Study Guide - Chapter 2 – National Differences in Political Economic and Legal Systems

Brief chapter summary and most important points

Last week when we looked at globalisation we made the point that the world was becoming increasingly
integrated and that in many ways countries had become more similar to each other in the ways that
they do business. However, despite this, significant differences between countries remain, notably with
respect to political economy. ‘Political Economy’ refers to the Political, Economic and Legal systems of a
country. Each country has a slightly different mix of systems, governments choose between systems
based on what they think will be of greatest benefit to the citizens of the country.

This chapter looks at the ways in which countries political economies can differ. Once you have
completed all the activities in this study guide you should be able to clearly define a country’s political
economy and make comparisons between the political economy of different countries.

Political systems

Political systems can be compared and measured across two dimensions: the extent to which the system
is collectivist or individualist; and the extent to which is a country is democratic or totalitarianist.

In a collectivist political system, the good of society as a whole is emphasised and the right of individuals
may have to be sacrificed to ensure the overall strength and harmony of the country as a whole.
Collectivist societies have strong governments with significant responsibilities to ensure distribution of
wealth and support for society’s less advantaged. Communist countries like China are collectivist, as are
‘social democracies’ as found in many northern European Countries. In an individual political system,
the rights of the individual are paramount and government has a much more limited role (see the
Ronald Reagan youtube video), basically it is only there to stop one individual from directly harming
another individual. The U.S. is a highly individualist system where people are generally ‘free’ to do what
they wish, but on the flip side of that, comparatively little may be provided in the way of government
support.

A democratic system is where each member of society has an equal say in the actions that their
government takes. In what are called representative democracies, people vote for a party or
representative which aligns with their views and have the right to change their representatives in
periodic elections. A totalitarian state is one controlled by a particular individual, group or party which
makes decisions and there is little room for dissent from others in society. China is an example of a
communist totalitarian state, other forms include tribal, right-wing and theocratic totalitarian states.

Economic systems

Closely linked to the choice of political system is a country’s economic system. There are three main
forms of economic system; command, free-market and mixed. In a command economy the government
is in control of all factors of production owning all land, factories, capital and in control of labour. The
government decides what is to be produced and how goods are to be allocated. These governments
seek to make use of the countries resources to profit a maximum benefit to all society. By contrast in a
free-market economy the government plays a very limited role and economic activity is governed by
corporations and individuals working within the market system. What is produced and how it is
allocated is governed by that market and the price mechanism. Hong Kong was traditionally seen as
having a very free-market system. Most countries fall somewhere between the two extremes and have
what can be termed a mixed economy. These systems retain production and ownership of some parts
of the economy under government control (often healthcare, education, transportation, utilities for
example) while allowing other parts to operate in the free market. In general countries that are more
individualistic are more to the free-market end of the spectrum, collectivist countries tend to have
higher levels of government control.

Legal systems

It is harder to categorise countries by the type of legal system that they have, as legal systems tend to
be idiosyncratic (meaning each country has its own laws, regulations and methods of enforcement). It is
possible however to compare countries that have a civil law system to those that have a common law
system. Common law countries have courts which rule largely based on precedent (previous decisions
made by the courts), the judiciary has a higher level of flexibility in interpreting law. In common law
countries contracts tend to be more specific and detailed so as any dispute can be more easily decided
upon. In civil law countries the laws themselves are more specific and courts have less room for
interpretation. In these countries, contracts may be less detailed as relevant contract law determines
how any dispute is settled.

As a business operating in other countries it is important to be aware of the specifics of the legal system
in which you are operating. Particular attention should be paid to contract law and to property rights.
Property rights indicate the degree of protection that a firm has over its physical and intellectual assets
and the ability to protect these assets from being seized by other firms or from the government itself.
Countries with a less established legal system and lower protection of property rights are subject to
corruption which may impact the ability of multinational firms to operate within them.

Managerial Implications

The political economy that a country chooses has a major impact on the attractiveness of that country as
a trading partner and more directly as an investment location. In general companies will prefer to
operate in a country that has a free-market system with well established property rights and a well-
functioning legal system. On one hand, most of the countries that have these conditions are already
well-developed with strong competition already established. On the other hand, countries that have a
larger degree of government control and a less well-established legal system tend to be in earlier stages
of development with greater potential for growth. Companies need to balance the opportunities and
the risks of operating in each country.

The political economy of a country may also lead to ethical concerns for multinational firms considering
operating within them. High levels of corruption, and low legal protection may dissuade firms from
working in such countries; similarly concerns over a lack of respect for worker and human rights might
lead multinational firms to redirect investment to locations without such ethical concerns (see
additional readings for how China remains an attractive investment location despite a still developing
legal system).
Resources supplied and required and suggested reading

View the PowerPoint files of Chapter 2 available on Moodle

Read Chapter 2 from the assigned textbook

Participate in the class

Review the same class session made available as a recording

Watch the following video available on youtube: President Ronald Reagan’s final address to the
American people, documenting his belief in the limited role of government

https://www.youtube.com/watch?v=K7lhHnLQLA4

Answer the 10 multiple choice questions covering chapter 2 that have been prepared as a turnitin
assignment available on Moodle

Complete the written self-assessment questions that come at the end of this study guide

In your groups: complete the following activities

Make a start on your Weighted Country Attractiveness Matrix (WCAM). Prepare a blank version of
the WCAM that contains your initial thoughts on the criteria you will include and the weightings you
will assign to each. DO NOT include scores for each country at this time; we will discuss where to
find this information and how to compare countries in a later class.

Include all of the areas that you think are important criteria that will impact the decision as to which
country your firm should choose. Try to put yourself in the shoes of a factory owner and ask ‘what
factors MUST the chosen country have, what are the really important things that will influence your
final decision?’ These things should come high up in your WCAM and carry more weight. Then there
are things that are NICE to have, which should be included, but will carry less weight.

The best final projects are always INDUSTRY-SPECIFIC. Include things that are important to your
particular product, based on the costs of manufacturing that product, the types of workers you
need, supporting industries, etc. This should be clear based upon your research of how the product
is made that you did last week.

Very likely your WCAM will change many times before you submit your final project; you will add
some things and change weightings; that’s to be expected – but I do want you to at least make a
start on this activity NOW.

Take a look at the following suggested articles also available on Moodle

‘Beware the bossy state’ The Economist January 15th 2022

The resurgence of government intervention in business from industrial policy to increases in

taxes to regulation of ethical issues.

‘Effective Tax Revenues’ OECD May 12th 2019

 A table showing how different countries collect different amounts of tax as a percentage of their
economies. (note: shows OECD, meaning developed, countries only)

‘Good Copy, Bad Copy’ The Economist February 9th 2019

The development of China's intellectual property system, from the first granting of a patent by
the Communist party in 1985 to today’s significantly enhanced system supported by many local
Chinese companies.

‘The doing business report pulling rank’ The Economist September 26th 2015

The doing business report is a useful tool for comparing the favourability of business
environments. But it is not perfect. This article highlights some of the report’s limitations.

‘China above the law’ Newsweek February 19th 2007

Commentary on how China has been able to maintain its economic growth despite a poorly
functioning legal system. How firms get around the weaknesses in the system and what the
government does to maintain a business-friendly environment despite weak legal protections.

‘Hong Kong’s economy: end of an experiment’ The Economist July 17th 2010

The introduction of a minimum wage law in Hong Kong and how this represents another step
away from the laissez faire capitalism that the state is known for. A historic discussion of HK's
economic development and increased pressure for social spending.
 Self-Assessment Questions

Please note that these self-assessment questions are totally voluntary and for your own personal use
only. Please do NOT submit answers to these questions, additionally there is no ‘model answer’ for
these questions. Please note that although completing these questions may help you in your
preparation for the final exam, the inclusion of any question below does not imply that similar questions
either will or will not be on the final exam paper.

Choose two different countries, one Asian and one European (example South Korea and France) and
using the internet find the answers to the following questions:

1. What is the political system of the countries? How do they rank in terms of
individualism/ collectivism and totalitarianism/ democratisation? What political party is
currently in power and what sort of government policies do they follow? Does the
country have a political history that may still be reflected in business conditions or
institutions?

2. How would you classify the economic system in each of the countries? Have these
changed greatly in recent years?

3. How strong are the legal systems in each of the countries? How well respected are
property and intellectual property rights? How stringent are product safety and
employee safety laws?

4. How significant are the political and economic risks of investing in each country?