the political and economic environment. economic and political systems and policies are interrelated...

The Political and Economic Environment

• Economic and political systems and policies are interrelated and always changing.

• There are many different types of economic and political systems.

• These systems play a large role for a business that is deciding which international markets to pursue.

Introduction

• Countries active in international trade naturally have an interest in protecting politically powerful elements in their own economies. As such, trade policies and economic controls have come into existence, creating both tariff and nontariff barriers to free trade.

Introduction

Stability of Government Policies

• Five main political causes of international market instability – Some forms of government seem to be

unstable– Changes in political parties during elections

can have major effects on trade conditions– Nationalism– Animosity targeted toward specific countries– Trade disputes

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Worst Case Political Risks

• Confiscation – the seizing of a company’s assets without payment

• Expropriation – where the government seizes an investment but makes some reimbursement for the assets

• Domestication – when host countries gradually cause the transfer of foreign investments to national control and ownership through a series of government decrees – Mandating local ownership – Greater national involvement in a company’s

management– An example of domestication is given on the next

slide 5

Domestication - Example

• A good example of domestication can be seen in the nationalization of Air-India (formerly called as Tata Airlines). Tata owned and operated Air-India and Indian Airlines until they were nationalized by the Indian Government, against Tata’s wishes. Very recently, the Indian government has asked Mr. Ratan Tata, chairman of the Tata group, to head an advisory panel to revive Air India. http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ag_NJBLk6TVo

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http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ag_NJBLk6TVo

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ag_NJBLk6TVo

Political and Social Activists (PSAs)

• Not usually government sanctioned • Can interrupt the normal flow of trade• Range from those who seek to bring

about peaceful change to those who resort to violence and terrorism to effect change– Worldwide boycott of Nestle products

• The Internet has become an effective tool of PSAs to spread the word – Protest rallies against the U.S. – Iraq War

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Cyberterrorism and Cybercrime (1 of 2)

• The internet is a vehicle for terrorist and criminal attacks to inflict damage on a company with little chance of being caught– By foreign and domestic antagonists

• It is hard to determine if a cyber attack has been launched – By a rogue state – A terrorist– A hacker as a prank

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Cyberterrorism and Cybercrime (2 of 2)

• Each wave of viruses – Gets more damaging – Spreads so rapidly that considerable harm is

done before it can be stopped

• Tools for cyberterrorism - can be developed to do considerable damage – To a company, – An entire industry– A country’s infrastructure

• Mounting concern over the rash of attacks– Business leaders and government officials

addressed a Group of Eight conference

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Nongovernmental Organizations (NGOs)

• Nongovernmental organizations (NGOs) are increasingly affecting policy decisions made by governments– Protests– Lobbying– Collaborations with governmental organizations

• Many also are involved in mitigating much of the human misery plaguing parts of the planet– Red Cross and the Red Crescent– Amnesty International– Oxfam– UNICEF– Care and Habitat for Humanity

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Violence and Terrorism

• International warfare is fast becoming obsolete as the number of wars have declined steadily since the end of the Cold War

• The greatest threat to peace and commerce for the twenty-first century remain civil strife and terrorism

• Tourism and International education are two industries that have been affected by terrorism.

• An example of terrorism is the attacks by Sudanese terrorists on ships.

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Politically Sensitive Products and Issues

• Politically sensitive products– Are perceived to have an effect on the

environment, exchange rates, national and economic security, and the welfare of people

– Are publicly visible or subject to public debate

• Health is often the subject of public debate, and products that affect or are affected by health issues can be sensitive to political concern

• The European Union has banned hormone-treated beef for more than a decade

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Political Risk Insurance

• Political risk insurance companies can also provide protection against:1. Contract repudiation

2. Negative government actions• Equity restrictions• Repatriation restrictions• Taxation discrimination• Non-tariff barrier imposition• Payment delays

Political Risk Insurance

3. Event intervention• Kidnapping of executives• Strikes or sabotage for political reasons

4. Process deterioration• Lack of enforcement of copyright agreements• Government interference in operations• Bribery and systematic corruption

Lessening Political Vulnerability (1 of 2)

• Relations between governments and MNCs are generally positive if the investment– Improves the balance of payments by increasing

exports or reducing imports through import substitution

– Uses locally produced resources– Transfers capital, technology, and/or skills– Creates jobs– Makes tax contributions

• Political parties often focus public opinion on the negative aspects of MNCs whether true or false– As scapegoats for their own failure – To serve their own interests

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Lessening Political Vulnerability (2 of 2)

• Strategies that MNCs use to minimize political vulnerability and risk– Joint ventures– Expanding the investment base– Licensing – Planned domestication– Political bargaining– Political payoffs– Insurance– Adding a risk premium to investments

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• Name 3 types of political risk?• Give an example of how a

company could be negatively affected by terrorism?

• Give an example of a politically sensitive product?

• Give 3 examples of how companies try to lessen political risk

Questions

Economic Risks (1 of 2)

• Exchange controls– Stem from shortages of foreign exchange

held by a country

• Local-content laws– Countries often require a portion of any

product sold within the country to have local content

• Import restrictions– Selective restrictions on the import of raw

materials to force foreign industry to purchase more supplies within the host country and thereby create markets for local industry 18

Economic Risks (2 of 2)

• Tax controls– A political risk when used as a means of

controlling foreign investments

• Price controls– Essential products that command

considerable public interest • Pharmaceuticals , Food, and Gasoline

• Labor problems– Labor unions have strong government

support that they use effectively in obtaining special concessions from business

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Economic Intelligence Unit (EIU)

• Country Risk Service– Complete internationally comparable

and regularly update country risk reports for 100 developing and highly indebted countries.

– Generate credit ratings.– Quantifies risks that affect

institutions that lend money or finance trade.


• Assesses composite country risk through 4 types of risk:1. Political (22%)

2. Economic policy (28%)

3. Economic structure (27%)

4. Liquidity (23%)


• Political Risk– Political stability

• War• Social unrest• Orderly political transfer• Politically motivated violence• International disputes


• Political Risk– Political effectiveness

• Change in government or pro-business orientation.

• Institutional effectiveness• Bureaucracy• Transparency• Corruption• Crime


• Economic Policy Risk– Monetary policy

• Inflation rate• Direction of inflation• Policies favorable to savers• Ability to boost interest rates• Monetary stability• Real lending rates• Boom/bust scenario• Financial liberalization


• Economic Policy Risk– Exchanger Rate Policy

• Real appreciation• Exchange rate regime• Change in prospects• Expectations of regime change• Interest differentials• Black market or dual exchange rate


• Economic Policy Risk– Fiscal policy

• Public-sector budget/GDP• Cumulative years of public-sector

budget balance• Government’s ability to generate tax

revenue• Public debt/GDP• Direction of public debt/GDP


• Economic Policy Risk– Trade Policy

• Trade liberalization• Exports/GDP

– Regulatory Environment• Official date (quality and timeliness)• Policy towards foreign capital• Popular attitudes towards foreign capital• Restrictions on transfers


• Economic Structure RiskEconomic Structure Risk– Growth

• National savings/GDP• Fixed investment/GDP• Pension system• Investment efficiency• Real GDP growth, average• Real GDP growth, latest• Real GDP growth, volatily


• Ratings Bands– Band A (0 to 20 points)

• Countries which have no FX constraints on debt-service ability.

• No problems financing their trade.• Economic policies deemed to be

effective.• Have working government capable of

effective policy implementation.• No constraints on international

transactions.


• Ratings Bands– Band B (21 to 40 points)

• Countries which have no significant FX constraints, but whose economic policies or political structure may be a cause for concern.

• No major risks with financial transactions, but political and economic risks need to be watched closely.


• Ratings Bands– Band C (41 to 60 points)

• Countries which have a record of periodic FX crises and political problems.

• Usually in a state of flux with persistent, but controllable, internal and external imbalances.

• These countries offer exciting opportunities for foreign investors, but with caution.


• Ratings BandsRatings Bands– Band D (61 to 80 points)

• Countries which are currently suffering from serious economic and political problems.

• Frequent debt rescheduling.• Restricted access to official lending.• Narrow commodity export-dependent

base.• Any investment should be carefully

considered and would best be postponed.


• Ratings Bands– Band E (81 to 100 points)

• Countries which have severe fiscal imbalances.

• Hyperinflation.• FX will be scarce.• Might be on verge of war or civil war.• Risk is extremely high.

Euromoney

• Provides a full country risk rating based on 9 individual variables.– These reports include Corruption

Perception Index.

• www.nationmaster.com

• www.tradingeconomics.com

• http://www.eiu.com/landing/risk_analysis

• https://www.cia.gov/library/publications/the-world-factbook/

• See country notebook.

Economic Environment

• What country has a high enrollment in tertiary education?

• Find the GDP per capita of Malaysia?

• Make a short report on the political and economic risk for any country mainly based on the EIU data.

Internet tasks

Legal Environment – Chapter 7

• Companies may face various legal and regulatory hurdles.

• Local legal systems determine how business is conducted in a foreign country.

• International regulations exist only to the extent that individual countries agree to follow certain standards of conduct.

Introduction

• Bases for today’s legal systems• The important factors in jurisdiction of

legal disputes• The various methods of dispute

resolution• The unique problems of protecting

intellectual property rights internationally

• Cyber law• Commercial law within countries

Overview

• Four heritages form the basis for the majority of the legal systems of the world– Common law – Civil or code law– Islamic law– Marxist-socialist tenets

• Even though a country’s laws may be based on the doctrine of one of the four legal systems its individual interpretation may vary significantly

Bases for Legal Systems

• Common law – Makes decisions through the past decisions of

higher courts.– Applies established and customary law principles to

a similar set of facts– Are recognized as not being all-inclusive – Ownership is established by use

• Code law – Legal system is generally divided into three

separate codes• Commercial • Civil• Criminal

– Ownership is determined by registration

Common and Code Law

• The basis for Islamic law is interpretation of the Koran

• Islamic law defines a complete system that prescribes specific patterns of social and economic behavior for all individuals– Property rights– Economic decision making– Types of economic freedom

• Among the unique aspects of Islamic law is the prohibition against the payment of interest

• The Islamic system – Places emphasis on the ethical, moral, social,

and religious dimensions to enhance equality and fairness for the good of society

Islamic Law

• No judicial body exists to deal with legal commercial problems arising between citizens of different countries– Legal disputes can arise in three situations

• Between governments• Between a company and a government• Between two companies

• Jurisdiction is generally determined on the basis of:– Jurisdictional clauses included in contracts– Where a contract was entered into– Where the provisions of the contract were

performed

• Most clear-cut decisions can be made:– When contracts or legal documents supporting a

business transaction include a jurisdictional clause

Jurisdiction in International Legal Disputes

• The best advice is to seek settlement• Deterrents to litigation

– Fear of creating a poor image and damaging public relations

– Fear of unfair treatment in a foreign court

– Difficulty in collecting a judgment that may otherwise have been collected in a mutually agreed settlement through arbitration

– The relatively high cost and time required when bringing legal action

– Loss of confidentiality

Litigation

• A mediator is appointed, acceptable to both sides.

• The mediator listens to both sides and offers a reasonable solution

• Both parties should accept the decision of the mediator and agree.

• It is not legally binding

Mediation

• An arbitrator is appointed, usually a person with expertise in the area.

• Both sides legally agree to accept the arbitrators decision.

• Much cheaper than litigation and less public.

Arbitration

• What is intellectual property?• Companies spend millions of dollars

establishing brand names or trademarks to symbolize quality and design and to entice customers

• Millions are spent on research to develop products, processes, designs, and formulas - patents

• Intellectual or industrial properties are among the most valuable assets

• New technologies developed to prevent piracy

Protection of Intellectual Property Rights – A Special Problem

• Lost sales from the unauthorized use of U.S. patents, trademarks, and copyrights – Amount to more than $100 billion annually

• The piracy industry has grown so sophisticated– Many counterfeit goods are indistinguishable

from original

• Piracy actually can serve come companies– Microsoft

• Counterfeit pharmaceuticals – 2% of the $327 billion worth of drugs sold each

year

Counterfeiting and Piracy

• Failing to adequately protect intellectual property rights can lead to the legal loss of rights in potentially profitable markets

• There have been many cases where companies have legally lost the rights to trademarks and have had to buy back these rights or pay royalties for their use– McDonald’s in Japan, Coach in Korea

• Many businesses fail to take proper steps to legally protect their intellectual property

Inadequate Protection

• Prior Use – whoever can show first use is typically considered the rightful owner

• Registration – the first to register a trademark or other property right is considered the rightful owner

• A company that believes it can always establish ownership in another country by proving it used the trademark or brand name first is wrong and risks the loss of these assets

• It is best to protect intellectual property rights through registration

• For example Jordan.

Prior Use Versus Registration

• Three major international conventions– Paris Convention for the Protection of Industrial

Property (100 countries)– Inter-American Convention– Madrid Arrangement (26 European countries)

• World Intellectual Property Organization (WIPO)– Responsible for the promotion of the protection of

intellectual property and for the administration of the various multilateral treaties through cooperation among its member states

• Patent Cooperation Treaty (PCT)• European Patent Convention (EPC)• The Trade-Related Aspects of Intellectual

Property Rights (TRIPs)

International Conventions

• Apart from the US usually there are regulations that the holder of the patent should share the knowledge within their country.

• If patent is not used within an average of 3 years then it expires.

• Us idea – encourage and protect innovation

• Korean Idea – one persons idea should benefit all.

Patents

1. Register IP with relevant agencies

2. Try mediation and arbitration

3. Complain to the host government

4. Complain to the WTO

•Microsoft – see piracy as a free trial

•Warner Bros – Change what the market will bear

Protecting IP

• All countries have laws regulating marketing activities–Promotion–Product development–Labeling–Pricing–Channels of distribution

Marketing Laws

• Differences across markets cause problems for trade negotiators – particularly for managers and their firms–Some countries only have a few

marketing laws with poor enforcement

–Others have detailed, complicated rules that are strictly enforced e.g. Sweden, France, Canada, China, EU

Marketing Laws

• Domain names – usually can company can only buy a name already registered

• Taxes – Amazon and EBay, TV, movies services.

• Jurisdiction: If the e-commerce seller advertises the consumers country then the consumers country hears the case.

• Digital signatures – Legal acceptance becoming more widespread.

Cyber law

• What are the main differences between common and code law and where are they mainly practiced?

• What should you do before making a contract to protect yourself legally?

• Why might a company prefer mediation or arbitration to litigation?

• How should we protect our intellectual property in an overseas market?

Questions

• 1. What legal system does Bulgaria use?

• https://www.cia.gov/library/publications/the-world-factbook/fields/2100.html

• 2. What does the PCT help with?

• http://www.wipo.int/pct/en/

• 3. What service does the ICC arbitration provide?

• http://www.iccwbo.org/products-and-services/arbitration-and-adr/

Internet tasks

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