Individualism

Individualism is the opposite of collectivism. In a political sense, individualism refers to a philosophy that an individual should have freedom in his or her economic and political pursuits. In contrast to collectivism, individualism stresses that the interests of the individual should take precedence over the interests of the state. Like collectivism, however, individualism can be traced back to an ancient Greek philosopher, in this case Plato's disciple Aristotle (384 - 322 bc). In contrast to Plato, Aristotle argued that individual diversity and private ownership are desirable. In a passage that might have been taken from a speech by Margaret Thatcher or Ronald Reagan, he argued that private property is more highly productive than communal property and will thus stimulate progress. According to Aristotle, communal property receives little care, whereas property that is owned by an individual will receive the greatest care and therefore be most productive.

After sinking into oblivion for the best part of two millennia, individualism was re-born as an influential political philosophy in the Protestant trading nations of England and the Netherlands during the 16th century. The philosophy was refined in the work of a number of British philosophers including David Hume (1711 - 1776), Adam Smith (1723 - 1790), and John Stuart Mill (1806 - 1873). The philosophy of individualism exercised a profound influence on those in the American colonies who sought independence from Britain. Individualism underlies the ideas expressed in the Declaration of Independence. In more recent years, the philosophy has been championed by several Nobel prize-winning economists, including Milton Friedman, Friedrich von Hayek, and James Buchanan.

Individualism is built on two central tenets. The first is an emphasis on the importance of guaranteeing individual freedom and self-expression. As John Stuart Mill put it,

The sole end for which mankind are warranted, individually or collectively, in interfering with the liberty of action of any of their number is self-protection . . . The only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others. His own good, either physical or moral, is not a sufficient warrant. . . .

 

The only part of the conduct of any one, for which he is amenable to society, is that which concerns others. In the part which merely concerns himself, his independence is, of right, absolute. Over himself, over his own body and mind, the individual is sovereign.⁶

The second tenet of individualism is that the welfare of society is best served by letting people pursue their own economic self-interest, as opposed to some collective body (such as government) dictating what is in society's best interest. Or as Adam Smith put it in a famous passage from the Wealth of Nations, an individual who intends his own gain is

led by an invisible hand to promote an end which was no part of his intention. Nor is it always worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who effect to trade for the public good.⁷

The central message of individualism, therefore, is that individual economic and political freedoms are the ground rules on which a society should be based. This puts individualism in direct conflict with collectivism. Collectivism asserts the primacy of the collective over the individual, while individualism asserts just the opposite. This underlying ideological conflict has shaped much of the recent history of the world. The Cold War, for example, was essentially a war between collectivism, championed by the now-defunct Soviet Union, and individualism, championed by the United States.

In practical terms, individualism translates into an advocacy for democratic political systems and free market economics. Viewed this way, we can see that since the late 1980s the waning of collectivism has been matched by the ascendancy of individualism. A wave of democratic ideals and free market economics is sweeping away socialism and communism worldwide. The changes of the past few years go beyond the revolutions in Eastern Europe and the former Soviet Union to include a move toward greater individualism in Latin America and in some of the social democratic states of the West (e.g., Britain and Sweden). This is not to claim that individualism has finally won a long battle with collectivism--it has not--but as a guiding political philosophy, individualism is on the ascendancy. This represents good news for international business, since in direct contrast to collectivism, the pro-business and pro-free trade values of individualism create a favorable environment within which international business can thrive.

Democracy and Totalitarianism

Democracy and totalitarianism are at different ends of a political dimension. Democracy refers to a political system in which government is by the people, exercised either directly or through elected representatives. Totalitarianism is a form of government in which one person or political party exercises absolute control over all spheres of human life and opposing political parties are prohibited. The democratic - totalitarian dimension is not independent of the collectivism - individualism dimension. Democracy and individualism go hand in hand, as do the communist version of collectivism and totalitarianism. However, gray areas exist; it is possible to have a democratic state where collective values predominate, and it is possible to have a totalitarian state that is hostile to collectivism and in which some degree of individualism-particularly in the economic sphere-is encouraged. For example, Chile in the 1980s was ruled by a totalitarian military dictatorship that encouraged economic freedom but not political freedom.

Democracy

The pure form of democracy, as originally practiced by several city-states in ancient Greece, is based on a belief that citizens should be directly involved in decision making. In complex, advanced societies with populations in the tens or hundreds of millions this is impractical. Most modern democratic states practice what is commonly referred to asrepresentative democracy. In a representative democracy, citizens periodically elect individuals to represent them. These elected representatives then form a government, whose function is to make decisions on behalf of the electorate. A representative democracy rests on the assumption that if elected representatives fail to perform this job adequately, they will be voted down at the next election.

To guarantee that elected representatives can be held accountable for their actions by the electorate, an ideal representative democracy has a number of safeguards that are typically enshrined in constitutional law. These include (1) an individual's right to freedom of expression, opinion, and organization; (2) a free media; (3) regular elections in which all eligible citizens are allowed to vote; (4) universal adult suffrage; (5) limited terms for elected representatives; (6) a fair court system that is independent from the political system; (7) a nonpolitical state bureaucracy; (8) a nonpolitical police force and armed service; and (9) relatively free access to state information.⁸

Totalitarianism

In a totalitarian country, all the constitutional guarantees on which representative democracies are built--such as an individual's right to freedom of expression and organization, a free media, and regular elections--are denied to the citizens. In most totalitarian states, political repression is widespread and those who question the right of the rulers to rule find themselves imprisoned, or worse.

Four major forms of totalitarianism exist in the world today. Until recently the most widespread was communist totalitarianism. As discussed earlier, communism is a version of collectivism that advocates that socialism can be achieved only through totalitarian dictatorship. Communism, however, is in decline worldwide and many of the old Communist dictatorships have collapsed since 1989. The major exceptions to this trend (so far) are China, Vietnam, Laos, North Korea, and Cuba, although all of these states exhibit clear signs that the Communist Party's monopoly on political power is under attack.

A second form of totalitarianism might be labeled theocratic totalitarianism. Theocratic totalitarianism is found in states where political power is monopolized by a party, group, or individual that governs according to religious principles. The most common form of theocratic totalitarianism is based on Islam and is exemplified by states such as Iran and Saudi Arabia. These states restrict not only freedom of political expression but also freedom of religious expression, while the laws of the state are based on Islamic principles.

A third form of totalitarianism might be referred to as tribal totalitarianism. Tribal totalitarianism is found principally in African countries such as Zimbabwe, Tanzania, Uganda, and Kenya. The borders of most African states reflect the administrative boundaries drawn by the old European colonial powers, rather than tribal realities. Consequently, the typical African country contains a number of different tribes. Tribal totalitarianism occurs when a political party that represents the interests of a particular tribe (and not always the majority tribe) monopolizes power. Such one-party states still exist in Africa.

A fourth major form of totalitarianism might be described as right-wing totalitarianism. Right-wing totalitarianism generally permits individual economic freedom but restricts individual political freedom on the grounds that it would lead to the rise of communism. One common feature of most right-wing dictatorships is an overt hostility to socialist or communist ideas. Many right-wing totalitarian governments are backed by the military, and in some cases the government may be made up of military officers. Until the early 1980s, right-wing dictatorships, many of which were military dictatorships, were common throughout Latin America. They were also found in several Asian countries, particularly South Korea, Taiwan, Singapore, Indonesia, and the Philippines. Since the early 1980s, however, this form of government has been in retreat. The majority of Latin American countries are now genuine multiparty democracies, while significant political freedoms have been granted to the political opposition in countries such as South Korea, Taiwan, and the Philippines.

Economic Systems

It should be clear from the previous section that there is a connection between political ideology and economic systems. In countries where individual goals are given primacy over collective goals, we are more likely to find free market economic systems. In contrast, in countries where collective goals are given preeminence, the state may have taken control over many enterprises, while markets in such countries are likely to be restricted rather than free. More specifically, we can identify four broad types of economic systems--a market economy, a command economy, a mixed economy, and a state-directed economy.

Market Economy

In a pure market economy all productive activities are privately owned, as opposed to being owned by the state. The goods and services that a country produces, and the quantity in which they are produced, are not planned by anyone. Rather, production is determined by the interaction of supply and demand and signaled to producers through the price system. If demand for a product exceeds supply, prices will rise, signaling producers to produce more. If supply exceeds demand, prices will fall, signaling producers to produce less. In this system consumers are sovereign. The purchasing patterns of consumers, as signaled to producers through the mechanism of the price system, determine what is produced and in what quantity.

For a market to work in this manner there must be no restrictions on supply. A restriction on supply occurs when a market is monopolized by a single firm. In such circumstances, rather than increase output in response to increased demand, a monopolist might restrict output and let prices rise. This allows the monopolist to take a greater profit margin on each unit it sells. Although this is good for the monopolist, it is bad for the consumer, who has to pay higher prices. Moreover, it is probably bad for the welfare of society. Since, by definition, a monopolist has no competitors, it has no incentive to search for ways of lowering its production costs. Rather, it can simply pass on cost increases to consumers in the form of higher prices. The net result is that the monopolist is likely to become increasingly inefficient, producing high-priced, low-quality goods, while society suffers as a consequence.

Given the dangers inherent in monopoly, the role of government in a market economy is to encourage vigorous competition between private producers. Governments do this by outlawing monopolies and restrictive business practices designed to monopolize a market (antitrust laws serve this function in the United States). Private ownership also encourages vigorous competition and economic efficiency. Private ownership ensures that entrepreneurs have a right to the profits generated by their own efforts. This gives entrepreneurs an incentive to search for better ways of serving consumer needs. That may be through introducing new products, by developing more efficient production processes, by better marketing and after-sale service, or simply through managing their businesses more efficiently than their competitors. In turn, the constant improvement in product and process that results from such an incentive has been argued to have a major positive impact on economic growth and development.⁹

Command Economy

In a pure command economy, the goods and services that a country produces, the quantity in which they are produced, and the prices at which they are sold are all planned by the government. Consistent with the collectivist ideology, the objective of a command economy is for government to allocate resources for "the good of society." In addition, in a purecommand economy, all businesses are state owned, the rationale being that the government can then direct them to make investments that are in the best interests of the nation as a whole, rather than in the interests of private individuals.

Historically, command economies were found in communist countries where collectivist goals were given priority over individual goals. Since the demise of communism in the late 1980s, the number of command economies has fallen dramatically. Some elements of a command economy were also evident in a number of democratic nations led by socialist-inclined governments. France and India both experimented with extensive government planning and state ownership, although government planning has fallen into disfavor in both countries.

While the objective of a command economy is to mobilize economic resources for the public good, just the opposite seems to have occurred. In a command economy, state-owned enterprises have little incentive to control costs and be efficient, because they cannot go out of business. Moreover, the abolition of private ownership means there is no incentive for individuals to look for better ways to serve consumer needs; hence, dynamism and innovation are absent from command economies. Instead of growing and becoming more prosperous, such economies tend to be characterized by stagnation.

Mixed Economy

Between market economies and command economies can be found mixed economies. In a mixed economy, certain sectors of the economy are left to private ownership and free market mechanisms, while other sectors have significant state ownership and government planning. Mixed economies are relatively common in Western Europe; although they are becoming less so. France, Italy, and Sweden can all be classified as mixed economies. In these countries the governments intervene in those sectors where they believe that private ownership is not in the best interests of society. For example, Britain and Sweden both have extensive state-owned health systems that provide free universal health care to all citizens (it is paid for through higher taxes). In both countries it is felt that government has a moral obligation to provide for the health of its citizens. One consequence is that private ownership of health care operations is very restricted in both countries.

In mixed economies, governments also tend to take into state ownership troubled firms whose continued operation is thought to be vital to national interests. The French automobile company Renault was state owned until recently. The government took over the company when it ran into serious financial problems. The French government reasoned that the social costs of the unemployment that might result if Renault collapsed were unacceptable, so it nationalized the company to save it from bankruptcy. Renault's competitors weren't thrilled by this move, since they had to compete with a company whose costs were subsidized by the state.

State-Directed Economy

A state-directed economy is one in which the state plays a significant role in directing the investment activities of private enterprise through "industrial policy" and in otherwise regulating business activity in accordance with national goals. Japan and South Korea are frequently cited as examples of state-directed economies. A state-directed economy differs from a mixed economy in so far as the state does not routinely take private enterprises into public ownership. Instead, it nurtures private enterprise but proactively directs investments made by private firms in accordance with the goals of its industrial policy. For example, in the early 1970s, the Japanese Ministry of International Trade and Industry (MITI) targeted the semiconductor industry as one in which it would like to see Japanese firms have a major presence.¹⁰ Industrial policy often takes the form of state subsidies to private enterprises to encourage them to build significant sales in industries deemed to be of strategic value for the nation's economic development. Thus, the Japanese government subsidized research and development (R&D) investments made by Japanese semiconductor companies. It also used direct administrative pressure to persuade several companies to enter the industry. To help targeted industries develop, the state may also protect them from foreign competition by erecting barriers to imports and foreign direct investment. Accordingly, Japanese semiconductor companies were protected from foreign competition by barriers to imports and restrictions on the ability of foreigners to establish operations in Japan.

The intellectual foundation for a state-directed economy is based on the so-called infant industry argument (which we shall review in greater depth in Chapter 5). This argument suggests that in some industries, economies of scale are so large and incumbent firms from developed nations have such an advantage that it is difficult for new firms from developing nations to establish themselves. Industrial policy is seen as a means of overcoming this economic disadvantage. Moreover, it is argued that state-directed industrial policy may allow a country to establish a leading position in an emerging industry where scale economies will ultimately be of great importance (this argument is at the core of the new trade theory, which we review in Chapter 4).

One criticism of state-directed economies is that government bureaucrats don't necessarily make better decisions about the allocation of investment capital than the market mechanism would. For a long time, the economic success of countries such as Japan and South Korea allowed advocates of state involvement to dismiss such criticisms.¹¹ However, a decade of stagnant growth in Japan coupled with the 1997 implosion of the South Korean economy have added legitimacy to these criticisms. The South Korean collapse, in particular, has been widely attributed to uneconomic investments by Korean companies in industries that the government deemed to be of national importance, such as semiconductors.

Legal System

The legal system of a country refers to the rules, or laws, that regulate behavior along with the processes by which the laws are enforced and through which redress for grievances is obtained. The legal system of a country is of immense importance to international business. A country's laws regulate business practice, define the manner in which business transactions are to be executed, and set down the rights and obligations of those involved in business transactions. The legal environments of countries differ in significant ways. As we shall see, differences in legal systems can affect the attractiveness of a country as an investment site and/or market.

Like the economic system of a country, the legal system is influenced by the prevailing political system. The government of a country defines the legal framework within which firms do business-and often the laws that regulate business reflect the rulers' dominant political ideology. For example, collectivist-inclined totalitarian states tend to enact laws that severely restrict private enterprise, while the laws enacted by governments in democratic states where individualism is the dominant political philosophy tend to be pro-private enterprise and pro-consumer.

The variances in the structure of law among countries is a massive topic that warrants its own textbook. We do not attempt to give a full description of the variations; rather, we will focus on three issues that illustrate how legal systems can vary-and how such variations can affect international business. First, we look at the laws governing property rights with particular reference to patents, copyrights, and trademarks. Second, we look at laws covering product safety and product liability. Third, we look at country differences in contract law.

Property Rights

In a legal sense the term property refers to a resource over which an individual or business holds a legal title; that is, a resource that they own. Property rights refer to the bundle of legal rights over the use to which a resource is put and over the use made of any income that may be derived from that resource.¹² Countries differ significantly in the extent to which their legal system protects property rights. Although almost all countries have laws on their books that protect property rights, the reality is that in many countries these laws are not well enforced by the authorities and property rights are routinely violated. Property rights can be violated in two ways-through private action and through public action.

Private Action

Private action refers to theft, piracy, blackmail, and the like by private individuals or groups. While theft occurs in all countries, in some countries a weak legal system allows for a much higher level of criminal action than in others. An example much in the news of late is Russia where the chaotic legal system of the post-Communist era, coupled with a weak police force and judicial system, offers both domestic and foreign businesses scant protection from blackmail by the "Russian mafia." Often successful business owners in Russia must pay "protection money" to the Mafia or face violent retribution, including bombings and assassinations (there were around 500 contract killings of businessmen in 1995 and again in 1996).¹³ In one example, Ivan Kivelidi, a banker and founder of the Russian Business Roundtable, was murdered by poison applied to the rim of his coffee cup. In another, Vladislav Listiev, the head of Channel 1, Russia's largest nationwide TV network, announced in 1996 that he was going to remove unsavory elements (i.e., Mafia) from the network. Soon afterward he was gunned down by professional assassins outside of his apartment building.¹⁴ And in perhaps the most disturbing case, American businessman Paul Tatum was assassinated in late 1996 after a Moscow hotel joint venture that he was involved in turned sour.¹⁵

Of course, Russia is not alone in having Mafia problems. The Mafia has a long history in the United States. In Japan, the local version of the Mafia, known as the yakuza, runs protection rackets, particularly in the food and entertainment industries.¹⁶ However, there is an enormous difference between the magnitude of such activity in Russia and its limited impact in Japan and the United States. This difference arises because the legal enforcement apparatus, such as the police and court system, is so weak in Russia. Many other countries have problems similar to or even greater than those currently being experienced by Russia. In Somalia during 1993 - 1994, for example, the breakdown of law and order was so complete that even United Nations food relief convoys proceeding to famine areas under armed guard were held up by bandits.

Public Action

Public action to violate property rights occurs when public officials, such as politicians and government bureaucrats, extort income or resources from property holders. This can be done through a number of mechanisms including levying excessive taxation, requiring expensive licenses or permits from property holders, taking assets into state ownership without compensating the owners (as occurred to the assets of numerous US firms in Iran after the 1979 Iranian revolution), or by demanding bribes from businesses in return for the rights to operate in a country, industry, or location.¹⁷ For example, the government of the late Ferdinand Marcos in the Philippines was famous for demanding bribes from foreign businesses wishing to set up operations in that country.¹⁸

Another example of such activity surfaced in mid-February 1994 when the British paper The Sunday Times ran an article that alleged a 1 billion sterling ($750 million) sale of defense equipment by British companies to Malaysia was secured only after bribes had been paid to Malaysian government officials and after the British Overseas Development Administration (ODA) had agreed to approve a 234 million sterling grant to the Malaysian government for a hydroelectric dam of (according to The Sunday Times) dubious economic value. The clear implication was that UK officials, in their enthusiasm to see British companies win a large defense contract, had yielded to pressures from "corrupt" Malaysian officials for bribes-both personal and in the form of the development grant.¹⁹

The Protection of Intellectual Property

Intellectual property refers to property, such as computer software, a screenplay, a music score, or the chemical formula for a new drug, that is the product of intellectual activity. It is possible to establish ownership rights over intellectual property through patents, copyrights, and trademarks. A patent grants the inventor of a new product or process exclusive rights to the manufacture, use, or sale of that invention. Copyrights are the exclusive legal rights of authors, composers, playwrights, artists, and publishers to publish and disperse their work as they see fit. Trademarksare designs and names, often officially registered, by which merchants or manufacturers designate and differentiate their products (e.g., Christian Dior clothes).

The philosophy behind intellectual property laws is to reward the originator of a new invention, book, musical record, clothes design, restaurant chain, and the like, for his or her idea and effort. Such laws are a very important stimulus to innovation and creative work. They provide an incentive for people to search for novel ways of doing things and they reward creativity. For example, consider innovation in the pharmaceutical industry. A patent will grant the inventor of a new drug a 17-year monopoly in production of that drug. This gives pharmaceutical firms an incentive to undertake the expensive, difficult, and time-consuming basic research required to generate new drugs (on average it costs $150 million in R&D and takes 12 years to get a new drug on the market). Without the guarantees provided by patents, it is unlikely that companies would commit themselves to extensive basic research.²⁰

The protection of intellectual property rights differs greatly from country to country. While many countries have stringent intellectual property regulations on their books, the enforcement of these regulations has often been lax. This has been the case even among some countries that have signed important international agreements to protect intellectual property, such as the Paris Convention for the Protection of Industrial Property, which 96 countries are party to. Weak enforcement encourages the piracy of intellectual property. China and Thailand have recently been among the worst offenders in Asia. Local bookstores in China commonly maintain a section that is off-limits to foreigners; it ostensibly is reserved for sensitive political literature, but it more often displays illegally copied textbooks. Pirated computer software is also widely available in China. Similarly, the streets of Bangkok, the capital of Thailand, are lined with stands selling pirated copies of Rolex watches, Levi blue jeans, videotapes, and computer software.

The computer software industry suffers more than most from lax enforcement of intellectual property rights. Estimates suggest that violations of intellectual property rights cost computer software companies revenues equal to $12.3 billion in 1994, $13.3 billion in 1995, and $11.2 billion in 1996.²¹ According to the Business Software Alliance, a software industry association, in 1996 43 percent of all software applications used in the world were pirated. The worst region was Eastern Europe, where the piracy rate was 80 percent. This was followed by piracy rates of 79 percent in the Middle East, 68 percent in Latin America, 55 percent in Asia, 43 percent in Western Europe, and 28 percent in North America. One of the worst countries was China, where the piracy rate in 1996 ran 96 percent and cost the industry $704 million in lost sales, up from $444 million in 1995.²²

Music recordings represent another area where piracy is rampant. According to one estimate, nearly 200 million illegal compact disks are stamped each year, almost 60 percent of them in China. The International Federation of the Phonographic Industry claims that its members lose $2.2 billion annually to pirates.²³

International businesses have a number of possible responses to such violations. Firms can lobby their respective governments to push for international agreements to ensure that intellectual property rights are protected and that the law is enforced. An example of such lobbying is given in the next Management Focus, which looks at how Microsoft prompted the US government to start insisting that other countries abide by stricter intellectual property laws.

(Management Focus - see text)

Partly as a result of such actions, international laws are being strengthened. As we shall see in Chapter 5, the most recent world trade agreement, which was signed in 1994 by 117 countries, for the first time extends the scope of the General Agreement on Tariffs and Trade (GATT) to cover intellectual property. Under the new agreement, as of 1995 a council of the newly created World Trade Organization (WTO) is overseeing enforcement of much stricter intellectual property regulations. These regulations oblige WTO members to grant and enforce patents lasting at least 20 years and copyrights lasting 50 years. Rich countries had to comply with the rules within a year. Poor countries, in which such protection generally was much weaker, had 5 years' grace, and the very poorest have 10 years.²⁴ (For further details, see Chapter 5.)

One problem with these new regulations, however, is that the world's biggest violator--China--is not yet a member of the WTO and is therefore not obliged to adhere to the agreement. However, following pressure from the US government, which included the threat of substantial trade sanctions, in 1996 the Chinese government agreed to enforce its existing intellectual property rights regulations (in China, as in many countries, the problem is not a lack of laws; the problem is that existing laws are not enforced). During 1996 Chinese officials closed 19 counterfeit CD-ROM factories with a capacity of 30 to 50 million units a year. Still, according to the Business Software Alliance, a further 21 counterfeit CD-ROM factories were operating in China as of late 1996.²⁵

In addition to lobbying their governments, firms may want to stay out of countries where intellectual property laws are lax, rather than risk having their ideas stolen by local entrepreneurs (such reasoning partly underlay decisions by Coca-Cola and IBM to pull out of India in the early 1970s). Firms also need to be on the alert to ensure that pirated copies of their products produced in countries where intellectual property laws are lax do not turn up in their home market or in third countries. The US computer software giant Microsoft, for example, discovered that pirated Microsoft software, produced illegally in Thailand, was being sold worldwide as the real thing (including in the United States). In addition, Microsoft has encountered significant problems with pirated software in China, the details of which are discussed in the Management Focus.

Product Safety and Product Liability

Product safety laws set certain safety standards to which a product must adhere. Product liability involves holding a firm and its officers responsible when a product causes injury, death, or damage. Product liability can be much greater if a product does not conform to required safety standards. There are both civil and criminal product liability laws. Civil laws call for payment and money damages. Criminal liability laws result in fines or imprisonment. Both civil and criminal liability laws are probably more extensive in the United States than in any other country, although many other Western nations also have comprehensive liability laws. Liability laws are typically least extensive in less developed nations.

In the United States a boom in product liability suits and awards resulted in a dramatic increase in the cost of liability insurance. In turn, many business executives argue that the high costs of liability insurance are making American businesses less competitive in the global marketplace. This view was supported by the Bush administration. Former Vice President Dan Quayle once argued that the United States has too many lawyers and that product liability awards are too large. According to Quayle, the result is that product liability insurance rates are typically much lower overseas, thereby giving foreign firms a competitive advantage. In the United States, tort costs amount to about 2.4 percent of gross national product (GNP), three times as much as in any other industrialized country. So the cost of lawsuits does seem to put America at a competitive disadvantage.²⁶

In addition to the competitiveness issue, country differences in product safety and liability laws raise an important ethical issue for firms doing business abroad. When product safety laws are tougher in a firm's home country than in a foreign country and/or when liability laws are more lax, should a firm doing business in that foreign country follow the more relaxed local standards or should it adhere to the standards of its home country? While the ethical thing to do is undoubtedly to adhere to home-country standards, firms have been known to take advantage of lax safety and liability laws to do business in a manner that would not be allowed back home.

Contract Law

A contract is a document that specifies the conditions under which an exchange is to take place and details the rights and obligations of the parties involved. Many business transactions are regulated by some form of contract. Contract law is the body of law that governs contract enforcement. The parties to an agreement normally resort to contract law when one party feels the other has violated either the letter or the spirit of an agreement.

Contract law can differ significantly across countries, and as such it affects the kind of contracts an international business will want to use to safeguard its position should a contract dispute arise. The main differences can be traced to differences in legal tradition. Two main legal traditions are found in the world today--the common law system and the civil law system. The common law system evolved in England over hundreds of years. It is now found in most of Britain's former colonies, including the United States. Common law is based on tradition, precedent, and custom. When law courts interpret common law, they do so with regard to these characteristics. Civil law is based on a very detailed set of laws organized into codes. Among other things, these codes define the laws that govern business transactions. When law courts interpret civil law, they do so with regard to these codes. Over 80 countries, including Germany, France, Japan, and Russia, operate with a civil law system. Since common law tends to be relatively ill-specified, contracts drafted under a common law framework tend to be very detailed with all contingencies spelled out. In civil law systems, however, contracts tend to be much shorter and less specific, because many of the issues typically covered in a common law contract are already covered in a civil code.

The Determinants of Economic Development

The political, economic, and legal systems of a country can have a profound impact on the level of economic development and hence on the attractiveness of a country as a possible market and/or production location for a firm. Here we look first at how countries differ in their level of development. Then we look at how political economy affects economic progress.

Differences in Economic Development

Different countries have dramatically different levels of economic development. One common measure of economic development is a country's gross national product per head of population. GNP is often regarded as a yardstick for the economic activity of a country; it measures the total value of the goods and services produced annually. Map 2.1 summarizes the GNP per capita of the world's nations in 1997. As can be seen, countries such as Japan, Sweden, Switzerland, and the United States are among the richest on this measure, while the large countries of China and India are among the poorest. Japan, for example, had a 1997 GNP per head of $37,850, whereas China achieved only $860, and India $390. The world's poorest country, Mozambique, had a GNP per head of only $90, while the world's richest, Switzerland, came in at $44,320.27.

However, GNP per head figures can be misleading because they don't take into account differences in the cost of living. For example, although the 1997 GNP per head of Switzerland, at $44,320, exceeded that of the United States, which was $28,740, the higher cost of living in Switzerland meant that American citizens could actually afford more goods and services than Swiss citizens. To account for differences in the cost of living, one can adjust GNP per capita to account for differences in purchasing power. Referred to as a purchasing power parity (PPP) adjustment, this adjustment allows for a more direct comparison of living standards in different countries. The base for the adjustment is the cost of living in the United States. Table 2.1 gives the GNP per capita measured at PPP in 1997 for a selection of countries, along with their GNP per capita and their growth rate in GNP over the 1990 - 1997 time period. Map 2.2 summarizes the GNP per capita in 1997 for the nations of the world.

As can be seen, there are striking differences between the standard of living in different countries. Table 2.1 suggests that the average Indian citizen can afford to consume only 5.9 percent of the goods and services consumed by the average US citizen. Given this, one might conclude that, despite having a population of close to one billion, India is unlikely to be a very lucrative market for the consumer products produced by many Western international businesses. However, this is not quite the correct conclusion to draw, for India has a fairly wealthy middle class, despite its large number of very poor people.

Table 2.1:  PPP Index and GNP Data for Selected Countries

				GNP per Capita,		Annual Average
		GNP per capita		measured at PPP,		Growth in GDP,
	Country	1997 (US $)		1997 (US $)		1990 - 97 (%)
	Mozambique		90		520		6.9%
	India		390		1650		5.9%
	China		860		3570		11.9%
	Indonesia		1110		3450		7.5%
	Romania		1420		4290		0.0%
	Russia		2740		4190		-9.0%
	Mexico		3680		8120		1.8%
	Brazil		4720		6240		3.1%
	S. Korea		10550		13500		7.2%
	United Kingdom		20710		20520		1.9%
	Australia		20540		20170		3.7%
	Canada		19290		21860		2.1%
	Singapore		32940		29000		8.5%
	United States		28740		28740		2.5%
	Japan		37850		23400		1.4%
	Switzerland		44320		26320		- 0.1%

Source: World Bank. World Development Report 1998/99. Tables 1, 11. Oxford: Oxford University Press, 1999.

 

Gross National Product Per Capita 1997

Source: GNP per Head 1995. Map 30 "Gross National Product per Capita," John L. Allen, Student Atlas of World Geography, Dushkin/McGraw-Hill, 1999, p. 49.

A problem with the GNP and PPP data discussed so far is that they give a static picture of development. They tell us, for example, that China is much poorer than the US, but they do not tell us if China is closing the gap. To assess this, we have to look at the economic growth rates achieved by different countries. Table 2.1 gives the rate of growth in GNP achieved by a number of countries between 1990 and 1997. Map 2.3 summarizes the growth rate in GNP over the 1990 - 97 time period. Although countries such as China and India are currently very poor, their economies are growing more rapidly than those of many advanced nations. Thus, in time they may become advanced nations themselves and huge markets for the products of international businesses. Given their future potential, it may well be good advice for international businesses to start getting a foothold in these markets now. Even though their current contributions to an international firm's revenues might be small, their future contributions could be much larger. One might also note, however, that Table 2.1 tells us that the economy of Russia shrank substantially over the 1990 - 97 time period.

A number of other indicators can also be used to assess a country's economic development and its likely future growth rate. These include literacy rates, the number of people per doctor, infant mortality rates, life expectancy, calorie (food) consumption per head, car ownership per 1,000 people, and education spending as a percentage of GNP. In an attempt to estimate the impact of such factors upon the quality of life in a country, the United Nations has developed a Human Development Index. This index is based upon three measures: life expectancy, literacy rates, and whether average incomes, based on PPP estimates, are sufficient to meet the basic needs of life in a country (adequate food, shelter, and health care). The Human Development Index is scaled from 0 to 100. Countries scoring less than 50 are classified as having low human development (the quality of life is poor), those scoring from 50 - 80 are classified as having medium human development, while those countries that score above 80 are classified as having high human development. Map 2.4 summarizes the Human Development Index scores for 1995, the most recent year for which data is available.

Political Economy and Economic Progress

It is often argued that a country's economic development is a function of its economic and political systems. What then is the nature of the relationship between political economy and economic progress? This question has been the subject of a vigorous debate among academics and policymakers for some time. Despite the long debate, this remains a question for which it is not possible to give an unambiguous answer. However, it is possible to untangle the main threads of the academic arguments and make a few broad generalizations as to the nature of the relationship between political economy and economic progress.