International Business (9th, Wild) - Notes for Chapter (3).doc

12 Ch 3: Political Economy and Ethics 5 Ch 3: Political Economy and Ethics Chapter 3 Political Economy and Ethics Learning Objectives: 3.1 Describe the key features of each form of political system. 3.2 Explain how the three types of economic systems differ. 3.3 Summarize the main elements of each type of legal system. 3.4 Outline the global legal issues facing international firms. 3.5 Describe the main issues of global ethics and social responsibility. Chapter Outline: Introduction Political Systems Totalitarianism Theocratic Totalitarianism Secular Totalitarianism Doing Business in Totalitarian Countries Democracy Representative Democracy Doing Business in Democracies Economic Systems Centrally Planned Economy Origins of the Centrally Planned Economy Decline of Central Planning Failure to Create Economic Value Failure to Provide Incentives Failure to Achieve Rapid Growth Failure to Satisfy Consumer Needs Mixed Economy Origins of the Mixed Economy Decline of Mixed Economies Move toward Privatization Market Economy Origins of the Market Economy Laissez-Faire Economics Features of a Market Economy Government’s Role in a Market Economy Enforcing Antitrust Laws Preserving Property Rights Providing a Stable Fiscal and Monetary Environment Preserving Political Stability Economic Freedom Legal Systems Common Law Civil Law Theocratic Law Global Legal Issues Intellectual Property Industrial Property Copyrights Product Safety and Liability Taxation Antitrust Regulations Ethics and Social Responsibility Philosophies of Ethics and Social Responsibility CSR Issues Bribery and Corruption Labor Conditions and Human Rights Fair Trade Practices Environment Bottom Line for Business A comprehensive set of specially designed PowerPoint slides is available for use with Chapter 3. These slides and the lecture outline below form a completely integrated package that simplifies the teaching of this chapter’s material. Lecture Outline I. INTRODUCTION This chapter considers the basic differences between political and legal systems around the world. Disputes grounded in political and legal matters affect business activities, but companies can manage the associated risks. II. POLITICAL SYSTEMS A political system includes the structures, processes, and activities by which a nation governs itself. A nation’s political system derives from its history and culture, and includes such factors as population, age, race composition, and per capital income. The political system also allows for Participation, which occurs when people voice opinion, vote and show general approval or disapproval of the system. Totalitarianism is the belief that every aspect of people’s live Must be controlled in order for a political system to be effective. Anarchism is the belief that only individuals, and private groups should control a nation’s political activities. Pluralism is the belief that private and public groups belong in politics. Individuals govern without the support of the people, the government tightly controls people’s lives, and do not tolerate opposing viewpoints. These governments share three features: imposed authority, lack of constitutional guarantees, and restricted participation. Theocratic totalitarianism: political system under the control of totalitarian religious leaders. Secular totalitarianism: political system in which leaders rely on military and bureaucratic power. It takes three forms: Communist, tribal and right wing. Communism: obtain social and economic equality only by establishing an all-powerful Communist Party and by granting the government ownership and control over all types of economic activity, and by instituting socialism, a system in which the government owns and controls all types of economic activity Tribal totalitarianism: one ethnic group imposes its will on others with whom it shares a national identity. Right-wing totalitarianism: government endorses private ownership of property and a market-based economy but grants few (if any) political freedoms. Leaders strive for economic growth but oppose left-wing totalitarianism, or communism. Doing business in totalitarian countries: Companies need not be concerned with political opposition outside the government. It can be risky because the law is vague or nonexistent, and people in powerful government positions can interpret laws at will. Democracy – a political system in which government leaders are elected directly by wide participation of the people or their representatives. In representative democracies, citizens elect individuals from their groups to represent their political views. Representative democracies strive to provide: freedom of expression; periodic elections; full civil and property rights; minority rights; and nonpolitical bureaucracies. Doing business in democracies: Democracies tend to maintain stable business environments through laws protecting individual property rights. Participative democracy, property rights, and free markets encourage (not guarantee) economic growth. Capitalism: belief that ownership of the means of production belongs in the hands of individuals and private businesses. III. ECONOMIC SYSTEMS Economic system: structure and processes a country uses to allocate its resources and conduct its commercial activities. No economy reflects a completely individual or group orientation but displays a blend of individual and group values. A. Centrally Planned Economy Land, factories, and other economic resources are owned by the government, which plans nearly all economic activity. Ultimate goal is to achieve political, social, and economic objectives through complete control of production and distribution of resources. 1. Origins of the centrally planned economy a. Group welfare is more important than individual well-being, and thus strives to achieve economic and social equality. b. Karl Marx in the 1800s argued the economy must be overthrown and replaced with an equitable “communist” system. c. By the 1970s, central planning was the economic law in lands stretching across Central and Eastern Europe (Albania, Bulgaria, Czechoslovakia, East Germany, Hungary, Poland, Romania, and Yugoslavia), Asia (Cambodia, China, North Korea, and Vietnam), Africa (Angola and Mozambique), and Latin America (Cuba and Nicaragua). 2. Decline of central planning a. In the late 1980s, nation after nation began to dismantle communist central planning in favor of market-based economies. Shortly after the former Soviet Union implemented its twin policies of glasnost (political openness) and perestroika (economic reform), its totalitarian government crumbled. Communist governments in Central and Eastern Europe fell soon after, and today countries such as the Czech Republic, Hungary, Poland, Romania, and Ukraine have republican governments. There are far fewer communist nations than there were two decades ago, although Cuba and North Korea remain hard-line communist nations. These nations dismantled central planning in favor of market-based economics for several reasons. b. Failure to create economic value: Central planners failed to produce quality products efficiently. c. Failure to provide incentives: Government ownership limited incentives to maximize benefits from resources, which lowered economic growth and living standards. d. Failure to achieve rapid growth: Leaders realized their nations were falling quickly behind other nations (lack of innovation). e. Failure to satisfy consumer needs: Consumers’ basic needs were not being met. B. Mixed Economy Land, factories, and other economic resources are more equally split between private and government ownership. Government controls economic sectors important to national security and long-term stability. Generous welfare system supports unemployed and provides health care. 1. Origins of the mixed economy a. Successful economy must be efficient and innovative, but also protect society. Goals are low unemployment, low poverty, steady economic growth, and an equitable distribution of wealth. b. Mixed economies are modernizing to be more competitive. 2. Decline of mixed economies Mixed economies are converting to market-based systems. Government ownership means less efficiency, innovation, responsibility, and accountability; higher costs; slower growth; and higher taxes and prices. a. Move toward privatization Selling government-owned economic resources to private companies and individuals. Increases efficiency, cuts subsidies to state-owned firms, curtails appointment of managers for political reasons. C. Market Economy Most land, factories, and other economic resources are privately owned, either by individuals or businesses. Price mechanism determines: Supply: Quantity of a good or service that producers are willing to provide at a specific selling price. Demand: Quantity of a good or service that buyers are willing to purchase at a specific selling price. 1. Origins of the market economy Individual concerns are above group concerns. The group benefits when individuals receive incentives and rewards to act in certain ways. a. Laissez-faire economics: French for “allow them to do [without interference].” Individualism fosters democracy as well as a market economy. 2. Features of a market economy Free choice: individuals have purchase options. b. Free enterprise: companies can decide what to produce and which markets to compete in. Price flexibility: prices rise or fall reflecting supply and demand. 3. Government’s role in a market economy Little direct involvement, but plays four important roles: a. Enforce antitrust laws Goal of antitrust (antimonopoly) laws is to encourage the development of industries with as many competing businesses as the market will sustain. Prevent trade-restraining monopolies and combinations that exploit consumers and constrain commerce. b. Preserve property rights Encourage individuals and firms to take risks such as technology investments, new product invention. Legally safeguard claims to assets and future incomes they generate. c. Provide a stable fiscal and monetary environment Influence inflation and unemployment rates through effective fiscal and monetary policies. Stability improves company forecasts and reduces risks associated with future investments. d. Preserve political stability Market economy depends on a stable government. Helps companies avoid worrying about political risk. 4. Economic freedom a. Connection between political freedom and economic growth is very uncertain. b. Greater economic freedom tends to coincide with higher living standards. IV. LEGAL SYSTEMS Set of laws and regulations, including the process by which laws are enacted and enforced and the ways in which courts hold parties accountable for their actions. It is influenced by cultural variables, including class barriers, religious beliefs, emphasis on individualism or conformity, and the political system. Totalitarian governments favor public ownership and enact laws limiting entrepreneurial behavior. Democracies encourage entrepreneurial activity and protect businesses with property-rights laws. A. Common Law Tradition: Country’s legal history Precedent: Past cases that have come before the courts Usage: How laws are applied in specific situations Originated in England in the eleventh century and adopted in its territories worldwide. Business contracts tend to be lengthy because they consider many contingencies and possible interpretations in case of dispute. Common law systems are flexible, taking into account particular situations and circumstances. Practiced in Australia, Britain, Canada, Ireland, New Zealand, the United States, and some nations in Asia and Africa. B. Civil Law Based on a detailed set of written rules and statutes that constitute a legal code. Can be traced to Rome in the fifth century B.C. and is the oldest and most common legal tradition. Can be less adversarial than common law because it is not interpreted according to tradition, precedent, and usage. Because laws are codified and concise, parties are concerned with the explicit wording of the code; obligations, responsibilities, and privileges follow the relevant code. Practiced in Cuba, Puerto Rico, Quebec, Central and South America, most of Western Europe, and parts of Asia and Africa. C. Theocratic Law Legal tradition based on religious teachings (e.g., Islamic, Hindu, and Jewish law). Islamic law is the most widely practiced theocratic legal system today. It was initially a code governing moral and ethical behavior and was later extended to commercial transactions. It restricts investments and sets guidelines for business conduct. Firms operating in countries with theocratic legal systems must be sensitive to local values and beliefs. They must evaluate business activities, including hiring practices and investment policies, to ensure compliance with the law, local values, and beliefs. V. GLOBAL LEGAL ISSUES Companies must adapt to dissimilar legal systems in global markets because there is no clearly defined body of international law that all nations accept. There is a movement toward standardizing the interpretation and application of laws in more than one country, but this does not involve standardizing entire legal systems. Enduring differences, therefore, can force companies to continue the costly practice of hiring legal experts in each country where they operate. A. Intellectual Property Results from intellectual talent and abilities such as graphic designs, novels, computer software, machine-tool designs, and secret formulas. Property rights are the legal rights to resources and any income they generate. Intellectual property can be traded, sold, and licensed in return for fees or royalty payments. Industrial property is often a firm’s most valuable asset. Laws protecting industrial property reward inventive and creative activity. Patent is a right granted to the inventor of a product or process that excludes others from making, using, or selling the invention. The WTO grants patents for 20 years. Trademarks are words or symbols that distinguish a product and its manufacturer. Trademark protection lasts indefinitely, provided the word or symbol continues to be distinctive (e.g., Xerox). b. Copyrights give creators of original works the freedom to publish or dispose of them as they choose. Holder can (1) reproduce the copyrighted work, (2) derive new works from it, (3) sell or distribute it, (4) perform it, and (5) display it publicly. Protected under the Berne Convention and the 1954 Universal Copyright Convention. B. Product Safety and Liability 1. Product liability holds manufacturers, sellers, and others, including individual company officers, responsible for damage, injury, or death caused by defective products. 2. Developed nations have the toughest product liability laws. Less-developed and emerging countries have weaker laws. C. Taxation 1. Tax revenues needed to pay government salaries, build military capacity, and shift earnings from people with high incomes to the poor. 2. Consumption taxes: indirect taxes that help pay for consequences of using a particular product and to make imports more expensive. 3. Value added tax (VAT): levied on each party that adds value to a product throughout its production and distribution. D. Antitrust Regulations 1. Antitrust (antimonopoly) laws are designed to prevent companies from fixing prices, sharing markets, and gaining unfair monopoly advantages. Such laws help ensure a wide variety of products at fair prices. 2. The United States and European Union have strict antitrust regulation and are strict enforcers. In Japan, the Fair Trade Commission enforces antitrust laws, but it is often ineffective. 3. In strict antitrust countries, companies see a disadvantage against competitors whose home countries condone market sharing, whereby competitors agree to serve only designated market segments. VI. ETHICS AND SOCIAL RESPONSIBILITY International managers are exposed to different conceptions of ethical behavior and guidelines for socially responsible behavior. Child labor, human rights, the environment, and plant closings are the heart of debates over impact of multinationals. Ethical Behavior: personal behavior in accordance with guidelines for good conduct or morality. No right or wrong decisions, but alternatives, each of which may be equally valid depending on one’s perspective. Corporate Social Responsibility: practice of companies going beyond legal obligations to actively balance commitments to investors, customers, other companies, and communities. Three layers of CSR activity: (1) company works toward a specific social cause; (2) company follows a code of conduct and operates with greater transparency; and (3) company builds social responsibility into its core operations to create value and build competitive advantage. A. Philosophies of Ethics and Social Responsibility 1. Friedman View: company’s sole responsibility is to maximize profits for its owners (or shareholders) while operating within the law. a. Example: managers would applaud a company moving pollution-generating operations from a strict country to a lax country. b. Many disagree with this argument against socially responsible activities. Today the discussion is not whether a company has CSR obligations, but how it will fulfill them. 2. Cultural Relativist View: company should adopt local ethics wherever it operates because all belief systems are determined within a cultural context. a. Sees truth, itself, as relative and argues that right and wrong are determined within a specific situation. b. “When in Rome, do as the Romans do” captures the essence of cultural relativism. 3. Righteous Moralist View: company should maintain its home-country ethics wherever it operates because the home-country’s view of ethics and responsibility is superior to others’ views. a. Example: company headquarters instructs subsidiary managers to refrain from bribing local officials and, thereby, imposes its righteous moralist view on local managers. 4. Utilitarian View: company should behave in a way that maximizes “good” outcomes and minimizes “bad” outcomes wherever it operates. a. A utilitarian manager asks the question “What outcome should I aim for?” and answers, “That which produces the best outcome for all affected parties.” b. Example: manager pays a bribe based on calculations that more people will benefit than will be harmed by the outcome. Bribery and corruption Corruption leads to the misallocation of resources, hurts economic development, distorts public policy, and damages the integrity of “the system.” Enron’s failure sent a shockwave around the world. Energy trading markets were in chaos and many lost jobs worldwide. In 2002, Congress passed the Sarbanes-Oxley Act, which set more stringent accounting standards and reporting practices. Labor conditions and human rights Managers must monitor behavior of themselves, employees, and business partners. Governments, labor unions, consumer groups, and human rights activists force apparel companies to implement codes of conduct and monitoring principles in international production. Fair trade practices Fair trade products: involve companies working with suppliers in more equitable, meaningful, and sustainable ways. Fair Trade USA (www.fairtradeusa.org) certifies that a product embodies fair prices, fair labor conditions, direct trade, democratic community development, and environmental sustainability. Environment Companies pursue “green” initiatives to reduce their toll on the environment and to reduce operating costs and boost profit margins. Carbon footprint: environmental impact of greenhouse gases (measured in units of carbon dioxide) that results from human activity. VIII. BOTTOM LINE FOR BUSINESS Differences in political and legal systems present both opportunities and risks for international companies. Understanding differences in culture, politics, and law is the first step for any company that hopes to manage the risks of doing business in unfamiliar environments. Managers of international companies also need to understand how global legal issues, including intellectual property, product safety, and antitrust laws, affect operations and strategy. Quick Study Questions Quick Study 1 1. Q: What features characterize the political ideology called pluralism? A: Pluralism is the belief that both private and public groups play important roles in a nation’ political activities. Each group (consisting of people with different ethnic, racial, class and lifestyle backgrounds) serves to balance power that can be gained by others. Pluralistic political systems include democracies, constitutional monarchies, and some aristocracies. 2. Q: Communists believe that a violent revolution is needed to seize control over resources, wish to eliminate political opposition, and do what else? A: A communist government has sweeping political and economic powers. In this type of system, private business is virtually or totally non-existent. 3. Q: What does a representative democracy strive to provide for its people? A: Representative democracies strive to provide some or all of the following: (1) freedom of expression, (2) periodic elections, (3) full civil and property rights, (4) minority rights, and (5) nonpolitical bureaucracies. 4. Q: By what other name is capitalism referred? A: Capitalism is also frequently referred to as the free market. Quick Study 2 1. Q: What factors contributed to the decline of centrally planned economies? A: Factors that contributed to the decline of centrally planned economies include: (1) failure to create economic value, (2) failure to provide incentives, (3) failure to achieve rapid growth, and (4) failure to satisfy customer needs. 2. Q: Which economic system strives toward low unemployment, low poverty, steady economic growth, and an equitable distribution of wealth? A: The goals of a market economy are low unemployment, low poverty, steady economic growth and an equitable distribution of wealth. 3. Q: Laissez-faire economics calls for less government interference in commerce and what else? A: This approach not only called for less government interference, but also greater individual economic freedom. 4. Q: Countries with the greatest amount of freedom tend to have what? A: Countries with the greatest economic freedom tend to have the highest standard of living. Quick Study 3 1. Q: Which legal system decides cases by interpreting the law on the basis of tradition, precedent, and usage? A: Under common law, the justice system decides cases by interpreting the law on the basis of tradition, precedent, and usage. 2. Q: Which legal system is based on a detailed set of written rules and statutes that constitute a legal code? A: Civil law is a system based on a detailed set of written rules and statutes that constitute a legal code. 3. Q: A legal tradition based on religious teachings is called what? A: A legal tradition based on religious teaching is called theocratic law. Quick Study 4 1. Q: What are some examples of intellectual property rights? A: Intellectual property rights are legal rights to resources that result from intellectual abilities and any income these resources generate. Like other types of property, intellectual property can be traded, sold, and licensed in return for fees or royalty payments. Examples include: copyrights, patents, and trademarks. 2. Q: What are the different types of industrial property? A: Industrial property includes patents and trademarks. A patent is a right granted to the inventor of a product or process that excludes others from making, using, or selling the invention. Trademarks are words or symbols distinguishing a product and its manufacturer. 3. Q: Laws that hold manufacturers, sellers, individuals, and others responsible for damage, injury, or death caused by defective products are called what? A: Product liability laws hold manufacturers, sellers, and others responsible for damage, injury, or death caused by defective products. They differ greatly from one nation to another. The United States has the toughest product liability laws in the world, with Europe a close second. Awarded damages tend to be several times larger in the United States than in other developed nations. Developing and emerging countries have the weakest laws. Enforcement of such laws also varies from nation to nation, with highly developed countries being the strictest enforcers. Quick Study 5 1. Q: The essence of which philosophy is captured by the expression, “When in Rome, do as the Romans do”? A: The expression captures the essence of cultural relativism. This view states that a company should adopt local ethics wherever it operates because all belief systems are determined within a cultural context. 2. Q: Possible consequences of corruption include what? A: Corruption is detrimental to society and business. Corruption can send resources toward inefficient uses, hurt economic development, distort public policy and damage national integrity. 3. Q: What are some criteria a product must meet to be Fair Trade certified? A: Fair Trade certifies that a product meets the following criteria: (1) fair prices, (2) fair labor conditions, (3) direct trade, (4) democratic community, and (5) environmental sustainability. 4. Q: The environmental impact of greenhouse gases that result from human activity is called what? A: Carbon footprint is the environmental impact of greenhouse gases that result from human activity. Ethical Challenge You are the proprietor of a fledgling computer graphics company in Shanghai, China. The sophisticated business application software you need for your business normally sells for 2,900 renminbi (around $350) at computer stores in Shanghai and online. But with an income of just over $5,000 a year, you cannot afford to buy the original graphics software for your business. An associate has told you she can get you all the software you need, and more, for only $30. Yet, you have financially strapped friends who code software for the global software companies that make the very programs you need. 3-5 Do your personal circumstances make it ethical for you to purchase the pirated software? A: Entrepreneurs who have just started a company with limited resources may turn to pirated software to keep cost down. Is the use of the pirated software justified? Is it ethical to assume that this software is available over the internet for free or from colleagues at reduced prices ethical? I think most would conclude that software piracy is not only illegal, but completely unethical. However, student responses will vary. 3-6 What would you do if you were told of a new government effort to actively punish users of pirated software? A: Student answers will vary. Many students will probably hold the belief that online software piracy is not a serious offense. However, with the government actively exerting an effort to punish users, the possibility of criminal punishment would make them reconsider. 3-7 Does a software company bear any responsibility for subcontracting work to low wage markets where its finished product is unaffordable for the same coders who worked on it? A: This question forces students to consider the piracy issue from the perspective of a budding entrepreneur who cannot possibly afford the legal version of the software. One option that students often suggest is for companies to offer their products at reduced prices in markets where piracy is rampant. However, the company must be able to ensure that products are not then re-exported to other wealthier markets and sold at the official price—earning pirates a huge profit. Another is the precedent that is set for other markets—all people need to do to have companies reduce their prices would be to start an underground market. The position most students might arrive at is for multinationals to fight piracy but to be less forceful in the poorest markets. Teaming Up Debate Project. Two groups of four students each will debate the ethics of doing business in countries with totalitarian governments. After the first student from each side has spoken, the second student will question the opposing side’s arguments, looking for holes and inconsistencies. The third student will attempt to answer these arguments. A fourth student will present a summary of each side’s arguments. Finally, the class will vote to determine which team has offered the more compelling argument. A: Students arguing in favor of entering countries with totalitarian governments should consider the perspective of companies based in like countries, not just democratic ones. Many students will overlook the fact that many companies based in totalitarian countries do business in other like countries. Trying to view business from this perspective might challenge students not coming from such a country. For this reason, it can be interesting for international students in the class to be divided into different groups so that each group has a variety of opinions and perspectives. Likewise, students arguing against entering totalitarian countries must grapple with whether their not investing will create political change—it oftentimes does not. These students will also need to accept the fact that not investing might actually mean a lower standard of living for people in the totalitarian country and perhaps less work at home for the multinational that would undertake the investment. Practicing International Management Case Pirates of Globalization 3-16 Q: What more do you think that the international business community could do to protect intellectual property rights? A: Student answers will vary. The first step a business should take with their intellectual property is to protect it both at home and in the other countries where they do business and source products. Intellectual property rights are territorial, meaning, for example, a U.S. patent or trademark only provides protection in the United States. To be able to enforce your intellectual property rights in other countries, you need to secure protection of that IP in those countries, through local registration. Companies need to examine their business to see what might be eligible for a patent, trademark, copyright or trade secret status.   Once it is known what intellectual property a company possesses, the business can then review their options for protecting that property, at home and abroad. The businesses need to research whether foreign export markets or sourcing locations have signed patent or trademark agreements with the United States. Business should attempt to determine if companies similar have experienced problems abroad. Contracts with suppliers and other partners should include specific intellectual property clauses protecting their rights. 3-17 Q: Are international companies simply afraid to speak out against counterfeiting in potentially lucrative emerging markets for fear of being denied access to them? A: This question gets students to consider the ramifications of cracking down on counterfeiters in lucrative markets. A policy of zero tolerance in some developing and emerging markets may invite the wrath of politicians and government bureaucrats. Officials might see multinationals with deep pockets as extremely greedy and determined to go after every petty pirate in a market. This can create a damaging backlash by local law enforcement. 3-18 Q: By using the latest technologies, people can often create prefect clones of original works. How are the Internet and the latest digital technologies influencing intellectual property laws? A: The spectacular growth of e-business conducted over the Internet will force a reevaluation of intellectual property laws. Holders of intellectual property will likely want existing laws revised to protect them from hackers that break into company networks and others who monitor e-mails and other Internet traffic in an effort to steal valuable data and information. 3-19 Q: Locate information on the Tiffany versus eBay lawsuit and identify each sides arguments and who prevailed. What are the implications of that lawsuit for the sale of counterfeits in online auctions? A: Tiffany’s allegation that eBay contributed directly to infringement of the Tiffany trademark due to the sale of counterfeit Tiffany jewelry is a strong warning to online auction houses. The policy of eBay has been to monitor its own site for fraud, yet that has been insufficient according to Tiffany executives. Defendant eBay was victorious in the lawsuit, though Tiffany is appealing the case. The ongoing saga can be tracked online through newspapers and search engines. Copyright © 2019 Education, Inc. -