National Differences in Political Economy – Week 2 Lecture

Political Systems

• Defines who holds power & how it is exercised.
• Ideological spectrum:
  • Collectivism – group goals > individual goals; linked to socialism.
  • Communists: attain socialism via violent revolution & dictatorship.
  • Social democrats: pursue socialism through democratic means.
  • Individualism – prioritises individual freedom & self-expression; supports democracy & free markets.
• Governance forms:
  • Democracy – government by the people/representatives.
  • Constitutional safeguards: free expression, free media, universal adult suffrage, regular elections, limited terms, independent judiciary, non-political bureaucracy/police, open access to information.
  • Totalitarianism – one party/person monopolises power, suppresses civil liberties.
  • Four variants: communist, theocratic, tribal, right-wing.
• Political risk:
  • Macro – affects all firms (wars, revolutions, nationwide strikes).
  • Micro – targets specific sectors/firms (selective expropriation, discriminatory taxes).
• Geopolitical risk – interstate conflicts, terrorism, cyberattacks (e.g. Russia-Ukraine, US-China).

Legal Systems

• Provide rules for behaviour, enforcement & dispute resolution.
• Traditions:
  • Common law – precedent-based; long, detailed contracts.
  • Civil law – codified statutes; shorter contracts.
  • Theocratic/customary law – religion-based (e.g. Islamic law).
• Key issues:
  • Property rights – legal right to use & benefit from resources.
  • Threats: private action (theft, piracy) vs public action (state extortion).
  • Corruption – abuse of public office for private gain ⇒ FDI \downarrow, trade \downarrow, growth \downarrow.
  • US FCPA bans bribery abroad by US entities.
  • Legal risks – contract breach, expropriation, IP abuse, product liability, conflict of laws.
• Intellectual Property (IP):
  • Patent – exclusive rights to invention.
  • Copyright – exclusive rights of authors/artists.
  • Trademark – protected names/designs.
  • Piracy – unauthorised IP use.

Economic Systems

• Framework for resource ownership & allocation.
• Types:
  • Command economy – state owns factors; prices set by planners to meet social goals.
  • Market economy – private ownership; activities driven by supply & demand (the "invisible\ hand").
  • Mixed economy – blend; state controls strategic sectors.
• Economic risk – possibility that mismanagement triggers environment shifts hurting firm performance (e.g. inflation, debt crises).

Managerial Implications

• Country selection: weigh long-run benefits vs costs & risks.
  • Benefits – market size, growth, first-mover advantages.
  • Costs – corruption, weak infrastructure, legal expenses.
  • Risks – political (instability), legal (weak property rights), economic (mismanagement).
• Managing political risk:
  • Choose suitable entry mode.
  • Build political support at home & abroad.
  • Leverage trade/investment treaties.
  • Share/insure risk; enhance bargaining power.
• Managing legal risk:
  • Zero-tolerance policy on corruption.
  • Protect IP via product/tech selection, functional separation, continuous partner monitoring.