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To learn how differing types of political system function, in terms of governmental processes, societies and business interactions.To gain a critical appreciation of democracy’s progress in differing national environments.To assess political risk, both internally and internationally.To appreciate the nature and significance of diverse national

To assess legal risk for international managers, including both national and international implications.

legal systems, as well as their interactions with both regional and international legal frame-works

Chapter 5

Introduction to Political economy • political economy is an area of study that permits a variety

of ideological perspectives and theoretical paradigms.• It's more than four hundred year old history includes the

works of French Physiocrats, Adam Smith, David Ricardo and Karl Marx, among others.

• a political economy approach in Sociology is applied to study the effects of people's involvement in society as members of groups, and how that changes their ability to function.

Political economy

• Political economy, branch of social science that studies the relationships between individuals and society and between markets and the state, using a diverse set of tools and methods drawn largely from economics, political science, and sociology.

• The term political economy s derived from the Greek polis, meaning “city” or “state,” and oikonomos, meaning “one who manages a household or estate.”

• Political economy thus can be understood as the study of how a country—the public’s household—is managed or governed, taking into account both political and economic factors.

•

Renaissance of political economy•In the second half of the 20th century, as the social sciences (especially economics but also political science) became increasingly abstract, formal, and specialized in both focus and methodology, political economy was revived to provide a broader framework for understanding complex national and international problems and events.• The field of political economy today encompasses several areas of study, including the politics of economic relations, domestic political and economic issues, the comparative study of political and economic systems, and international political economy.• The emergence of international political economy, first within international relations and later as a distinct field of inquiry, marked the return of political economy to its roots as a holistic study of individuals, states, markets, and society.

Political Economy define• Political economy is a term used for studying production and trade,

and their relations with law, custom, and government, as well as with the distribution of national income and wealth.

• Political economy originated in moral philosophy. • It was developed in the 18th century as the study of the economies of

states, or polities, hence the term political economy.• In the late 19th century, the term economics came to replace political

economy, coinciding with the publication of an influential textbook by Alfred Marshall in 1890.[2] Earlier, William Stanley Jevons, a proponent of mathematical methods applied to the subject, advocated economics for brevity and with the hope of the term becoming "the recognized name of a science."[3][4]

Political economy

• A rapidly growing mainstream literature from the 1970s has expanded beyond the model of economic policy in which planners maximize utility of a representative individual toward examining how political forces affect the choice of economic policies, especially as to distributional conflicts and political institutions.[5] It is available as an area of study in certain colleges and universities.

Comparing political systemsComparing political systemsDefinition: structures and processes by which a nation-state is governed.Authoritarian government – concentration of power in an individual or small group, often military or ideology-based.Democratic government – system based on accountability of governments to the people, through free elections.Many political systems fall on a continuum between democracy and authoritarianism:

• The market-oriented authoritarian or semi-authoritarian system characterizes numerous emerging economies, where the state guides economic development.

Degrees of democracyDegrees of democracyStates vary in democratic accountability, participation and civil rights. Attributes of democracy include:

• Free and fair elections, supported by media freedom• The rule of law, including independent judiciary (though its robustness

varies between states)• Civil society – the presence of freely-functioning voluntary groups

(including religious, political and labour) is a substantive indicator of genuine pluralism.

Many transition economies are building democratic institutions alongside market structures; however, legacies of authori-tarianism remain.

Features of authoritarianism and democracyAuthoritarian government rests on rule by a political elite that has power for the time being. Such a regime usually holds on to the power by suppressing dissent, often by force. Democratic governments tend to beaccountable to the people, instead, by relying on free and fair elections. The will of the leadership thus domi-nates in an authoritarian regime, whereas democracy relies on representative institutions like the elected legislatures.

Power determines law;constitution on paper only

Detention without charge;few rights for accused;

Imprisonment forpolitical dissent

Restrictions on association,expression and any activitycontrary to the official line

Elections with little or nochoice of the candidates

Courts are an administra-tive arm of government

Press controlled by thestate; restricted reporting

Constitutional framework;equality before law

Right to a fair trial; nodetention without charge;

torture prohibited

Right to vote and standfor office; freedom of

association and expression

Regular elections; one per-son/one vote; monitoring forirregularities, intimidation

Independent judiciary;transparent process

Editorial and reporting inde-pendent from government

Rule of law

Civil rights

Politicalrights

Elections

Courtsystem

Freedomof the press

Authoritarianism Democracyversus

From authoritarian to democratic: selected countries

Source: Kekic, L. (2006) ‘A pause in democracy’s march’, The Economist: The World in 2007 data, www.theworldin.com

Branches of governmentExecutive – carries out government functions, including finances, national security and social welfare.Legislative – law-making structures and processes; in democracies, based on a national elected assembly.Judicial – through the court system, officials administer justice and adjudicate in disputes for both individuals and organizations.

Two constitutional principles underpin relations between the three branches:– Separation of powers – each is independent,

but…– Checks and balances prevent domination by one

branch.

Parties and politicsPolitical activities in most countries are played out via political parties, although they are typically restricted to government-sponsored parties in authoritarian states.

In democratic societies, parties represent a range of views:• Conservative (on the ‘right’), socialist (on the ‘left’), nationalist, religious

and rural, among others.• Centrist parties have greater widespread appeal to electorates.

In multiparty systems, a coalition government (formed by two or more parties) is a solution,but can be unstable.

Respect for institutions in Latin America (2007)

Source: ‘A warning for reformers’, The Economist, 17 November 2007

Political riskPolitical riskBusinesses value stability and predictability of government policy in assessing location strengths and weaknesses.Political risk can arise within a country or from external sources.An authoritarian regime may seem to be more stable than a multiparty democratic one, but appearances can be deceptive.Factors which can destabilize a government (to which authoritarian governments are particularly vulnerable)

include: corruption , personalized power centres, factional infighting, institutionalpower bases (such as the army).

Internal political risks

Note: 0 = highly corrupt, 10 = highly clean. Rankings appear in bracketsSource: Transparency International (2007) Corruption Perception Index, www.transparency.org

Transparency International’s Corruption Perception Index, selected countries, 2007

International political riskInternational political riskInsecurities in relations between countries create uncertainties which affect international business.

Countries differ in their relative power – in economic, political and military respects – and their businesses often reflect these strengths (and weaknesses).

Regional and cross-border conflicts give rise to risk in many parts of the world, especially affecting operations in resource-rich countries.

In unstable locations and uncertain environments, MNEs must assess risks and work with stakeholders.

International risksInternational risks

The role of governments in economic activities

Traditional liberal market view is one of minimum intervention, but recent financial crises have prompted direct financial support by US and European governments.State-owned enterprises, especially in strategic sectors (such as energy), are limbs of the government.State-controlled enterprises have varying ownership structures – some are listed companies, although the state is the majority shareholder.State players are a growing force in the global economy, notably China and resource-rich Middle Eastern states.

Business regulation• Regulation can be advantageous for businesses, as in

government small-business initiatives, but is generally perceived as burdensome and costly.

• A trend has been reduction in national regulation.• Businesses may be attracted to countries with little regulation,

but the downside may be weak environmental and safety regimes, as well as weak protection of property.

• Competition law seeks to control anti-competitive and unfair business practices:

• EU competition law targets abuse of a dominant position in the relevant market.

Business regulation in selected countries

Legal frameworks: Legal frameworks: national to internationalnational to internationalThe national legal system provides the substantive law and court structure which most directly affect businesses.

MNEs operating in different countries are subject to the national law in each.

• Legal systems in democratic societies where the rule of law prevails tend to be more transparent than those in authoritarian countries.

Regional frameworks and international law overlap with national law in several spheres, such as environmental protection.

Dimensions of the legal environment

Legal risk internationallyLegal risk internationallyLegal risk arises when a company needs to launch legal action (such as to enforce a contract) or when it must defend itself against legal action.In FDI and outsourcing strategies, the MNE is involved in webs of legal relations in foreign environments:

Contracts with suppliers, customers, subcontractorsLiability under employment law and health & safety lawLiability under environmental protection lawLiability for dangerous productsLiability for industrial accidents

Legal risks in overseas locations

Most numerous types of litigation in the US and UK (2004)

Source: Financial Times, 10 October 2005

Legal institutions in the EULegal institutions in the EUThe Council of Ministers is the seat of executive authority.The European Commission has both legislative and executive powers, such as issuing regulations and directives.The European Parliament acts as a check on the other institutions, but is not as influential as a national legislature.EU institutional reforms focus on reducing unwieldy structure, but face objections …

From those fearful of loss of national sovereignty

From those objecting to lack of democratic accountability.

International law and business International law and business implicationsimplicationsInter-governmental co-operation has led to a growing body of international law, in the form of conventions and treaties.There is a growing consensus internationally that in some areas, such as human rights and the environment, international law is setting the standards.

For firms, compliance with international standards, rather than weaker national laws, is increasingly expected by stakeholders, consonant with CSR strategy.

Ratification of major human rights conventions

Source: UNDP (2006) Human Development Report 2006 (Basingstoke: Palgrave Macmillan)

ConclusionsConclusionsIn both operations and markets, national political and legal systems are key aspects of the environment for MNEs.Both authoritarian and democratic systems – and many in between – offer opportunities for international business, but…

Political and legal risks arise in countries with authoritarian regimes and weak rule of law.Achieving corporate goals depends on managing these risks.

The growing importance of international law is concentrating the minds of decision-makers in both governments and MNEs.