Assignment Questions:
Class – Please note that you are required to answer all the 5 questions and cite references in APA format.
a. Discuss the difference between individualism and collectivism? What is the relationship between government and business under each orientation?
b. What are the differences between democratic and totalitarian political systems? What does current research suggest about the spread of democracy and totalitarianism in the world?
c. Define procedural political risk? How does a nation’s political and legal environment influence procedural risk for MNEs?
d. Why is economic freedom an important factor to consider when analyzing a country’s economic development, performance, and potential?
e. List and Explain the three types of economies.
International Business
Seventeenth Edition
Chapter 3
The Political and Legal
Environments Facing
Business
Copyright © 2022, 2018, 2015 Pearson Education, Inc. All Rights Reserved.
Learning Objectives
3-1 Explain how politics and laws influence business activities
3-2 Interpret the principles and practices of a political
environment
3-3 Discuss the principles and practices of political freedom
3-4 Describe the idea of political risk
3-5 Interpret the principles and practices of a legal
environment
3-6 Describe legal issues facing international companies
3-7 Relate the ideas of politics, law, and business
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Politics, Laws, and Operating
Internationally (1 of 2)
Objective 3.1
Map 3.1 Map of Political Risk, 2019
Source: Marsh, Political Risk Index Map 2019;
https://www.marsh.com/us/campaigns/political-risk-map-2019.html .
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Politics, Laws, and Operating
Internationally (2 of 2)
Figure 3.1 Political and Legal Factors Influencing IB Operations
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The Political Environment
•
Objective 3-2
• Individualism
• Collectivism
• Political ideology
• Democracy
• Totalitarianism
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Political Ideology
Figure 3.2 The Political Ideology Spectrum
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Democracy
Table 3.1 Prominent Types of Democracies
Form
Profile
Examples
Multiparty
System whereby three or more parties govern, either
separately or as part of a coalition. One party
negotiates with opposition parties to legislate policy.
Canada, Germany, Italy,
Israel, Mexico
Parliamentary
Citizens exercise political power by electing
representatives to a legislative branch, the
Parliament. It is the basis of legitimacy for the various
ministers who then direct the executive branch.
Australia, India, New
Zealand, United
Kingdom
Representative
Originates in a constitution that protects individual
freedoms and liberties. The law treats all citizens
equally. Elected representatives, while ultimately
autonomous, act in the people’s interest. Officials
represent voters and, while mindful of voters’
preferences, have the authority to act as they see fit.
Japan, United States
Social
Applies democratic means to transition from
capitalism to socialism. The government promotes
egalitarianism while also regulating capitalism’s
tendency toward opportunism.
Denmark, Finland,
Norway, Sweden
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Totalitarianism
Table 3.2 Prominent Types of Totalitarianism
Form
Profile
Examples
Authoritarian
Tolerates no deviation from state ideology. Day-to-day life
reflects submission to state authority; resistance incurs
punishment. Officials control politics, but pay less attention to
the economic and social structure of society.
Kazakhstan, North Korea,
Chad, and Turkmenistan
Fascist
Advocates a single-party state that controls, through force and
indoctrination, people’s minds, souls, and daily existence. Calls
for the merger of state and corporate power to standardize
values and systems. There have been few fascist political
systems; nearly all prevailed during World War II.
Italy, Germany, Japan, circa
1920s–1945
Secular
A single party controls elections, tolerates dissent if it does not
challenge the state, and suppresses other ideologies. The state
does not prescribe a grand, all-encompassing vision. It grants
an individual some economic and civil freedoms provided one
does not contest state authority or disrupt social harmony.
China, Vietnam, Rwanda,
Russia, and Venezuela
Theocratic
Government is an expression of the favored deity. Leaders
profess to represent its interests on earth. The State applies
ancient dogma in place of modern principles. Strict social
regulation and gender regimentation typically prevails.
Iran, Afghanistan, and Saudi
Arabia
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The State of Freedom (1 of 2)
•
Objective 3-3
Map 3.2 The Distribution of Political Freedom
Source: Freedom House, “Freedom in the World, 2019 Map.” Used by permission of
Freedom House.
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The State of Freedom (2 of 2)
• The prevalence of political freedom
– Third Wave of Democratization
• Freedom struggles
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Freedom Struggles
Fig 3.3 Freedom in the World: Gains and Declines by Country
Source: “Freedom in the World 2019: Democracy in Retreat,” www.freedomhouse.org.
Used by permission of Freedom House.
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The Distribution of Democracy (1 of 2)
Table 3.3 The Texture of Democracy: Types, Characteristics,
and Examples
Type
Characteristics46
Examples
Full
Democracy
• Mature political culture promotes and protects political
freedoms and civil liberties.
• Government discharges responsibilities transparently.
• An effective system of checks and balances regulates
politics.
• The judiciary is independent, its decisions are
impartially enforced, and the rule of law predominates.
• Media are independent, vigilant, and diverse.
Australia, Austria,
Costa Rica, Denmark,
New Zealand, Norway,
Switzerland, Uruguay
Flawed
Democracy
• The State respects basic civil liberties.
• Free and fair elections regularly occur but experience
fraud or media restrictions.
• Governance problems and low political participation
make for a weak political culture.
• Leadership and policy change occur frequently.
Brazil, Estonia,
Hungary, India,
Indonesia, Mexico,
Senegal, Singapore,
South Africa, South
Korea, United States,
Taiwan
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The Distribution of Democracy (2 of 2)
Table 3.3 The Texture of Democracy: Types, Characteristics,
and Examples
Type
Characteristics46
Examples
Hybrid
Regime
• Electoral irregularities undermine freedom and justice.
• The state limits opposition parties and candidates.
• Judicial bias favouring the “man” undermines the rule of law.
• Political culture, public administration, and political
participation struggles.
• Corruption is extensive, civil society fades, and media are
regulated.
Bangladesh,
Cambodia, Honduras,
Kyrgyzstan, Nigeria,
Pakistan, Tanzania,
Thailand, Ukraine
Authoritarian
Regime
• Political pluralism is absent or repressed by the state.
• Democratic institutions may exist but the state uses them to
legitimate single-party rule.
• Elections, if they do occur, are neither free nor fair.
• The state systematically disregards civil liberties.
• There is no independent judiciary and the rule of man
predominates.
• Media are typically state-owned or controlled by groups
connected to the state.
• Censorship suppresses criticism of the state.
• Propaganda promotes the state ideology.
Afghanistan, Belarus,
China, Gabon, Kuwait,
Nicaragua,
Mozambique, Russia,
Saudi Arabia,
Zimbabwe
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The Allure of Authoritarianism
• Political economy of growth
• Rhetoric versus reality
• Economic problems
• Who defines democracy?
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Political Risk
•
Objective 3-4
• What is political risk?
– Systematic
– Procedural
– Distributive
– Catastrophic
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Classifying Political Risk
Figure 3.4 Classes and Characteristics of Political Risk
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The Legal Environment
•
Objective 3-5
• What is the legal system?
• Components of a legal system
– Constitutional law
– Criminal law
– Civil and commercial law
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Types of Legal Systems (1 of 2)
Map 3.4 The Wide World of Legal Systems
Source: University of Ottawa, “World Legal Systems,” retrieved January 15, 2020, from
www.juriglobe.ca/eng/index.php . Used by permission.
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The Context of Legality
• The Context
– The rule of man
– The rule of law
• The basis of rule: legacies & trends
• Implication to managers
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Legal Issues Facing International
Companies
Objective 3-6
• The legality of business practices
• The legality of business strategies
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Types of Legal Systems (2 of 2)
Objective 3-7
Table 3.4 Easy Here, Hard There: Doing Business In Various Countries
Country
Ranking
Country
Ranking
New Zealand
1
Timor-Leste
181
Singapore
2
Chad
182
Hong Kong SAR, China
3
Congo, Dem. Rep
183
Denmark
4
Central African Republic
184
South Korea
5
South Sudan
185
United States
6
Libya
186
Georgia
7
Yemen
187
United Kingdom
8
Venezuela
188
Norway
9
Eritrea
189
Sweden
10
Somalia
190
Source: Doing Business 2020. The World Bank. Retrieved January 29, 2020 from
https://www.doingbusiness.org/en/doingbusiness
Copyright © 2022, 2018, 2015 Pearson Education, Inc. All Rights Reserved.
Copyright
This work is protected by United States copyright laws
and is provided solely for the use of instructors in
teaching their courses and assessing student learning.
Dissemination or sale of any part of this work (including
on the World Wide Web) will destroy the integrity of the
work and is not permitted. The work and materials from
it should never be made available to students except by
instructors using the accompanying text in their
classes. All recipients of this work are expected to abide
by these restrictions and to honor the intended
pedagogical purposes and the needs of other
instructors who rely on these materials.
Copyright © 2022, 2018, 2015 Pearson Education, Inc. All Rights Reserved.
International Business
Seventeenth Edition
Chapter 4
The Economic
Environments Facing
Businesses
Copyright © 2022, 2018, 2015 Pearson Education, Inc. All Rights Reserved.
Learning Objectives
4-1 Explain the value of economic analysis
4-2 Distinguish the types of economic environments
4-3 Discuss the idea of economic freedom
4-4 Distinguish the types of economic systems
4-5 Interpret indicators of economic development,
performance, and potential
4-6 Discuss elements of economic analysis
4-7 Profile approaches to integrate economic analysis
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International Economic Analysis
Objective 4-1
Figure 4.3 Economic Factors Affecting International
Business Operations
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Who’s Who in the Global Business
Environment
Objective 4-2
• Types of economics
– Developed economy
– Developing economy
– Emerging economy
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Emerging Economies
Objective 4-2
Map 4.1 Emerging Economies of the World
Source: MSCI Emerging Markets Index. Retrieved January 22, 2020, from
https://www.msci.com/market-classification
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Economic Freedom
Objective 4-3
• What is economic freedom?
• Measuring economic freedom
• The value of economic freedom
• The prevalence of economic freedom
• Economic freedom by type of economic environment
• The paradox of promise versus prevalence
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Dimensions of the Economic Freedom
Index (1 of 2)
Objective 4-3
Table 4.2 Dimensions of the Economic Freedom Index
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Dimensions of the Economic Freedom
Index (2 of 2)
Objective 4-3
Table 4.3 Economic Freedom: Classification and Characteristics
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Chart on Economic Freedom and
Standard of Living
Figure 4.4 Economic Freedom and the Standard of Living
Sources: Terry Miller, Anthony B. Kim, James M. Roberts, and Patrick Tyrrel, 2020 Index of
Economic Freedom (Washington: The Heritage Foundation, 2020),
http://www.heritage.org/index and International Monetary Fund, World Economic Outlook
Databasehttps://bit.ly/3eWOIHl (accessed July, 20, 2020).
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Map of Economic Freedom (1 of 2)
Map 4.2 The Distribution of Economic Freedom
Source: Terry Miller, Anthony B. Kim, James M. Roberts, and Patrick Tyrrel, 2020 Index of
Economic Freedom (Washington, DC: The Heritage Foundation and Dow Jones & Co., Inc.,
2020).
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Map of Economic Freedom (2 of 2)
Table 4.4 Average Freedom Scores by Type of Economic
Environment (in %)
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Types of Economic Systems
Objective 4-4
Figure 4.5 Types of Economic Systems
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Assessing Economic Development,
Performance, and Potential (1 of 3)
Objective 4-5
• Ways to measure an economy
– Monetary
? GNI (Gross National Income)
? GDP (Gross Domestic Product)
? GNP (Gross National Product)
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Assessing Economic Development,
Performance, and Potential (2 of 3)
• Improving economic analytics
– Rate of economic growth
– Population size
– Purchasing Power Parity
• The shadow economy
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Assessing Economic Development,
Performance, and Potential (3 of 3)
Table 4.6 The 10 Largest Economies, GDP Adjusted for Purchasing Power Parity
Rank
Country
Population
(millions)
GDP by PPP
(US$ trillions)
Percent of World
Economy
Economic
Freedom Score
1
China
1,341
29.47
21.62
58.4
2
United States
322
22.32
16.38
76.8
3
India
1,267
12.36
9.07
62.2
4
Japan
127
5.89
4.32
72.1
5
Germany
83
4.59
3.37
73.5
6
Russia
142
4.52
3.32
58.9
7
Indonesia
252
4
2.93
65.8
8
Brazil
203
3.6
2.64
51.9
9
United
Kingdom
63
3.24
2.38
78.9
France
64
3.16
2.32
63.8
World
7,556,278
$135.24
68.34
10
Blank
Blank
Sources: International Monetary Fund 2019 and the 2019 Index of Economic Freedom.
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Sustainability in Economies
• Green Economics
• Sustainability
– Net National Product (NNP)
– Genuine Progress Indicators (GPI)
– Human Development Index (HDI)
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Stability in Economies
• Happynomics
– Your Better Life Index (YBLI)
– Gross National Wellness (GNW)
– Gross National Happiness (GNH)
– Happy Planet Index (HPI)
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Elements of Economic Analysis (1 of 2)
Objective 4-6
Table 4.7 Key Components of Economic Analysis
Dimension
Specification
Implication
Balance of
Payments
(BOP)
Summary of an economy’s trade and
financial transactions, as conducted
by individuals, businesses, and
government agencies, with the rest
of the world.
Indicates if a country has sufficient
savings to pay for its imports as well as
if it produces enough income to finance
growth.
Deflation
General decline in prices, often
caused by a reduction in the supply
of money or credit or declining
aggregate demand.
Slows economic growth; anticipating
lower prices,
consumers defer purchases, thereby
risking a deflationary spiral. Increases
the real value of debt.
Foreign
Direct
Investment
Controlling ownership in a business
enterprise in one country by an entity
based in another country.
Promotes development, job expansion,
industrialization, and exports. Transfers
skills and technologies.
Income
Distribution
The distribution of income among a
nation’s population; estimated by the
GINI coefficient.74
Equality stabilizes society and opens
opportunities; inequality promotes debt,
stress, and risks.
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Elements of Economic Analysis (2 of 2)
Objective 4-6
Table 4.7 Key Components of Economic Analysis
Dimension
Specification
Implication
Misery Index
The sum of a country’s inflation and
unemployment rates. The higher the sum, the
greater the economic misery.
Higher misery discourages spending and
investment in the face of growing austerity.
Poverty
Multidimensional condition whereby a person
or community lacks the essentials for a
minimum standard of well-being and life.
Persistent poverty destabilizes performance
and constrains potential. Creates stress
points that challenge civil society.
Public Debt
The total of a state’s financial obligations;
measures what the government borrows from
its citizens, foreign organizations, foreign
governments, and international institutions.
Decreasing debt opens growth
opportunities. Growing debt signals
increasing austerity, rising taxes, and, if
uncontrolled, debt crises that impose
political, economic, and social costs.
Unemployme
nt
The share of out-of-work citizens actively
seeking employment for pay relative to the
total civilian labor force.
People gainfully employed testify to the
competency of policymakers to sustain a
productive economy. Persistent
unemployment indicates government
ineptitude.
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Integrating Economic Analysis
Objective 4-7
• Other elements of economic analysis for IB managers to
consider
– Global Competitiveness Index (GCI)
– World Competitiveness Index (WCI)
– Global Innovation Index (GII)
– The Best Countries Index (BCI)
– The Where-To-Be-Born Index (WTBBI)
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Economic Freedom, Innovation, and
Competitiveness (1 of 2)
Table 4.8 Integrating Economic Freedom, Innovation, and Competitiveness
Nation
Economic
Freedom
Score
Type of
Economy
Global
Competitiveness
Index, Rank
World
Competitiveness
Index, Rank
Global
Innovation
Index, Rank
Best
Countries
Index,
Rank
Where-ToBe-Born
Index Rank
Singapore
89.4
Developed
1
1
8
15
6
Switzerland
81
Developed
5
3
1
1
1
Australia
80.9
Developed
16
18
22
7
2
Canada
77.1
Developed
14
8
17
3
9
United
States
76.2
Developed
2
10
3
8
17
Sweden
75.2
Developed
8
6
2
6
4
Malaysia
74
Emerging
27
27
35
38
36
Germany
73.5
Developed
7
17
9
4
16
South
Korea
72.3
Developed
13
23
11
22
19
Japan
72.1
Developed
6
34
15
2
25
Poland
67.8
Emerging
37
39
39
33
33
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Economic Freedom, Innovation, and
Competitiveness (2 of 2)
Nation
Economic
Freedom
Score
Type of
Economy
Global
Competitiveness
Index, Rank
World
Competitiveness
Index, Rank
Global
Innovation
Index, Rank
Best
Countries
Index,
Rank
Where-ToBe-Born
Index Rank
Colombia
67.3
Emerging
57
54
63
66
42
Indonesia
65.8
Emerging
50
40
85
43
71
Mexico
64.7
Emerging
48
53
56
35
39
Philippines
63.8
Emerging
64
45
54
50
63
Saudi
Arabia
60.7
Developing
36
24
68
32
38
Russia
58.9
Emerging
43
50
46
24
72
China
58.4
Emerging
28
20
14
16
49
South
Africa
58.3
Emerging
60
59
63
*
53
India
55.2
Emerging
68
43
52
27
66
Brazil
51.9
Emerging
71
56
66
28
37
Copyright © 2022, 2018, 2015 Pearson Education, Inc. All Rights Reserved.
Copyright
This work is protected by United States copyright laws
and is provided solely for the use of instructors in
teaching their courses and assessing student learning.
Dissemination or sale of any part of this work (including
on the World Wide Web) will destroy the integrity of the
work and is not permitted. The work and materials from
it should never be made available to students except by
instructors using the accompanying text in their
classes. All recipients of this work are expected to abide
by these restrictions and to honor the intended
pedagogical purposes and the needs of other
instructors who rely on these materials.
Copyright © 2022, 2018, 2015 Pearson Education, Inc. All Rights Reserved.