D270 Chapter 3

How has China transformed IB business-wise?

Before, the CCP (Chinese Communist Party) feared interaction with foreigners would corrupt its politics and its culture so they blocked foreign investment and restricted foreign trade. However, after they began opening up their markets, China has been seeing great success with its per capita income and becoming one of the biggest economies.

Why is it difficult for foreign investors to succeed in China?

China’s political and legal system makes operating them a difficult process.

The government practices “State Capitalism” which manipulates market activities to to achieve its political objectives.

The government has to know exactly what you are doing in excruciating detail and only proposals that the government supports, get approval.

How does China’s legal system complicate business?

While China’s legal system has greatly reformed, it’s still filled with policy gaps, hazy interpretations, and arbitrary enforcement.

Based on reasonable regulations but arbitrary agendas. Personal connections matter more in doing deals and righting rights.

While there are national laws, China is so large that many local officials are left by themselves which leads to the national laws getting fuzzy across cities.

Why is China the leading counterfeiter?

Chinese officials could be tolerating local counterfeiters because of the economic growth that they bring

Collectivist orientation focuses on how innovation should be shared to bring benefits to all

Ambiguous laws

What is next in the business scene in China?

With China becoming part of organizations such as the World Trade Organization, some of its legal codes have adjusted to comply

However, there are still many issues like with its slowing market growth and countries want to disperse their supply centers around the world

What is a political system?

The structural dimensions and power dynamics of the government that specifies institutions, organizations, and interest grounds and define the norms and rules that govern political activities

How can a political system be effective?

An effective political system integrates the diverse elements of a society. Its test is uniting society in the face of divisive viewpoints. Failure can lead to systematic instability and institutional fragility.

What is individualism?

Individualism champions the primacy of the individual over the group. It focuses on “I” rather than we, and emphasizes individual freedom, self-expression, and personal independence.

How does individualism affect government and business?

The government protects the liberty of individuals to act as they wish, as long as their actions do not infringe upon the liberties of others.

In business, every person has the right to make decisions free of onerous rules and regulations. However, the government does still step in to provide regulations knowing that some individuals maximize self-interest at the expense of collective welfare.

What is laissez-faire?

It means to “let do” or “let it be”. Its ideas recommend letting business affairs run their course, free from government principles, because people pursing personal ambition do not threaten collective welfare.

What is collectivism?

Collectivism emphasizes the primacy of the collective (group, nation, etc.) over the interests of the individual. Relationships and interconnections are a central aspect of social identity. Emphasizes “we” over “I” and encourages being self-sacrificing, dependable, and helpful to others.

How does collectivism affect government and business?

Collectivism encourages the system to develop regulations that promote social justice, labor rights, income equality, and workplace harmony.

In business, it holds that business operations should share the common goal of making decisions and conducting activities that benefit the collective, sometimes in extreme cases, at the expense of individual property rights.

What is political ideology?

Political ideology encapsulates the doctrine of political behavior and change and describes the path to convert ideals into outcomes. Stipulates how society ought to govern itself and explains the methods it will do so.

What is political freedom?

Marked by choices on matters such as fair and competitive elections, individual and group freedoms, rule of law, and civil and human rights.

Used to set the political spectrum used in this class with democracy at one endpoint and totalitarianism at the other.

What is democracy?

An ideology where the principles are that all citizens are politically equal, entitled to freedom of thought, opinion, and belief, and command ultimate authority over public officials.

Based in individualism, personal freedoms needed to pursue happiness

What is a multiparty democracy?

System whereby three or more parties govern, either separately or as a part of a coalition. One party negotiates with opposition parties to legislate policy.

Ex) Canada, Germany, Italy

What is a parliamentary democracy?

Citizens exercise political power by electing representatives to a legislative branch, the Parliament. It is the basis of legitimacy for the various ministers who then direct the executive branch.

Ex) Australia, India, United Kingdom

What is representative democracy?

Originates in a constitution that protects individual freedoms and liberties. The law treats all citizens equally. Elected representatives, while ultimately autonomous, act in the people’s interest. Officials represent voters and, while mindful of voters’ preferences, have the authority to act as they see fit.

Ex) United States, Japan

What is social democracy?

Applies democratic means to transition from capitalism to socialism. The government promotes egalitarianism while also regulating capitalism’s tendency toward opportunism.

Ex) Denmark, Finland, Swedna

What are the business implications of democracy?

In a democracy, political and economic freedoms are increasingly interconnected. Freedom legitimizes profits and prosperity. Managers have the freedom to operate on economic, not political standards. Officials see a free business environment as a pathway toward progress.

Supports private enterprises, has checks and balances to reduce corruption and barriers, and its rights and liberties promote openness to different people in different places

What is totalitarianism?

Totalitarianism subordinates the interests of the individual to that of the collective. An agent of some form monopolizes political power to regulate aspects of public and private life, believing that it is protecting people from the hazards of individual choice

Tolerates few, if any, interests or activities that oppose state ideology

Uses propaganda, indoctrination, and incarceration to coerce citizens

What is authoritarian totalitarianism?

Tolerates no deviation from state ideology. Day-to-day life reflects submission to state authority; resistance incurs punishment. Officials control politics, but pay less attention to the economic and social structure of society.

Ex) North Korea, Chad, Kazakhstan

What is fascist totalitarianism?

Advocates a single-party state that controls, through force and indoctrination, people’s minds, souls, and daily existence. Calls for the merger of state and corporate power to standardize values and systems. There have been few fascist political systems; nearly all prevailed during World War II.

Ex) Italy, Germany, Japan all circa in the 1920s-1945

What is secular totalitarianism?

A single party controls elections, tolerates dissent if it does not challenge the state, and suppresses other ideologies. The state does not prescribe a grand, all-encompassing vision. It grants an individual some economic and civil freedoms provided one does not contest state authority or disrupt social harmony.

Ex) China, Russia, Vietnam

What is secular totalitarianism?

Government is an expression of the favored deity. Leaders profess to represent its interests on earth. The State applies ancient dogma in place of modern principles. Strict social regulation and gender regimentation typically prevail.

Ex) Iran, Afghanistan, Saudi Arabia

What are the business implications of totalitarianism?

Private enterprise, when allowed, supports the state and rejects the laisse-faire outlook typically found in democracies

State manipulates markets for political purposes, distorting resource valuations and blurring risk-return relationships

What are the states of freedom?

Assessment by Freedom House that estimates freedom worldwide based on the Universal Declaration of Human Rights which consists of 30 rights that all people are inherently entitled to

What is a “free” country?

A “free” country exhibits open political competition, respect for civil liberties, robust rule of law, independent civic life, and independent media. There are inalienable freedoms of expression, assembly, association, education, and religion. Examples include Australia, Brazil, India, and the United States.

What is a “partly free” country?

A “partly free” country exhibits limited political rights and civil liberties, corruption, weak rule of law, ethnic and religious strife, unfair elections, and censorship. Examples include Guatemala, Hungary, Pakistan, and Tanzania.

What is a “not free” country?

A “not free” country has few to no political rights and civil liberties. The government allows minimal to no exercise of personal choice, relies on the rule of man as the basis of law, constrains religious and social freedoms, and controls a large share, if not all, of business activity. Examples include China, Russia, Saudi Arabia, and Iran.

What level of freedom countries do most people live in in?

Most people live in either “partly free” or “not free” countries

What is the Third Wave of Democratization?

Latter twentieth-century movement that expanded individual freedoms and civil liberties worldwide. Countries began building just institutions, civil societies, fair property rights, independent media, and impartial judiciaries.

What forces powered the Third Wave of Democratization?

Growing failure of totalitarian regimes to deliver prosperity

Improving communication technology allowed more news to spread and quickly circulated information

Economic dividends of political freedom, moving people from poverty to prosperity

Is political freedom still increasing?

Political freedom has been declining worldwide for the 13th consecutive year which is the longest consecutive period of setbacks in modern times

68 nations saw net declines in political rights and civil liberties while only 50 reported gains

What does the Economist Intelligence Unit identify as the four types of political systems?

Full democracy, flawed democracy, hybrid regime, authoritarian regime

What is a full democracy?

Mature political culture promotes and protects political freedoms and civil liberties.

Government discharges responsibilities transparently.

An effective system of checks and balances regulates politics.

The judiciary is independent, its decisions are impartially enforced, and the rule of law predominates.

Media are independent, vigilant, and diverse.

Ex) Australia, Austria, New Zealand

What is a flawed democracy?

The State respects basic civil liberties.

Free and fair elections regularly occur but experience fraud or media restrictions.

Governance problems and low political participation make for a weak political culture.

Leadership and policy change occur frequently.

Ex) Brazil, United States, India

What is a hybrid regime?

Electoral irregularities undermine freedom and justice.

The state limits opposition parties and candidates.

Judicial bias favoring the “man” undermines the rule of law.

Political culture, public administration, and political participation struggles.

Corruption is extensive, civil society fades, and media are regulated.

Ex) Pakistan, Nigeria, Ukraine

What is an authoritarian regime?

Political pluralism is absent or repressed by the state.

Democratic institutions may exist but the state uses them to legitimate single-party rule.

Elections, if they do occur, are neither free nor fair.

The state systematically disregards civil liberties.

There is no independent judiciary and the rule of man predominates.

Media are typically state-owned or controlled by groups connected to the state.

Censorship suppresses criticism of the state.

Propaganda promotes the state ideology

Ex) China, Russia, Saudi Arabia

What is the distribution of democracy like?

While the EIU classifies 76 countries as democracies (meeting the minimum expectation of regularly running nominally fair elections), only 22 are full democracies and the rest are flawed (fragile institutional structures and low political participation)

Why is authoritarianism rising?

Robust economic performance in single-party states: Combined GDP of authoritarian nations surpassed the economic output of democratic nations in 2019

Gaps between the principles and practices of democracy: Some nations such as the United States went from a full democracy to a flawed one

Economic insecurities and growing populism: People are fearful of future prospects and people are concerned about corrupt elites

Competing interpretations of the idea of democracy: Western notions of democracy translate poorly to countries with different ideals and people believe Western-style democracy shouldn’t dictate solutions to developing countries

What is the Washington Consensus?

The Washington Consensus centers on free-market, pro-trade, and pro-globalization policies based on the neoliberal political economy of the US. Attainment of this is believed to be the endpoint of humanity’s sociocultural evolution

What is the Beijing Consensus?

The Beijing Consensus inspired by the CCP’s system advocates for a single party overseeing a nominally democratic system whose citizens though granted the right to vote, do not participate in decision-making

Ideologically agnostic & advocates trade with “no strings attached”

Gaining popularity for providing stability and some believe is the new way to bring harmony to a nation

How must managers change/adjust their behavior based on whether countries move to the Washington Consensus vs the Beijing Consensus?

With the Washington Consensus, managers must adjust operations to the countries that endorse individualism, champion freedom, and adopt the rule of law. Prosperity may be difficult but it will be for many.

With the Beijing Consensus, managers must rethink business in a world that advocates collectivism, seeks harmony, and relies on the state to deliver economic prosperity in exchange for political freedoms. Prosperity may come a bit easier but price will constrain choice

What is political risk?

Political risk refers to the threat that decisions or events in a country will negatively affect the profitability and sustainability of an investment

What are systemic political risks?

Systemic political risks, by influencing investment and operating conditions in a nation, affect the activities of all firms. Can include financial anomalies (difficulty on credit or loans overseas), competing perspectives, and unilateral breach of contract (host government approves a local firm doing something but not a foreign firm)

What are procedural political risks?

Procedural political risks institute impediments that constrain efficiently running activities. Can include tax discrimination (charging foreign firms higher taxes) and restrictions on profit repatriation (limits profits remitted)

What are distributive political risks?

Distributive political risks progressively eliminate the local property rights of foreign companies like through creeping expropriation (gradual reduction of a MNE’s local property rights), and other destructive government actions such as unilateral trade barriers

What are catastrophic political risks?

Catastrophic political risk devastates the business environment for all companies can include extraordinary political events such as ethnic conflict, civil disorder, harmful action against people, expropriation/naturalization, and civil strife, war

What is a proactive political risk management approach?

A proactive approach allows companies to get ahead of future political risks by conducting analytical models and consulting country experts to predict any risks. However, could face some limitation because not all risks can be predicted.

What is a passive political risk management approach?

A passive approach allows companies to get ahead of political risks by buying insurance from political risk insurance organizations such as OPIC or Multilateral Development Banks. However, could face limitations because not all organizations have the coverage needed and countries could be behind competitors who are taking proactive approaches.

What is a legal system?

The legal system is the mechanism for developing, stipulating, interpreting, and enforcing the laws in a formal jurisdiction. It specifies the rules that regulate behavior, the processes that enforce laws, and procedures that resolve grievances.

What are the three essential components of modern legal systems?

Constitutional law: translates a country’s constitution into an open and legal system, setting the framework for government and defining the authority and procedure to establish laws

Criminal law: specifies what conduct is criminal and punishment

Civil and commercial laws: stipulating private rights and regulating conduct between individuals and/or organizations

What is common law?

Common law is derived from judicial decisions of courts'; its defining characteristic is that it emerged as precedent. Relies on tradition, judge-made precedent, and usage

What is the civil law system?

Civil law codifies core principles that serve as the primary source of law. Rather than create laws like in the common law system, judges apply the relevant statutes to resolve disputes and are not bound by precedent

What is theocratic law?

Theocratic law applies the inspirations and instructions of religious teachings. Ultimate power is vested in religious leaders who regulate business transactions and social relations

What is customary law?

Customary law is based on the norms of behavior that gain legitimacy throughout ongoing practice. Legitimacy comes from individuals willingly accepting the benefits of complying with community standards and offenses are treated as torts (private wrongs).

What is the mixed legal system?

The mixed legal system results when a nation uses two or more of the legal types and each type applies cumulatively or interactively as well as locations where no type clearly dominates

What is the rule of the law?

The rule of law holds that no individual, no matter their status, is above laws that are clearly specified, commonly understood, and fairly enforced. Justice is impartial and transparent, not arbitrary and self-serving.

Democracy is fortified by the rule of law

How does the rule of law affect businesses?

Rule of law guarantees the enforceability of commercial contracts, business transactions, and the sanctity of property rights. Companies rely on its legitimacy to validate the laws, codes, and statutes that regulate their activity

What is the rule of man?

Rule of man holds that the ruler, in whatever form, commands authority that is above the law. Actions of the leader are unrestricted by the constitution, unregulated by criminal codes, and beyond civil challenge

Supports totalitarianism

How does the rule of man affect businesses?

In nations where the rule of man is the law, acceptable marketplace behavior is unpredictable. Principles and practices of the law can be abstract therefore creating ambiguous property rights. Injunctions and lawsuits are also trapped in a slow-grinding legal machine since everything answers to the leader.

What is the trend with basis of rule?

During the Third Wave of Democratization, the rule of the law spread to many countries, changing their system. Markets became more politically stable and legally predictable.

As countries move to be more industrial too economically, more citizens are calling for laws to protect their property rights which comes with the rule of the law.

However, with democracy declining, there can be less pressure on the man to institute the rule of the law. There’s also growing confidence of emerging economies increasingly questioning the presumption that “West knows best”

What rules does the World Bank maintain that productive business activity requires?

Set and sustain property rights

Minimize the costs and complications of resolving disputes

Specify rules that reduce the riskiness of transactions

Organize rules to product contractual partners against abuse

What practical aspects of the business operations does the legal system moderate?

Start a business: Registering its names, licenses, permits, arranging credit, and securing insurance

Entering and enforcing contracts: contracts with buyers and sellers

Hiring and Firing: Workplace regulation and employment law speak to how workers are hired, what they paid, how many hours they can work, and how they are fired

Getting out or going under: Bankruptcy laws differ country to country

What are the strategic aspects of business operations that the legal system moderates?

Product regulation: Regulates access based on product’s country of origin, labeling, informing consumers & supporting local producers, local content regulations (ensuring certain % of goods used come from domestic suppliers)

Product safety and liability regulation: Requires MNE to adapt a product or lose market access, outlines legal responsibility of manufacturers, stipulates the process of liability compensation cliams

Legal Jurisdiction: Determines which country’s legal system takes precedence in the matter of legal jurisdiction, MNEs can specify a choice of law clause

Intellectual property: Creative ideas in the form of inventions, names, images, etc that creates a competitive advantage for individual, company, or country

What is intellectual property right?

Primary safeguard for IP which grants registered owners the legal authority to decide who may use its property and under what circumstances

What is the top-ranked and lowest-rank country whose political and legal polices create the most or least supportive business environments?

New Zealand (1) and Somalia (190)

What is piracy?

The illegal imitation, copying, or counterfeiting of IP

Why is piracy happening?

IP left is a big business, especially when moved to countries with poor IP protection which creates cheap and easily accessible marketing and distribution channels.

How are companies combating piracy?

Companies use lawyers to lobby officials, monitor the web, take down copycat sites, and file injunctions against illegal sellers. Others also use tracking devices and technology to confirm authenticity.

What can determine political and legal system differences?

History: colonialism, dominance/influence, internal development

Economic circumstances: poverty fosters rationale to restrict and control while wealth is associated with few restrictions and freedom

What are the advantages of democracy?

People prefer to have choice over personal and economic decisions

People prefer freedom over control of behavior

What are the disadvantages of democracy?

Difficult for individuals and groups to achieve national agreement

National policy can be slow and cumbersome to implement

What are the advantages of totalitarianism?

Can permit fast and efficient national policy formation because there is no need to debate decisions

Enlightened and benevolent leaders can make good decisions in the national interest

What are some disadvantages of totalitarianism?

The needs of individuals and private enterprises are subordinate to those of the state

Leaders can make poor decisions and may be corrupted by power