Impact of Political Systems & Legal Frameworks on Economies & International Business - Pro, Study notes of Introduction to Business Management

Download Impact of Political Systems & Legal Frameworks on Economies & International Business - Pro and more Study notes Introduction to Business Management in PDF only on Docsity! Chapter 6  Country risk? o Exposure to potential loss or adverse effects on company operations and profitability caused by developments in a country’s political and/or legal environments  Political Systems o totalitarianism  Seeks to control not only all economic and political matters but the attitudes, values and beliefs of its citizenry. Led by a dictator  Either theocratic (religion-based) or secular  Power sustained via secret police, propaganda, regulation of free discussion and criticism  Middle East and Africa o socialism  Capital and wealth vested in the state and used primarily as a means of production for use rather than for profit  Group welfare > Individual welfare  Gov controls the basic means of production, distribution and commercial activity  Social Democracy (West. Europe, Brazil, India): frequent gov. intervention in the private sector, higher corporate income tax o democracy (2 key features)  Private Property Rights : the ability to own property and assets and to increase one’s assets base by accumulating private wealth. Gov. devise laws that protect property rights and therefore encourage individual initiative, ambition and innovation  Limited government : Gov. perform only essential functions that serve all citizens, such as national defense, maintaining law&order, foreign relations, providing basic infrastructure  Democracy = greater economic freedom = higher economic living standards o How political systems influence economic systems  command economy /centrally planned economy (totalitarianism)  State make all decisions regarding what goods and services, quantity, prices & distribution the country produces  State owns all property, and allocates resources based on which industries they wanna develop  Central planning is less efficient than market forces in getting supply and demand  China, India, Russia, Eastern Europe, Middle East  market economy (socialism)  Decisions result from the interaction of supply and demand – market forces  Individuals and firms are decision-makers; Gov. intervention is limited  mixed economy (democracy)  Has features of both command & market economy  Combine state intervention and market mechanisms  Legal Systems o Common/Case Law (England, Australia, Canada, USA)  Basic of law is tradition, past practices and legal precedents set by courts via interpretation of statutes, legislation and past rulings  Judges have much power to interpret laws based on circumstances of indv. Cases => common law is relatively flexible o Civil Law (France, Germany, Italy, Japan, Turkey, much of Latin America)  Based on an all-inclusive system of laws that have been ‘codified’ – clearly written  Laws are more ‘cast in stone’=> less flexible Key Difference: civil law is judicial in origin & based on court decisions; civil law is legislative in origin & based on legislatures o Religious (Theocratic) Law (Hindu, Jewish, Islamic law)  Influenced by religious beliefs, ethical codes, moral values  Most Muslim countries maintain a dual system (religious & secular courts coexist) o Socialism Law (China, former Soviet Union, few Africa)  Based on Civil Law, with elements of socialist principles that emphasize state ownership of property  Loose treatment of property and intellectual property rights o Mixed Systems (combine 2 or more legal systems)  Actors in Political and Legal Systems o Government: public sector, operating at federal & local levels o International Organizations: World Trade Organization, United Naations, World Bank o Regional Economic Blocs: EU, NAFTA, ASEAN o Special Interest Groups: labor unions, environmental groups o Competing Firms: locals oppose foreign and lobby their governments  Types of Country Risk Produced by the Political System o Government takeover of Corporate Assets  Confiscation: seizure of foreign assets without compensation  Expropriation: seizure of foreign assets with compensation  Nationalization: seizure of an entire industry, with or without compensation  Privatization: selling of state-owned enterprises to private interests o Embargoes and Sanctions (often during wartime)  Sanctions: ban on international trade  Embargoes: official bans on exports or imports o Boycotts (voluntary refusal to engage in commercial dealings) against Firms or Nations o War, Insurrection, and Revolution o Terrorism  Types of Country Risk Produced by the Legal System o Country risk arising from the host country legal environment  Foreign investment laws: Nations impose restrictions on inward FDI, which affect the type of entry strategy, operations and performance  Controls on operating forms and practices  Marketing and distribution laws: determine which practices are allowed in advertising, promotion & distribution  Laws regarding income repatriation: limit the amount of net income that firms can transfer back to home country  Environmental laws: to preserve natural resources, fight pollution, ensure health&safety  Contract laws: (5 types) sale of goods or services, distribution via foreign intermediaries, licensing and franchising, FDI, joint ventures  Internet and e-commerce regulations: new frontier in legal systems o Country risk arising from the home country legal environment  Extraterritoriality: application of home-country laws to persons or conduct outside of national borders  The Foreign Corrupt Practices Act (1977): made it illegal to offer bribes to foreign parties. Definition of ‘bribe’ is unclear. Foreigners are not so constrained  Anti-boycott regulations: prevent companies from participating in restrictive trade practices or boycotts imposed by foreign countries  Accounting and reporting law: differ widely around the world  Transparency: degree to which firms regularly reveal substantial financial & account info. Differ widely. The higher the better  Ethical values and practices: Ethics refers to moral behavior. Corruption is an extreme form of unethical behavior (Bribery). Common in developing countries  Managing Country Risk o Export-led development: encouraging the development of export-intensive industries. Win  How Firms Should Respond to Government Intervention o Strategies for Managers  Research to gather knowledge and intelligence  Choose the most appropriate entry strategies  Take advantage of foreign trade zone  Foreign trade zone: area within a country that receives imported goods for assembly or other processing, and subsequent re-export  Maquiladoras: export-assembly plants in northern Mexico that produce finished products destined for the US  Seek favorable customs classifications for exported products  Take advantage of investment incentives & other gov. support  Lobby for freer trade and investment Chapter 8  Regional Integration and Economic Blocs o Regional Economic Integration: growing economic interdependence that results when countries within a geographic region form an alliance aimed at reducing barriers to trade and investment. 40% of world trade o Regional Economic Integration bloc/economic bloc: geographic area that consists of 2 or more countries that agree to pursue economic integration o Free trade agreement: arrangement between 2 or more country to reduce or eliminate tariffs, quotas and other barriers  Types of Regional Integration o Free trade area: simplest, most common. Member agree to gradually eliminate tariffs and non tariff trade barriers but maintain their own barriers with non member. NAFTA, ASEAN o Custom Union: similar to free trade area, but common external tariffs to non-member. MERCOSUR o Common Market: similar to custom union, except product, services and factors of production (capital, labor, tech)can move freely among members. Pre-1992 European Economic Community o Economic Union: members also aim for common fiscal and monetary policies, standardized commercial regulations, and social policy. European Union (EU) o Political Union: perfect unification, remains an ideal, yet to be achieved  Leading Economic Blocs o The European Union (27 members)  Market access: tariffs and most nontariff barriers eliminated  Common market: barriers of factors of production (capital, labor, tech) removed  Trade rules: Customs procedures and regulations eliminated  Standards harmonization: harmonizing tech standards, regulations..  Common fiscal, monetary, taxation, social welfare policies (long-run)  New members from Eastern bring low-cost manufacturing sites but take decades to catch up to wealthier countries’ levels o European Free Trade Association (EFTA) (Iceland, Leichtenstein, Norway, Switzerland)  Free trade and strengthens economic relations with other countries o North American Free Trade Agreement (NAFTA)  Was facilitated by the maquilladora program  Greatly benefited Mexico o El Mercado Comun del Sur (MERCOSUR)  Launched in 1991. 4 largest members (Argentina, Brazil, Paraguay, Uruguay) account for 80% of South America’s total GDP o The Caribbean Community (CARICOM) o Comunidad Andina de Naciones (CAN) o Association of Southeast Asian Nations (ASEAN): large economic differences between members o Asia Pacific Economic Cooperation (APEC) o Australia and New Zealand Closer Economic Relations Agreement (CER) o Economic Integration in the Middle East and Africa  Why Countries Pursue Regional Integration o Expand market size o Achieve scale economies and enhanced productivity o Attract investment from outside the bloc o Acquire stronger defensive and political posture  Success Factors for Regional Integration o Economic similarity o Political similarity o Similarity of culture and language o Geographic proximity  Drawbacks and Ethical Dilemmas of Regional Integration o Trade diversion (more trade inside the bloc, less outside the bloc) o Reduced global free trade o Loss of national identity o Sacrifice of autonomy o Transfer of power to advantaged firms / failure of small or weak firms (less protection) o Corporate restructuring and job loss  Management Implications of Regional Integration o Internationalization by firms inside the economic bloc o Rationalization of operations o Mergers and acquisitions o Regional products and marketing strategy o Internationalization by firms from outside the bloc (best way to enter a bloc is via FDI) o Increased collaborative ventures Chapter 10  Currencies and Exchange Rates in International Business o Currency risk: the risk that arises from changes in the price of one currency relative to another, complicating international transaction o Exchange rate: the price of one currency expressed in terms of another o Convertible and Nonconvertible Currencies  Convertible Currency: can be exchanged by other currencies. Most convertible = hard currencies (U.S. dollar, Jap yen, Canadian dollar, british pound, euro)  Nonconvertible currency: domestic transactions not acceptable internationally  Capital flight: sale of holdings in a nation’s currency into a foreign currency o Foreign exchange: all forms of money that is trade internationally o Foreign exchange market: global marketplace for buying and selling national currencies. No fixed location o Exchange rates are in constant flux  Example: Before 240 yen = 1 US Dollar. Now 120 yen = 1 USD Dollar => The Yen appreciates (its value increases because less Yen can buy 1 dollar). From the U.S. point of view: export to Japan increases (cheaper for Japanese to buy U.S. products), imports of Japanese products (i.e. Jap export to U.S.) decreases (1 dollar can buy less Japanese stuff now)  Exchange rates are determined by supply and demand (greater supply, lower price; greater demand, higher price). Factors: o Economic Growth: increase in value of goods and services produced by an economy  Measured as annual increase in real GDP  Central bank: monetary authority that regulates the money supply, issues currency, manages exchange rate o Interest Rates and Inflation  Inflation occurs when demand grows more rapidly than supply & central bank increases money supply faster than output  Interest rates & Inflation are positively related (high inflation = high I; oversupply of money = rising inflation = falling currency) o Market Psychology (unpredictable behavior of investors)  Investors engage in herding behavior (mimic each others’ actions / copying) and/or momentum trading (buy stocks whose prices have been rising and sell stocks whose prices have been falling) o Government Action  Trade surplus: exports > imports , net inflow of foreign exchange (+)  Trade deficit: imports > exports, net outflow of foreign exchange (-)  Devaluation: government action to reduce the value of its currency by buying and selling currencies in foreign exchange market. Aim to reduce the trade deficit  Balance of payments: annual accounting of all economic transactions of a nation  Development of the Modern Exchange Rate System o Bretton Woods Agreement (1944): U.S. government agreed to buy and sell gold to maintain the fixed exchange rates and minimize currency risk. Broke down. Created IMF and World Bank o The Exchange Rate System today  Floating exchange rate system: value of currency floats daily according to market forces (supply and demand), little government intervention (Europe, Japan, US).  Fixed exchange rate system: the value of a currency is set at a specified rate to the value of another currency (China, African). Government intervention. (used in Bretton Woods Agreement)  The International Monetary and Financial Systems o International Monetary system: institutional framework, rules and procedures by which national currencies are exchanged for one another o Global financial system: collection of financial institutions that facilitate and regulate the flows of investment and capital funds, incorporating banking systems, stock/bond markets, market of bank deposits  Contagion: tendency of a financial crisis in one country to spread to others (S.E. Asia)  Key Players in the Monetary and Financial Systems o The Firm o National Stock Exchanges and Bond Markets o Commercial Banks  Investment banks, merchant banks, private banks, offshore banks, commercial banks ( o Central Banks  Buying and selling money in the banking system  Control interest rates  Conduct monetary intervention (buying and selling government securities to maintain a certain exchange rate) o The Bank for International Settlements (supporting stability) o International Monetary Fund  International agency that attempts to stabilize currencies by monitoring exchange systems of member countries and by lending money to developing  Special Drawing Right (SDR): unit of account/reserve asset, a type of currency used by central banks to supplement their existing reserves in transactions with the IMF  Play an important role in addressing currency crisis (currency depreciates sharply), banking crisis (losing confidence => widespread withdrawals from banks), foreign debt crisis o World Bank: provides loans and technical assistance to low and middle income countries, reduce poverty