Country Difference

Political Economy and

Culture

CUHK MGNT 2510 International Business

2016 Fall
Definition of Political Economy

The interactions of the political, legal and economic

systems of a country and their effects on the level o
f economic well-being and development.
Growth rate accelerates with adoption
of capitalism and modern management
practice

Courtesy Prof. David Ahlstrom

 Political Systems
Political System refers to the system of government
of a country.
Political system affects the legal and economic syst
ems of that country

Collectivism Pluralism Individualism

Totalitarianism
Anarchism Democracy
Planned Economy Mixed Market
Economy Economy
Collectivism, Totalitarianism and Planned Economy

Collectivism: Collective goals over individua

l goals
Socialism: Marx: State ownership of means
of production and exchange.
Production planned and managed to match
consumption.
Avoid business cycle
Ensure that workers whose labor is the sole
source of value are properly compensated.
 Collectivism, Totalitarianism and Planned Economy

The State is a class-oppression tool. Use violen

ce to seize power and suppress opposition to ens
ure State power to implement economic plan.
1970s: more than half of world population live in
planned economies: China, India, Vietnam, USSR
and E. Europe and some African and S. American
countries.
2010s: only a handful of fringe countries like Nor
th Korea, Cuba.
Collectivism, Totalitarianism and Planned Economy

Collectivism usually leads to a Totalitarian

form of government one person or one
group of persons exercise all state power
The state has to fight off opposition do
mestic or foreign; real or imagined.
Usually lack freedom of speech and press
; organization and regular election with cl
ose to universal suffrage.
 Collectivism, Totalitarianism and Planned Economy

State ownership of key industries.

State plan key economic targets by industry and
firm; select officials to implement the targets an
d force down stream firms to absorb the produc
ed goods.
Advantage: effective mobilization of resources, r
apid industrialization
Disadvantage: monotonous products; lack width
and depth [no market segmentation]; unwanted
goods
 Why Marxism failed?
Materialism / Dialectics / Theory of Knowled
ge / Historical Materialism
Theory of Knowledge: Existence determine
s consciousness. Human beings do not hav
e any in-born, predetermined value-system.
His value-system is determined by his social
existence mostly class affiliation.
Selfishness stems from private ownership.
Public ownership breeds altruism.
 Why Marxism failed?
Human Nature can be changed and modified.
Leaders with power will use the power for the goo
d of the public.
Marxs Theory of Knowledge may be wrong: Evoluti
on: Selfish Genes to Selfish Carrier of genes to Selfi
sh human beings. Richard Dawkins: The Selfish G
ene.
Unchecked power leads to corruption. Lord Acton
: Power corrupts; absolute power corrupts absolut
ely.
 Planned Economy in Practice
China per capita GDP:
1952: RMB119; 1978: RMB381; 2012: RMB38,45
0
S Korea vs N. Korea GDP

Net
Foreign
Aid
 Individualism, Democracy and Market Economy
Individualism: individual should have freedom i
n his or her economic and political pursuits.
Welfare of the society is best served by letting p
eople pursue their own economic self-interest.
Adam Smiths invisible hand.
Reason for existence of Government: We hold th
ese truths to be self-evident, that
all men are created equal, that they are endowe
d by their Creator with certain unalienable Rights
, that among these are
Life, Liberty and the pursuit of Happiness.
 Individualism, Democracy and Market Economy
That to secure these rights, Governments are instituted amon
g Men, deriving their just powers from the
consent of the governed, That whenever any Form of Govern
ment becomes destructive of these ends, it is the
Right of the People to alter or to abolish it, and to institute ne
w Government, laying its foundation on such principles and or
ganizing its powers in such form, as to them shall seem most l
ikely to effect their Safety and Happiness.

[Compared to Marxs theory: State is a class-oppression tool]

Governments economic role is to protect private ownership a

nd to ensure free and fair [no deceit or coercion] exchange of i
nformation, goods and services.
 Individualism, Democracy and Market Economy

Democracy: State power is exercised by of

ficials and representatives elected by almo
st universal suffrage on regular basis.
Usually has these features: freedom of sp
eech, press and organization; independent
courts and legislature; non-political civil se
rvices, armed forces and police.
Private ownership of property and capital.
Rule of Law [as compared to Rule by Law]
 Individualism, Democracy and Market Economy

Suppliers free to decide what, how and when to pro

duce and what price to sell. Buyers free to buy wh
atever quantity and at whatever price. The interacti
on between sellers and buyers creates a Market whi
ch provides Signals through price changes to suppli
ers and buyers.
Governments role is to ensure fair and open marke
t practice
Advantage: more efficient than planned economy;
more variety
Disadvantage: business cycle, government deficit, in
come gap
 Legal systems
1. Common Law: UK, USA, Australia, Hong Kong
Based on Tradition [legal history] , Precedent
[previous court ruling of similar cases] and lo
cal custom [how laws are applied in specific sit
uations]. Judges and Courts have some liberty
to interpret laws.
2. Civil law: 80 countries: Continental Europe, S.
America, Japan and China.
. Based on detail set of laws organized as Code
s
. Judges and courts must apply the law as writt
en
How Does Political Economy Influenc
e Economic Progress?
Innovation, entrepreneurship and productivity are
the engines of long-run economic growth
Innovation and entrepreneurship require a market
economy, good education system and strong prop
erty rights
Democratic regimes are probably more conducive
to long-term economic growth than dictatorships,
even the benevolent kind ?? Discussion
Subsequent economic growth leads to the establis
hment of democratic regimes ?? Discussion
2-17
 Country Attractiveness
Cost: product
Benefit: size of
adaptation, legal
economy, growth
costs, profit
rate; first mover
repatriation
advantage

Country
Attractiveness

Political Risk: Nationalization, social unrest,

war
Economic Risk: Exchange rate
Legal Risk: Intellectual Property
 Culture
Culture Defined: Culture is a of Set of values and
norms that a specific group of people are e
motionally attached.

Value: Set of ideas of what is good, right or desirabl

e
e.g. freedom, honesty, responsible, patriotism, fi
lial piety
Norms: social guidelines and rules about the right b
ehavior in specific situations
e.g. manners and customs
Components and Determinants of Cult
ure
Social
structure
Values &
Education attitudes

Culture

Religion Manners &

customs
Aesthetics
 Components and Determinants of Cult
ure
1. Social Structure:
Social Strata: all societies have hierarchical
stratifications.
Stratification can be based on wealth or income or
heredity

Social Mobility: the extent to which an individual can

move between the class
he/she is originally attached to.

2. Value: Set of ideas of what is good, right or desirable

3. Manner and Customs: expected behavior under

specific situations
 Components and Determinants of Cult
ure
4. Aesthetics: what is pleasing to the eye
Color, weight, clothing

5. Religion: A system of shared beliefs and rituals that

are concerned with the realm of the sacred or
supernatural.

6. Education: both a product of culture [are girls

entitled to education?] and a medium to propagate
culture
German [Blue] / China [Red] Cultural
Difference
Opinion On-time

Life Style Relationship

Anger Self

Queuing Weekend Street

up Scene
Gathering Having a stomach ache

In a restaurant
Means of Transportation
Crated by Ms. Yang Liu who lived in Germany for 13 years and lives in
New York now. http://chaoglobal.wordpress.com/2013/08/11/china-
german/ Solving a problem The Leader

Child of the family Complexion

 Cultural Difference its RELATIVE
Most cultural difference is relative, rarely is any difference absolute.
While the Germans may call On-time to be exact to the minute,
meaning +1 to -1 minute in business circumstances, the Chinese idea
of on time is +5 to -10. The range is relative larger. Rarely can one
find a culture in which On-time means -30 minutes.
Culture for International Managers
1. Act on the better side of your
Culture. E.g. If on-time is +5 to
-15 minutes, try to be +5
minutes to meetings.
2. Be tolerant and accommodating
to behaviors from other cultures.
E.g. dont get mad or pass early
judgment if the other party is
late by more than 10 minutes.
3. Politely state your bottom line
up front and ask for
consideration and appropriate
arrangement. E.g. I do not eat
xxxxx.
Culture for International Managers

1. It is important to develop cross-

cultural literacy
Managers must beware of
ethnocentric behavior, or a belief
in the superiority of one's own
culture
2. There is a connection between
culture and national competitive
advantage
suggests which countries are likely to
produce the most viable
competitors
has implications for the choice of
Questions
1. Define Political Economy
2. According to Marx and Socialism, what role does
the state play in the economy?
3. What is the advantage and disadvantage of Plan
Economy?
4. In a democratic political system practicing market
economy, what role does the government play in
economic affairs.
5. What is culture?
6. List for components of culture