IB 3101 Lecture Notes - Lecture 2: Social Stratification, Ethnocentrism, Class Consciousness

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Published on 3 Apr 2016
Chapter 2&3: National Differences in Political Economy & Development
Political Economy
a country’s political, economic, and legal systems
these systems are interdependent, and interact and influence each other
a country’s political system has major implications for the practice of international business
Political Systems
Democratic Rule v. Totalitarian Rule
- Norway - North Korea
- Sweden - Central African Republic
- Finland - Syria
Individualist v. Collectivist
- US Czech Republic - Ecuador
- UK Austria - Indonesia
- Australia Spain - Ghana
Economic Systems
Market Economy
Consumers Determine what to produce and how much
Businesses are publicly traded or privately owned
Gov’t encourages free and fair competition between producers
More likely in Individualist countries with Democratic rule
Mixed Economy
Elements of both market and command economic systems
Some government ownership of firms (i.e: utilities)
Many services are not provided in markets (i.e: postal service, water, power, public
transportation, ect.)
Regulations limit “pure” capitalism
most economies are mixed to a greater or lesser degree
Command Economy
Most businesses are state-owned
Government sets production targets and prices
More likely in collectivist countries with totalitarian rule
Differences in laws and legal systems
Civil v Common Law ← not so important
IMPORTANT: weather or not laws are inforced
Does a firm have legal recourse if:
it’s physical or intellectual property is stolen?
many countries have poor protection of intellectual property and don’t respect
legal ownership rights
a partner breaks a contract?
contract laws may be on the books, but are they enforced? - in many, no.
corrupt officials demand bribes?
Foreign Corrupt Practices Act forbids bribery by US firms in foreign countries but
allows “GREASE” payments
Grease Payment: a payment to a foreign official, political party or party
official for "routine governmental action”
Bribe: persuading someone to act in someone's favor
High level of corruption → Untrusted legal system
Economies are dysfunction because the “best” firms don't win businesses -- the most connect
firms that make bribes win businesses
Firms may be subject at any time to seizure of their assets
The most corrupt environments are also the poorest because it’s too risky to do business, &
they attract little investment
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Corruption & Development
Q: How are corruption and development related?
A: circular and self-reinforcing relationship
corrupt governments are bad at collecting tax revenue (or they steal it)
no taxes = poor infrastructure and very poor service delivery
poor infrastructure constrains stay poor
poor countries don’t generate much tax revenue
Corruption and Entrepreneurship
In corrupt economies, poor protection of property rights means entrepreneurs cannot be
sure they will be able to reap the benefits of their business. This GREATLY lowers the incentive
to start companies.
In corrupt economies, people and companies that innovate face high risks of having their ideas
stolen due to
Factors Influencing Economic Development
#1. Geography - influences economic policy, and thus economic development
countries with favorable geography are more likely to engage in trade which can
promote economic growth
“favorable” geography usually means temperate climate, not landlocked and relatively
urban population
#2. Education Levels
countries that invest more in the education of their young people develop faster
Costs and Benefits of Doing Business
The benefits of doing business in a country are a function of market size, market growth, and
current and future consumer purchasing power
The costs of doing business in foreign markets include:
#1. Political Costs: include the cost of paying bribes or lobbying for favorable or fair
#2. Economic Costs: relate primarily to the sophistication of the economic system,
including the infrastructure and supporting businesses
#3. Legal Costs: can be higher in countries with dramatically different product,
workplace, and pollution standards, or where there is poor legal protection for property
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