Legal system of a country greatly influences the way business operates. Political and legal systems, to certain extent, determine the kind of economic system a country has and it governs the business activities.
The government is the formal institutions and processes that are responsible for making and enforcing the collective decisions for society and the system of government in a country is called political system.
Capitalism and socialism are to major forms of political systems. Western countries have at least three political ideologies: conservatism, liberalism and socialism.
Conservatives are traditionalists, liberals give importance to individualism while socialists favour social equality and common good. In between the extremism of individualism and collectivism, there lies a large grey area. Most countries today fall within this grey area.
Collectivists stress the primacy of collective goals over individual goals. Common good of society as a whole is more important to them against individual welfare. Today, we see this character in socialists. Socialists believe state should own the country’s means of production, distribution and exchange so that all can benefit.
Extreme socialists follow communism made popular by Karm Marx while others are social democrats. Communists believe socialism is achieved through violent revolution while social democrats have followed the democratic means to achieve the socialist goal.
These political ideologies determine how an individual in a country achieves his or her economic goal. Though rarely used in this book, capitalist believe on individualism and promote that individuals should have the right to economic activities, freedom and self-expression and letting people pursue their own self-interest in order to achieve the best overall good for society.
The capitalists and social democrats have similar political ideals with regards to governance and these democratic ideas swept the communism from many states and popularised free market economy (introduced by Smith and Ricardo).
The radical socialists, the communists – object the theory of free market economy. They regard multinational companies as an instrument of imperialist domination and a tool for exploiting host countries to the exclusive benefit of their capitalist-imperialist home countries.
The fall of Berlin wall and the collapse of Soviet Union were major causes for the radical views to retreat. Many nations who shifted from radical ideology to free market economy have performed better in economic development.
Free market economy opened doors for Foreign Direct Investment (FDI) encouraging the multinational companies invest in developing countries. The investments, until today, have increased the efficiency of the host economy. However, no countries so far have adopted the absolute free market economy form explained by Smith and Ricardo. Even USA, the leader of free market economy, has not adopted the theory in pure form.
Countries choose to go for pragmatic nationalism, where FDI is accepted balancing the negative and positive effect of the FDI. Only in areas where national interests are not affected, countries accept FDI.
There are still many countries not being able to stabilise their economy as they make transition from closed economy to free market economy and from socialism/communism to democracies. This political instability is a concern for international business operating in the emerging market economies.