IB

Political Economy

The political, economic, and legal systems of a country

Political System

System of government in a nation

Collectivism

A political system that emphasizes collective goals as opposed to individual goals

Socialists

Those who believe in public ownership of the means of production (i.e business) for the common good of society

Communists

Those who believe socialism can be achieved only through revolution and totalitarian dictatorship

Social Democrats

Those commited to achieving socialism by democratic means (ex: Australia, Great Britain, and Finland)

Privatization

The sale of state-owned enterprises to private investors

Individualism

An emphasis on the importance of guaranteeing individual freedom and self-expression. Opposite of collectivism. (EX: USA)

Totalitarianism

Form of government in which one person or political party exercises absolute control over all spheres of human life and opposing politcal parties are prohibited (No freedom of speech, heavy censorship)

Representative Democracy

A political system in which citizens periodically elect individuals to represent them in government

Communist Totalitarian

A version of collectivism advocating that socialism can only be achieved through a totalitarian dictatorship- ex: China, North Korea, Vietnam and Cuba

Theocratic Totalitarianism

A political system in which political power is monopolized by a party, group, or individual that governs according to religious principles

Tribal Totalitarianism

A political system in which a party, group, or individual that represent the interests of a particular tribe (ethnic group) monopolizes political power

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 restrics individual political freedom, including free speech, often on the grounds that it would lead to the rise of communism. - seen a lot with military dictators, but not that common anymore

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

Legal system

System of rules that regulate behavior and the processes by which the laws of a country are enforced and through which redress of grievances is obtained (i.e. asking the government to fix a wrong)

Common Law

A system of law based on tradition, precedent, and custom; when law courts interpret common law, they do so with regard to these characteristics. (example: USA)

Civil Law system

A system of law based on a very detailed set of written codes

Theocratic Law system

A system of law based on religious teachings

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 business in different nations

When Firms don’t accept the CISG, they?

Often opt for arbitration by a recognized arbitration court to settle contract disputes

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, black-mail, and the like by private individuals or groups. (examples: russian mafia and yakuza)

Public Action

The extortation of income or resources of property holders by public officials, such as politicians and government bureaucrats. (examples: legally levying excessive taxation, legally requiring expensives licenses or permits, illegally demanding bribes)

Intellectual Property

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

Patent

Grants the inventor of a new product or process exclusive rights to 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

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 made by the WIPO to protect intellectual property

Product Safety Laws

Set certain safety standards to which a product must adhere

Product Liability

Involvers holding a firm and its officers responsible when a product causes injury death or damage.

Gross National Income

Measures the total annual income received by residents of a nation

Purchasing Power Parity (PPI)

An adjustment in gross domestic product per capita to reflect differences in the cost of living

Black Economy/Shadow Economy

Economic activity that avoids the payment of taxes through unrecorded cash transactions or barter agreements.

Human Development Index

An attempt by the United Nations to assess the impact of a number of factors on the quality of human life in a country (i.e life expectancy at birth, educational attainment, and whether average incomes based on PPP estimates are sufficient to meet the basic needs of life in a country - (Based on Amartya Sen’s arguement)

Innovation

Development of new products, processes, organizations, management practices, and strategies

Entrepreneurs

Those who first commercialize innovations

Only when a totalitarian regime is committed to what, will they achieve economic growth?

A market system and strong protection of property rights

With economic progress what can occur in totalitarian governments?

greater individual freedoms and democracy

Which geographical features encourage economic growth?

Coastal with temporate climates

Which geographical features discourage economic growth?

Landlocked with tropic climates

Three main reasons for the semi-recent spread of democaracy

1. Mainly totalitarian regimes failed to deliver economic progress to the vast bulk of their populations

2. New information and communication technologies have reduced a state’s ability to control access to uncensored information

3. In many countries, economic advances have led to the emergence of increasingly prosperous middle and working classes that have pushed for democratic reforms

Explain the trends in the political economy of the world

1. Communist governments dismantled

2. Free market economies take over

3. Shift back to authoritarianism, slight retreat from free market model

Deregulation

Removing legal restrictions to the free play of markets and the establishment of private enterprises

For privatization to work:

Entities should face significant competition and thus have to improve their operating efficiency to survive

In terms of legal systems, a well-functioning market economy requires:

Laws protecting private property rights and provides mechanisms for contract enforcement

First-mover advantages

Advantages accruiung to the first to enter a market

Late-mover disadvantages

Handicaps experienced by being a late entrant in a market

Political Risk

The likelihood that political forces will cause drastic changes in a country’s business environment that will adversely affect the profit and other goals of a particular business enterprise

Economic Risk

The likelihood that events including economic mis-management will cause drastic changes in a country’s business environment that adversely affect the profit and other goals of a particular business enterprise - (Example: when countries relied too much on high prices of oil to fund their lavish/unnecessary spending, leading to issues when the prices of oil collapsed)

Legal Risk

The likelihood that a trading partner will opportunistically break a contract or expropiate intellectual property rights.

Cross-cultural Literacy

Understanding how the culture of a country affects the way business is practiced

Is Culture static or dynamic?

dynamic

Culture

A system of values and norms that are shared among a group of people and that when taken together constitute a design for living

Values

Abstract ideas about what a society believes to be good, right, and desireable

Norms

Social rules and guidelines that prescribe appropiate behiavor in particular situations

Society

A group of people who share a common set of values and norms

Folkways

Norms that are the routine conventions of everyday life (example: dress code).

Mores

Norms seen as central to the functioning of a society and to its social life (a lot of them have been enacted into laws).

Based on Samuel Huntington’s view of a world fragmented into different civilizations, how should MNCs target countries?

They should divide the world’s countries into like-minded and culturally similar business regions

The availability of a pool of skilled and knowledgeable workers is a major determinant of:

The likely economic success of a country - (good arguement for education being really important)

Hofstede’s 4 (and potentially 5) dimensions that he claimed summarized the different cultures:

Power distance, Uncertainty Avoidance, Individualism vs Collectivism, Masculinity vs. Femininity, Long-term vs Short-term orientations

Power distance

The theory of how a society deals with the fact that people are unequal in physical and intellectual capabilities. High power distance cultures are found in countries that let inequalities grow over time into inequalities of power and wealth; low power distance cultures are societies that try to play down such inequalities as much as possible - (the US is on the lower side)

Individualism vs Collectivism

Theory focusing on the relationship between the individual and his or her fellows; in individualistic societies, the ties between individuals are loose and individual achievement is highly valued; in societies where collectivism is emphasized, ties between individuals are tight, people are born into collectives, such as extended families, and everyone is supposed to look after the interests of his or her collective.

Uncertainty Avoidance

Extent to which cultures socialize members to accept ambigous situations and to tolerate uncertainty

Masclinity vs. Femininty

Theory of the relationship between gender and work roles. In masculine cultures, sex roles are sharply differentiated and traditional “masculine values” such as achievement and the effective exercise of power determine cultural ideas; in feminine cultures, sex roles are less sharply distinguished, and little differentation is made between men and women in the same job

Long-term vs short-term orientation

The theory of the extent to which a culture programs its citizens to accept delayed gratification of their material, social, and emotional needs. It captures attitudes toward time, persistence, ordering by status, protection of face, respect for tradition, and reciprocation of gifts and favors.

What’s more important than culture in explaining differential economic growth rates?

Economical, Political, and Legal systems

Ethnocentrism

Behavior that is based on the belief in the superiority of one’s own ethnic group or culture; often shows disregard or contempt for the culture of other countries

It’s better to push production facilities and products to countries that:

have well developed education systems, social stratification is lacking, group identification is valued by the culture, and there is only one linguistic group, as they’re most likely to achieve the greatest level of economic growth