ch 3 4 fall 09 politics law ethics emerging ec moodle

8/14/2019 Ch 3 4 Fall 09 Politics Law Ethics Emerging Ec Moodle

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Lecture Notes Ch. 3 & 4

International Business BUSI 2490


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Objectives

Discuss different Political,

Economic and Legal Systems Examine the influence of Political

Economy:

On a countrys attractiveness as apotential target for business, and

In determining a countrys ethicalframework.

In determining potential risks

Challenges facing EmergingMarkets


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Importance of topic Countries differ significantly from one

another culturally, but also because oftheir POLITICAL & LEGAL systems

These differences constitute the mostimportant factor in determining:

The attractiveness of a target market forinternational business Benefits, Costs, Risks

The design of the strategy to use in thetarget market

How international operations must bemanaged in the target market


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Political Economy At the conceptual level (high level of abstraction) all

countries (nations) are defined by two majorsystems that influence each other:Their Political-Economic-Legal group of

systems, and

Their CultureThe term Political Economy embraces the

three systems that are strongly interdependent: THE POLITICAL SYSTEM

THE ECONOMIC SYSTEM THE LEGAL SYSTEM


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Political Systems In accordance

with the dominantgoal

COLLECTIVISM

INDIVIDUALISM

In accordance with the

way governments areorganized exercised

TOTALITARIANISM

DEMOCRACY

(PLURALISM)

Both private and public

groups need to balance

each others powerEvery aspect of

peoples lives must be

controlled to preserve order

Only individuals and

private groups can

preserve personal liberties

TotalitarianismTotalitarianism AnarchismAnarchismPluralismPluralism


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Collectivism Restricts

individuals rights in

favour of thecommon good(Plato, Marx) Socialism

Communism Social-democracy

State ownershipof the means of

production,distribution &exchange No competition

Governmentdecides production

markets financing

RESULTS:

INEFFICIENCIES --> NO GROWTH

CUSTOMER NEEDS NOT SATISFIED

HENCE: NO COMMON GOOD


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Individualism

Individuals economic and politicalfreedom are paramount

Individual diversity is encouraged

Private ownership is guaranteed

By promoting individuals self-

interest productivity is enhanced andprogress is stimulated


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Totalitarianism

No personal freedoms (expression,organization) or media freedom, NoOpposition, Control over peoples lives

Main types: Bureaucratic-Military (Secular) &Religious

COMMUNIST TOTALITARIANISM TRIBAL TOTALITARIANISM RIGHT WING TOTALITARIANISM (some

individual economic freedoms)

THEOCRATIC TOTALITARIANISM (mostcommon today: totalitarianism based on Islamicprinciples - Iran)


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DemocracyPure representative

Safeguards in Constitution: Individuals right to freedom of expression, opinion

and organization; Free media

Minority rights

Regular elections all eligible citizens allowed tovote

Limited terms for elected representatives

Fair court system independent from government

Non-political bureaucracy, police force and army

Form ofgovernmentin Canada?

(pls. see separate

file on Moodle)


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Economic Systems

MARKET ECONOMY

Ownership of the factors ofproduction is open to allwho have the ability andthe interest

Distribution of resources isbased on supply & demand

Buyers and sellers havefreedom of choice

The market is themechanism for theexchange of goods andservices

COMMANDECONOMY

The government ownsALL/MOST/MANY ofthe factors ofproduction

The governmentmakes all decisionsregarding distributionof resources (for thecommon good)


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Legal Systems

The legal system includes:

the rules and standards of conduct (includingrights, privileges, responsibilities) that anorganized community has established, i.e., TheLaw, and

the methods and mechanisms that based onsuch rules and standards settle the disputesbetween the members of the community withrespect to each other or between members of thecommunity and the community as a whole, i.e.,the judiciary or The Court System.


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eren egaSystems

COMMON LAWBased on Tradition

(history),Precedent(previous cases),custom (situations)

Judges interpret the

law & set precedentConsistency but also

Flexibility

CIVIL LAWBased on

Codes (fromJustinian &

Napoleon)

Judges apply thelaw

Less flexibility,but

Predictability

Less adversarial

THEOCRATIC LAWBased on

Religiousteachings

(Hindu, Islam,Jewish)Based on holy

documents, thefoundationscannot be

changedMainly directed atmoral behaviour

International Law & Treaties


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Law

Contracts (oral or in writing) include the terms &conditions that the parties intend to apply to their

business transaction and the rights & obligationsof the parties CONTRACT LAW:

THE BODY OF LAW THAT GOVERNS CONTRACT ENFORCEMENT CONFLICT OF LAWS

What law should be applied to the case at hand?

Common law leads to complex contracts Civil law may be not known to the other party VALIDITY OF CONTRACTS AND ENFORCEMENT OF DECISIONS

UNITED NATIONS CONVENTION ON CONTRACTS FOR THEINTERNATIONAL SALE OF GOODS (CIGS) - UNCITRAL APPLIES TO 70 COUNTRIES (2006) THAT HAVE RATIFIED THE

CONVENTION (75% OF THE WORLD TRADE)

ARBITRATION BY A RECOGNIZED ARBITRATION COURT INTERNATIONAL COURT OF ARBITRATION OF THE ICC INPARIS


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Property rights THE LEGAL PROVISIONS (OFTEN EMBEDDED IN THE

CONSTITUTION) THAT DEAL WITH THE RIGHT TO OWN, USE

AND FREELY DECIDE OVER THE INCOME OBTAINED FROMRESOURCES SUCH AS: Real Property (Immovable) Chattels (Movable) Businesses Intangibles (Intellectual Property)

ENFORCEMENT! IN CANADA NOT ENTRENCHED IN CONSTITUTION IN COMMUNISM BANNED Violation of property rights:

Private action theft, piracy, blackmail

Public action onerous licensing systems,requisition of assets

Corruption asking a cut or bribes


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Product Safety and Product

LiabilityEnormous differences from country to

country

Safety standards

Product liability companies

directors & officers

Protection of IntellectualPropertyPlease visit the following sites (MANDATORY READING):

http://users.trytel.com/~pbkerr/copyright.html andhttp://www.cipo.ic.gc.ca/eic/site/cipointernet-internetopic.nsf/eng/wr00090.ht
http://users.trytel.com/~pbkerr/copyright.htmlhttp://www.cipo.ic.gc.ca/eic/site/cipointernet-internetopic.nsf/eng/wr00090.htmlhttp://www.cipo.ic.gc.ca/eic/site/cipointernet-internetopic.nsf/eng/wr00090.htmlhttp://users.trytel.com/~pbkerr/copyright.html


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POLITICAL ECONOMY & ECONOMICPROGRESS - I

ECONOMIC PROGRESS REQUIRES INNOVATION &ENTRPRENEURSHIP Innovation: new products, processes, organizations, managerial

practices, strategies

INNOVATION & ENTREPRENEURSHIP REQUIRE

Market economy Property rights

MARKET ECONOMIES AND PROPERTY RIGHTS REQUIRE ADEMOCRACY AS FORM OF GOVERNMENT

Strong correlation between democracy/freedom and

prosperity


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Prentice Hall, 2008 International Business 4e Chapter 4 - 17

Economic SystemsEconomic Systems

Centrally Planned Market

Mostly private (individualor business) ownership of

economic resourcesGovernment and privateownership of economic

resoures split rather evenly

Government ownership ofeconomic resources and

state planning

Mixed


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Centrally Planned EconomyCentrally Planned EconomyCentrally Planned EconomyCentrally Planned Economy

Government owns most land,

factories, and other economic

resources and plans nearly all

economic activity

AsiaCentral Europe

Eastern

EuropeLatin America

Russia (1917)Eastern

Europe(1945/1947)China (1949)Cuba (1959)

Welfare of the groupis paramount

Economic and socialequality is the goal

Communist systemis needed


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Copyright 2010 Pearson Education,Inc. publishing as Prentice Hall

International Business 5e Chapter 4 - 19

Decline of Central PlanningDecline of Central Planning

Central planning failed to:

Create economic value

Provide incentives

Achieve rapid growth

Satisfy consumer needs


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Mixed EconomyMixed Economy

Noble goals:Noble goals:

Low unemploymentand poverty

Steady economic growth

Equitable distributionof wealth

But stagnant:But stagnant:

State-owned businessesuncompetitive

Prices and taxes higher,living standards mixed

Privatized state firms toboost competitiveness

Government and private parties share ownership of land,

factories, and other economic resources rather evenly


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Private parties (individuals or businesses) own vast

majority of land, factories, and other economic resources

Demand

Quantity of a good or

service that buyers are

willing to purchase at a

specific selling price

Market EconomyMarket Economy

Supply

Quantity of a good or

service that producers

are willing to provide at a

specific selling price


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Governments Role in aGovernments Role in a

Market EconomyMarket Economy

Enforce antitrust laws

Preserve property rights

Provide fiscal and

monetary stability

Preserve political stability


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Economic DevelopmentEconomic Development

Economic well-being of oneEconomic well-being of one

nations people relative tonations people relative to

another nations peopleanother nations people

Economic output (agricultural,

industrial, service)

Infrastructure(communications,

transportation, power)

People(physical health,

education level)

Productivity is keyRatio of outputs (goods &

services created)

to inputs (resources used to

create output)

Productivity is keyRatio of outputs (goods &

services created)

to inputs (resources used to

create output)

POLITICAL ECONOMY & ECONOMIC


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POLITICAL ECONOMY & ECONOMICPROGRESS - II

The spread of democracy since late 1980shas been accompanied by a spread ofmarket-based economies Command (and mixed) economies have not

performed anywhere near the marketeconomies

The HDI mirrors this reality!The Heritage Foundations index of economic

freedom mirrors this reality too!

The top ten economies in the rankingsinclude CanadaAt the lower end of the rankings come:

North Korea, Cuba, etc.


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Economic Freedom & WealthEconomic Freedom & Wealth


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Classifying CountriesClassifying Countries

Developed Country

Emerging Market

Newly Industrialized

Country

Developing Country

Highly industrialized, highly efficient, and

whose people enjoy a high quality of life

Newly industrialized countries plus thosewith potential to be newly industrialized

Recently greater national production and

exports from industrial operations

Poor infrastructure and extremely low

personal income


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Copyright 2006 Pearson Education Canada Inc.

GDP per CapitaGDP per Capita (Source: CIA The World Factbook)

2-27

Rank Country GDP/Capita (US$)

7 Norway 55,200

9 Singapore 52,000

10 U.S.A. 47,000

11 Ireland 46,200

14 Hong Kong 43,800

18 Netherlands 40,300

21 Canada 39,30031 U.K. 36,600

37 E.U. 33,400

74 Russia 15,800

104 Brazil 10,100

133 China 6,000

169 India 2,800

192 North Korea 1,700

230 Zimbabwe 200

FOR MORE DETAILS, PLEASE VISIT:http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP%29_per_capita
http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP%29_per_capitahttp://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP%29_per_capitahttp://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP%29_per_capita


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Emerging Markets

NARROW VIEW

BRIC

Brazil, Russia,India, China

TRIAD

US

Japan

Europe


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WIDE VIEW

DEVELOPEDCOUNTRIES

G-8

NorthAmerica

EU - 27 OECD

G-20

EMERGINGMARKETS

China, India,Indonesia Brazil,

Argentina,Mexico Russia, Poland,

Turkey


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Focus on ChinaFocus on China

Socialism withChinese

characteristics:

Communist after civilwar ended in 1949

Agricultural reformsbegan in 1979

Township and VillageEnterprises legal in

1984

Aggressive reform

since that time

Challenges ahead:

Political problems andsocial unrest

Unemployment andmigrant labor

Eventual(?)reunification

with Taiwan

Advancedentrepreneurial

and managementskills


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Focus on RussiaFocus on Russia

Operated under a staunchly communist system forabout 75 years

Underwent a rough transition of simultaneouseconomic and political reform

But the economy isimproving and foreigninvestment is returning

Challenges includedeveloping managerialtalent and fostering political and social stability


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Obstacles to TransitionObstacles to Transition

Cultural

differences

Cultural

differencesEnvironmental

degradation

Environmental

degradation

Capital

shortageCapital

shortage

Lack of

managerial

expertise

Lack of

managerial

expertise


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Economic TransitionEconomic Transition

Reforms include:

Reduce budget deficits and expand credit

Allow the price mechanism to determine prices

and economic activity

Legalize private firms and privatize state-owned

assets within a property rights framework Remove barriers to trade and investment and

eliminate currency controls

Ensure social-welfare system to ease transition

Fundamental reorganization of an economy and the

creation of new free-market institutions


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Rights

Ethics of doing business in countries thatviolate human rights Ethics of doing business in countries lacking

labour and environment protection laws Ethics of doing business in countries with

widespread corruption

APPROACHES: Ethical Absolutism (The Home Country Ethics)

Ethical Relativism (The Host Country Ethics When in Rome)


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Friedman ViewFriedman ViewFriedman ViewFriedman View Cultural RelativismCultural RelativismCultural RelativismCultural Relativism

UtilitarianismUtilitarianismUtilitarianismUtilitarianismRighteous MoralismRighteous MoralismRighteous MoralismRighteous Moralism

Philosophies of EthicsPhilosophies of Ethics

and Social Responsibilityand Social Responsibility

ETHICSPersonal behavior in accordance with rules

orstandards for right conduct or morality


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Fight to eliminate bribery and corruption Improve labor conditions and guard human rights

Practice fair trade to help the disadvantaged

Protect the environment and conserve resources

Corporate SocialCorporate Social

ResponsibilityResponsibility

Go beyond legal obligations to balance commitments to

investors, customers, communities, and other companies

IMPORTANCE OF POLITICAL ECONOMY


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IMPORTANCE OF POLITICAL ECONOMYANALYSIS FOR THE CANADIANEXPORTER

EVALUATION OF TARGET MARKET LEVEL OFATTRACTIVENESS

ASSESSMENT OF RISKS AND ETHICAL ISSUESIN THE TARGET MARKET


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Attractiveness BENEFITS

from POLITICAL ECONOMY REALITIES

(assess/calculate benefits both short and long term)

COSTS(visible & hidden)

(assesseconomic, financial inputs, legal factors, local practices e.g. unclear

structures, endless negotiations)Assess and

apply corrections for RISKS (including long term)

FACTORS TOCONSIDER:

Economic risk (e.g., inflation, unemployment, debt)

Legal risk (e.g., stability and independence of legal system)Political risk (e.g. new government, expropriation, offset rules)


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Types of Political RiskTypes of Political RiskTypes of Political RiskTypes of Political Risk

Conflict and violenceConflict and violenceConflict and violenceConflict and violence

Policy changesPolicy changesPolicy changesPolicy changes

Terrorism and kidnappingTerrorism and kidnappingTerrorism and kidnappingTerrorism and kidnapping

Local content requirementsLocal content requirementsLocal content requirementsLocal content requirements

Property seizureProperty seizureProperty seizureProperty seizure


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Arises from:Arises from: Peoples resentment

toward government

Territorial disputes

between nations

Ethnic, racial, orreligious disputes

Reduces ability to:Reduces ability to: Obtain materials

and equipment

Manufacture and

distribute products

Protect employees livesand firms assets

Conflict and ViolenceConflict and Violence


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Property SeizureProperty Seizure

ConfiscationForced transfer of assets from

a company to the government

without compensation

ExpropriationForced transfer of assets from

a company to the government

with compensation NationalizationForced asset transfer to the

government of an entire

industry


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Policies and LawsPolicies and Laws

Foreign ownership

Investment levels

Business activities

Foreign ownership

Investment levels

Business activities

Policy changes restrict: Local content

requirements:

Specify the portion

of a good or service

to be suppliedby local firms


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Managing Political RiskManaging Political Risk

AdaptationAdaptationIncorporate risk intoIncorporate risk into

business strategiesbusiness strategies

AdaptationAdaptationIncorporate risk intoIncorporate risk into

business strategiesbusiness strategies

LocalizationLocalization

Development assistanceDevelopment assistance

Local equity / debtLocal equity / debt

Insurance andInsurance andHiring specialized agenciesHiring specialized agencies

PartnershipsPartnerships

R f Obj ti


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Recap of Objectives

Different Political Systems

Different Economic Systems

Different Legal Systems

Political Economy & EconomicProgress

Political Economy and: The attractiveness of a potential

market The assessment of a countrys political

& economic systems as well as its ethicalframework.

The risks


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Looking forward Please Read: CHAPTER 5

Prepare presentation assignments

Prepare the chapter-end case of Ch.5:First in Asia and the World thequestions will be discussed in class

Work continually & diligently on GroupTerm Projects Follow carefully the MESPrequirements in each chapter

ch 3 4 fall 09 politics law ethics emerging ec moodle

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