mktg 769 economics, political, and legal systems lars perner, instructor 1 economics, political, and...

MKTG 769 ECONOMICS, POLITICAL, AND LEGAL SYSTEMS Lars Perner, Instructor 1

ECONOMICS, POLITICAL, AND LEGAL SYSTEMS

• Brief review of– International

economics– Trade policy

• The political environment

• Legal systems• The California

“Win-Win” Project


VERY BRIEF REVIEW OF ECONOMICS

• Exchange rates– Floating (supply and

demand)– fixed

• Trade balances and their impact on exchange rates

• Measuring country wealth– gross domestic product– “purchase parity” vs.

nominal


U.S./Euro Exhange RateEuros per Dollar

00.20.40.60.8

11.21.4

1/1/

1999

7/1/

1999

1/1/

2000

7/1/

2000

1/1/

2001

7/1/

2001

1/1/

2002

7/1/

2002

1/1/

2003

7/1/

2003

1/1/

2004

7/1/

2004

1/1/

2005

Rate


Demand for Currency Depends OnDemand for Currency Depends On

• Trade deficit (demand for foreign currency to fund this) or trade surplus (demand for country’s currency)

• Interest rates: Higher interest rates (real) attract foreign investors (especially for “stable” U.S. bonds and equities)

• Inflation: Reduces the attractiveness of holding the currency


Nominal vs. Purchase Parity Adjusted GNPs—Examples (2004)Nominal vs. Purchase Parity Adjusted GNPs—Examples (2004)

Country Nominal GNP PPA Luxemburg $56,230 $61,220

Norway 52,030 38,550

United States 41,400 41,400

Japan 37,180 30,040

Argentina 3,720 12,460

Czech Republic 9,150 18,400

Mexico 6,770 9,590

China 1,290 5,530

Source: World Bank http://siteresources.worldbank.org/DATASTATISTICS/Resources/GNIPC.pdf


Nominal vs. Purchasing Power Parity GNPs

05,000

10,00015,000

20,000

25,00030,000

35,00040,000

0 10,000 20,000 30,000 40,000

PPA


Nominal GNP vs. Ratio

0.001.002.00

3.004.005.006.00

7.008.00

0 10,000 20,000 30,000 40,000

Ratio


Cautions on Interpreting Per Capita FiguresCautions on Interpreting Per Capita Figures

• Averages are not very meaningful!– Regional variations– Socio-economic differences

• Comparison to U.S. dollar and U.S. costs is arbitrary


Obstacles to Trade: Protectionism

• Differing interests of consumers and manufacturers

• Benefits of trade tend to be more diffused than benefits to specific groups of protectionism


Approaches to Protectionism

• Tariffs• Quotas• “Voluntary” export

restrictions• Subsidies to

domestic producers/exporters

• Non-tariff barriers– legal obstacles– differential

treatment


U.S. Protectionism--justified or not...

• Defense industry• Agricultural products--

e.g., beef, sugar• Textiles• Automobiles

(“voluntary” import restrictions)

• Steel


Justifications for Protectionism

• Protect infant industry• Resist “unfair” or inappropriate

competition• Protect home market (ensure that

product can be produced domestically)--defense

• Intervene into temporary imbalance• Maintain domestic living standards• Preserve jobs• Bargaining power/retaliation (Super-301

provision in U.S.)


Effects of Protectionism

• Reduced competition ---> inflation• More tariffs • Weaken balance of payments

(have to pay more in own currency)

• Reduce choice to consumers • May induce global trade wars

(vicious cycle)


THE POLITICAL AND LEGAL ENVIRONMENTS

• Political history and stability

• Political relations between countries --impact on business

• Legal differences between countries

• Extra-territorial application of laws


The Legal Environment

• Which laws apply when doing business between countries?– contractual

specifications– treaties– extra-territorial

applications of laws

– “compulsion” as a defense


Some Political RisksSome Political Risks

• Confiscation, expropriation, and domestication

• Economic risks– Exchange controls– Local content

requirements– Import restrictions– Tax controls– Price controls– Labor problems


Development of Legal Systems

• Laws on the books vs. laws enforced (transparency)– Japan: “Administrative guidance”

• The ability to sue--a blessing or a curse?– Means of litigation– Implications for contract initiation

and enforcement

• Evolving nature of legal systems


Approaches to Law

• Common law (U.S., Britain, and many English speaking countries)

• Code law (much of Europe and Louisiana)

• Islamic law• Socialist based

law• Asian laws


Common Law

• Gradually evolved in British courts, settling issues as they arose

• Emphasis on precedent• Recognized by U.S. Constitution• Standards

– criminal: “Innocent until proven guilty”

– civil: “Preponderance of evidence”


Code (Napoleonic) Law

• Law governed by explicit statutory codes--”match” codes to issues as well as possible

• Somewhat different standards in contracts --what constitutes an “act of God” canceling contractual obligations?

• Criminal law: “Guilty until proven innocent” but difficult to bring to trial


Islamic Law

• Note that different varieties exist• Traditions of Islamic countries are

not all tied to Islamic religion per se

• Purpose of promoting justice– assets are thought to be held in “trust”– interest is frowned upon

• Much wider scope than Western law: Shar’ia: the way


Socialist Law

• Basis for law in China, former Soviet Republics, and countries influenced by Communist allies

• Based on the view that the government owns productive resources --->– contract and intellectual property laws

are typically not well developed

• Legal scholars from the West are helping to reform


Asian LawAsian Law

• Based on compromise and accommodation

• Less emphasis on abstract principles

• Less emphasis on consistent application across circumstances

• Emphasis on informal resolution


U.S. Laws of Interest to firms with U.S. Involvement

• Anti-trust• Foreign Corrupt

Influences• Anti-boycott laws• Trading With the Enemy

mktg 769 economics, political, and legal systems lars perner, instructor 1 economics, political, and...

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