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Chapter
2 Outline
Summary of Chapter
This chapter has reviewed how the political, economic,
and legal systems of different countries vary. The potential benefits,
costs, and risks of doing business in a country are a function of its
political, economic, and legal systems. More specifically:
- Political systems can be assessed according to two dimensions:
the degree to which they emphasize collectivism as opposed to individualism,
and the degree to which they are democratic or totalitarian.
- Collectivism is an ideology that views the needs of society
as being more important than the needs of the individual. Collectivism
translates into an advocacy for state intervention in economic activity
and, in the case of communism, a totalitarian dictatorship.
- Individualism is an ideology that is built upon an emphasis
of the primacy of individual's freedoms in the political, economic,
and cultural realms. Individualism translates into an advocacy for democratic
ideals and free market economics.
- Democracy and totalitarianism are at different ends of
the political spectrum. In a representative democracy, citizens periodically
elect individuals to represent them and political freedoms are guaranteed
by a constitution. In a totalitarian state, political power is monopolized
by a party, group, or individual, and basic political freedoms are denied
to citizens of the state.
- There are four broad types of economic system: a market
economy, a command economy, a mixed economy, and a state-directed economy.
In a market economy, prices are free of controls and private ownership
is predominant. In a command economy, prices are set by central planners,
productive assets are owned by the state, and private ownership is forbidden.
A mixed economy has elements of both a market economy and a command
economy. A state-directed economy is one in which the state plays a
significant role in directing the investment activities of private enterprise
through "industrial policy" and in otherwise regulating business activity
in accordance with national goals.
- Differences in the structure of law between countries
can have important implications for the practice of international business.
The degree to which property rights are protected can vary dramatically
from country to country, as can product safety and product liability
legislation and the nature of contract law.
- The rate of economic progress in a country seems to depend
on the extent to which that country has a well-functioning market economy
in which property rights are protected.
- Many country are now in a state of transition. There
is a marked shift away from totalitarian governments and command or
mixed economic systems and toward democratic political institutions
and free market economic systems.
- It is not clear, however, that we are witnessing the
emergence of a universal global civilization based on democratic institutions
and free market capitalism. The bipolar world of the Cold War era may
ultimately be replaced by a multi-polar world of ideologically divergent
civilizations.
- The attractiveness of a country as a market and/or investment
site depends on balancing the likely long-run benefits of doing business
in that country against the likely costs and risks.
- The benefits of doing business in a country are a function
of the size of the market (population), its present wealth (purchasing
power), and its future growth prospects. By investing early in countries
that are currently poor but are nevertheless growing rapidly, firms
can gain first-mover advantages that will pay back substantial dividends
in the future.
- The costs of doing business in a country tend to be greater
where political payoffs are required to gain market access, where supporting
infrastructure is lacking or underdeveloped, and where adhering to local
laws and regulations is costly.
- The risks of doing business in a country tend to be greater
in countries that are (1) politically unstable, (2) subject to economic
mismanagement, and (3) lacking a legal system to provide adequate safeguards
in the case of contract or property rights violations.
- Country differences give rise to several ethical dilemmas.
These including (1) should a firm do business in a repressive totalitarian
state, (2) should a firm conform to its home product, workplace, and
environmental standards when they are not required by the host country,
and (3) should a firm pay bribes to government officials to gain market
access?
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