The Role of Government in International Business

HOW GOVERNMENT DISCOURAGES INTERNATIONAL BUSINESS

Laws

• Governments regulate businesses in order to protect the health and safety of workers.

• Workers must be protected from dangerous working conditions (laws enforcing the wearing of hard hats, ear plugs, eye goggles, etc.)

• Other occupational protection laws prohibit employing children as farm or factory workers.

Laws

• Govt’s establish consumer protection laws to ensure that products are safe to use (all food ingredients be listed on labels; electrical safety standards "Canadian Standards Association - CSA).

• Complying with worker and consumer protection laws usually increases the cost of doing business. These increased costs can make a product less competitive with products manufactured in countries that do not have such laws.

Trade Barriers

• Governments that establish such trade barriers are enforcing protectionism.

• Examples: – Tariffs– Quotas– Boycotts: refers to an absolute restriction on the import

of certain countries. ( e.g. India)– Licensing Requirements - granted to foreign companies

by government and gives permission to import a product.

Political Risks

• Government actions or political policies can change at any time, thereby adversely affecting foreign companies.

• Examples:– Trade Sanctions– Trade Embargos: halting all importing/exporting

with a country.

Political Risks

• Examples (contd.)– Expropriation: when a government takes control

and ownership of foreign-owned assets and companies (e.g. new republics after break up of Soviet Union)

– Economic Nationalism - refers to the restriction of foreign ownership of companies and to establish laws that protect against foreign imports.

– Civil Unrest or War

Taxes

• Governments collect taxes (revenues) to pay for welfare programs, to build roads and bridges, to provide health care insurance, and to support military forces, and many other things.

• Examples:– Customs Duty - an import tax on imported

products.

Taxes

• Examples (contd.)– Sales Tax: It is considered a regressive tax

because the same rate of tax is charged to all consumers, no matter what their income level.

– Excise Tax - a tax levied on the sale or consumption of specific products or commodities such as alcohol, tobacco, telephone service, airline tickets, gasoline, and motor vehicles.

– Payroll-Related Tax - automatically deducted from an employee’s pay.

Taxes

• Examples ( contd.)– Value-Added Tax - a value-added tax (VAT) is a

tax on the increase in value of goods from each stage of production to final consumption.

– Income Taxes - tax on the amount a person or corporation earns, minus allowable deductions and credits. Corporations pay income tax, but also get tax credits for buying new equipment, investing research etc.

HOW GOVERNMENT ENCOURAGES INTERNATIONAL BUSINESS

Why they support international business

• Governments around the world encourage domestic industries to export by providing export counseling and training, export insurance, and export subsidies and tax credits.

• Governments view exporting as an effective way to created jobs and foster economic prosperity.

Establishing Free Trade Zones

• A designated area, usually around a seaport or airport, where product can be imported duty-free and then stored, assembled, and used in manufacturing.

• Only when the product leaves the zone does the importer pay duty.

Granting Most-Favoured-Nation Status

• MFN status allows a country to export into the granting country under the lowest customs duty rates.

• Products imported from countries without MFN status are charged a higher rate.

Establishing Free-Trade Agreements

• Countries under a free-trade agreement agree to eliminate duties and trade barriers on products traded among members.

Providing Export Insurance

• To exporters to guarantee against foreign commercial and political risks.

Providing Free or Subsidized Export Marketing Assistance

• Help research foreign markets, promote their products overseas, and find foreign buyers.

• EDC (Export Development Canada)

Provide Tax Incentives

• To foreign companies to invest and to locate manufacturing plants in their countries.

Reducing or Eliminating Trade Barriers

• Removing tariffs, import licenses, and quotas.

Establishing Common Markets

• Members of a common market eliminate duties and other trade barriers, allowing companies to invest freely in each member’s country, and allow workers to mover freely across borders.

• Common-market members also have a common external duty on products being imported from nonmember countries.