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National Differences
in Political,
Economic, and
Legal Systems
Chapter 2

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 Learning Objectives
2-1 Understand how the political systems of countries differ.
2-2 Understand how the economic systems of countries
differ.
2-3 Understand how the legal systems of countries differ.
2-4 Explain the implications for management practice of
national differences in political economy.

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 Introduction
Political Economy
• Political, economic, and legal systems of a country.
• These systems are interdependent.
• They influence each other.

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 Political Systems 1

The system of government in a nation is called the political

system.
Assessed according to two dimensions:
• Emphasis on collectivism or individualism.
• Degree to which they are democratic or totalitarian.

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 Political Systems 2

Collectivism and Individualism

Collectivism:
• Emphasizes collective goals over individual goals.
Socialism:
• Public ownership of the means of production for the
common good.
• Karl Marx: the few benefit at the expense of the many in a
capitalist society where individual freedoms are not
restricted.
• Communists versus social democrats.
• Privatization.

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 Political Systems 3

Collectivism and Individualism continued

Individualism:
• An individual should have freedom in economic and
political pursuits.
• The interests of the individual should take precedence over
the interests of the state.
• Two tenets:
• Guarantee of individual freedom and self-expression.
• Welfare of society best served by letting people pursue their
own economic self-interest.

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 Political Systems 4

Democracy and Totalitarianism

• Democracy: government is by the people, exercised either
directly or through elected representatives.
• Totalitarianism: one person or political party exercises
absolute control over all spheres of human life and
prohibits opposing political parties.
• Democracy and individualism go hand in hand, as do the
communist version of collectivism and totalitarianism.

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 Political Systems 5

Democracy and Totalitarianism continued

Democracy:
• Representative democracy: citizens periodically elect
individuals to represent them.
• Includes a multitude of safeguards that are typically based
in constitutional law, including:
• Freedom of expression.
• Free media.
• Universal adult suffrage.
• Fair court system.

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 Political Systems 6

Democracy and Totalitarianism continued

Totalitarianism:
• Communist totalitarianism: socialism can be achieved only
through a totalitarian dictatorship.
• Theocratic totalitarianism: monopolized by a party, group, or
individual that governs according to religious principles.
• Tribal totalitarianism: a party, group, or individual that represents
the interests of a particular tribe monopolizes political power.
• Right-wing totalitarianism: generally permits individual economic
freedom but restricts individual political freedom, including free
speech, on the ground that it would lead to the rise of
communism.

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 Political Systems 7

Democracy and Totalitarianism continued

Pseudo-democracies:
• Lie between pure democracies and complete
totalitarianism systems.
• Authoritarian elements have captured some or much of the
machinery of state and use this to deny basic political and
civil liberties.

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 Economic Systems 1

Market Economy
• All productive activities are privately owned.
• Production is determined by supply and demand.
• To work, supply must not be restricted.
• Role of government is to encourage vigorous free and fair
competition.

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 Economic Systems 2

Command Economy
• Government plans the goods and services, quantity and
price, then allocates them for “the good of society.”
• All businesses are state owned.
• Historically found in communist countries.
• No incentive for individuals to look for better ways to serve
needs.

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 Economic Systems 3

Mixed Economy
Some sectors are privately owned, some are government
owned.
Once common in developed world, less so now.
Government may aid troubled firms whose operations are
vital to national interests.
• U.S. helped Citigroup, General Motors in 2008 recession.

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 Legal Systems 1

Legal Systems
Refer to:
• Rules or laws that regulate behavior.
• Process through which laws are enforced.
• Process through which redress for grievances is obtained.

Are influenced by the prevailing political system.

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 Legal Systems 2

Different Legal Systems

Common law: Civil law:
• Evolved in England over • Based on detailed laws
hundreds of years. organized into codes.
• Based on tradition, • Less adversarial than a
precedent, custom. common law system.
• More flexible than other Theocratic law:
systems.
• Based on religious teachings.
• Most common is Islamic law.

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 Legal Systems 3

Differences in Contract Law

Contract: specifies conditions under which an exchange is to
occur, and details rights of parties involved.
Contract law: body of law that governs contract enforcement.
• Under common law:
• Contracts are very detailed with all contingencies spelled out.
• More expensive and can be adversarial.
• Under civil law:
• Contracts tend to be much shorter and less specific.

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 Legal Systems 4

Differences in Contract Law continued

United Nations Convention on Contracts for the International
Sale of Goods (CISG):
• Establishes a uniform set of rules governing certain
aspects of the making and performance of everyday
commercial contracts between sellers and buyers who
have their places of business in different nations.
• Applies automatically to all contracts for the sale of goods
between different firms based in countries that have ratified
the convention, unless the parties opt out.

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 Legal Systems 5

Property Rights and Corruption

Property: a resource that an individual or business owns.
• Land, buildings, equipment, capital, mineral rights,
businesses, intellectual property.
Property rights: 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.

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 Legal Systems 6

Property Rights and Corruption continued

Private action:
• Theft, piracy, blackmail by private individuals or groups.
Public action and corruption:
• Public officials extort income, resources, or property.
• Can be done legally by levying excessive taxation, requiring
licenses or permits from property holders, taking assets into
state ownership without compensating owners, redistributing
assets without compensating prior owners.
• Can be done illegally through corruption, demanding bribes.

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 Figure 2.1 Rankings of Corruption by Country,
2020

Access the text alternative for slide images.

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 Legal Systems 7

Property Rights and Corruption continued

Foreign Corrupt Practices Act (FCPA):
• Illegal to bribe a foreign government official to obtain or
maintain business over which that foreign official has
authority.
• Requires all publicly traded companies to keep detailed
records that would reveal whether a violation of the act has
occurred.
Convention on Combating Bribery of Foreign Public Officials
in International Business Transactions (1997):
• Makes bribery of a foreign public official a criminal offense.
• Allows for facilitating or expediting payments.
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 Legal Systems 8

The Protection of Intellectual Property

Intellectual property: property that is the product of intellectual
activity, such as computer software, a screenplay, a music score.
• Patent: inventor’s exclusive rights for a defined period.
• Copyrights: exclusive legal rights of authors, composers,
playwrights, artists, and publishers.
• Trademarks: officially registered designs and names used to
differentiate products.

World Intellectual Property Organization: international organization

whose members sign treaties to protect intellectual property.
• Paris Convention for the Protection of Industrial Property.

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 Legal Systems 9

Product Safety and Product Liability

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.
• Can be much greater if a product does not conform to
safety standards.
• Criminal and civil laws apply.
• Raises ethical issues when doing business abroad.

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 360° View: Managerial Implications
The Macro Environment Influences Market Attractiveness
Two broad implications for international business:
• Political, economic, and legal systems of a country raise
important ethical issues that have implications for
international business.
• Political, economic, and legal environments of a country
clearly influence the attractiveness of that country as a
market or investment site.
• A country with democratic political institutions, a market-
based economic system, and a strong legal system is more
attractive to do business in.

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