What are the pros and cons to living in a society where the rule of man dominates the legal system? Would the rule of man be a better system than the rule of law in your opinion?
Your journal entry must be at least 200 words. No references or citations are necessary.
MBA 6601, International Business 1
Course Learning Outcomes for Unit II Upon completion of this unit, students should be able to:
2. Analyze the effects of political, legal, economic, and cultural dimensions of international business on an organization.
6. Examine economic concepts and indicators.
Reading Assignment In order to access the following resource(s), click the link(s) below: Gale, S. F. (2016). A two-way street. PM Network, 30(2), 28–35.Retrieved from
Sundstrom, M., & Radon, A. (2015). Utilizing the concept of convenience as a business opportunity in
emerging markets. Organizations & Markets in Emerging Economies, 6(2), 7–21. Retrieved from https://libraryresources.columbiasouthern.edu/login?url=http://search.ebscohost.com/login.aspx? direct=true&db=bth&AN=112158259&site=ehost-live&scope=site
Unit Lesson International Economics is the Thermometer of Business When we speak of economics, we generally refer to the economic interactions between countries (e.g., international trade, exchange rates, money flow between countries, resource utilization, manufacturing capacities, and transportation costs). Economics originates as the study of consumption on both the individual level and the macro level. Therefore, we are interested in those factors that affect a country’s productivity and those things that shape a country’s proclivity to buy and sell on the international markets. The level of economic freedom is an important indicator of the standard of living a country enjoys. The Heritage Foundation (2016) describes economic freedom as including property rights, freedom from corruption, limited government spending, labor and business freedoms, few price controls, and open markets in which to trade and invest in. A country’s level of economic freedom relates directly to its culture, as explained in Unit I. The record of accomplishment for countries with higher economic freedom relates positively to financial prosperity and economic stability. The message of economic freedom is clear; an unencumbered consumer, without government interference, improves resource utilization and market equilibriums (The Heritage Foundation, n.d.). The emerging economies of Brazil, Russia, India, and China (BRIC) are on the verge of the rapid growth of their consumer markets. Experience indicates that consumer demand takes off when gross national income (GNI) per capita reaches levels between $3,000 and $10,000 per year. In Russia, there is already significant evidence of the growth of consumerism during the past decade. There are also early signs of similar trends in China and India, where the growth of their middle classes is very rapid. Within a decade or so, each of the BRIC countries will show higher returns, increased demand for capital, and stronger national currencies (The Heritage Foundation, n.d.). With some variation, there are three types of economic systems:
UNIT II STUDY GUIDE
International Business Global Framework, Part 2https://libraryresources.columbiasouthern.edu/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=112687087&site=ehost-live&scope=sitehttps://libraryresources.columbiasouthern.edu/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=112687087&site=ehost-live&scope=sitehttps://libraryresources.columbiasouthern.edu/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=112158259&site=ehost-live&scope=sitehttps://libraryresources.columbiasouthern.edu/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=112158259&site=ehost-live&scope=site
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Market economies: These are economies in which individuals and private organizations make the buying and selling decisions based on economic motives. Characteristics of these economies are capitalism, entrepreneurial innovation, and limited government interference. Top market economies would include Hong Kong, Singapore, New Zealand, and the United Sates (The Heritage Foundation, n.d.)
Command economies: In this type of economy, the government controls the use and distribution of resources based on social and political motives. Characteristics include bias towards large-scale and capital-intensive production with socialistic tendencies. North Korea, Argentina, and Pakistan are typical examples of command economies (The Heritage Foundation, n.d.).
Mixed economies: In this type of economy, both government and private enterprise work together in a
predetermined framework. The goals here are to achieve some degree of economic efficiency while also protecting society against the excesses of greed and self-interest. Typical mixed economies would be Russia, China, and Brazil (The Heritage Foundation, n.d.).
Measures of Economic Performance Given an understanding of the general types of economic systems throughout the world, the next step is to assess their economic development. In general, economic measures determine how much an economy is expanding or contracting and which areas of the economy are meeting economic objectives. These economic performance measures allow economists to analyze and propose policies that remedy poor performance. Gross national income (GNI): GNI is the broadest measure of a country’s economy that shows the value of all production in the domestic economy in addition to the net income received from other countries. A good example can be seen on the World Bank’s (n.d.-b) website where they list GNI per capita (GNI divided by the midyear population) for each country in U.S. dollars. The first country listed by the World Bank is Afghanistan, whose GNI per capita went from $730 in 2013 to $680 in 2014 (The World Bank, n.d.-b). Gross national product (GNP): GNP is the total market value of all final goods and services produced within a nation plus the income of the citizens abroad minus the income earned by foreigners. Conceptually, GNP and GNI are equal; however, slightly different calculations can yield slightly different numbers. Many years ago, GNP was the accepted number, but now, GNI is the official number. Returning to the Afghanistan example, the GNP per capita was $666.8 in 2013 and $633.6 in 2014 (The World Bank, n.d.-b). Gross domestic product (GDP): GDP is the total market value of goods and services produced by workers and capital within a nation’s borders; it provides the truest measure of national economic activity (Turner, 2014). Purchasing power parity (PPP): PPP is a statistic that adjusts for the cost of living in different countries. GNI per capita does not take into account that similar products and standards of living do not cost the same from country to country. Usually the country that manufactures a product has a lower cost than a country that imports that same product; otherwise, it would make more sense for the importing country to produce it rather than import it. Certain cities, because of the land shortage, have exorbitant land prices making lodging and food prices out of proportion with similar cities in other countries. PPP calculates how much money it takes to purchase the same goods and services in two countries and uses that ratio to determine an implicit foreign exchange rate. Looking back at Afghanistan as our example, PPP was $2080 in 2013 and $2000 in 2014 (The World Bank, n.d.-b). The Human Development Index (HDI): Improvements in economic performance yield improvements in the human condition and vice versa. This statistic measures life expectancy at birth, adult literacy, and school enrollment rates. This measurement parallels the standard of living for any given country (Human Development Reports, n.d.). These five measures represent the most common statistics used to measure a country’s output, to measure a country’s relative importance to other countries, and to look at trends in economic expansion and decline. Thus, foreign firms will want to monitor major economic indicators such as GNI, PPP, and HDI, as well as developments in the cultural, political, and legal environments of those nations. There are other measures used to analyze a country’s productivity, economic growth, stability, sustainability, income distribution, debt, unemployment, poverty, gender, nutrition, population, migration, balance of
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payments, and competitiveness. Most of those measurements are contained in the World Bank data file (The World Bank, n.d.-b). On a special note about climate change, the World Bank (n.d.-a) created the Climate Change Knowledge Portal in their effort to provide a one-stop shop for all climate change data for each country over different periods. While the World Bank provides all kinds of economic statistics and datasets, it now provides environmental, disaster-risk, and socio-economic datasets for individuals and groups who want to develop policies for climate impacts. International Political and Legal Frameworks A country’s culture heavily influences its political system. For example, democracy, socialism, theocracy, and totalitarianism are direct results of the culture embraced by a country’s population. Those countries that believe in individual rights and believe that inequality is wrong embrace democracy. Countries with a high affinity for collectivism and with feminine characteristics, in which the homeless and poor are provided for, result in strong support for socialism. Theocratic regimes and totalitarianism would appear to have support from populations that accept a high power distance ratio, display masculinity gender roles, and hold a collectivistic view (Hofstede, 1980). There are variations to these outcomes, but a lot of the culture directly affects the political system. There is some anxiety that democracy and global freedom, in general, are in decline. Moreover, 2015 marked the 10th consecutive year that global freedom declined. To demonstrate the decline in global freedom, in 1999, 63% of the world’s population lived in nations with an electoral democracy. In 2015, about 40% of the world’s population lived in free nations, while 24% and 36% lived in nations designated partly free and not free respectively (Puddington & Roylance, n.d.). Why would this decline in political freedom affect any international business? As we discussed earlier in this unit, research shows that countries with economic freedom have a much higher standard of living. However, there are variations to this rule. For example, CSU has conducted numerous educational classes in Vietnam, primarily in the two principle cities of Hanoi and Ho Chin Minh City (formerly Saigon). Vietnam is Communist, which means that the state owns all resources. Individual freedoms and rights are secondary to the rights of the state. However, the country is also economically competitive. The people want to work. The government is pro- business. There are factories from all major companies in the country. The educational classes were full of government and factory managers trying to get their MBA degree for advancement up the career ladder. The profit motive on the micro level is strong, and their standard of living is improving. It is evident that Western values were migrating into that country. The fact that political freedom in a country is limited does not mean that a company cannot conduct profitable business. It just takes due diligence to find a way to map out the political risk and make it happen. Political risks are the potential losses arising from changes in a country’s political system. The primary types of political risk, from least to most disruptive are:
Systemic: The rise in corruption, weakened property rights, unpredictably enforced laws, and freedom constraints (e.g., paying bribes to government officials).
Procedural: As products and funds move around the globe, their movements create opportunities for
procedural regulations to disrupt the safe and secure completion of these transactions (e.g., a government that sets an import quota on a product to protect the domestic industry).
Distributive: This involves government interference of production or operation of foreign-based
subsidiaries, including nationalization. (e.g., Venezuela’s confiscation of multiple oil companies).
Catastrophic: This would be war, disease, or other developments that adversely affect the operations of every firm in a country (e.g., the Syrian civil war or the Ebola epidemic in Sierra Leone).
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The Law of the Land The legal system specifies the rules that regulate behavior, the processes by which laws are enforced, and the procedures used to resolve grievances. Legal systems, like political systems, are different due to culture, politics, religious precepts, and tradition. International treaties will bind countries to honor international laws, but outside of that obligation, countries rarely recognize the legitimacy of judgments made in other countries. Most legal systems are comprised of constitutional law, criminal law, and civil and commercial laws. Constitutional law relates to a country’s political framework, and criminal law specifies what is illegal and what the punishments are. For conducting business in the international arena, it is in our interest to know the civil and commercial laws of a country. If a country is pro-business, their politicians shape the laws to make it easy to attract and retain foreign investors. In some cases, the countries give mixed signals. China is one country that wants foreign investment, but wants it on its own terms. For example, developed countries in the west have laws that protect creditors, which are warranted if you want investors for risky ventures. China, on the other hand, has investment laws that favor the debtors. This goes back to the political risk discussed in the last section. Legal systems are classified into four types:
Common law relies on tradition and precedent.
Civil law relies on regulatory statutes. These laws derive from politicians and are enforced by judges.
Theocratic law relies on religious doctrine, precepts, and beliefs. The most common theocratic system is Shari’, a law found in Muslim or Islamic communities.
Customary law comes from norms of behavior that gain legitimacy through long-term practice.
As discussed in Unit I, a country’s cultural orientation towards standards of accountability, equity, and fairness influences the prevailing principles in its legal environment. Legality comes down to the basis of rule. Investors and managers should ask, “What is the basis of rule?” in a given country. There are two categories:
The rule of law holds that no one, whether a powerful public official or a wealthy private individual, is above the law. The rule of law holds that governmental authority is legitimately exercised in accordance with written, publicly disclosed laws.
The rule of man holds that the ruler of the country (man or political party), in whatever form, commands authority that is above the law. The rule of man anchors the legal system in totalitarian states.
Earlier in this lesson, it was noted that democracies were in decline. One could also say that the rule of man is ascending. Legal Issues in International Business Some of the trickiest legal problems arise from dealing with different legal systems. In terms of business operations, the issues below represent the most common and most difficult to solve.
Making and enforcing contracts: Most countries have contract law, but the particulars vary.
Product safety and liability: The European Union’s directive on product safety has set the global standard. It outlines the responsibility of manufacturers and the process of product liability compensation claims.
Legal jurisdiction: When companies face litigation in whatever form, they prefer the home-court advantage. Many countries insist that contract resolution and arbitration take place within their national boundaries.
Intellectual property: The power of ideas has made the protection of intellectual property a hot issue.
Intellectual property rights (IPR) grants the registered owner of a copyright the legal ownership of that idea. The pervasiveness of piracy testifies to the difficulty of enforcing IPRs.
Corruption: This stems from political and cultural roots, and it affects the ability to conduct
transactions on time and as needed. The growth and decline of democracies across the world reveal an uncertainty in how international businesses should plan their operations. The rule of man is an uncertain predicament also because the “man”
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may change from regime to regime. Foreign direct investment occurs when investors spend large amounts of capital to build factories and businesses that will make a profit. Uncertainty in terms of political risk means the investor as well as the manager must do their due diligence before committing to long-term funds and plans.
References The Heritage Foundation. (n.d.). 2016 index of economic freedom. Retrieved from
www.heritage.org/index/explore Hofstede, G. (1980). Culture’s consequences: International differences in work-related values. Newbury Park,
CA: Sage. Human Development Reports. (n.d.). Human development index. Retrieved from
http://hdr.undp.org/en/content/human-development-index-hdi Puddington, A. & Roylance, T. (n.d.). Overview essay: Anxious dictators, wavering democracies. Retrieved
from https://freedomhouse.org/report/freedom-world-2016/overview-essay-anxious-dictators- wavering-democracies
Turner, C. (2014). Drugs and prostitution add £10bn a year to UK economy. The Telegraph. Retrieved from
The World Bank. (n.d.-a). Climate change knowledge portal. Retrieved from
http://sdwebx.worldbank.org/climateportal/index.cfm?page=why_climate_change The World Bank. (n.d.-b). GNI per capita, atlas method (current US$). Retrieved from
Suggested Reading In order to access the following resource(s), click the link(s) below: Central Intelligence Agency. (n.d.). The world factbook. Retrieved from
https://www.cia.gov/library/publications/resources/the-world-factbook/ The Heritage Foundation. (n.d.). 2016 index of economic freedom. Retrieved from
www.heritage.org/index/explore Human Development Reports. (n.d.). Human development index. Retrieved from
http://hdr.undp.org/en/content/human-development-index-hdi Puddington, A. & Roylance, T. (n.d.). Overview esay: Anxious dictators, wavering democracies. Retrieved
from https://freedomhouse.org/report/freedom-world-2016/overview-essay-anxious-dictators- wavering-democracies
The World Bank. (n.d). GNI per capita, atlas method (current US$). Retrieved from