Political, Economic and Legal Systems

• Chapter focuses on how political, economic, and legal systems differ across nations.
• Consideration is given to how these systems collectively form a country's political economy.
• The interdependence and influence of a nation's political, economic, and legal systems on each other can affect the level of economic well-being.
• Examines variations in political, economic, and legal systems across nations and their impact on economic development and future growth.
• Also touches on cultural differences and their effects on international business practices, emphasizing the reciprocal relationship between social culture and the political, economic, and legal systems of a nation.

Kenya: An African Lion

• Kenya has emerged as a story of economic growth in East Africa, with GDP growth of 4.9% in 2017 and 5.9% in 2018, projected to reach 6% annually in 2019 and 2020.
• It serves as the economic, financial, and transportation hub of East Africa.
• Key industries include agriculture, mining, manufacturing, tourism, communications, and financial services.
• Kenya chose "African socialism" after gaining independence from Great Britain in 1963.
• Principles of Kenyan socialism: social development guided by a large public sector, an emphasis on African identity, and the abolishment of social classes.
• The Kenyan government invested in infrastructure through state-owned companies and supported small farmers.
• It implemented import substitution policies with high tariffs on foreign manufactured goods.
• Economic stagnation in the early 1990s led to economic reforms and liberalization in 1993.
• This involved price control elimination, trade barrier reduction, state-owned enterprise privatization, and responsible fiscal and monetary policies.
• The economy shifted towards market-based principles, reducing trade and investment barriers and fostering a dynamic private sector.
• Political reforms occurred alongside economic reforms.
• The presence of ethnic divisions, common in African nations, impacted Kenyan politics.
• Kikuyu is the largest ethnic group and exerts disproportionate political influence.
• Kenya was effectively a one-party state until the early 1990s, ethnic conflicts persisted, and a new Constitution was enacted in 2010 to address these issues.
• The 2010 constitution limited central government power, decentralized political power to 47 semi-autonomous regions, and aimed to facilitate free and fair elections.
• These political reforms have strengthened democracy and fostered a more confident business environment, leading to higher economic growth.
• Kenya's strengths include a relatively young and educated population with universal primary education.
• A growing urban middle class is expected to drive demand for goods and services.
• Challenges include inadequate protection of property rights and insecure land titles, which hinder the use of land as collateral for business ventures.
• Bureaucratic procedures and corruption make starting a business difficult.
• Kenya ranked 61 out of 190 nations in ease of doing business, corruption and ethnic conflicts pose persistent problems.
• Terrorism by Al-Shabab, based in Somalia, is a security threat.
• Despite challenges, Kenya is emerging from its post-colonial past with a dynamic multiethnic society, a thriving economy, and a more stable democracy.

Introduction

• International business is more complex than domestic business due to variations in political, economic, and legal systems; levels of economic development; growth trajectories; cultural practices; and education levels.
• These differences impact the benefits, costs, and risks, management practices, and international strategies.
• The main purpose of this section is to increase understanding of differences in political, economic, and legal systems across countries, economic development, and social culture.
• A further aim is to describe how political, economic, legal, and cultural systems evolve to reduce the implications of these changes for international business.
• Focus is on differences in the political, economic, and legal systems of nations, and the term "political economy" is used to emphasize their interdependence and influence on economic well-being.
• Analyzation occurs on how differences in political, economic, and legal systems affect economic development and growth.
• Examination of cultural differences and their effect on international business practices.

Political Systems

• A country's political system shapes its economic and legal systems.
• A political system is defined as a nation's system of government.
• Assessments of political systems are based on: the emphasis on collectivism as opposed to individualism, and the degree to which the country is democratic or totalitarian.
• Systems emphasizing collectivism tend to lean towards totalitarianism, while those valuing individualism lean towards democracy.
• However, hybrid exist; where democracies may value collectivism, and totalitarian states may not be entirely collectivistic.

Collectivism and Individualism

• Collectivism prioritizes collective goals over individual ones.
• Societal needs are considered more important than individual freedoms.
• Individual actions may be restricted if they contradict the "good of society."
• Collectivism harks back to Plato, who argued for sacrificing individual rights for the common good, with property being collectively owned.
• Plato also advocated for a society stratified by class, where the most qualified leaders (philosophers and military) would guide society for all's benefit.
• Modern socialists have adopted collectivism.

Socialism

• Modern socialist ideas originate from Karl Marx (1818-1883).
• Marx argued that capitalism benefits a minority at the expense of the majority due to unrestricted individual freedoms.
• He posited that capitalists accumulate wealth, workers' wages are suppressed to subsistence levels.
• Marx believed capitalists exploited workers by appropriating the value they created and paying them only subsistence wages.
• Marx advocated for state ownership of the means of production, distribution, and exchange to ensure workers received full compensation.
• State-owned enterprises would benefit society instead of individual capitalists.
• The socialist ideology diverged into two main paths in the 20th century: Communists promoted violent revolution and totalitarian dictatorships to achieve socialism while social democrats favored achieving socialism through democratic means, rejecting violent revolution and dictatorship.
• Both versions of socialism gained and then lost influence throughout the 20th century.
• Communist socialism peaked in the late 1970s, with most of the world's population living in Communist states, including the now-defunct Soviet Union and its satellite nations, China, Southeast Asian countries, African nations, and Latin American nations.
• By the mid-1990s, communism was in decline globally. The Soviet Union collapsed and was replaced by 15 republics.
• Communist China maintained a nominally communist state but embraced economic liberalization.
• Old-style communism, emphasizing state control, exists only in a few nations, with North Korea being a prime example.
• Social democracy has been influential, particularly in democratic Western nations such as Australia, Denmark, Finland, France, Germany, Great Britain, Norway, Spain, and Sweden.
• Adherents to the socialist position nationalized some private companies and transformed them into state-owned enterprises after World War II, to serve the "public good".
• This trend was prominent in Great Britain, where state-owned companies had monopolies in sectors like telecommunications, electricity, gas, coal, railroads, shipbuilding, and significant interests in oil, steel, automotive, and commercial aviation.
• Government ownership demonstrated problems. Lacking competition and supported by government funding, state-owned companies became increasingly inefficient.
• Citizens bore the costs of state-owned companies through higher prices and taxes.
• Voters in Western democracies voted out social democratic parties starting the late 1970s/early 1980s.
• Political parties committed to free market economics, and privatization sold state enterprises to private investors.
• Social democratic parties now favor private property.

Individualism

• Individualism values an individual's freedom to pursue economic and political ideals.
• Individual interests should take precedence of the state.
• Individualism traces back to Aristotle.
• Aristotle believed individual diversity and private property are desirable.
• Private property is more productive than collective property and stimulates progress.
• Individuals care more for property they own, making it more productive.
• Individualism as a political philosophy regained influence in Protestant nations like England and the Netherlands during the 16th century.
• British thinkers such as David Hume (1711-1776), Adam Smith (1723-1790), and John Stuart Mill (1806-1873) refined individualism.
• Individualism influenced American colonists seeking independence from Great Britain.
• Emphasis is placed on guaranteeing individual freedom and expression. The belief is that society benefits from individual action.

Democracy and Totalitarianism

• Democracy and totalitarianism are at opposite ends of the political spectrum.
• Democracy means government by the people, directly or through elected representatives.
• Totalitarianism concentrates control in one person or political party and political opposition is prohibited.
• The democracy-totalitarianism dimension overlaps with the individualism-collectivism dimension.
• Democracy and individualism are related, while communism links to totalitarianism.
• There may be hybrid models with collectivistic values in democratic states, or state-led individualism in authoritarian states.
• China and Vietnam allowed more economic individual freedom, but the governments remains totalitarian.

Democracy

• Direct democracy is impractical in complex societies with populations of millions.
• Modern democratic states employ representative democracy. A representative democratic state forms a government whose function is to make decision on behalf of the electorate the public.
• Voters are able to un-elect unelected representatives.
• Representative democracy should include safeguards: including guarantees of free expression, organisation, freedom of the press, universal adult suffrage, limited terms for representatives, a fair court system independent of the political system; nonpolitical bureaucracy; nonpolitical police force and army, relative free access to state information.

Totalitarianism

• Constitutions are not upheld, individual rights to expression, organization, freedom of the press or right to elect politicians in regular elections are prohibited.
• Political repression rife, no free or fair elections, media censored, and no civil liberties exist.
• Current totalitarian examples include communistic, theocratic, tribal, right wing.
• Communistic totalitarians is on the wane due to most dictatorial Communist states have fallen since 1989.
• Governments in China, Vietnam and Laos are nominally communist but have broadly implemented economic reforms based on a free market. Still are totalitarian.

Russia under Putin

• The modern Russian State rose from the ashes of the USSR in 1991
• Post USSR, policies were set in place to push a command economy to a democratic, free market one
• The political reform had a strong presidency but was able to work in a way as to subvert the democratic process.
• Economically, privatisation of enterprise left large amounts of shares in the hands of officials from party and factory in the Soviet system
• Corruption became a problem, with organised crime taking control of newly privatised enterprise
• Mal managed systems led to 1998, and a financial crash
• Currently, 2020 as well, Russia must progress more to become an effective free market, and modern democracy
• In the early 2000's, there was growth due to high prices of gas and oil, which made up 75% of exports (2013)
• GDP per capita grew double levels between 2000-2013
• Since 2018 its been declared the 12 largest economy in the world only behind Korea, and ahead of Spain
• High oil means government has has a low debt vs global standards, 16% of GDP in 2018 (USA 80% of GDP), healthy surplus due to oil and mineral exports.
• Russian is overly reliant on commodities, in particular gas and oil, 2014 shows this when costs dropped
• Public finances are affected by a low oil, Russian remains largely owned by government, through the control in Gazprom and Rosneft
• Government also took advantage of high carb sales between 2004 and 2014 so increased public spending on investment projects, workers wages etc, though less private investments exist.
• Corruption levels high at 138 of 180 ranked by Transparancy International
• The state assigs public works to private companies owned by Putin
• There have been less democratic activities since 1999
• Putin has a strong hold on Russian politics and governance
• Putin marginalizes protestors which has progressively impacted on censorship , freedoms, and rights
• Governments have increased control on internet, greatly increase fines for protests.

Economic Systems

• Linked to political and economic ideology.
• Prioritizing individual goals promotes free markets.
• Prioritizing collective goals results in state control over firms.
• The state may control businesses whereas free markets may be restricted.
• Market economies encourage prioritising individual goals.

Market Economy

• Productive activities are privately owned.
• Goods and services production and quantity based on supply and demand.
• Prices provide signals to producers.
• Producers respond to purchase patterns.
• Consumers determine what is produced and in what quantity.
• Governments promote competition by prohibiting restrictive practices.
• Private property ensures that entrepreneurs have the right to profits.
• Entrepreneurs are incentivized to find better ways to serve consumer needs.

Command Economy

• In a planned economy, the government decides what to produce, in what quantities, and at what prices.
• All businesses are state-owned in an economy planned from the top-down.
• A command economy works to mobilize economic resources for the public good.
• State-owned enterprises have little incentive to control costs, as no bankruptcy is possible.
• The abolition of private ensures that individuals have no incentive to find better ways to serve consumer needs, so there is a lack of economic dynamism and innovation.
• Planned economies fail to generate sustained economic growth; such economies stagnate.

Mixed Economy

• A mixed economy has elements of both a market economy and a command economy.
• in sections of an mixed economy, are left to private ownership where as in the rest state ownership prevails.
• Government intervention in the economy has been increasing.
• Where governments often take possession of troubled firms vital to the national interest to ensure stability.

Legal Systems

• Legal systems important for international business.
• Differences in legal systems can affect a country's attractiveness as an investment site.

Different Legal Systems

• There are 3 laws of traditions: Common, civil, theocratic
• In addition, are aspects on differences on contracts, property, intellectual property protection and product safety and product liability

Common Law

• Common evolved over years in England, is what most former British colonies have, US for example, the tradition, the precedents of it
• Courts interpret common law with flexibility where they can be adapted, each case has an interpretation and is taken into consideration.

Civil Law

• Systems used in lots of countries, codes of laws. Courts interpret based on that existing code.

Theocratic Law

• Based on religion, Sharia Law islamic example of this. Is a very broad law, that regulates all life. Considers that laws of islamic scripture cannot be changed.