The Political and Economic
Environment
Introduction
• 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.
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
4
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
5 next slide
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=new
sarchive&sid=ag_NJBLk6TVo
6
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
7 War
– Protest rallies against the U.S. – Iraq
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
8
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
9
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
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–
–
–
–
Red Cross and the Red Crescent
Amnesty International
Oxfam
UNICEF
Care and Habitat for Humanity
10
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.
11
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 hormonetreated beef for more than a decade
12
Political Risk Insurance
• Political risk insurance companies can
also provide protection against:
1. Contract repudiation
2. Negative government actions
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•
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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
15
Lessening Political
Vulnerability (2 of 2)
• Strategies that MNCs use to minimize
political vulnerability and risk
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Joint ventures
Expanding the investment base
Licensing
Planned domestication
Political bargaining
Political payoffs
Insurance
Adding a risk premium to investments
16
Questions
• 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
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
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thereby create markets for local industry
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
19
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.
Economic Intelligence Unit (EIU)
• Assesses composite country risk
through 4 types of risk:
1.
2.
3.
4.
Political (22%)
Economic policy (28%)
Economic structure (27%)
Liquidity (23%)
Economic Intelligence Unit (EIU)
• Political Risk
– Political stability
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•
•
•
•
War
Social unrest
Orderly political transfer
Politically motivated violence
International disputes
Economic Intelligence Unit (EIU)
• Political Risk
– Political effectiveness
• Change in government or pro-business
orientation.
• Institutional effectiveness
• Bureaucracy
• Transparency
• Corruption
• Crime
Economic Intelligence Unit (EIU)
• Economic Policy Risk
– Monetary policy
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•
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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 Intelligence Unit (EIU)
• Economic Policy Risk
– Exchanger Rate Policy
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•
•
•
•
•
Real appreciation
Exchange rate regime
Change in prospects
Expectations of regime change
Interest differentials
Black market or dual exchange rate
Economic Intelligence Unit (EIU)
• Economic Policy Risk
– Fiscal policy
• Public-sector budget/GDP
• Cumulative years of public-sector budge
t balance
• Government’s ability to generate tax rev
enue
• Public debt/GDP
• Direction of public debt/GDP
Economic Intelligence Unit (EIU)
• Economic Policy Risk
– Trade Policy
• Trade liberalization
• Exports/GDP
– Regulatory Environment
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•
•
•
Official date (quality and timeliness)
Policy towards foreign capital
Popular attitudes towards foreign capital
Restrictions on transfers
Economic Intelligence Unit (EIU)
• Economic Structure Risk
– Growth
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National savings/GDP
Fixed investment/GDP
Pension system
Investment efficiency
Real GDP growth, average
Real GDP growth, latest
Real GDP growth, volatily
Economic Intelligence Unit (EIU)
• 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 effectiv
e.
• Have working government capable of ef
fective policy implementation.
• No constraints on international transacti
ons.
Economic Intelligence Unit (EIU)
• Ratings Bands
– Band B (21 to 40 points)
• Countries which have no significant FX
constraints, but whose economic policie
s or political structure may be a cause f
or concern.
• No major risks with financial transaction
s, but political and economic risks need
to be watched closely.
Economic Intelligence Unit (EIU)
• Ratings Bands
– Band C (41 to 60 points)
• Countries which have a record of period
ic FX crises and political problems.
• Usually in a state of flux with persistent,
but controllable, internal and external im
balances.
• These countries offer exciting opportunit
ies for foreign investors, but with caution
.
Economic Intelligence Unit (EIU)
• Ratings 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.
Economic Intelligence Unit (EIU)
• Ratings Bands
– Band E (81 to 100 points)
• Countries which have severe fiscal imba
lances.
• 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.
Economic Environment
•
•
•
•
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.
Internet tasks
• 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.
Legal Environment – Chapter 7
Introduction
• 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.
Overview
• 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
Bases for Legal Systems
• Four heritages form the basis for the majority
of the legal systems of the world
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–
–
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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
Common and Code Law
• 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
Islamic 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
Jurisdiction
in International Legal Disputes
• 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
Litigation
• 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
Mediation
• 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
Arbitration
• 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.
Protection of Intellectual Property
Rights – A Special Problem
• 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
Counterfeiting and Piracy
• 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
Inadequate Protection
• 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
Prior Use Versus Registration
• 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.
International Conventions
• 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)
Patents
• 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.
Protecting IP
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
Marketing Laws
• 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
Cyber law
• 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.
Questions
• 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?
Internet tasks
• 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-andservices/arbitration-and-adr/