e on intellectual property ri+hts at Dhttp:EEusinfo9state9+o(EprouctsEpu-sEintelprpEG9
EH "he protection of intellectual property ri+hts iffers +reatly from country to country9 4hile
many countries ha(e strin+ent intellectual property re+ulations on their -oo)s2 the enforcement of
these re+ulations has often -een la*9
%ecture Note: $9S9 e*ports of intellectual property ,ere nearly N:> -illion in 3??M9 Intellectual
property imports ,ere 8ust N339: -illion9 'uch of the trae in intellectual property ,as
intracorporate trae9 'ore etails can -e foun at
Dhttp:EE,,,9oi+9oc9+o(Eoi+EreportsE2000E$SP"O-1"D-33>;>-0M-20009pf G9
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Chapter 02 - National Differences in Political Economy
"eachin+ "ip: Protectin+ intellectual property a-roa is a )ey concern for many companies9 "he
$9S9 +o(ernment maintains a ,e- site e(ote to helpin+ companies unerstan their ri+hts on
intellectual property9 "o learn more2 +o to
Dhttp:EE,,,9e*port9+o(Ere+ulationEe*pFticFiprFarticle9aspG9
"eachin+ "ip: /or more information on $9S9 "raemar) la, +o to
Dhttp:EE,,,9la,9cornell9euEtopicsEtraemar)9htmlG9
/H An international a+reement si+ne a-out 3>0 nations Kas of 200>H to protect intellectual property
ri+hts is )no,n as the Paris Con!ention )or the Protection o) #ndustria Property$ O(er 3M0
nations are part of the Word #nteectua Property .rgani"ation$ In aition2 a ne, a+reement
)no,n as the Trade Reated -spects o) #nteectua Property Rights +TR#PS, re@uires 4"O
mem-ers to +rant an enforce patents lastin+ at least 20 years an copyri+hts lastin+ <0 years9

"eachin+ "ip: "he 4orl Intellectual Property Or+ani5ation pro(ies e*tensi(e information on
(arious treaties an a+reements -et,een countries re+arin+ the protection of intellectual property9
Go to Dhttp:EE,,,9,ipo9intEportalEine*9html9enG an clic) on A-out 4IPO2 an then on .o,
4IPO 4or)s2 an on "reaties
Management Focus: Starbucks Wins Key Trademark Case in China
Summary
"his feature focuses on intellectual property la,s in China9 4hen Star-uc)s entere China in 3???2
the company ,as @uic)ly challen+e -y a loo)-ali)e competitor2 Shan+hai Pin+ 1a 6e Coffee
Shop9 Not only i the name Pin+ 1a 6e mimic the Star-uc)s name2 -ut Pin+ 1a 6e!s stores ,ere
(irtual replicas of those operate -y Star-uc)s9 In 200:2 Star-uc)s sue Pin+ 1a 6e for traemar)
(iolations9 In 200=2 Star-uc)s ,on its case2 an Pin+ 1a 6e ,as fine N=22000 an orere to
stop usin+ its name9 "he case ,as seen as a -rea) throu+h of sorts2 a si+nal that China ,as finally
ca(in+ to pressure from other nations an the 4orl "rae Or+ani5ation to respect intellectual
property ri+hts9 "oay2 Star-uc)s operates o(er :00 stores in China an e*pects the mar)et to
-ecome secon only to the $9S9
Su++este Discussion 7uestions
39 Discuss the concept of property ri+hts protection an ,hy it is so important to companies9 4hat
oes he court rulin+ a+ainst Pin+ 1a 6e mean for other companies that are alreay oin+ -usiness
in China2 or are consierin+ enterin+ the mar)etA
2-33
Chapter 02 - National Differences in Political Economy
Discussion Points: 'ost stuents ,ill reco+ni5e that firms that epen on proprietary property such
a -ran name or technolo+y for their competiti(e a(anta+e pro-a-ly also rely on property ri+hts
protection to ensure that competitors cannot -enefit from their efforts9 "he finin+ a+ainst Pin+ 1a
6e is a sym-ol that property ri+hts protection shoul -e ta)en seriously2 an that -latant (iolations
of property ri+hts ,ill not -e tolerate9
29 .o, important is the Chinese mar)et to Star-uc)sA Does the presence of loo)-ali)e companies
li)e Pin+ 1a 6e eter firms from enterin+ the mar)etA
Discussion Points: 4ith its +ro,in+ mile class2 the potential in the Chinese mar)et is (ast9 Some
stuents mi+ht ar+ue that the presence of Pin+ 1a 6e is actually a positi(e force for Star-uc)s in
that the coffee shop helps to promote the iea of coffee consumption in the Star-uc)s! ,ay9 'ost
stuents ho,e(er2 ,ill pro-a-ly su++est that companies li)e Pin+ 1a 6e are a nuisance -ecause
they coul potentially ama+e the reputation of Star-uc)s if customers ha(e a ne+ati(e e*perience
at the stores2 an -ecause they re@uire constant monitorin+2 an are a rain on profits9

"eachin+ "ip: "o e*plore Star-uc)s in more epth2 +o to the company!s ,e- site at
Dhttp:EE,,,9star-uc)s9comEG9 Clic) on BInternationalC to e*plore ini(iual country sites9
Prouct Safety an Prouct %ia-ility
GH Different countries ha(e ifferent prouct safety an lia-ility la,s Ksafety stanars to ,hich a
prouct must ahereH9 In some cases $S -usinesses must customi5e proucts to ahere to local
stanars if they are to o -usiness in a country2 ,hether these stanars are hi+her or 8ust
ifferent9
.H 4hen prouct stanars are lo,er in other countries2 firms face an important ethical ilemma9
Shoul they prouce proucts only of the hi+hest stanars e(en if this puts them at a competiti(e
isa(anta+e relati(e other proucers an results in not ma*imi5in+ (alue to shareholersA Or
shoul they prouce proucts that respon to local ifferences2 e(en if that means that consumers
may not -e assure of the same le(els of safety in ifferent countriesA
2-32
Chapter 02 - National Differences in Political Economy
".E DE"E#'INAN"S O/ ECONO'IC DE0E%OP'EN"
AH One reason for loo)in+ at the ifferent political2 economic2 an le+al systems in the ,orl is that
collecti(ely these ifferent systems can ha(e a profoun impact on the le(el of a countryIs economic
e(elopment2 an hence on the attracti(eness of a country as a possi-le mar)et anEor prouction
location for a firm9
Differences in Economic De(elopment

1H Different countries ha(e ramatically ifferent le(els of economic e(elopment9 One common
measure of economic e(elopment is a country!s gross nationa income per hea of population
+*N#,$ "o account for cost of li(in+ ifferences -et,een countries2 GNI can -e a8uste -y
purchasin+ po,er9 A purchasing po&er parity +PPP, a8ustment allo,s for a more irect
comparison of li(in+ stanars in ifferent countries9 A ra,-ac) of -oth GNI an PPP ata is that
they pro(ie only a static picture of e(elopment9

2-3:
Chapter 02 - National Differences in Political Economy
1roaer Conceptions of De(elopment: Amartya Sen
CH No-el Pri5e ,innin+ economist Amartya Sen has ar+ue that e(elopment shoul -e assesse
less -y material output an more -y the capa-ilities an opportunities that people en8oy9 Sen!s
ieas ha(e -een pic)e up -y the $nite Nations an are reflecte in the /uman %e!eopment
#nde' Ka $nite Nations e(elope ine* -ase on life e*pectancy2 eucation attainment2 an
,hether a(era+e incomes are sufficient to meet the -asic nees of life in a countryH9 "he ine* ,as
e(elope to +au+e a country!s economic e(elopment an li)ely future +ro,th rate9
Political Economy an Economic Pro+ress
DH 4hat is the relationship -et,een political economy an economic pro+ressA "his @uestion has
-een the su-8ect of a (i+orous e-ate amon+ acaemics an policy ma)ers for some time9
Inno(ation an Entrepreneurship Are the En+ines of Gro,th
EH #nno!ation is the process throu+h ,hich people create ne, proucts2 ne, processes2 ne,
or+ani5ations2 ne, mana+ement practices2 an ne, strate+ies9 Inno(ation is often seen as the
prouct of entrepreneurial acti(ity9 Entrepreneurs first commerciali5e inno(ati(e ne, proucts
an processes9 "here is -roa a+reement that inno(ation an entrepreneurship are the en+ines of
lon+-run economic +ro,th9
Inno(ation an Entrepreneurship #e@uire a 'ar)et Economy
/H It has also -een ar+ue that the economic freeom associate ,ith a mar)et economy creates
+reater incenti(es for inno(ation an entrepreneurship than either a planne or mi*e economy9
Inno(ation an Entrepreneurship #e@uire Stron+ Property #i+hts
GH Stron+ le+al protection of property ri+hts is another re@uirement for a -usiness en(ironment
conuci(e to inno(ation2 entrepreneurship2 an economic +ro,th9
"he #e@uire Political System
.H In the 4est2 it is often ar+ue that emocracy is +oo for economic +ro,th9 .o,e(er2 there
are e*amples of totalitarian re+imes that ha(e fostere a mar)et economy an stron+ property ri+hts
protection an e*perience rapi economic +ro,th9 Gi(en all the facts thou+h2 it seems li)ely that
emocratic re+imes are far more conuci(e to lon+-term economic +ro,th than a ictatorship2 e(en
one of the -ene(olent )in9

Economic Pro+ress 1e+ets Democracy
2-3;
Chapter 02 - National Differences in Political Economy
IH 4hile it is possi-le to ar+ue that emocracy is not a necessary preconition for the esta-lishment
of a free mar)et economy in ,hich property ri+hts are protecte2 it seems e(ient that su-se@uent
economic +ro,th leas to esta-lishment of emocratic re+imes9
Country Focus: Emerging Property Rights in China
Summary
"his feature e*plores the effect of a ne, property la, in China9 "he la,2 ,hich ,as passe in
200>2 +i(es -oth rural an ur-an lan holers more secure property ri+hts9 "he ne, la, ,as a
much neee response to the chan+es in China!s economy o(er the last :0 years9 $ner the la,2
ur-an lan holers are +rante ;0 Q >0 year leases2 an rural lan holers :0 year leases2 an -oth
+roups ha(e the ri+ht to automatically rene, their leases9 4hile the la, has its limitations2 it is a
step to,ar stren+thenin+ property ri+hts in China9
Su++este Discussion 7uestions
39 4hat prompte the ne, property la, in ChinaA 4hy i it ta)e so lon+ to actually e(elop the
la,A
Discussion Points: China!s economy has uner+one si+nificant chan+es o(er the last :0 years9 "he
country has shifte from a centrally planne economy ,here state o,nership rule2 to a ynamic
mar)et -ase system ,here some t,o thirs of economic acti(ity is no, conucte -y pri(ate
companies9 So2 ,hile the state technically still controls all lan2 the ne, la, means that pri(ate
enterprises ha(e a +reater opportunity to -eha(e as true lan o,ners9 "he ne, la, too) 3; years
to create than)s to si+nificant opposition from Communist Party acti(ists ,ho -elie(e that it
(iolates -asic communist policies9
29 China!s ne, la, has implications for -oth ur-an lan holers an rural lan holers2 -ut it is
especially important for the latter +roup9 E*plain ,hat China!s ne, property la, means for
farmers9
Discussion Points: "he ne, la, is important for -oth farmers an other lan holers -ecause it
+rants lan holers the ri+ht to a lon+ lease an the opportunity to rene, the lease9 In the past2
many farmers foun themsel(es e(icte from their farms ,ithout compensation ,hen the state too)
the lan for housin+ or factories9 $ner the ne, la,2 ,hile the state technically still controls all
lan2 an coul therefore2 appropriate it2 farmers ha(e a more sta-le2 secure en(ironment9 If the
state nees the lan2 the farmer must -e compensate9 Still2 the la, fails to +i(e farmers o,nership
ri+hts to their lan2 an effecti(ely pre(ents them from either ac@uirin+ aitional lan an ta)in+
a(anta+e of scale economies2 or sellin+ their lan2 an mo(in+ into a more proucti(e situation9
2-3<
Chapter 02 - National Differences in Political Economy
%ecture Note: 'ore etails on China!s ne, property la, are a(aila-le at
Dhttp:EEen+lish9+o(9cnE200>-0:E0MEcontentF<;<;>:9htmG9
Geo+raphy2 Eucation2 an Economic De(elopment
JH Geo+raphy can also affect economic e(elopment9 A lanloc)e country ,ith an inhospita-le
climate2 poor soil2 fe, natural resources2 an terri-le iseases is unli)ely to e(elop economically as
fast as country ,ith the opposite characteristics on each of these attri-utes9
6H 4hile it can -e har to o much a-out unfa(ora-le +eo+raphy2 eucation is somethin+ that
+o(ernments can affect9 Numerous stuies su++est that countries that in(est more in the eucation
of their youn+ people e(elop faster economically9
S"A"ES IN "#ANSI"ION
AH Since the late 3?M0s there ha(e -een t,o ma8or chan+es in the political economy of many of the
,orl!s nations9 /irst2 a ,a(e of emocratic re(olutions s,ept the ,orl2 an many of the pre(ious
totalitarian re+imes collapse9 Secon2 there has -een a more a,ay from centrally planne an
mi*e economies to,ars free mar)ets9
"he Sprea of Democracy
1H One nota-le e(elopment of the past 3< years has -een the sprea of emocracy Kan -y
e*tension2 the ecline of totalitarianism9 "hree main reasons account for the sprea of emocracy9
/irst2 many totalitarian re+imes faile to eli(er economic pro+ress to the (ast -ul) of their
population9 Secon2 ne, information an communication technolo+ies ha(e -ro)en o,n the
a-ility of the state to control access to uncensore information9 "hir2 in many countries the
economic a(ances of the last @uarter century ha(e le to the emer+ence of increasin+ly prosperous
mile an ,or)in+ classes ,ho ha(e pushe for emocratic reforms9
"he Ne, 4orl Orer an Glo-al "errorism
CH "he en of the Col 4ar an the Bne, ,orl orerC that follo,e the collapse of communism in
Eastern Europe an the former So(iet $nion2 ta)en to+ether ,ith collapse of many authoritarian
re+imes in %atin America2 ha(e +i(en rise to intense speculation a-out the future shape of +lo-al
+eopolitics9 Author /rancis /u)uyama2 su++ests a more harmonious ,orl ominate -y a
uni(ersal ci(ili5ation characteri5e -y emocratic re+imes an free mar)et capitalism2 ,hile others2
incluin+ .untin+ton2 en(ision a ,orl that is split into ifferent ci(ili5ations each of ,hich ,ith its
o,n (alue systems an ieolo+y9
2-3=
Chapter 02 - National Differences in Political Economy
"he Sprea of 'ar)et-1ase Systems
DH Parallelin+ the sprea of emocracy since the late 3?M0s has -een the transformation from
centrally planne comman economies to mar)et--ase economies9 "he rationale for
transformation has -een the same the ,orl o(er9 In +eneral2 comman an mi*e economies faile
to eli(er the )in of sustaine economic performance that ,as achie(e -y countries aoptin+
mar)et--ase systems9
"eachin+ "ip: "he CIA maintains a site ,ith e*tensi(e information on e(ery country in the ,orl
incluin+ a section on current issues9 "his can -e an e*cellent Bfirst stopC ,hen conuctin+
research on the mar)et potential of a particular country or area9 "he site is a(aila-le at
Dhttps:EE,,,9cia9+o(Eli-raryEpu-licationsEthe-,orl-fact-oo)EG9
"eachin+ "ip: "he $9S9 State Department prouces a series of annual LCountry #eportsL to
ac@uaint American -usinesses ,ith other countries9 Each report contains nine sections: K3H 6ey
Economic InicatorsO K2H General Policy /rame,or)O K:H E*chan+e #ate PoliciesO K;H Structural
PoliciesO K<H De-t 'ana+ement PracticesO K=H Si+nificant 1arriers to $S E*ports an In(estmentsO
K>H E*port Su-siies PoliciesO KMH Protection of $S Intellectual PropertyO an K?H 4or)er #i+hts9
Information a-out o-tainin+ these reports is a(aila-le throu+h the $nite States Department9 "here
is also a special section e(ote to international -usiness9 "he site is
Dhttp:EE,,,9state9+o(Etra(elan-usinessEG9
"he Nature of Economic "ransformation
EH "he shift to,ar a mar)et--ase economic system typically in(ol(es at least three istinct
acti(ities: ere+ulation2 pri(ati5ation2 an le+al enforcement of property ri+hts9
Dere+ulation
/H %ereguation in(ol(es remo(in+ restrictions on the free operation of mar)ets2 the esta-lishment
of pri(ate enterprises2 an the manner in ,hich pri(ate enterprises operate9
Pri(ati5ation
GH Pri!ati"ation transfers the o,nership of state property into the hans of pri(ate in(estors9 In
orer to attract in(estment an protect the interests of the pri(ate enterprise encoura+e -y the first
t,o acti(ities2 chan+es typically nee to -e mae to le+al systems to protect the property ri+hts of
in(estors an entrepreneurs9
2-3>
Chapter 02 - National Differences in Political Economy
%e+al Systems
.H %a,s protectin+ pri(ate property ri+hts an pro(iin+ mechanisms for contract enforcement are
re@uire for a ,ell functionin+ mar)et economy9 4ithout a ega system that protects property
ri+hts2 an ,ithout the machinery to enforce that system2 the incenti(e to en+a+e in economic
acti(ity can -e reuce su-stantially -y pri(ate an pu-lic entities that e*propriate the profits
+enerate -y the efforts of pri(ate sector entrepreneurs9
Implications of Chan+in+ Political Economy
IH "he implications for -usiness of the mo(e to,ar free mar)ets an emocracy are enormous9
'ar)ets that ,ere formerly off-limits to 4estern -usiness are no, open9 .o,e(er2 8ust as the
potential +ains are lar+e2 so are the ris)s9
/OC$S ON 'ANAGE#IA% I'P%ICA"IONS
AH "he material iscusse in this chapter has t,o -roa implications for international -usiness9
/irst2 political2 economic2 an le+al systems of a country raise important ethical issues that ha(e
implications for the practice of international -usiness9 Secon2 the political2 economic2 an le+al
en(ironment of a country clearly influences the attracti(eness of that country as a mar)et anEor
in(estment site9
1enefits
1H "he lon+ run monetary -enefits of oin+ -usiness in a country are a function of the si5e of the
mar)et2 the present ,ealth Kpurchasin+ po,erH of consumers2 an the li)ely future ,ealth of
consumers9 1y ientifyin+ an in(estin+ early in a potential future economic star2 firms may -e a-le
to +ain )irst mo!er ad!antages Ka(anta+es that accrue to early entrants into a mar)etH an
esta-lish loyalty an e*perience in a country9 Companies that are late to enter a mar)er may suffer
from ate0mo!er disad!antages$ ",o factors that are reasona-ly +oo preictors of a country!s
future economic prospects are its economic system an property ri+hts re+ime9
Costs
CH "he costs of oin+ -usiness in a country are etermine -y a num-er of political2 economic2 an
le+al factors9 Political costs can in(ol(e the cost of payin+ -ri-es or lo--yin+ for fa(ora-le or fair
treatment9 Economic costs relate primarily to the sophistication of the economic system2 incluin+
the infrastructure an supportin+ -usinesses9 #e+arin+ le+al factors2 it can -e more costly to o
-usiness in countries ,ith ramatically ifferent prouct2 ,or)place2 an pollution stanars2 or
,here there is poor le+al protection for property ri+hts9
2-3M
Chapter 02 - National Differences in Political Economy
#is)s
DH As ,ith costs2 the ris)s of oin+ -usiness in a country are etermine -y a num-er of political2
economic2 an le+al factors9 Poitica risk is the li)elihoo that political forces ,ill cause rastic
chan+es in a countryIs -usiness en(ironment that a(ersely affects the profit an other +oals of a
-usiness enterprise9 Economic risk is the li)elihoo that economic mismana+ement ,ill cause
rastic chan+es in a countryIs -usiness en(ironment that a(ersely affects the profit an other +oals
of a -usiness enterprise9 1ega risk is the li)elihoo that a train+ partner ,ill opportunistically
-rea) a contract or e*propriate property ri+hts9
O(erall Attracti(eness
EH "he o(erall attracti(eness of a country as a potential mar)et anEor in(estment site for an
international -usiness epens on -alancin+ the -enefits2 costs2 an ris)s associate ,ith oin+
-usiness in that country9
Critical "hin)in+ an Discussion 7uestions
39 /ree mar)et economies stimulate +reater economic +ro,th2 ,hereas state-irecte economies
stifle +ro,thR Discuss9
Ans,er: In a mar)et economy2 pri(ate ini(iuals an corporations are allo,e to o,n property
an other assets9 "his ri+ht of o,nership pro(ies a po,erful incenti(e for people to ,or) har2
introuce ne, proucts2 e(elop -etter a(ertisin+ campai+ns2 in(ent ne, proucts2 etc92 all in the
hopes of accumulatin+ aitional personal capital an ,ealth9 In turn2 the constant search on the
part of ini(iuals an corporation to accumulate ,ealth enriches the entire economy an creates
economic +ro,th9 In contrast2 in a comman economy2 pri(ate ini(iuals an corporations are not
allo,e to o,n su-stantial @uantities of property an other assets9 "he o-8ecti(e of a comman
economy is for e(eryone to ,or) for Bthe +oo of the society9C Althou+h this souns li)e a no-le
ieal2 a system that as)s ini(iuals to ,or) for the +oo of society rather than allo,in+ ini(iuals
to -uil personal ,ealth oes not pro(ie a +reat incenti(e for people to in(ent ne, proucts2
e(elop -etter a(ertisin+ campai+ns2 fin ,ays to -e more efficient2 etc9 As a result2 comman
economies typically +enerate less inno(ation an are less efficient than mar)et economies9
2-3?
Chapter 02 - National Differences in Political Economy
29 A emocratic political system is an essential conition for sustaine economic pro+ress9 Discuss9
Ans,er: "his @uestion has no clear-cut ans,er9 In the 4est2 ,e ten to ar+ue that emocracy is
+oo for economic pro+ress9 "his ar+ument is lar+ely preicate upon the iea that inno(ation is
the en+ine of economic +ro,th2 an a emocratic political system encoura+es rather than stifles
inno(ation9 .o,e(er2 there are e*amples of totalitarian re+imes that ha(e fostere a mar)et
economy an stron+ property ri+hts protection an e*perience rapi economic +ro,th9 "he
e*amples inclue four of the fastest +ro,in+ economies of the past :0 years Q South 6orea2
"ai,an2 Sin+apore2 an .on+ 6on+ Q all of ,hich ha(e +ro,n faster than 4estern economies9
.o,e(er2 ,hile it is possi-le to ar+ue that emocracy is not a necessary preconition for the
esta-lishment of a free mar)et economy2 it seems e(ient that su-se@uent economic +ro,th leas to
esta-lishment of emocratic re+imes9 Se(eral of the fastest-+ro,in+ Asian economies ha(e recently
aopte more emocratic +o(ernments9
:9 4hat is the relationship -et,een corruption Ki9e92 -ri-e ta)in+ -y +o(ernment officialsH in a
country an economic +ro,thA Is corruption al,ays -aA
Ans,er: Economic e(ience su++ests that hi+h le(els of corruption si+nificantly reuce the
economic +ro,th rate in a country9 1y siphonin+ off profits2 corrupt politicians an -ureaucrats
reuce the returns to -usiness in(estment2 an hence2 reuce the incenti(e that -oth omestic an
forei+n -usinesses ha(e to in(est in that country9 "he lo,er le(el of in(estment that results has a
ne+ati(e impact on economic +ro,th9 .o,e(er2 ,hile most stuents ,ill pro-a-ly a+ree that
corruption is -a2 some may point out that the $9S92 espite its /orei+n Corrupt Practices Act2 oes
allo, B+rease paymentsC to e*peite or secure the performance of a routine +o(ernmental action9
Accorin+ to Con+ress2 B+rease paymentsC ,hile technically -ri-es are not -ein+ use to o-tain or
maintain -usiness2 -ut rather are simply mae to facilitate performance of uties that the recipients
are alreay o-li+ate to perform9
;9 "he No-el pri5e-,innin+ economist Amartya Sen ar+ues that the concept of e(elopment shoul
-e -roaene to inclue more than 8ust economic e(elopment9 4hat other factors oes Sen thin)
shoul -e inclue in an assessment of e(elopmentA .o, mi+ht aoption of Sen!s (ie,s influence
+o(ernment policyA Do you thin) Sen is correct that e(elopment is a-out more than 8ust
economic e(elopmentA E*plain9
Ans,er: Sen has ar+ue that e(elopment -e assesse less -y material output measures such as
GNP per capita2 an more -y the capa-ilities an opportunities that people en8oy9 Sen su++ests that
e(elopment -e seen as a process of e*panin+ real freeoms that people e*perience2 an as such2
that e(elopment re@uires the remo(al of ma8or impeiments to freeom9 Go(ernments influence
-y Sen mi+ht ensure that -asic health care an eucation pro+rams are a(aila-le especially for
,omen9 'any stuents ,ill a+ree ,ith Sen an the notion that e(elopment is not 8ust an
economic process2 -ut a political one too2 an that to succee citi5ens must -e +i(en a (oice in the
important ecisions mae for the country9
2-20
Chapter 02 - National Differences in Political Economy
<9 &ou are the CEO of a company that has to choose -et,een ma)in+ a N300 million in(estment in
either #ussia or the C5ech #epu-lic9 1oth in(estments promise the same lon+-run return2 so your
choice of ,hich in(estment to ma)e is ri(en -y consierations of ris)9 Assess the (arious ris)s of
oin+ -usiness in each of these nations9 4hich in(estment ,oul you fa(or an ,hyA
Ans,er: 4hen assessin+ the ris)s of in(estment2 one shoul consier the political2 economic2 an
le+al ris)s of oin+ -usiness in either #ussia or the C5ech #epu-lic9 "oay2 the ris) in #ussia
,oul pro-a-ly -e consiere hi+her than the ris) in the C5ech #epu-lic9 "he C5ech #epu-lic has
recently -een accepte as a mem-er of the E$2 an as such +ains the -enefits an sta-ility offere
-y the E$9 #ussia2 -y contrast2 is still many years a,ay from e(en -ein+ in a position to -e
consiere -y the E$ for mem-ership9 Depenin+ upon ,hen you are usin+ the -oo)2 this situation
coul -e ifferent9 K&ou also may ,ant to su-stitute other countries into this @uestion epenin+
on current e(ents an the countries ,ith ,hich you feel your stuents ,ill -e most familiar9H
=9 #ea the Openin+ Case on Inia in this chapter an ans,er the follo,in+ @uestions:
a9 4hat )in of economic system i Inia operate urin+ 3?;>-3??0A 4hat )in of system is it
mo(in+ to,ars toayA 4hat are the impeiments to completin+ this transformationA
-9 .o, mi+ht ,iesprea pu-lic o,nership of -usinesses an e*tensi(e +o(ernment re+ulations
ha(e impacte KiH the efficiency of state an pri(ate -usinesses2 an KiiH the rate of ne, -usiness
formation in Inia urin+ the 3?;>-3??0 time frameA .o, o you thin) these factors affecte the
rate of economic +ro,th in Inia urin+ this time frameA
c9 .o, ,oul pri(ati5ation2 ere+ulation2 an the remo(al of -arriers to forei+n irect in(estment
affect the efficiency of -usiness2 ne, -usiness formation2 an the rate of economic +ro,th in Inia
urin+ the post-3??0 time perioA
9 Inia no, has poc)ets of stren+ths in )ey hi+h technolo+y inustries such as soft,are an
pharmaceuticals9 4hy o you thin) Inia is e(elopin+ stren+th in these areasA .o, mi+ht success
in these inustries help to +enerate +ro,th in other sectors of the Inian economyA
2-23
Chapter 02 - National Differences in Political Economy
e9 Gi(en ,hat is no, occurrin+ in the Inian economy2 o you thin) that the country represents an
attracti(e tar+et for in,ar in(estment -y forei+n multinationals sellin+ consumer prouctsA 4hyA
Ans,er:
a9 "he economic system that e(elope in Inia after 3?;> ,as a mi*e economy characteri5e -y a
lar+e num-er of state-o,ne enterprises2 centrali5e plannin+2 an su-siies9 In 3??32 Inia!s
+o(ernment em-ar)e on an am-itious economic reform pro+ram9 'uch of the inustrial licensin+
system ,as ismantle2 an se(eral areas once close to the pri(ate sector ,ere opene9 In
aition2 in(estment -y forei+n companies ,as ,elcome2 an plans to start pri(ati5in+ state-
o,ne -usinesses ,ere announce9 Inia has poste impressi(e +ains since 3??32 ho,e(er there
are still impeiments to further transformation9 Attempts to reuce import tariffs ha(e -een stalle
-y political opposition from employers2 employees2 an politicians9 'oreo(er2 the pri(ati5ation
pro+ram has -een slo,e than)s to actions ta)en -y the Supreme Court9 /inally2 e*treme po(erty
continues to pla+ue the country9
-9 "he mi*e economy that e(elope in Inia after 3?;> ,as characteri5e -y a lar+e num-er of
state-o,ne enterprises2 centrali5e plannin+2 an su-siies9 "his system not only constraine the
+ro,th of the pri(ate sector2 -ut it also conse@uently limite the effects of competition that typically
promote efficiency an proucti(ity in a free mar)et system9 "he system e(en limite the actions
of pri(ate companies2 re@uirin+ them to +et +o(ernment appro(al for routine -usiness acti(ities9
Prouction @uotas an hi+h import tariffs also stunte the e(elopment of a healthy pri(ate sector2
as i restricti(e la-or la,s that mae it ifficult to fire employees9 /orei+n e*chan+e restrictions2
limitations on forei+n in(estment2 controls on lan use2 an mana+e prices further e*acer-ate the
situation9 It ,oul appear that Inia!s rate of economic +ro,th ,as ne+ati(ely affecte urin+ this
time frame9 1y 3??;2 Inia!s economy ,as still smaller than 1el+ium!s espite ha(in+ a lar+e
population9 1oth GDP an literacy rates ,ere (ery lo,2 an a hu+e percenta+e of the population
li(e in po(erty9
c9 In 3??32 Inia!s +o(ernment em-ar)e on an am-itious economic reform pro+ram9 So far2 the
response to the pro+ram has -een impressi(e9 "he economy e*pane at an annual rate of a-out
=9: percent from 3??; to 200;2 an ? percent annually from 200< to 200>9 /orei+n in(estment is
up from N3<0 million in 3??3 to N3<9: -illion in 200>9 Certain sectors of the economy incluin+
information technolo+y an pharmaceuticals ha(e one particularly ,ell9 Still2 pro-lems persist9
Actions ta)en -y the +o(ernment continue to limit efficiency +ains for pri(ate companies an the
country!s hi+h rate of po(erty is still a ma8or pro-lem9
9 Inia!s +ains in information technolo+y an pharmaceuticals are impressi(e9 "he country has
emer+e as a (i-rant +lo-al center for soft,are e(elopment2 an Inia!s pharmaceutical companies
ha(e ta)en a stron+ +lo-al position -y sellin+ lo, cost +eneric (ersions of ru+s that ha(e come of
patent in the e(elope ,orl9 As these inustries continue to prosper2 other sectors of the
economy shoul also see the -enefit of spillo(er effects9
2-22
Chapter 02 - National Differences in Political Economy
e9 /orei+n in(estment is up in Inia9 In fact2 forei+n in(estment rose from N3<0 million in 3??3 to
N3<9: -illion in 200>9 .o,e(er2 ,hether Inia is an attracti(e estination for forei+n multinationals
sellin+ consumer proucts remains to -e seen9 Certainly2 the lar+e population ,ill ser(e to attract
some companies2 -ut the fact that some ;0 percent of the ,orl!s population li(in+ in a-8ect
po(erty are in Inia ,ill scare other companies a,ay9 'oreo(er2 it is still not easy to run a
company in Inia than)s to la,s limitin+ e(erythin+ from ,ho can -e fire to ,ho can manufacture
certain proucts9
Closin+ Case: Cha(e5!s 0ene5uela
Summary
"he closin+ case e*plores the political an economic situation in 0ene5uela since .u+o Cha(e5 ,as electe
presient in 3??M9 4hen Cha(e52 ,ho ran on a platform a+ainst corruption an economic mismana+ement2
initially too) office2 0ene5uela!s economy ,as in a eep recession9 Once in office2 Cha(e5 consoliate his
hol o(er the +o(ernment -y raftin+ a ne, constitution that put him in po,er until 20322 an reconfi+urin+
the Supreme Court9 As a result2 0ene5uela is no, consiere to -e only Bpartly free9C Economically2 thin+s
ha(e also remaine ifficult for 0ene5uela9 $nemployment is hi+h2 an po(erty continues to rise9
Corruption is rampant2 an there is a mo(e to ta)e certain inustries into state o,nership2 ,ith the oil
inustry -ein+ a particular tar+et9 Discussion of the case can re(ol(e aroun the follo,in+ @uestions:
7$ES"ION 3: $ner Cha(e5!s leaership2 ,hat )in of economic system is -ein+ put in place in
0ene5uelaA .o, ,oul you characteri5e the political systemA
ANS4E# 3: It ,oul appear that Cha(e5 is mo(in+ to,ar a socialist re+ime9 Numerous
enterprises ha(e -een ta)en o(er -y the state2 an other companies ha(e -een force into
reor+ani5in+ as B,or)ers cooperati(esC9 "he +o(ernment is also e*tenin+ its reach into rural
areas2 ,here it has sei5e farms an turne them into state-o,ne cooperati(es9 Cha(e5 has also
use some of the profits from the country!s soarin+ oil re(enues to increase +o(ernment spenin+
on (arious social pro+rams2 some of ,hich are moele after pro+rams in Cu-a9
7$ES"ION 2: .o, o you thin) that Cha(e5!s unilateral chan+es to contracts ,ith forei+n oil
companies ,ill impact upon future in(estment -y forei+ners in 0ene5uelaA

ANS4E# 2: In the oil inustry2 ,hich the country epens on for some >0 percent of its e*ports2
Cha(e5 has pushe out forei+n companies2 an e*pane the hol of the state run company9
Cha(e5 announce in 200< that the state ,oul increase its royalties on oil sales from 3 percent to
:0 percent2 an that in 200=2 the ta* rate of oil sales ,oul also increase from :; percent to <0
percent9 'ost stuents ,ill reco+ni5e that -y ma)in+ it more ifficult for forei+n in(estors to o
-usiness in the country2 in the oil inustry or other,ise2 Cha(e5 is threatenin+ future economic
+ro,th9
2-2:
Chapter 02 - National Differences in Political Economy
7$ES"ION :: .o, ,ill the hi+h le(el of pu-lic corruption in 0ene5uela impact future +ro,th
ratesA
ANS4E# :: Corruption in 0ene5uela is rampant9 In 200>2 "ransparency International lo,ere its
ran)in+ of the country to 3=2 out of 3>?2 ma)in+ it one of the most corrupt countries in the ,orl9
Go(ernment officials are permitte to eman -ri-es in return for permission to e*pan operations
or enter ne, lines of -usiness9 'any stuents ,ill reco+ni5e the challen+es of operatin+ in an
en(ironment li)e the current situation in 0ene5uela9 Some stuents ,ill pro-a-ly su++est that firms
may reassess their in(estments +i(en the ne, political an economic ris)s present in the country9
'any stuents ,ill pro-a-ly conclue that a mar)et that is consiere to -e only partly free2 ,ith
rampant corruption an pri(ati5ation ta)in+ place2 is no lon+er a ,orth,hile estination9
7$ES"ION ;: Currently2 0ene5uela is -enefitin+ from a -oom in oil prices9 4hat o you thin)
mi+ht happen if oil prices retreat from their current hi+hA
ANS4E# ;: Oil prices are currently at an all-time hi+h ma)in+ 0ene5uela2 one of the ,orl!s
lar+est proucers of oil2 (ery rich9 So far2 Cha(e5 has -een usin+ the oil profits for (arious social
pro+rams9 'ost stuents ,ill pro-a-ly reco+ni5e that if oil prices -e+in to retreat2 these pro+rams
,ill pro-a-ly suffer9 Some stuents may ,oner ,hether fallin+ oil prices coul spell isaster for
0ene5uela!s oil inustry9 Cha(e5 has -een ma*imi5in+ the state!s share of oil re(enues -y pushin+
out forei+n companies an increasin+ the hol of state-run Petroleos e 0ene5uela SA9
Conse@uently2 if prices o fall2 this or+ani5ation ,ill -e more si+nificantly affecte9
7$ES"ION <: In your estimation2 ,hat is the lon+ run pro+nosis for the 0ene5uelan economyA Is
this a country that is attracti(e to international -usinessesA
ANS4E# <: A recent 4orl 1an) stuy puts 0ene5uela as -ein+ one of the most re+ulate economies in the
,orl9 "he mo(e to ta)e (arious enterprises uner state control is also impein+ economic +ro,th9 In the oil
inustry2 for e*ample2 Cha(e5 has reuce the sta)es o,ne -y forei+n companies to +i(e the state run
company a -i++er position9 'ost stuents ,ill pro-a-ly conclue that +i(en the le(els of corruption an
re+ulation2 the country is 8ust too ris)y to consier as a estination for international companies9
Continuous Case Concept

Nissan!s chief financial officer2 Alain Dassas2 e*pects emer+in+ mar)ets in #ussia2 China2 an the
'ile East to -e the ne, +ro,th mar)ets for automa)ers9 In fact2 o(er >< percent of all +lo-al
auto sales +ro,th in the ne*t si* years is e*pecte to come from emer+in+ mar)ets li)e China an
Inia9 In -oth of these mar)ets an emer+in+ mile class coul hol the )ey to future +ro,th9
.o,e(er2 -oth mar)ets coul also -e consiere ris)y -oth politically an economically9
2-2;
Chapter 02 - National Differences in Political Economy
As) stuents to consier the o(erall attracti(eness of these mar)ets for the auto inustry9
4hat are the economic costs of oin+ -usiness in China an IniaA
"hen2 reflect on the political or le+al issues that coul threaten the success a firm enterin+
the mar)et9
/inally2 as) stuents to consier the traeoffs of operatin+ in an emer+in+ mar)et li)e China
or Inia as compare to a more esta-lishe mar)et9
"his e*ercise coul -e use at the -e+innin+ of the iscussion of this chapter!s material2 anEor
a+ain at the en9 "o ta)e the iscussion into +reater epth2 as) stuents rea the pertinent
selections in the additional readings section -elo,9 "he e*ercise also ,or)s ,ell at the -e+innin+
of the implications for managers section9
+lo-alEDGE E*ercises
$se the +lo-alEDGE #esource Des) Dhttp:EE+lo-alEDGE9msu9euE#esourceDes)EG to complete
the follo,in+ e*ercises9
Exercise 1
&ou ,or) for a manufacturin+ company that has operations in the $9S9 an 4estern Europe9
.o,e(er2 increasin+ competition has prompte the firm to e*amine the option of shiftin+
prouction to a lo,er-cost location9 &ou ha(e narro,e the list of potential countries o,n to
"ai,an2 South Africa2 an Ar+entina9 1ase on the political an economic risk ratings2 ho, ,oul
you rate the attracti(eness of these three countries for your companyA Prepare a -rief report
summari5in+ your assessment2 incluin+ a etaile runo,n of ris)s for your top country choice9
Ans,er: "here are se(eral ,e-sites that pro(ie countries! ris) ratin+s9 "hese resources can -e
foun uner the B#eference: #an)in+sC cate+ory at http:EE+lo-ale+e9msu9euE#esourceDes)E -y
searchin+ the term Brisk ratings9C One of these sources2 calle BSratin+C pro(ies etaile analysis
of their ris) ratin+s as ,ell9 Once on the Sratin+ ,e-site2 select the country of interest from the
rop o,n menu9 "he ris) ratin+ an the ris) assessment are a(aila-le for all three countries9
Search Phrase: B#is) #atin+sC
#esource Name: Sratin+
4e-site: http:EE,,,9train+-safely9comE
+lo-alEDGE Cate+ory: B#esearch: #an)in+sC
2-2<
Chapter 02 - National Differences in Political Economy
Exercise 2
"he Market Potential Index K'PIH is an ine*in+ stuy conucte -y the 'ichi+an State $ni(ersity
Center for International 1usiness Eucation an #esearch K'S$-CI1E#H to compare emer+in+
mar)ets on a (ariety of imensions9 Pro(ie a escription of the inicators use in the ine*in+
proceure9 4hich of the inicators shoul ha(e +reater importance for a company that mar)ets
laptop computersA Consierin+ the 'PI ran)in+s2 ,hich e(elopin+ countries ,oul you a(ise a
company sellin+ laptops to enter firstA
Ans,er: "he Market Potential Index is an annual ran)in+ stuy e*clusi(e to the +lo-alEDGE
,e-site9 It uses the list of emer+in+ mar)ets as ientifie -y "he Economist ma+a5ine2 an analy5es
them for their attracti(eness to $9S9 e*porters9 It is locate uner the +lo-alEDGE #esource Des)
an can -e foun uner the B#esearch: #an)in+sC cate+ory9
Search Phrase: B'ar)et Potential Ine*C
#esource Name: 'S$-CI1E#: 'ar)et Potential Ine*
4e-site: http:EE+lo-ale+e9msu9euEresourceDes)EmpiE
+lo-alEDGET Cate+ory: B#esearch: #an)in+sC
Aitional #eain+s an Sources of Information
China is Inia!s UOnly Possi-le "hreat!
http:EE,,,9-usiness,ee)9comE+lo-al-i5EcontentEmay200ME+-200M0<32F?:><0<9htm
Inia V China: "he "ies "hat 1in
http:EE,,,9-usiness,ee)9comE+lo-al-i5EcontentE8un200>E+-200>0=0MF3<MM><9htmAchanWsearch
#olls-#oyce "ar+ets China!s #eally #ich
http:EE,,,9-usiness,ee)9comE+lo-al-i5EcontentEmay200ME+-200M0<>FM;><M09htmAchanWsearch
Emer+in+ 'ar)ets 1ec)on 4orl Carma)ers
http:EE,,,9-usiness,ee)9comEin(estorEcontentEmar200=Epi200=0:20F;:2;<<9htmAchanWsearch
No)ia!s 1i+ Plans for Inia
http:EE,,,9-usiness,ee)9comE+lo-al-i5EcontentEau+200>E+-200>0M:3F?3;:<;9htmAchanWsearch
2-2=
Chapter 02 - National Differences in Political Economy
China!s .y-ri Car /uture
http:EE,,,9-usiness,ee)9comElifestyleEcontentE8an200ME-,200M03:3F=>00:>9htm
4IPO Guie to Intellectual Property 4orl,ie
http:EE,,,9,ipo9intEa-out-ipEenE
Small 1usiness Primer to /ilin+ for "raemar)s in a /orei+n Country
http:EE,,,9ita9oc9+o(Ee*portamericaE"echnicalA(iceEtaFtraemar)s9htm
2-2>