mgt 207: international business · pdf file9/5/2017 · it stresses the primacy of...

MGT 207: International Business

BBA 5th SemesterMechi Multiple Campus

Bhadrapur, Jhapa

©Suman Ghimire

Unit 3: Global Business Environment

MMCBBA

12/21/2016 ©Suman Ghimire 2

In this unit, we discuss about❶ Political and legal systems; Actors in political and legal systems; Political risks; ❷ E-commerce and intellectual property rights; ❸ Government interventions and investment barriers; ❹ Cultural environment – concept, why culture matters in international business?; ❺ Regional economic integration – types, leading economic blocs; ❻ Emerging foreign markets; The changing demographics of the global economy; ❼ International monetary and financial environment –currencies and exchange rate systems; The floating exchange rate system.; Modes of payment in international trade; Global financial system; ❽ International economic institutions; WTO and free trade policies.

Political system

• A political system is a set of formal institutionsthat constitute a government.

• Political systems can be assessed according totwo dimensions: Collectivism And individualism.

• These dimensions are interrelated; systems thatemphasize collectivism tend toward totalitarian,whereas those that place a high value onindividualism tend to be democratic.

• However, a large gray area exists in the middle.• It is possible to have democratic societies that

emphasize a mix of collectivism andindividualism.

• Similarly, it is possible to have totalitariansocieties that are not collectivist.

• There are three major types of political systems: totalitarianism, socialism, and democracy


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Collectivismvs

Individualism

Political Ideology

Collectivism Individualism

It stresses the primacy of collective goalsover individual goals

It holds that interests of the individualshould take precedence over the interestsof the state.

Needs of society as a whole are generallyviewed as being more important thanindividual freedoms.

An individual should have freedom in hisor her economic and political pursuits.

Root: Greek philosopher Plato (427-347BC), argued that individual rights shouldbe sacrificed for the good of the majorityand that property should be owned incommon.

Root: Plato's disciple Aristotle (384-322BC) who argued that individual diversityand private ownership are desirable.private property receive the greatest careand therefore more highly productivethan communal property and will thusstimulate progress.


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Political system

Political System Description

Totalitarianism Form of government in which one person or political party exercises absolutecontrol over all spheres of human life and prohibits opposing political parties. Itseeks to control not only all economic and political matters but the attitudes,values, and beliefs of the citizen. Four major forms of totalitarianism exist in theworld today. Communist, theocratic, tribal, right wing totalitarianism.

Socialism Capitalists receive a disproportionate amount of society’s wealth relative toworkers. the pay of workers does not represent the full value of their labor. To fullycompensate for their labor, Marx advocated state ownership of the basic means ofproduction, distribution, and exchange (i.e., businesses).

Democracy It is characterized by two key features. Private property rights and Limitedgovernment. People and firms can acquire property, use it, buy or sell it, Theserights are important because they encourage individual initiative, ambition, andinnovation, as well as desire to accumulate wealth.State control and intervention in the economic activities of private individuals or firms is minimal.


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There are three major types of political systems. However, these categories are not mutually exclusive.

Economic system

EconomicSystem

Description

Market Economy Consistent with the ideology of Individualism, all productive activities are privatelyowned. Production is determined by the interaction of supply and Demand.Government intervention in the marketplace is limited, and economic decisionsare left to individuals and firms. Private ownership encourages vigorouscompetition, economic efficiency, and innovation.

CommandEconomy

Consistent with the ideology of Collectivism, all businesses are state owned for thegood of the society. In a command economy, state-owned enterprises have littleincentive to control costs and be efficient. Dynamism and innovation are absentfrom command economies. Instead of growing and becoming more prosperous,such economies tend to stagnate.

Mixed Economy It COMBINES state intervention and market mechanisms for organizing productionand distribution. In a mixed economy, certain sectors of the economy are left toprivate ownership and free market mechanisms while other sectors havesignificant state ownership and government planning. State-owned enterprisesoperate in key sectors such as transportation, telecommunications, and energy.


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Political ideology and economic systems are connected.

Legal system

Legal System Description

Common law(Case law)

Common law is based on tradition, previous cases, and custom. Judges in a commonlaw system have the power to interpret the law so that it applies to the uniquecircumstances of an individual case. Originated in England and spread to Australia,Canada, the United States, and former members of the British Commonwealth. It ismore flexible than other legal systems.

Civil Law(Code Law)

A civil law system is based on a detailed set of laws organized into codes. When lawcourts interpret civil law, they do so with regard to these codes. It is found in France,Germany, Italy, Japan, Turkey, and Latin America. Its origins go back to Roman law andthe Napoleonic Code. Judges under a civil law system have less flexibility than thoseunder a common law system. Judges in a civil law system have the power only toapply the law.

Theocratic Law Theocratic law is based on religious teachings and moral values. Islamic law is widelypracticed, found mainly in the Middle East and North Africa. Because It is seen divinelyordained, it is relatively static and absolute. In Islamic law, payment or receipt ofinterest, is considered sinful and therefore outlawed by Koran. Most Muslim countriescurrently maintain a dual system, wherein both religious and secular courts coexist.

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It refers to the rules, or laws, that regulate behavior along with the processes bywhich the laws are enforced

Actors of Political and Legal system

Actors Description

Government It is the most important actor, operating at national, state, and locallevels. It has the power to enact and enforce laws. It strongly influencehow firms enter host countries and how they conduct business there.Governments regulate international business activity through acomplex system of institutions, agencies, and public officials such asMinistry of Foreign Affairs, Ministry of Finance, and the Export andImport Controls Bureau.

InternationalOrganizations

World Trade Organization, the United Nations, and the World Bankstrongly influence international business. They facilitate free and fairtrade, providing administrative guidance and financial support.

RegionalEconomic Blocs

Regional trade organizations, such as EU, NAFTA, and ASEAN, aim toadvance the economic and political interests of their members. Theyenacts and enforces laws and regulations that directly affect business.

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Actors play great role in transforming political and legal system and influencing globalbusiness environment.

Actors of Political and Legal system

Actors Description

SpecialInterestGroups

Special interest groups (such as OPEC) serve the interests of particularcountries, industries, or causes. Special interest groups engage in politicalactivity to advance specific causes, ranging from labor rights toenvironmental protection.For Example: Labour unions (US Steel workers union opposed imports ofsteel from China.)

CompetingFirms

Rival domestic firms with a strong presence in the host country naturallyhave an interest in opposing the entry of foreign firms into the localmarket and may lobby their government for protection.For example: U.S. Automakers opposed BMW’s construction of a factory inSouth Carolina. However, the state Government supported the BMWfacility on the grounds that it would generate jobs and increase taxrevenues.

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Political Risk• Political risk has been defined as the likelihood that

political forces will cause drastic changes in a country'sbusiness environment that adversely affect the profit andother goals of a business enterprise.

• Business environment may be affected by social unrestsuch as strikes, demonstrations, terrorism, and violentconflict, political revolution.

• Such unrest is more likely to be found in countries– where there is more than one ethnic nationality, in countries– where competing ideologies are battling for political control– where economic mismanagement has created high inflation and

falling living standards.

• Social unrest can result in abrupt changes in governmentand government policy which tends to have negativeeconomic implications for the profit goals of businessenterprises.


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Political Risk• For example, in the aftermath of the 1979 Islamic revolution in Iran, the

Iranian assets of numerous U.S. companies were seized by the new Iraniangovernment without compensation. A change in political regime can result inthe enactment of laws that can be less favorable to international business.

• For example: As a move against American imperialism, Hugo Chavez increasedthe royalties foreign oil companies operating in Venezuela have to pay thegovernment from 1 to 30 percent of sales.

• There are different forms of Political risks such as– Government Takeover of Corporate Assets,– Embargoes (Official ban on export to or import from a particular countries, political punishment)– Sanctions (type of trade penalty imposed on countries in the form of tariffs, quota, duties etc.)– Boycotts against Firms or Nations, (voluntary refusal to use the product of particular company or

nation; example France boycotting McDonald, as an anti-globalization movement.)– War, Insurrection, and Violence, Terrorism

• The overall attractiveness of a country as a potential market or investment site for an international business depends on balancing the benefits, costs, and risks associated with doing business in that country. Generally, the costs and risks associated with doing business in a foreign country are typically LOWERin economically advanced and politically stable democratic nations and GREATER in less developed and politically unstable nations.


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What is Intellectual Property Rights?

• Intellectual property is the product of intellectual activity, such ascomputer software, a screenplay, a music score, or the chemical formulafor a new drug.

• It refers to ideas or works created by individuals or firms and includes avariety discoveries and inventions; artistic, musical, and literary works;and words, phrases, symbols, and designs.

• Intellectual property rights refers to the legal claim through which theproprietary assets of firms and individuals are protected fromunauthorized use by other parties.


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Examples of Intellectual Property Rights

• Trademarks, copyrights, and patents are examples of intellectualproperty rights.

• Trademarks are distinctive signs and indicators that firms use toidentify their products and services.

• Copyrights grant protections to the creators of art, music, books,software, movies, and TV shows.

• Patents grant exclusive right to manufacture, use, and sellproducts.


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Philosophy: Intellectual Property Rights

• In 1995, the WTO’s agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) was approved by approximately 150 WTO member countries.

• The philosophy behind intellectual property laws is to reward the originator of a newinvention, book, musical record, clothes design, restaurant chain, and the like, for hisor her idea and effort.

• Such laws stimulate innovation and creative work.

• They provide an incentive for people to search for novel ways of doing things, andthey reward creativity. For example,

• In the pharmaceutical industry, a patent will grant the inventor of a new drug a 20-yearmonopoly in production of that drug. This gives pharmaceutical firms an incentive toundertake the expensive, difficult, and time-consuming basic research required togenerate new drugs (it can cost $800 million in R&D and take 12 years to get a newdrug on the market).

• Without the guarantees provided by patents, companies would be unlikely to committhemselves to extensive basic research.

• Weak enforcement encourages the piracy (theft) of intellectual property.


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Intellectual Property Rights

• Intellectual property rights are notguaranteed equally in all the countries.

• China and Thailand have been amongthe worst offenders in Asia.

• Piracy in music recordings COSTS theindustry more than $4.5 billion annually.

• Piracy in personal computer softwarecost the industry equal to $51.4 billion in2009

• Regional piracy rates for software varyfrom region to region.

• The worst region was Central andEastern Europe where the piracy ratewas 64 percent.

• International business firm should lobbytheir respective governments to pushfor international agreements to ensurethat intellectual property rights areprotected.


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E-commerce• E-commerce drives the firm’s globalization efforts by helping it BEAT geography

and time zones, and do business around the world all day, every day.

• It LEVELS the playing field for all types of firms, large and small. E-commercegreatly enhances competitive advantages in the global marketplace.

• E-business provides many benefits.

1. It increases productivity and reduces costs in worldwide value-chain activities throughonline integration and coordination of production, distribution, and after-sale services.

2. It creates value for existing customers and uncovers new sales opportunity.

3. E-business facilitates and improves the flow of information and knowledge throughoutthe firm’s worldwide operations.

4. Internet enhances the ability to interact with customers, suppliers, and partnersworldwide.

5. The firm can accommodate real-time changes in market conditions almost as quickly as they occur. Managers can make instantaneous changes to strategies and tactics in value-chain activities.


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E-commerce• Most countries lack adequate legal protections for E-commerce.

• Individuals or firms that place information, photographs, or music online may be violating the intellectual property laws

• Consumers who use the Internet to make purchases with credit cards may risk identity theft and fraud.

• Taxation of international e-commerce is complex because of the difficulty of defining merchandise sold online. (Are they selling product or service?)

• E-commerce can also circumvent tariffs and other trade barriers. Most e-commerce is free ofcustoms duties because it is too difficult to apply them. A related problem is identifying thelocation of a sale. For example: A customer in Japan buys software from Microsoft’s Web site,which is based in the United States, does the sale originate in Japan or the United States?

• Inadequate legal frameworks are hindering the growth of global ecommerce.

• E-commerce laws are evolving differently in different countries. The resulting inconsistencycreates conflicts between national jurisdictions. When creating e-commerce law, somegovernments favor strong control and regulation. Others opt for a liberal. Those who favor amore liberal approach argue the Internet has the potential to transform national economies andease global poverty.

• Governments must devise frameworks that ENSURE The SECURITY of electronic payment systems and the privacy of online data.


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Government Interventions and Investment Barriers


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U.S. Tariffs on Tier Imports from China

• Free trade refers to a situationin which a government doesnot attempt to restrict whatits citizens can buy from or sellto another country.

• However, the political reality ofInternational trade is not freetrade oriented.

• Although many nations arenominally committed to freetrade, they tend to INTERVENEin international trade toprotect the interests ofpolitically important groups orpromote the interests of keydomestic producers.

Tariffs


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Tariff is a tax commonly levied on imports. It is of two kinds.

Specific Tariffs is levied as fixed charge for each unit of a goodimported. Example: $3 per barrel of oil

Ad valorem tariffs are levied as a percentage of the value of theimported product.

In most cases, tariffs are placed on imports to protect domesticproducers from foreign competition by raising the price ofimported goods;

Government Intervention

Tariffs

Subsidies

Import Quotas & VER

Local Content Requirement

Administrative Policies

Antidumping Policies

Tariffs


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Who suffers? Who Gains?In 2002 the U.S. government placed an ad valorem tariff of 8 percent to 30percent on imports of foreign steel. The idea was to protect domestic steelproducers from cheap imports of foreign steel. The effect, however, was to raisethe price of steel products in the United States between 30 and 50 percent. Anumber of U.S. steel consumers, ranging from appliance makers to automobilecompanies, objected that the steel tariffs would raise their costs of productionand make it more difficult for them to compete in the global marketplace.

o Government ...... Why? (The tariff increases governmentrevenues.).

o Domestic producers ........ Why? (Tariff affords them someprotection against foreign competitors by increasing the cost ofimported foreign goods)

o Consumer ............ Why? (Restriction of supply raises domesticprices.)

Conclusion: Effect of Import tariffs.1. Tariffs are generally pro-producer and anti-consumer.2. Import tariffs reduce the overall efficiency of the world

economy because a protective tariff encourages domestic firmsto produce products at home that, in theory, could be producedmore efficiently abroad. Inefficient utilization of resource!!


Tariffs

Subsidies

Import Quotas & VER




Subsidies


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A subsidy is a government payment to a domestic producer.Subsidies take many forms, such as cash grants, low-interest loans, taxbreaks, and government equity participation in domestic firms.

By lowering production costs, subsidies help domestic producers in twoways:(1) competing against foreign imports and (2) gaining export markets.

• According to the World Trade Organization, in the mid-2000s countriesspent some $300 billion on subsidies, $250 billion of which was spentby 21 developed nations. During financial crisis, some developednations gave $45 billion in subsidies to their automobile makers.

• Agriculture tends to be one of the largest beneficiaries of subsidies inmost countries. Subsidies historically were given to Boeing (tax crediton R&D) and Airbus (Government loan) as well to help them lower thecost of developing new commercial jet aircraft.

• Many subsidies are not that successful at increasing the international competitiveness of domestic producers. (Case: Japan Wheat ). Rather, they tend to protect the inefficient!


Tariffs

Subsidies

Import Quotas & VER




Import Quotas & VER


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An import quota is a direct restriction on thequantity of some good that may be importedinto a country. For example, the United Stateshas a quota on cheese imports.

The international agreement governing the imposition of import quotas on textiles, the Multi-Fiber Agreement, expired in December 2004.

A common hybrid of a quota and a tariff is known as a tariff rate quota. Under tariff rate quota, a lower tariff rate is applied to imports within the quota than those over the quota.

Import Quotas & VER


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• A voluntary export restraint (VER) is a quota on trade imposed bythe exporting country, typically at the request of the importingcountry's government.

• Example: limitation on auto exports to the United Statesenforced by Japanese automobile producers in 1981.

• A response to direct pressure from the U.S. government, this VERlimited Japanese imports to no more than 1.68 million vehiclesper year. The agreement was revised in 1984 to allow 1.85 millionJapanese vehicles per year. The agreement was allowed to lapsein 1985.

• Foreign producers agree to VERs BECAUSE they fear moredamaging punitive tariffs or import quotas might follow if theydo not. Agreeing to a VER is seen as a way to make the best of abad situation.

• Both import quotas and VERs benefit domestic producers bylimiting import competition. As with all restrictions on trade,quotas do not benefit consumers. An import quota or VER alwaysraises the domestic price of an imported good.


Tariffs

Subsidies

Import Quotas & VER






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• It is a requirement which specifies that some specific fraction of agood be produced domestically.

• The requirement can be expressed either in physical terms (e.g.,75 percent of component parts for this product must beproduced locally) or in value terms (e.g., 75 percent of the valueof this product must be produced locally).

• Local content regulations have been widely used by developingcountries to promote domestic industry producing componentparts.

• They have also been used in developed countries to try to protectlocal jobs and industry from foreign competition.

• Example: Buy America Act which specifies that governmentagencies must give preference to American products whenputting contracts for equipment out to bid unless the foreignproducts have a significant price advantage. The law specifies aproduct as "American" if 51 percent of the materials by value areproduced domestically.


Tariffs

Subsidies

Import Quotas & VER






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• It is an informal instrument of government intervention to restrictimports and boost exports.

• Administrative trade policies are bureaucratic rules designed tomake it difficult for imports to enter a country.

• Japanese are the masters of this trade barrier.• In recent decades Japan's formal tariff and nontariff barriers have

been among the lowest in the world. However, informal barriersrestricts import.

• For example, at one point the Netherlands exported tulip bulbs toalmost every country in the world except Japan. In Japan, customsinspectors insisted on checking every tulip bulb by cutting itvertically down the middle, and even Japanese ingenuity could notput them back together.

• For example, France once required that all imported videotaperecorders arrive through a small customs entry point that was bothremote and poorly staffed. The resulting delays kept Japanese VCRsout of the French market until a VER agreement was negotiated.

• Administrative instruments benefit producers and hurt consumers,who are denied access to possibly superior foreign products.


Tariffs

Subsidies

Import Quotas & VER




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