THE POLITICAL, ECONOMIC AND LEGAL

ENVIRONMENTS OF INTERNATIONAL TRADE

Political Systems• What are they?

–The means by which people in any society make the rules by which they live

How are political systems classified?

1. Who makes decisions in the system?

2. The number of personal freedoms and rights individuals have

TYPES OF POLITICAL SYSTEMS

• Democracy• Totalitarianism• Mixed

– Representative Republic

DEMOCRACY

• The people make the decisions• Equal Rights• Many Freedoms

• Representative Democracies– Elect citizens to represent them

TOTALITARIANISM

• Limited rights and freedoms• Government (one or few) makes decisions• People have no say in the laws

MIXED

• Characteristics of both systems– Almost all political systems are mixed

ECONOMIC SYSTEMS

• What are they?– The way a society decides to use and distribute

its resources

Questions of Economic Systems

1. Who can own property in this system?

2. Who controls and distributes the resources in this system?

BASIC ECONOMIC SYSTEMS

• Capitalism

• Communism

• Mixed Economy

Capitalism/Free Enterprise/Free Market

• Private Ownership• Profit Motive• Competition

– Who can own property? ANYONE– Who controls and distributes the resources?

• BUSINESSES

Communism/Command Economy

• Public Ownership• Government Control

– Who can own property? GOVERNMENT– Who controls and distributes the resources?

• GOVERNMENT

The Father of Communism

• Karl Marx– “Das Kapital”– Middle class revolt

Mixed Economy

• Between capitalism and communism– U.S.– Socialism

• Basic industries are owned & operated by the government or groups of people

• Both public and private ownership• Regulation of production

How Do Political & Economic Systems Relate?

• Democracy = Capitalism (Usually!)• Totalitarianism = Communism (Usually!)

• Socialism in varying degrees equals mixed political system to one side or other

Can they change?

• The type of government and economic system in a country may change over time

• Has the U.S. changed?• How?• What will happen if we become socialists?• Are we socialists?

POLITICAL PARTIES

• What do they stand for?• Democrats

– Bigger government/fewer freedoms• Republicans

– Smaller government/more freedoms• Libertarians

– Republic – Very small government/lots of freedom

What is necessary to have big government?

• High taxes• Limited freedoms• More laws• More government spending (big budgets)

What are advantages of big government?

• Everyone is taken care of• Socialized medicine• Socialized education• Fewer individual expenses

What are disadvantages of big government?

• Very high taxes• Fewer freedoms• More laws• Large budgets – government is large

percentage of GDP• Lower productivity

What are advantages of smaller government?

• Lower taxes• Smaller budges (less government spending)• More productivity• Fewer laws• More freedoms• Individual responsibility

What are disadvantages of smaller government?

• Unproductive people are poor – maybe in poverty

• Individuals may not be able to afford healthcare or higher education

• Fewer government programs• Individual responsibility

How has changes in governments affected International Business?

• USSR --- Russia• Reunification of Germany• European Union

Russia

Fall of Communism?

• What countries are communist?• Move toward free market economies• Privatization

– Selling government-owned companies to private citizens

A DEVELOPING WORLD

• 3 Different levels of economic development

• Developed Nations• Newly Industrialized Countries (NICs)• Less Developed Countries (LDCs)

Developed Nations

• High-income economies – industrialized nations– Europe– Japan– Australia– New Zealand– United States– Canada

Newly Industrialized Countries

• Rapid industrial growth in last 30 years• Sizable exports of manufactured goods• Heavy concentrations of foreign direct

investment

• Per Capita GNP as low as $2,000.• Per Capita GNP usually not more than

$6,000.

Less Developed Countries

• Per capita GNP less than $6,000• Not necessarily industrializing rapidly• High illiteracy rates, lower life expectancy,

little manufacturing capacity

• African countries• Asian countries• Eastern Europe• Latin America

LDCs Continued

• Produce raw materials, such as copper, sugar or coffee to be exported

• Until recently had neither technology nor resources to manufacture finished products

• Import manufactured goods from other countries

• Some now exporting manufactured products.

• Incomes range from $400 to over $2000 per person

• Goal- Increase the amount of industry

South Korea

• NIC that was a LDC• South Korea after Korean War built up

using new technology. • Exported clothing, shoes and textiles• Now exports steel, machinery, ships &

automobiles

Taiwan

• Few natural resources (forests main resource)

• Only ¼ land can be farmed• Built industrial economy by focusing on

small manufactured goods– Electrical appliances, televisions, radios,

calculators, toys and clothing

Cooperation Between Nations

• Organization for Economic Cooperation and Development (OECD)– G7 – Canada, France, Germany, Great Britain,

Italy, Japan and U.S.– G13 – Algeria, Argentina, Egypt, India,

Indonesia, Jamaica, Malaysia, Nigeria, Peru, Senegal, Venezuela, Yugoslavia and Zimbabwe

Adaptability

• World trade environment constantly changes

• Policies and plans must be designed to fit into another country’s level of economic development

• Knowledge and flexibility important in the international marketplace

Layers of Political Influence

• First Layer: The Home Environment

• Second Layer: The Host Environment

• Third Layer: The Global Environment

The Home Environment

• Domestic Market (the country in which the business is owned)

• Political systems strongly affect the way business functions

The Host Environment

• The host environment exists in the country where a business exports products, sets up factories, or opens its stores

• Policy and economic changes affect the foreign business in the host environment much the same as in the home environment

• International businessperson carefully examines host environment before deciding to do business there

Three Indicators of Instability

1. Evidence of social disorder.2. Evidence of extreme income unevenness,

with a few very rich people and a massive number of poor people.

3. Evidence of frequent changes in the structure and activity of political parties.

The Global Environment

• The interaction of businesses in the international marketplace

• General Agreement on Tariffs and Trade (GATT)– Ground rules for international trade– Promote world trade through negotiation and to

make world trade secure– Increase global economic growth and

development

LEGAL SYSTEMS

• Each nation develops and adapts a legal system that fits its own economic, political and social goals

• Two basic types of legal systems in global community– Common Law– Code Law

Common Law

• Judges decide current cases based on how judges have decided cases in the past– Precedents

Code Law• Based on statutes (rules)

passed by legislative bodies

• Set specific penalties for disobeying the law

• Based on Roman model of the 6th century

• More than 70 countries use code law system

• Judges don’t interpret law

Intellectual Property Rights

• Certain laws have a direct impact on a company’s interests and profits

• Intellectual property rights– The rights of an individual to own his or her

ideas– Important because they stimulate technological

growth

Intellectual Property Rights

• The U.S. Constitution states:“The Congress shall have the power…to promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive rights to their respective writings and discoveries”

• Giving inventors these rights is an incentive for continued inventing

• Patent and trademarks are two types

Patents• Patents give inventor

sole rights to the use and production of an invention for a certain period of time

• In U.S. the right goes to first inventor

• In other countries the right goes to first to apply for a patent

Trademarks

• A trademark is a word or words, name, design, picture or other symbol that identifies a product of a company.

• Laws vary from country to country

Layers of the Legal Environment

• The First Layer: The Home Environment

• The Second Layer: The Host Environment

• The Third Layer: The Global Environment

The Home Environment

• A company must follow the laws in its home country

• The company must follow laws regarding exportation of products – including those forbidding certain goods to certain countries

The Host Environment

• The company must also abide by the laws governing business in the host country

• Including employment practices, taxation and environmental protection

The Global Environment• Governed by agreements that countries make to

regulate the flow of goods and services across national borders

• Investment Treaty – Regulate direct investments across borders

• Trade Agreements – Rules of trade between countries (NAFTA)

• Multilateral Trade Agreements – Several countries (EU)

Settling International Disputes

• Despite trade agreements, there are still problems and legal disputes among companies and governments

• Three ways to settle differences:– Negotiation– Arbitration– Litigation

Negotiation

• Negotiation is solving a problem through discussion (least formal)

• Usually first step – companies try to negotiate and solve problems by themselves

Arbitration

• Arbitration is the judgment of a dispute by a third party who has no direct interest in the dispute

• Governments with trade disputes usually agree to use specific bodies to arbitrate such as GATT or FTA commissions

Litigation

• Litigation is the process that uses a nation’s legal system to file lawsuits.

• Both parties use attorneys to represent their interests in court

• Choosing which country to try the case is a major problem

• Major disadvantages – time & acceptance

The End!