ibg - national differences in the political economy s2 2014
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National Differences in thePolitical Economy
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Overview
1. What is country risk?
2. What are Political and Legal systems?
3. Types of Political systems
4. Types of Legal systems
5. Participants in Political and Legal systems6. Types of country risk produced by political systems
7. Types of country risk produced by legal systems
8. Managing country risk
2 Copyright 2012 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781442533561/Cavusgil/International Business
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Realities of Doing Business in Russia
High rate of piracy in software, music, DVDs, and other goods. Anti-piracy laws and law enforcement are weak.
Obtaining business licenses requires bribing officials.
SMEs may spend 20% of their net income on bribes.
There is substantial organised crime and killings. Criminal raiders may seize independent businesses.
Conditions in Russia are typical of many emergingmarkets and developing economies.
3 Copyright 2012 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781442533561/Cavusgil/International Business
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What is Country Risk?
Exposure to potential loss or adverse effects on companyoperations and profitability caused by developments in acountrys political and/or legal environments.
4 Copyright 2012 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781442533561/Cavusgil/International Business
Also known aspolitical risk
Each countryhas uniquepoliticaland legalsystems thatoften pose
challenges forcompanyperformance
ExampleCoca-Colas business fell off in
Germany when the governmentenacted a recycling plan. New lawsrequired consumers to returnnonreusable soft drink containersto stores for a refund of 0.25euros. Rather than cope with the
unwanted returns, big supermarketchains pulled Coke from theirshelves.
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5 Copyright 2012 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781442533561/Cavusgil/International Business
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Country Risk in Selected Countries
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Political and Legal Systems
Political system: A set of formal institutions thatconstitute a government. It includes legislative bodies,political parties, lobbying groups, and trade unions.The system also defines how these groups interactwith each other.
Varies between countries on the basis of Totalitarianism and Democracy
Collectivism and individualism
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Collectivism
Primacy of collectivist over individualgoals
Emphasis on good of society, common
good
Plato,427-347 BC, to Socialists, Marx,1818 - 83
Communists, Social Democrats
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R l i h li f b k h i h 1
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Individualism
Individual freedom over economic andpolitical action
- consumer sovereignty individual diversity and private ownership
are desirable
private property is more productive -communal property receives little care
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R l ith li f b k h i ht 1
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Democracy
Government is by the people, exercised
either directly or through elected
representatives
Safeguards hold elected representatives
accountable
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Political Systems: Totalitarianism
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Government controls all economic and political matters.
Either theocratic(religion-based) or secular.
A state party is led by a dictator.
Membership is mandatory for those wanting to advance.
Power is sustained via secret police, propaganda, and
regulation of free discussion and criticism.
Today: Some countries in the Middle East and Africa; Cuba,
North Korea.
Former totalitarian states tend to
have much government
intervention and bureaucracy.
China (19491980s)
Germany (19331945)
Soviet Union (1918991)
Spain (19391975)
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The Extent of Totalitarianism
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Spread of Democracy
totalitarian regimes failed to deliver economicprogress
New communication technologies have
reduced the ability of the state to controlinformation
prosperous middle and working classes
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p g
Ideology
a reasonably coherent and shared set ofvalues
Ideology is a set of values and beliefs that
justifies certain behaviours and guides
economic and political actions.
three common ideological traditions:
conservatism, liberalism and socialism.
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Liberalism
A political ideology concerned with protecting the
rights and liberties of individuals from government
interference
The individual is more important than the state or
community in which they live Equality of opportunity
Small role for government
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Socialism
The political ideology which emphasises the importance ofsocial cohesion and equality
Seek to create a more equal distribution of wealth, alleviate
poverty and create a higher standard of living for all
Equality of outcome
Larger role for government
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Conservatism
A political ideology that is critical of rapid change and progress
Conservative support traditional values, the church and family
Critical of modern social trends including abortion, feminism and gay rights.
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Why Government?
Maintaining competition
Groceries retail
Externalities
Positive vaccinations
Negative pollution
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Why Government?
Public goods
Military & roads
Common property resources
rivers
Income distribution
Stabilisation (macro)
Inflation, BOP, unemployment20
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Red Tape and Cost of Compliance
for individuals, the cost of acquiring sufficient knowledge to meet their legal
requirements; of compiling the necessary receipts and other data and of completing tax
returns; payments to professional advisors for tax advice; and incidental costs of
postage, telephone and travel in order to communicate with tax advisors or the tax
office. For a business, the compliance costs include the cost of collecting, remittingand accounting for tax on the products or profits of the business and on the wages and
salaries of its employees together with the costs of acquiring the knowledge to enable
this work to be done including knowledge of their legal obligations and penalties
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Red Tape and Cost of Compliance
Taxation compliance
Pope et al (1991) estimated that the gross taxation compliance costs were between
11.4 percent and 23.7 percent of revenue yield for the period 1986 to 1987.
Evans et al (1997) however, suggests that the Pope studies had overestimated the
compliance cost of taxation. They estimated these costs to be just 7 percent of revenueyield.
Small businesses
They suggest that the regulatory costs are some 35 percent higher for firms with less
than 20 employees compared to firms with over 500 staff
Competing levels of government
Local, state and federal
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Excessive paperwork
Information quantity and quality
Outsourcing the role of government
Taxation, the role of government and paperwork Industrial relations and equality
OH&S, paperwork and forcing compliance
Superannuation and the role of government
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Red Tape and Cost of Compliance
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Democracy and Openness
24 Copyright 2012 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781442533561/Cavusgil/International Business
Democracy is associated with openness, the lack ofregulation and barriers to the entry of firms in foreignmarkets.
Openness is associated with:
Successful market entry
Increased market demand
Competition on quality, whichimproves overall productquality
Increased competition, leadingto efficiencies and lower prices
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Political and Economic Systems
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Totalitarianism is associated with commandeconomies, wherein the state makes all decisionsabout what to produce, how much to produce, andwhat prices to charge.
Democracy is associated with market economies andcapitalism, in which decisions are largely left to market
forces, that is, supply and demand.
Socialism is associated with mixed economies, whichhave features of both market and commandeconomies, combining state intervention and marketmechanisms (e.g., Sweden, Singapore).
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Ideology and FDI
The radical view
Exploitation and imperial domination
Free market view
Comparative advantage informing the distribution of
production
Pragmatic nationalism
Recognising the costs and benefits of FDI http://www.youtube.com/watch?v=ctB9TlCWdk0
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Political and Legal Systems (cont.)
Legal system: A system for interpreting andenforcing laws. The laws, regulations, and rulesestablish norms for conduct. It incorporatesinstitutions and procedures for ensuring order andresolving disputes in commercial activities, as well asprotecting intellectual property and taxing economic
output. Four major types of legal systems:
Common law
Civil law
Religious law
Mixed systems
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The Rule of Law
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Existence of a legal system where rules are clear, publicly
disclosed, fairly enforced, and widely respected byindividuals, organisations, and the government.
Common in the advanced economies.
The legal system is: (i) applied to all citizens equally; (ii) issued
via recognised government authorities; and (iii) enforced fairlyand systematically by police forces and formally organisedjudicial bodies.
Economic activity suffers and uncertainty increases when therule of law is weak.
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Legal Systems: Common Law
29 Copyright 2012 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781442533561/Cavusgil/International Business
A legal system that originated in England and spreadto Australia, Canada, the U.S., and other formermembers of the British Commonwealth (also knownas case law).
The basis of law is tradition, past practices, and legal
precedents set by courts via interpretation ofstatutes, legislation, and past rulings.
Judges have much power to interpret laws based onthe circumstances of individual cases. Thus, commonlaw is relatively flexible.
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Legal Systems: Civil Law
30 Copyright 2012 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781442533561/Cavusgil/International Business
Found in France, Germany, Italy, Japan, Turkey, and
much of Latin America.
Based on an all-inclusive system of laws that have beencodifiedclearly written by legislative bodies.
Laws are more cast in stone than common law and notstrongly subject to interpretation by courts.
A key difference is that common law is mainlyjudicial inorigin and based on court decisions, whereas civil law ismainly legislative and based on laws passed by nationaland state legislatures.
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Dominant legal systems in selected countries
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Sampling of DifferencesBetween Common Law and Civil Law
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Legal Systems: Religious Law
33 Copyright 2012 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781442533561/Cavusgil/International Business
Strongly influenced by religious beliefs, ethical codes, and
moral values, which are viewed as mandated by asupreme being.
Most important religious legal systems are based onHindu, Jewish, and Islamic law.
Islamic law spells out norms of behaviour regarding
politics, economics, banking, contracts, marriage,and many other social and business issues.
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Country Risk Produced by Political Systems:Government Takeover of Corporate Assets
Confiscation: Seizure of corporate assets withoutcompensation
Expropriation: Asset seizure with compensation
Nationalisation: Takeover of an entire industry, with orwithout compensation
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Examples
In Venezuela, President Hugo Chavez confiscatedan oil field owned by the French petroleum firmTotal.
In 2006, the Bolivian government nationalised theoil and gas industries.
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Country Risk Produced by Political Systems:Creeping Expropriation
The most common expropriation today. The government gradually modifies regulations and laws
after foreign MNEs have made big local investments inproperty and plants.
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Examples
Abrupt termination of contracts.
Creation of laws that favour localfirms.
The governments in Bolivia, Russia,and Venezuela have modified taxregimes to extract revenues fromcoal, oil, and gas companies.
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Country Risk Produced by Political Systems:Embargoes and Sanctions
Governments may respond to offensiveactivities of foreign countries byimposing embargoes and sanctions.
Sanctionsare bans on internationaltrade, usually undertaken by a country,or a group of countries, against another
country judged to have jeopardisedpeace and security.
Embargoes are bans on exports orimports that forbid trade in specificgoods with specific countries. Example:
The U.S. has enforced embargoesagainst Iran and North Korea, labelledas state sponsors of terrorism.
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Country Risk Produced by Political Systems:Boycotts against Firms and Nations
Boycott: A voluntary refusal to engage in commercial dealingswith a nation or a company
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Examples from France
Citizens boycotted Disneyland Paris to express oppositionto globalisation and takeover of French farmland.
French farmers boycotted McDonalds, and crashed atractor into a shop, to vent their anger with agriculturalpolicies and globalisation.
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Country Risk Produced by Political Systems:Wars, Insurrection, and Violence
38 Copyright 2012 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781442533561/Cavusgil/International Business
War and insurrection: Indirect effects can be disastrousfor company activities.
Terrorism: The threat or actual use of force or violenceto attain a political goal through fear and intimidation.
Some terrorism is sponsored by national governments.
Terrorism particularly affects certain industries, such astourism, hospitality, aviation, finance, and retailing.
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Types of Country Risk Produced by Legal Systems
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Country risk arising from the host countrys legalenvironment:
Foreign investment laws
Controls on operating forms and practices
Marketing and distribution laws
Laws regarding income repatriation
Environmental laws
Contract laws
Convergence towards an international standard forinternational sales contracts.
Internet and e-commerce regulations
Inadequate or underdeveloped legal systems
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Country Risk Produced by Legal Systems (cont.)
40 Copyright 2012 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781442533561/Cavusgil/International Business
Country risk arising from the home countrys legal
environment: The Foreign Corrupt Practices Act (FCPA)
Antiboycott regulations
Accounting and reporting laws
Transparency in financial reporting
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Critical Thinking
41 Copyright 2012 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781442533561/Cavusgil/International Business
1.Globalisation is an ideology of supporting liberaleconomics and corporate interests as it promotesweakening trade unions, reducing business regulation andcurbing public spending and welfare budgets. Discuss.
2. What is the appropriate role of government in businessactivities? Examine this role from different ideologicalperspectives.
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