bs chapter 02

International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 2: 1

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PART II

International PoliticalEconomy

2


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LEARNING OBJECTIVES

To understand how international business is closely linked with political and economic environments

To discuss the types of political environments and political systems

To describe the legal systems that are used by countries in the world

To discuss the types of economic environments and economic systems

To explain the effects of political and economic conditions on international business


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2.1 INTRODUCTION

International business environments are influenced by various environmental factors such political situations, economic systems and developments, rules and regulations, and technological developments

As international business involves the understanding of political institutions, political environments, and economic systems, it is essential to be able to analyse political and economic environments

Forces that affect and shape the international business environment: Political forces Legal forces

Economic forces Social forces


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2.2 POLITICAL ENVIRONMENT

Politics and economics are two major forces in the political environment of a country that strongly influence international business

The political environment is an atmosphere that is created by the political situation in the country

A political environment is largely influenced by the country’s political ideologies and political system


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2.2.1 Political Ideologies

A form of social or political philosophy in which practical elements are as prominent as theoretical ones

It encompasses of a set of doctrines or beliefs that form the basis of a political, economic, or other system

Also defined as a system of beliefs, ways of thought, and categories that provide the foundation of programmes of political and social action


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Anarchism The political belief that society should have no

government, laws, police, or other authority, but should be a free association of all its members

Only individuals and private groups should control a nation’s political activities

Fascism A government or political philosophy that raises

nationalism, and frequently race, above the individual Characterized by a centralized autocratic state

governed by a dictatorial head, stringent organization of the economy and society, and aggressive oppression of opposition

2.2.1 Political Ideologies (cont.)


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2.2.1 Political Ideologies (cont.)

Pluralism A belief that lies in between anarchism and fascism Pluralism is a view that is associated with political

liberalism It holds that political power in society does not lie

with the electorate or with a small concentrated elite group, but is distributed among a wide number of groups

– These groups may be trade unions, interest groups, business organizations, and any of a multitude of formal and informal coalitions


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2.2.2 Political Systems

Refer to the system of government within a nation; it includes the structures, processes, and activities by which a nation governs itself

Determined by its political participants and political ideologies Political participants—the people who participate in

politics, and to what extent they participate A country’s political system is rooted in the history

and culture of its people Influenced by factors like population, age, race

composition, and per capita income


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2.2.2 Political Systems (cont.)

The two most common political systems: Democracy Totalitarianism

Democracy The system of rule by the people and is currently

understood and most frequently used through the terms of rule by majority

A common feature is competitive elections – Usually seen to require freedom of speech, freedom

of the press, and to some degree, of rule of law Types of democracy

– Representative democracy


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– Parliamentary democracy – Liberal democracy – Direct democracy– Socialist democracy

Totalitarianism The belief that every aspect of people’s lives must

be controlled in order for a nation’s political system to be effective

No concern for individual liberties – Societies and institutions such as family, religion,

business, and labour are considered as employees to the state


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Its political systems include authoritarian governments such as communism and fascism

A concept that describes a state that regulates nearly every aspect of public and private sectors

– A totalitarian government also seeks to control attitudes, values, and beliefs of its population, erasing the distinction between state and society


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2.2.3 Political Risks

The possibility that political decisions or social events in a country will affect the business climate, thus causing investors to lose a portion of their investment or expected return

Involves the risk of loss when investing in a given country, caused by changes in a country’s political structure or policies, such as tax laws, tariffs, expropriation of assets, or restriction in repatriation of profits

Political risk is distinct from commercial risk, which refers to those risks that arise in the usual way of conducting business


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2.2.3 Political Risks (cont.)

Includes potential losses from nationalization, expropriation, confiscation, and regulatory changes, as well as the potential risk of a government or government agency not honouring a contract

Countries with strong economic policies like Singapore, Hong Kong, and Chile are considered least risky

Some oil-producing countries like Kuwait, Oman, Bahrain, Qatar, and Saudi Arabia are moving up the ranking, implying the countries are going through much improvement


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2.2.3 Political Risks (cont.)

Can be further classified based on two categories: Country-specific risks

– Those which affect all companies operating within a particular country

Investment-specific risks – Risks that include discriminatory regulations


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2.3 LEGAL ENVIRONMENT

A country’s legal and regulatory environment has a great influence on its international business environment

Each country has its own legal and regulatory system in which political, economic, and socio-cultural aspects play a major role

A country’s legal environment is largely determined by its legal system and types of law that are being used

Three major legal systems Civil law Common law Religious law


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2.3.1 Civil Law

Civil law is the most widespread system of law in the world

It is also known as European Continental law The central sources of law that are recognized

as authoritative are codifications in a constitution


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2.3.2 Common Law

Common law is a law developed through decisions of courts and similar tribunals, rather than through legislative statutes or executive action

In common law legal systems, law is created and refined by judges

A decision in a case currently pending depends on decisions in previous cases and affects the law to be applied in future cases


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2.3.3 Religious Law

Religious law refers to the notion of a religious system or document used as a legal source

For example, Christian Canon Law is more similar to civil law in its use of civil codes; and Islamic Shariah law (and fiqh jurisprudence) is based on legal precedent and reasoning by analogy (Qiyas), and is thus considered a precursor to common law


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2.3.4 Pluralistic Systems

A pluralistic legal system refers to countries that use more than one type of legal system

Some countries combine civil law and common law, civil law and religious law, or common law and religious law


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2.4 ECONOMIC ENVIRONMENT

A country’s economic environment is also influenced by its political system

Countries that are more open and allow individuals and groups of people to hold assets and properties are more open in their economic system

Countries that are more rigid and control the society through the government are more closed in their economic system


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2.4 ECONOMIC ENVIRONMENT (cont.)

An economic system refers to the structure and processes that a country applies in allocating its resources and conducting commercial activities

Three main types of economic systems: Market economy Centrally planned economy Mixed economy

In Asia, alternative economic systems such as Buddhist and Islamic economic systems are also prominent


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2.4.1 Market Economy

A market economy is an economic system in which economic decisions and the pricing of goods and services are guided solely by the interactions of a country’s citizens and businesses

Also known as a free market economy A system in which the production and distribution of

goods and services take place through the free markets

Businesses and consumers decide what they will purchase and produce, and the decisions about the allocation of those resources are without government intervention


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2.4.1 Market Economy (cont.)

A market economy system also ensures the majority of production factors, such as land, plants, and other economic resources, are privately owned

Most economic decisions, which involve the types of products and capital, are determined by supply and demand in the market


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2.4.2 Centrally Planned Economy

Also known as command economy A system where production factors such as

land, plants, and other economic resources are owned and controlled by the government

The government is responsible for all decisions related to the economy, including designating the producer, deciding what should be produced, and determining the price of the products, labour, and capital


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2.4.2 Centrally Planned Economy (cont.)

Also known as communism or a closed economy It is a self-contained economic unit that has no

business or trading relations with anyone outside of that unit

Often characterized by a small amount of exposure to external markets, as opposed to the relatively open or market economy


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2.4.3 Mixed Economy

An economic system that incorporates aspects of more than one economic system

This usually means an economy that contains both private-owned and state-owned enterprises, or that combines elements of capitalism and socialism, or a mix of market economy and centrally planned economy characteristics

A mixed economy more precisely describes most contemporary economies, due to their containing both private-owned and state-owned enterprises


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2.4.3 Mixed Economy (cont.)

The most important criteria for a mixed economy is a degree of private economic freedom, including privately owned industries intermingled with centralized economic planning, which may include intervention for social welfare or state ownership of some of the means of production


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2.4.4 Buddhist Economic System

Economic systems in certain Asian countries are influenced by Buddhist philosophy to a certain extent, as it covers their social life and economic activities

Buddhist economic ethics and values pertaining to wealth and economic activity are practised as part of Buddhist social life

Issues of economic equality and distributive justice are dealt with in Buddhist economic ethics primarily through the ideas of karma, religious giving, and compassion; and focussing less on changing the overall existing distribution of wealth than on cultivating the proper ethical attitudes toward wealth and giving


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2.4.5 Islamic Economic System

Practised since the early centuries and is currently re-emerging in various parts of the world, particularly in the Middle East and some Asian countries

Based on the Islamic values and pillars as stated in the Quran and the Hadith (a record of the prophet’s words and doings)

Basic concepts that have to be implemented as part of fulfilment of the pillars of Islam are zakat (tax on excess income with certain proportion), gharar (uncertainties or deceit) and riba (interest charged on a loan)


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2.4.5 Islamic Economic System (cont.)

Current Islamic economic principles focus more on financial issues such as payment of zakat, interest free loans, and investments that are responsible for social well-being

The major difference between Islamic financial principles and conventional economic systems is interest free financial activities

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