Chp 2

Collectivism

refers to a political system that stresses the primacy of collective goals over individual goals

simply means: The needs of society as a whole are more important than individual freedoms. Individual rights can be restricted for "the good of society" or "the common good".

Ancient greek philosopher Plato

• who argued that individual rights should be sacrificed for the majority and that property should be owned in common.

• Plato did NOT equate collectivism with equality.

• He believed society should be stratified into social classes, where elite groups (philosophers and soldiers) rule for the benefit of all.

In modern political ideology,

collectivism is primarily expressed through socialism.

(Karl Marx):

Marx argued that capitalists expropriate value created by workers while paying them subsistence wages.

To fix this, Marx advocated for state ownership of the basic means of production, distribution, and exchange (state-owned enterprises) so profits benefit society rather than private capitalists.

In the early twentieth century: socialist ideology split into 2 camps

• Communists: Believed socialism could be achieved only through violent revolution and totalitarian dictatorship (e.g., Soviet Union, pre-reform China, Cuba, North Korea).

• Social Democrats: Committed to achieving socialism through democratic means, rejecting revolution and dictatorship.

Communism

Reached its peak in the late 1970s.

By the mid-1990s, communism was in retreat following the 1989 Eastern European revolutions and the collapse of the Soviet Union.

China retains political control under CCP rule but moved away from strict communist economic management.

State Ownership Failure

Protected state monopolies became inefficient, driving up taxes and consumer prices.

Privatization Definition

The sale of state-owned enterprises to private investors.

Individualism

refers to a philosophy that an individual should have freedom in their economic and political pursuits

Aristotle (384–322 B.C.):

Placed as the opposite of Plato. Argued that private property is more productive than communal property because communal property receives little care, while private property gets maximum care

Individualism 2 central tenets

• Tenet 1: Guaranteeing individual freedom and self-expression.

• Tenet 2: Society’s welfare is best served by letting people pursue their own economic self-interest (the "Invisible Hand" logic by Adam Smith in The Wealth of Nations) rather than a government dictating society's interest.

The Cold War:

The Cold War: Framed as a clash between collectivism (Soviet Union) and individualism (United States).

1980s–2005 Trend:

Collectivism waned while individualism surged as democratic ideals and market economics replaced communism/socialism.

Democracy

refers to a political system in which the government is by the people , exercised either directly or through elected representatives.

Totalitarianism

a form of government in which one person or political party exercises absolute control over all spheres of human life and prohibits opposing political parties.

-Gray area: you can have a totalitarian state that permits economic individualism/market reforms while restricting political freedom (e.g., China and Vietnam).

The 4 Forms of Totalitarianism

communist Totalitarianism- Advocates achieving socialism through a totalitarian dictatorship

Theocratic Totalitarianism- Political power is monopolized by a party, group, or individual that governs according to religious principles.

Tribal Totalitarianism - Occurs when a political party that represents the interests of a particular tribe or ethnic group monopolizes power.

Right-Wing Totalitarianism- Permits some individual economic freedom, but restricts political freedom (often to prevent the rise of communism or socialism).

Pseudo-Democracy

Systems that lie on the spectrum between pure democracy and complete totalitarianism. Also called imperfect democracies or illiberal democracies.

ex: ussia (Vladimir Putin): Elections are technically held, opposition candidates run, and dissenting voices exist, but Putin's regime systematically limits political liberties, controls media, and neutralizes serious political rivals.

3 Economic System Types:

Market Economy, Command Economy, and Mixed Economy.

Pure or free Market Economy:

All productive activities are privately owned.

Production is determined strictly by the interaction of supply and demand via the price system

Consumer purchasing patterns dictate what is produced and in what quantities.

The Problem with Monopolies:

• A single seller restricts supply to artificially raise prices and boost profit margins.

• Without competition, monopolists have no incentive to lower costs or innovate, resulting in inefficient operations, higher prices, and lower-quality goods.

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To preserve market efficiency

government must enforce vigorous free and fair competition.

Antitrust Laws:

Used in regions like the US and European Union to ban restrictive business practices designed to corner/monopolize a market.

Private Ownership

guarantees that entrepreneurs keep the profits earned from their own work and risk.

Pure Command Economy

A system where the government controls and plans:

• What goods and services are produced.

• The exact quantity produced.

• The prices at which they are sold.

Pure Command Economy

Tied directly to collectivism: all businesses are state-owned so the government can direct investments for the "good of society" rather than private individual gain.

Why Command Economies Fail

No Fear of Bankruptcy: State-owned enterprises cannot go out of business. Because government subsidies cushion them, managers have no incentive to control costs or operate efficiently.

No Profit Incentive: Abolishing private ownership means individuals cannot earn profit from their own initiative. Without a reward for innovation, dynamism is absent, and firms fail to serve consumer needs effectively.

Net Result: Economic stagnation instead of growth.

Mixed Economy

Lies between a market economy and a command economy.

Certain sectors are left to private ownership and free markets,

while other sectors have significant state ownership and government regulation to achieve social goals.

Most modern economies are mixed economies, but the degree of government involvement varies significantly.

China: Significant state ownership of businesses and heavy subsidies to private firms.

United States: Government does not directly own businesses, but intervenes via regulations and targeted subsidies (e.g., EV subsidies in the 2022 Inflation Reduction Act).

Global Trend (1980s–Present): Decline in State Ownership:

Nations like Great Britain, France, Sweden, and Ireland formerly owned massive sectors (steel, telecom, airlines, auto) but executed extensive privatization, reducing state ownership

In extreme cases, capitalist governments take temporary ownership of failing vital firms to prevent economic collapse.

ex: 2008 Financial Crisis: US government took temporary stakes in AIG (80%), Citigroup, and General Motors, but sold off all holdings once stability returned (e.g., AIG sold in 2012, GM in 2014)

Government intervention: Furthering its industrial policies

When the government uses state control or bank loans to support specific companies/industries to drive national growth

• Huawei (China): Supported by state-owned bank loans offering below-market interest rates.

• Airbus (Europe): Received substantial government launch aid and state support.

Advocates of Market-Based Economies (The Free-Market Side):

Their argument: Government bureaucrats lack the expertise to make smart investment choices and shouldn't try to "pick winners and losers".

What they advocate for: Letting private enterprise and supply-and-demand drive investment decisions.

Advocates of State Investment / Industrial Policy (The Government Support Side):

• What they advocate for: The government directly supporting, funding, or subsidizing specific industries to build national strength.

• Their argument: State support helps key domestic industries (like Huawei or Airbus) scale up and succeed internationally.

legal system

The rules (laws) that regulate behavior, along with the processes used to enforce laws and obtain redress for grievances.

Impact on International Business:

• Regulates business practices.

• Defines how business transactions are executed.

• Establishes rights and obligations of transaction parties.

• Directly affects the attractiveness of a country as an investment site or target market

Three main types of legal systems

Common law, Civil law, and Theocratic Law

Common law

Based on tradition (legal history), precedent (past court cases), and custom (application in specific situations)

judges have the power to interpret the law to fit the unique circumstances of a case, creating new precedents that alter or amend laws.

Where Found: Great Britain and former colonies, including the United States.

Civil law

Basis: Based on a detailed set of written laws organized into codes.

judges have power only to apply the law as written in the code, rather than interpreting tradition or creating precedent.

Where Found: Over 80 countries, including Germany, France, Japan, and Russia.

Theocratic Law

Based on religious teachings.

Islamic law is the most widely practiced theocratic law today (governing moral behavior and all aspects of life).

Outlaws usury (the payment or receipt of interest). Islamic banking relies on special profit-sharing arrangements rather than interest charges.

Contract

A document specifying exchange conditions and detailing the rights and obligations of involved parties.

Contract Law:

The body of law governing contract enforcement, used when a party feels the agreement's letter or spirit was violated.

United Nations Convention on Contracts for the International Sale of Goods (CISG):

Purpose: Establishes uniform rules governing everyday commercial contracts between businesses in different nations.

Automatic Application: Applies automatically to cross-border sales contracts between ratifying nations unless firms explicitly opt out.

Limitation: Only 98 nations ratified as of 2023. Major trading nations like India and the United Kingdom have NOT ratified it.

Common Law Contracts:

• Length & Detail: Very long, highly detailed, with all contingencies explicitly spelled out

• The underlying statutory law is relatively poorly specified, so everything must be written down.

• More expensive to draft, but greater flexibility

Civil Law Contracts:

• Length & Detail: Much shorter and less specific.

Most issues/contingencies are already automatically covered in the comprehensive civil legal code.

Cheaper to draft, but judges have less flexibility to interpret outside written code.

Property:

A resource over which an individual or business holds a legal title (land, buildings, equipment, capital, mineral rights, businesses, and intellectual property)

Property Rights

• The use to which a resource is put.

• The use made of any income derived from that resource.

Privacy action

Theft, piracy, blackmail, extortion, and the like committed by private individuals or criminal groups.

Occurs everywhere, but skyrockets in nations with weak legal enforcement apparatuses (weak police force, corrupt or ineffective judicial systems)

ex: russia (500 contract killings per year) and japanese mafia

Foreign Corrupt Practices Act (FCPA):

Passed by the US in the 1970s following discoveries that US companies bribed foreign officials to win lucrative contracts

Anti-Bribery Rule: Makes it illegal to bribe a foreign government official to obtain or maintain business over which that official has authority

Requires all publicly traded US companies to keep detailed financial records to reveal potential violations.

Intellectual Property

Property that is the product of intellectual activity (e.g., software, screenplays, drug formulas

Patents

Grants the inventor of a new product or process exclusive rights for a defined period to manufacture, use, or sell that invention.

Copyrights:

The exclusive legal rights of authors, composers, playwrights, artists, and publishers to publish and disperse their work.

Trademarks

Designs and names, officially registered, by which merchants/manufacturers differentiate their products (e.g., Christian Dior clothes).

Computer software industry heavy financial losses due to lax enforcement.

• China: Extremely high piracy rate (66%) causing huge revenue loss.

• US: Lower piracy rate (15%), but still incurs large total dollar losses due to massive market size.

TRIPS = Trade-Related Aspects of Intellectual Property Rights

- WTO Agreement enforcing global standards for IP

• Patents: 20 Years | Copyrights: Life + 50 Years

• Rich nations = 1 yr to comply | Poor = 5 yrs | Poorest = 10 yrs

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.

Civil Liability:

Involves financial compensation / monetary damages.

Criminal Liability

Involves fines or prison sentences.

The "Ideal" Foreign Market Profile:

• Political: Democratic institutions.

• Economic: Market-based system.

• Legal: Strong rule of law that protects property rights and controls corruption.