Government, Law, and Political Risk in International Business
What are political risks - political risks are the actions by groups of people or
government that have the potential to affect the immediate and/or long-term viability of a
firm.
Action of Managers Before Investing
(1) investigate political risk before entering a new market, and
(2) continually monitor political events that may affect ongoing operations.
(3) International business must find ways to work within the limitations and
constraints imposed by the various governments.
(4) Foreign tax credits, holidays, exemptions, depreciation allowances, and
taxation of corporate profits
Types of Political Risk
1. Systematic Risk: A risk that influences a large number of assets. An example is
political events. It is virtually impossible to protect yourself against this type of risk.
2. Unsystematic Risk: Sometimes referred to as “specific risk.” It is risk that affects a
very small number of assets. An example is news that affects a specific stock such as a
sudden strike by employees.
Specific types of risk
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Credit or Default Risk:
Country Risk:
Foreign Exchange Risk:
Interest Rate Risk:
Political Risk:
Market Risk:
Categories of Political risk
(1) the political/economic environment,
o expropriation -the action by the state or an authority of taking property
from its owner for public use or benefit.
o confiscation - the action of taking or seizing someone's property with
authority; seizure.
a. a phenomenon of ethnicity- a driving force behind political instability
around the world
(2) the prevailing domestic economic conditions, and
a. war
b. infrastructure
c. laws on environmental issues
(3) external economic relations.
1. tariff - a tax or duty to be paid on a particular class of imports or exports
2. Govt. subsidies
3. Laws for health concerns for other countries to open their market
4. quota - a limited quantity of a particular product which under official controls
can be produced, exported, or imported
5. embargo - an official ban on trade or other commercial activity with a particular
country.
The legal aspects of conducting international business
World Trade Organization (WTO) - is such an international agency that defines
internationally acceptable economic practices for its member countries. It deals with the
global rules of trade between nations. Its main function is to ensure that global trade
flows smoothly, predictably and freely as possible. The WTO agreements cover goods,
services and intellectual property. They spell out the principles of liberalization, and the
permitted exceptions. They include individual countries' commitments to lower customs
tariffs and other trade barriers, and to open services markets.
EU- anti money laundering and financing terrorist act.
North American Free Trade Agreement (NAFTA) – no tariff and quota
United Nations (UN) - UN is responsible for the trade policy of the member countries
and negotiates agreements for them. Speaking as one voice, the UN carries more
weight in international trade negotiations than each individual member would. The UN
actively engages with countries or regional groupings to negotiate trade agreements.
International Labor Organization, (ILO) - the ILO helps ensure that workers everywhere
enjoy the benefits of globalization. foster employment creation, promote fundamental
principles and rights at work and improve working conditions and incomes around the
world. ILO Declaration include: freedom of association; the effective recognition of the
right to collective bargaining; the elimination of all forms of forced or compulsory labor;
the effective abolition of child labor; and the elimination of discrimination in respect of
employment and
World Bank, - is an international development organization owned by 187 countries. Its
role is to reduce poverty by lending money to the governments of its poorer members to
improve their economies and to improve the standard of living of their people.
International Monetary Fund IMF’s objective is to promote international monetary cooperation, international trade, high employment, exchange-rate stability, sustainable
economic growth, and making resources available to member countries in financial
difficulty.
IMF provide the legal and regulatory context within which global business operates on
the following:
a.
b.
c.
d.
e.
markets the firms serve,
the cost of goods and/or services they offer,
the price they charge, and
costs for labor, raw materials, and
technology.
Legal System
Common Law
Common law is based on tradition, precedent, and custom and usage. The courts fulfill
an important role by interpreting the law according to these characteristics. Judge is
serves as neutral referee. Contracts tend to be detailed.
Civil Law
A civil law system, also called a codified legal system, is based on a detailed set of laws
organized into a legal code. Rules for conducting business trans- actions are a part of
the code. Over 70 countries, including Germany, France, and Japan operate on a civil
law basis. The judge takes on many of the tasks of the lawyers, determining, for
example, the scope of evidence to be collected and presented to the court. Contracts
tend to be shorter and less specific because many of the issues that a common law
contract would cover are already included in the civil code.
Theocratic Law
This law is based on the officially established rules governing the faith and practice of a
particular religion. Applies religious law to civil and criminal conduct