International Business

Environment
associate professor Radu
Muetescu, PhD
radu.musetescu@gmail.com

North Korea versus South Korea

(at night from satellite)

The tipology of the social /

political / economic systems
capitalism (and the market economy)
socialism (and the planned economy)
some attempted hybrids: market
socialism (or state capitalism) and
economic fascism (corporatism)
interventionism

The core difference between human

societies and national economies in the
international arena = the attitude of the
governments towards private property
rights (= the property regime) such an
institutional framework is the core
determinant of how individuals act and
interact
private
property
versus
property (state property)

common

Private property
is natural derives from the scarcity of goods that
are its object
allows capitalization = the value of future cash
flows can be taken into account in order to assess the
present capital value = a market value for the capital
goods (see the stock exchange)
align the control incentive with saving incentive
= the owner is the only one who can maximize the
present and future cash flows in order to preserve the
capital value of his good;
private property is void unless there is also free trade
in it and in its services

Capitalism
= the political and economic system where the proprerty rights
are private and there is also the freedom to exchange
a capitalist system = is naturally competitive, generate
competition (= the market economy) the economics goods
are usually held by those who value them most (and have the
ability to pay their price)
production is oriented towards the satisfaction of the
consumer preferences of the population it is anarchic =
each entrepreneur will assume an economic risk for his
investment
entrepreneurial decision = taken under uncertainty = imply
discoveries = there is always a process of creative destruction
= business failures are natural

World Economic Forum 2011

- the protection of private property rights in
the world
The most protected:

The least protected:

1.
2.
3.
4.
5.
6.
7.
8.

79. Romania

Switzerland
Finland
Singapore
Hong Kong
Sweden
Luxembourg
Austria
Germany

133.
134.
135.
136.
137.
138.
139.

Bosnia & Heregovina

Argentina
Ukraine
Chad
Bolivia
Zimbabwe
Venezuela

The market economy

scarcity the need for choice among competing
uses
the market = the allocation of economics goods is
made through the mechanism of free supply and
demand (free prices)
an economic good is employed in the most
profitable use identified by market participants
(everyone attempts to maximize his profit)
from a aggregate perspective, economic goods are
allocated towards the most profitable uses =
determines the maximization of the use of
economics goods

Collective property
either natural (and compatible with
capitalism) or imposed (by the state =
state property = socialism)
collective ownership = generate the
tragedy of the commons = each one
attempts to maximize his own gain so
they consume the capital value of the
commonly held goods

State ownership
state ownership implies the centralization
of the allocation of resources economic
planning = prices are fixed by a central
planner + the quantities are established
through plans
the state allocate the resources (including
credit, labor or currency) after political
criteria, ignoring profit and loss = economic
planning

Impossibility of
Economic Calculation in socialism
= as long as prices are politically fixed in
order to reach political objectives at some
point they will ignore the real scarcity of
resources as well as consumer preferences
Prices versus costs: does the price is a sum
of costs and a profit?

From a production
perspective
the concepts of profit / loss are arbitrary / void;
however, real scarcity remain (government
decrees cannot eliminate scarcity) = the criterion
for the allocation of
resources is however
political and not economic
no differences in motivation and rewards (= same
wages for the education / training) = no incentive
to excel, to be more professional than the others
state companies have usually the objectives to
avoid firings, promote hirings, national war effort
and so on.

as a general rule, socialist economies have

rejected private property and especially
foreign ownership however, these
economies were involved in trade and
investments
with
other
companies
sometimes, huge opportunities for profit

The impossibility of market

socialism (MS)
= can we have a market economy without
capitalism?
MS = defined as a system where ownership belongs
to the state but prices are free = state enterprises
had the liberty to negotate prices (ex. former
Yugoslavia, up to a point)
the failure of planning cannot be ignored =
without a free capital goods market and the liberty
to fail / start a new business no correct incentives

Economic fascism
= a particular form of planning and, fundamentally,
socialism = while property rights are formally private,
their exercise is somehow socialized the state plans
production and fixes prices and the companies are
obliged to honor these (especially as the major client /
supplier is the state)
the private business decision is denied
the only real liberty for private entrepreneurs = the
liberty to fail
all private producers are members of state imposed
cartels = they are told what and how much to produce

Dilemma: is the economic success of

contemporary China a counterexample of
the impossibility of economic calculation in
socialism?
Paradoxically, no. It seems to be even an argument.
the economic performance of China in the last 35 years is
due to the emergence of private property and freedom of
exchange and the engine of growth have been the foreign
direct investments (FDI).
1978: special economic zones + open cities:
- allowed FDI (initially, through joint ventures);
- some national legislation didnt apply (more business
friendly);
- fiscal facilities;

China
- a country, two systems: while Hong Kong is among the
freest market economies in the world, mainland China still
experiences state ownership and planning
- onshore jurisdictions = an area inside the borders of a
country where there is a special legislation with different
objectives (like free ports and son on)
- offshore jurisdictions = an autonomuous or independent
jurisdiction, usually in tropical islands, where there are
manifestly different legislations (commercial, fiscal, so on)