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.