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CHAPTER 2

National Differences
in Political, Economic,
and Legal Systems
BY DIANNE LALU PINEDA

INTERNATIONAL
BUSINESS AND TRADE
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I. RATIONALE
International business is much more complicated than domestic business because
countries differ in many ways.

Countries have different political, economic, and legal systems. They vary significantly
in their level of economic development and future economic growth trajectory. Cultural
practices can vary dramatically, as can the education and skill levels of the population.

All these differences can and do have major implications for the practice of
international business.
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II. LEARNING OBJECTIVES

LO1 LO2 LO3 LO4

Understand how the Understand how the Understand how the Explain the
political systems of economic systems of legal systems of implications for
countries differ. countries differ. countries differ. management practice
of national differences
in political economy.
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III. PRE-TEST
Countries have different political, economic, and legal
systems. Do you think these differences affect the daily
lives of citizens? Why or why not?
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IV. LEARNING CELLS

LO1. Understand how the political systems of countries differ.

The political system of a country shapes its economic and legal systems. By political system, we mean the
system of government in a nation. Political systems can be assessed according to two dimensions.

1. Collectivism - Refers to a political system that stresses the primacy of collective goals over individual
goals. When collectivism is emphasized, the needs of society as a whole are generally viewed as being
more important than individual freedoms.
2. Socialists - Those who believe in public ownership of the means of production for the common good of
society.

In the early twentieth century, the socialist ideology split into two broad camps.
Communists - Those who believe socialism can be achieved only through revolution and totalitarian
dictatorship.
Social Democrats - Those committed to achieving socialism by democratic means.
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In many countries, state-owned companies performed poorly. Protected from competition by their monopoly
position and guaranteed government financial support, many became increasingly inefficient. Individuals paid
for the luxury of state ownership through higher prices and higher taxes.

Privatization - The sale of state-owned enterprises to private investors.

Individualism - Refers to a philosophy that an individual should have freedom in his or her economic and
political pursuits.
Democracy - Political system in which government is by the people, exercised either directly or through
elected representatives.
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.
Representative Democracy - A political system in which citizens periodically elect individuals to
represent them in government.
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Four major forms of totalitarianism exist in the world today.

1. Communist Totalitarianism - A version of collectivism advocating that socialism can be achieved only
through a totalitarian dictatorship.
2. Theocratic Totalitarianism - A political system in which political power is monopolized by a party,
group, or individual that governs according to religious principles.
3. Tribal Totalitarianism - A political system in which a party, group, or individual that represents the
interests of a particular tribe (ethnic group) monopolizes political power.
4. Right-Wing Totalitarianism - A political system in which political power is monopolized by a party,
group, or individual that generally permits individual economic freedom but restricts individual political
freedom, including free speech, often on the grounds that it would lead to the rise of communism.
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LO2. Understand how the economic systems of countries differ.

Economic Systems - It should be clear from the previous section that political ideology and economic
systems are connected.

In countries where individual goals are given, we are more likely to find market-based economic systems and
in countries where collective goals are given, the state may have taken control over many enterprises;
markets in such countries are likely to be restricted rather than free.

Market Economy - An economic system in which the interaction of supply and demand determines the
quantity in which goods and services are produced.
Command Economy - An economic system where the allocation of resources, including determination of
what goods and services should be produced, and in what quantity, is planned by the government.
Mixed economy - Can be found between market and command economies. In a mixed economy, certain
sectors of the economy are left to private ownership and free market mechanisms, while other sectors
have significant state ownership and government planning.
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LO3. Understand how the legal systems of countries differ.

Legal Systems - Rules that regulate behavior and the processes by which the laws of a country are enforced
and through which redress of grievances is obtained.

DIFFERENT LEGAL SYSTEMS

Common Law - A system of law based on tradition, precedent, and custom. Tradition refers to a
country’s 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.
Civil Law - A system of law based on a very detailed set of written laws and codes.
Theocratic Law - A system of law based on religious teachings.

A civil law system tends to be less adversarial than a common law system because the judges rely on detailed
legal codes rather than interpreting tradition, precedent, and custom. Judges under a civil law system have
less flexibility than those under a common law system. Judges in a common law system have the power to
interpret the law, whereas judges in a civil law system have the power only to apply the law.
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Contract - A document that specifies the conditions under which an exchange is to occur and details the
rights and obligations of the parties involved.

Contract Law - The body of law that governs contract enforcement.

United Nations Convention on Contracts for the International Sale of Goods (CISG) - A set of rules
governing certain aspects of the making and performance of commercial contracts between sellers and
buyers who have their places of businesses in different nations.

Property Rights - 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.

Private Action - Violation of property rights through theft, piracy, blackmail, and the like by private
individuals or groups.

Public Action - The extortion of income or resources of property holders by public officials, such as
politicians and government bureaucrats.
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Rankings of corruption
by Venezuela country,
2015.

Source: Constructed by the author from raw

data from Transparency International,
Nigeria Corruption Perceptions Index 2015.
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Foreign Corrupt Practices Act (FCPA) - U.S. law regulating behavior regarding the conduct of
international business in the taking of bribes and other unethical actions.

Intellectual Property - Products of the mind, ideas (e.g., books, music, computer software, designs,
technological know-how); intellectual property can be protected by patents, copyrights, and trademarks.

Patent - Grants the inventor of a new product or process exclusive rights to the manufacture, use, or sale
of that invention.

Copyrights - The exclusive legal rights of authors, composers, playwrights, artists, and publishers to
publish and disperse their work as they see fit.

Trademarks - The designs and names, often officially registered, by which merchants or manufacturers
designate and differentiate their products.
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World Intellectual Property Organization - An international organization whose members sign treaties to
agree to protect intellectual property.

Paris Convention for the Protection of Industrial Property - International agreement to protect
intellectual property.

Product Safety Laws – Set certain safety standards to which a product must adhere.

Product Liability - Involves holding a firm and its officers responsible when a product causes injury,
death, or damage.
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LO4. Explain the implications for management practice of national differences in political
economy.

The material discussed in this chapter has two broad implications for international business. First, the
political, economic, and legal systems of a country raise important ethical issues that have implica- tions for
the practice of international business. Second, the political, economic, and legal environments of a country
clearly influence the at- tractiveness of that country as a market or investment site. The benefits, costs, and
risks associ- ated with doing business in a country are a function of that country’s political, economic, and
legal systems.

The overall attractiveness of a country as a market or investment site depends on balancing the likely long-
term benefits of doing business in that country against the likely costs and risks. For now, other things being
equal, a nation with democratic political institutions, a market-based economic system, and strong legal
system that protects property rights and limits corruption is clearly more attractive as a place in which to do
business than a nation that lacks democratic institutions, where economic activity is heavily regulated by the
state, and where corruption is rampant and the rule of law is not respected.
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LO4. Explain the implications for management practice of national differences in political
economy.

For example, China lacks democratic institu- tions, corruption is widespread, property rights are not always
respected, and even though the country has embraced many market-based economic reforms, there are still
large numbers of state-owned en- terprises, yet many Western businesses feel that they must invest in
China.
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National differences in political,
economic, and legal systems shape how
countries are run and how businesses
operate. Politically, nations vary in how
much freedom and government control
they allow.

Economically, they differ in whether

markets are driven by private businesses,
government planning, or a mix of both.
V. SUMMARY
Legally, each country has its own rules for
protecting property, enforcing contracts,
and regulating business activity.

Overall, these differences influence a

country’s stability, opportunities, and
INTERNATIONAL
risks for international business.
BUSINESS AND TRADE
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VI. POST-TEST
Countries have different political, economic, and legal
systems that affect citizens’ daily lives.
Do you think these differences make life better or worse for
people? Why?
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ANSWER
The political, economic, and legal environment shapes
almost every part of daily life. The jobs, safety, education,
healthcare, and personal freedoms of every individual. If
these systems work well, life will improves and if they don’t
life becomes harder.
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VI. REFERENCES:
A. Giddens, Capitalism and Modern Social Theory ( Cambridge, UK: Cambridge University Press, 1971).
[Link] D30250431C8761
A. O. Hirschman, “The On-and-Off Again Connection between Political and Economic Progress,” American Economic
Review 84, no. 2 (1994). [Link]
between-Political-and-Economic/
H. W. Spiegel, The Growth of Economic Thought (Durham, NC: Duke University Press, 1991). [Link]
[Link]/the-growth-of-economic-thought-3rd-ed
M. Friedman and R. Friedman, Free to Choose (London: Penguin Books, 1980). [Link] Library/Books/7-
11-2024/[Link]
R. Wesson, Modern Government—Democracy and Authoritarianism, 2nd ed. (Englewood Cliffs, NJ: Prentice Hall, 1990).
[Link] 05831/01CARLI_DPU:CARLI_DPU
Smith, Adam, The Wealth of Nations, Vol. 1. London: Penguin Books. [Link]
nt/21146122/Wealth-of-Nations-ADAM-SMITH-VOL1
Transparency International, “Global Corruption Report, 2014”. [Link] 14
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THANK YOU!