1-1

8-1

Ideological Forces

Communism Government should own all the major

factors of production Labor unions are government-controlled This ideology persists in few countries

Capitalism An economic system in which the means of

production and distribution are for the most part privately owned and operated for private profit

LO1

1-2

8-2

Ideological Forces

Socialism In an extreme form socialist governments can

control public utilities and some basic means of production

Socialist governments rarely perform in ways consistent with a “pure” doctrine

Many European countries including Great Britain, France, Spain, Greece, Germany, Italy, Austria, and others have practiced a form of socialism

LO1

1-3

8-3

Conservative or Liberal

Conservative In recent U.S. terms a conservative believes in

minimizing government oversight of economic activity and maximizing the independence of the private sector

Liberal In recent U.S. terms a liberal urges greater

government regulation and oversight of the economy

These terms usually have entirely different meanings outside the U.S.

LO1

1-4

8-4

The government suspects that the firms are concealing profits

To increase the firm’s profitability For ideological reasons - countries have national,

government run utility companies, control strategic industries (petroleum in Mexico), etc.

To preserve jobs by supporting failing industries that are important to the economy

As a consequence of previous government’s support to protect the public investment

Why Firms are Nationalized

LO2

1-5

8-5

Unfair Competition?

Privately owned companies complain that government owned companies Can cut prices because maximizing profit is

not their main purpose Get cheaper financing Get government contracts Get export assistance Can hold down wages with government

assistance

LO2

1-6

8-6

Privatization Anywhere Any Way

Privatization does not always refer to ownership transfer from government to private entities Activities previously conducted by the state

may be contracted out Governments may lease state-owned plants

to private entities Governments may combine a joint venture

with a management contract with a private group to run a previously government-operated business

LO2

1-7

8-7

Government Protection

Any government, regardless of ideology, must protect the nation’s economic welfare

National defense Protection from banditry, piracy Terrorism

LO3

1-8

8-8

Government Protection

Terrorism Unlawful acts of violence committed for a wide

variety of reasons, Economic gain: ransom To overthrow a government To gain release of imprisoned colleagues To exact revenge for real or imagined wrongs To punish nonbelievers of the terrorists' religion

LO3

1-9

8-9

Government Protection

World wide terrorist groups: a new trend Government-sponsored terrorism: act of war

Countries finance, sponsor, and train terrorists and/or provide sanctuaries for them

LO3

1-10

8-10

Government Protection Kidnapping for Ransom

Victims held for large ransoms Columbia and Peru are dangerous places

for American executives U.S. executives practice “commando

management” to avoid kidnap risk Arrive secretly, meet for a few days and

fly off before kidnappers learn of their presence

Such behavior is suggested when operating in countries that are on the U.S. State Department’s warning list

LO3

1-11

8-11

Countermeasures by Industry

KRE (kidnap, ransom, and extortion) Insurance to cover ransom payments, antiterrorist

schools Cassidy and Davis

The world’s largest kidnapping and extortion underwriting firm is located in London

Antiterrorist Schools

LO3

1-12

8-12

Terrorism Developments

Nuclear Terrorism Failing security standards at former Soviet

installations permit uranium to be stolen, then sold to terrorists

Chemical and Biological Terrorism Recipes from self-taught terrorists that can be

downloaded from the Internet

1-13

8-13

Government Stability

Stable Government Maintains itself in power and whose fiscal,

monetary and political policies are predictable and not subject to sudden, radical changes

Unstable Government Cannot maintain itself in power or makes

sudden, unpredictable, or radical policy changes

LO5

1-14

8-14

Traditional Hostilities

Traditional hostilities refer to long-standing enmities between tribes, races, religions, ideologies, or countries Arab countries -Israel Hutus and Tutsis in Burundi and Rwanda Tamils and Sinhalese in Sri Lanka

LO5

1-15

8-15

International Companies and Political Forces

International companies are powerful and can influence their destiny make decisions about where to invest, where to

conduct research and development, and where to manufacture products

The financial size of many international companies relative to the host economy or economic sector gives them a strong negotiating position

LO5

1-16

8-16

Country Risk Assessment

A country risk assessment (CRA) is an evaluation by the firm that assesses a country’s economic situation, policies and politics to determine how much risk exists of losing an asset or not being paid

LO6

1-17

8-17

Country Risk Assessment

Types of Country Risks Political: wars, revolutions, coups Economic Financial: BOP deficits Labor: low productivity, militant unions Legal: underdeveloped laws concerning

business Terrorism

LO6

1-18

8-18

Trade Restrictions

Government officials sensitive to interest groups that are being hurt by international competition

Arguments for trade restrictions National defense Sanctions to punish offending nations Protect infant or dying industry Protect domestic jobs from cheap foreign labor Scientific tariff or fair competition

LO7

1-19

8-19

Dumping

Dumping is within the domain of the WTO The WTO defines dumping as selling a product abroad

for less than the average cost of production at home home market price the price to third countries

LO7

1-20

8-20

Subsidies and Countervailing Duties

Subsidies are economic actions by a government to support exports or hinder imports

Countervailing duties are additional import taxes levied by the importing nation’s government on imports that have benefited from export subsidies offered by the exporting nation’s government

LO7

1-21

8-21

Tariff Barriers

Tariffs or import duties are taxes levied on imported goods to reduce their competitiveness

Ad valorem duties are assessed as a percentage of invoice value

Specific duties are assessed as a fixed sum per unit

Compound duties are a combination of ad valorem and specific duties

A variable levy may guarantee the market price of the import is equal to that of the domestic product

LO8

1-22

8-22

Non-Tariff Barriers

Forms of discrimination against imports other than import duties such as Specifications Customs procedures

Quotas are numerical limits on specific classes of imports Absolute: once number is reached imports stop Global: no regard to source Allocated or discriminating: assigned to specific

countries

LO8

1-23

8-23

Non-Tariff Barriers

Voluntary export restraints (VERs) are export quotas imposed by the exporting country

Orderly marketing arrangements are VERs based on formal agreements between exporting and importing countries

LO8

1-24

8-24

Non-Quantitative Non-Tariff Barriers

Government participation in trade Procurement policies Local content requirements

Customs and other administrative procedures Standards

LO8