Economic and Legal Systems in Cross-Border Activities

Economic Systems

• When a firm enters a new country, understanding the country's economic system is crucial. This includes:

  • Standards of living

  • Market regulations

  • Tax policies

• Economic systems exist on a continuum:

  • Market economy:

    • Underpinned by capitalist ideology.

    • Based on private property ownership.

    • Consumer demand drives the allocation of goods and services.

    • Entrepreneurship is key.

  • Command/Planned economy:

    • Rooted in communist doctrine

    • Goods and services are allocated according to the government's plan.

    • Ownership is public.

  • Mixed economy:

    • Combines elements of both market and planned systems.

• Examples:

  • The UK is a typical market-driven economy.

  • The USSR was built on the principles of a planned economy.

  • Modern Russia represents a mixed system.

• Changes in economic systems depend on the government's role in society.

• Institutional environments can differ even in seemingly similar countries.

  • The USA and France are both market-driven economies but have different rules.

Legal Systems

• Legal systems are closely related to political institutions.

• They are set for interpreting and enforcing a country's rules.

• Main types of legal systems:

  • Civil Law:

    • Developed under the influence of Roman law and the Napoleonic code.

    • Used in Europe, Latin America, Japan, and Turkey.

    • Based on laws approved by national and local authorities.

  • Common Law:

    • Originated in England.

    • Used in the USA, Australia, Canada, and other former British Empire countries.

    • Judges have considerable power to interpret laws based on the circumstances of each case.

• Knowing the differences in legal systems helps understand:

  • Skills corporate lawyers should have.

  • How common practices (e.g., employing people, signing contracts) should be conducted.

• Some countries' legal systems are based on religious law.

  • In many Middle Eastern countries, legal systems are strongly influenced by Islamic or Sharia law.

  • Western companies with subsidiaries in these countries (e.g., JP Morgan) must comply with Sharia law.

• Mixed legal systems:

  • Include different bits of the major legal systems.

Implications for International Business

• Understanding formal institutions (economic and legal systems) is crucial for cross-border activities. Further insights can be found in the podcast.