CHAPTER 2

National Differences in Political Economy

INTRODUCTION

Countries have different political systems, economic systems and legal systems. Collectively, referred as POLITICAL ECONOMY Vary in culture, education and skill level. Impact benefit, costs & risks of doing business overseas, how operations should be managed & the strategy international firm should pursue.

2.1 Differences in Political, Economy & Legal System

THE NATURE OF RISK

Political Risk
Likelihood that political forces

will cause drastic changes that adversely affect profits and other goals.

Economic Risk
Likelihood that economic mismanagement will

cause drastic changes that adversely affect profits and other goals.

Legal Risk
Likelihood that a trading partner will

opportunistically break a contract or expropriate property rights.

POLITICAL SYSTEMS
The System of Government in a Nation
Democratic Totalitarian

Individualism

Collectivism

VS

DEMOCRACY AND TOTALITARIANISM

Democracy Government by people exercised directly or through elected representatives. Totalitarianism One person or party exercises control over all spheres of human life. Opposing political parties are prohibited.

ECONOMIC SYSTEMS
1. Market Economy

Privately owned. Price and quantity produce are determined by supply and demand.
2. Command Economy

What product, quantity to produce, and price to charge are all planned by government. Most businesses owned by government. 3. State Direct Economy Government directing the investment of private firms through national policy

ECONOMIC SYSTEMS
4. Mixed Economy Certain sectors left to private ownership & free market mechanism. Others state ownership. For best interest of society. (Education, health care) Take ownership of troubled company, which operation is vital to national interest.

2-8

LEGAL SYSTEMS

Regulate business practice, manner business transactions are to be executed, rights and obligations for business people. Common, Civil, Theocratic Law. Differences in law impact country attractiveness.

Property rights patents, copyright, trademark Private action theft, piracy, blackmail, mafia

Public action bribery, excessive taxation, expensive permits/license, asset takeover (nationalization)
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Property Rights And Corruption

The Foreign Corrupt Practices Act makes it illegal for U.S. companies to bribe foreign government officials to obtain or maintain business over which that foreign official has authority The OECD has also adopted a convention that obliges member states to make the bribery of foreign public officials a criminal offense

Corruption Perception Index 2012

2.2 DIFFERENCES IN CULTURE

What Is Culture?
System of values & norms that are shared among a group of people and that when taken together constitute a design for living where - Values: Abstract ideas about what a group believes to be good, right, and desirable - Norms: Social rules & guidelines that prescribe appropriate behavior (Folkways & Mores) - Society: Group of people who share a common set of values and norms Norms Video 1 Norms video 2

Determinants of Culture

SOCIAL STRUCTURE
2 major social structure of a country:
1.

Individual vs. Group

Pro & con of individualism & group??

Bill Gate

Jerry Yang

Jeff Bezos

Larry Page

Pierre Omidyar

SOCIAL STRUCTURE
2.

Degree of stratification into classes or castes

Different levels of people. Determine by family background, occupation and income. Higher strata or castes better education, standard of living and work opportunities. All societies are stratified, but differ in 2 ways: 1. The degree of mobility Caste @ class 2. Significance of strata levels for business.

DEGREE OF STRATIFICATION
Significance to business TRY TO REFLECT TO YOUR WORKPLACE?? High degree of mobility Less impact on business operations. Lack of mobility Resulting in class consciousness Shapes the work and relationship with members from other classes. Customers might also want to deals with certain class only.

LANGUAGE
SPOKEN LANGUAGE Most obvious ways in which countries are different. Countries with more than 1 language, often finds more than one culture.

UNSPOKEN LANGUAGE
Refers to nonverbal communication.

Failure to understand the nonverbal cues of another culture can lead to a failure of communication.

CULTURE AND THE WORKPLACE

Hofstedes Model: Geert Hofstede study how culture relates to values in the workplace at IBM.

Identified 5 dimensions that summarize different culture. 1. Power Distance 2. Individualism vs. collectivism 3. Uncertainty avoidance 4. Masculinity vs. femininity 5. Confusion dynamism

POWER DISTANCE
How society deals with the fact that people are unequal in physical & intellectual capabilities.

High power distance culture:

Inequalities of power and wealth. Blindly obey supervisors orders (strict

obedience). Organization centralized & have tall organization.

How about your organization??

INDIVIDUALISM vs. COLLECTIVISM

Individualism: Tendency to look after themselves & their immediate family only. Collectivism: Tendency to belong to groups or collectives & to look at each other in exchange for loyalty. Individualistic society - Individual achievement & freedom were highly valued.

UNCERTAINTY AVOIDANCE
Extend which people feel threatened by ambiguous situation & uncertainty, and try to avoid it. High UA: Strong need for rules & regulation, manager expected to issue clear instruction, low risk taking by managers, lower labor turnover. (Japan, Germany, Spain) Low UA: Risk taker, fewer written rules, more risk taking managers & more ambitious employees (Sweden, Denmark)

MASCULINITY vs. FEMININITY

Masculinity: Dominant values in society are success, money & things. Femininity: Dominant values in society are caring for others & quality of life. High Masculinity Importance of earning, recognition, advancement & challenge (Japan, Singapore 5 Cs) Femininity country - Importance of co-operation, friendly atmosphere & employment security.

Confucian dynamism

Attitudes toward time, persistence, ordering by status, protection of face, respect for tradition, & reciprocation of gifts & favors

???
Individualism Uncertainty avoidance Masculinity Power distance 26 36 50 104

CULTURAL CHANGE
Culture is not a constant; it evolves over time. Japan, today, as it moves toward greater individualism in the workplace. What was unacceptable before could be a norm now. EXAMPLE??

CULTURE: IMPLICATIONS ON IB

Individual & firms must develop crosscultural literacy for success. Beware of ethnocentric culture belief in superiority of own culture.

Cultural values can influence costs & competitive advantage.