International Business BUSI 2490

Lecture Notes Ch. 3 & 4

Objectives
 Discuss different Political,
Economic and Legal Systems
 Examine the influence of Political
Economy:
 On a country’s “attractiveness” as a
potential target for business, and
 In determining a country’s ethical
framework.
 In determining potential risks
 Challenges facing Emerging
Markets
Importance of topic
 Countries differ significantly from one
another culturally, but also because of
their POLITICAL & LEGAL systems
 These differences constitute the most
important factor in determining:
 The “attractiveness” of a target market for
international business
 Benefits, Costs, Risks

 The design of the strategy to use in the

target market
 How international operations must be
managed in the target market
Political Economy
 At the conceptual level (high level of abstraction) all
countries (nations) are defined by two major
“systems” that influence each other:
 Their Political-Economic-Legal group of
systems, and
 Their Culture

 The term “Political Economy” embraces the

three systems that are strongly interdependent:
 THE POLITICAL SYSTEM
 THE ECONOMIC SYSTEM

 THE LEGAL SYSTEM

 Political Systems
 In accordance  In accordance with the
with the dominant way governments are
goal organized – exercised
 TOTALITARIANISM
 COLLECTIVISM
 DEMOCRACY
 INDIVIDUALISM
(PLURALISM)

Totalitarianism Pluralism Anarchism

Both private and public

groups need to balance
Every aspect of each other’s power Only individuals and
people’s lives must be private groups can
controlled to preserve order preserve personal liberties
 Collectivism State ownership
 Restricts of the means of
individuals’ rights in
favour of the
production,
“common good” distribution &
(Plato, Marx) – exchange
Socialism
 No competition
 Communism
 Social-democracy
 Government
decides
 production
 markets
RESULTS:
 financing
• INEFFICIENCIES --> NO GROWTH
• CUSTOMER NEEDS NOT SATISFIED
HENCE: NO “COMMON GOOD”
 Individualism
 Individuals’ economic and political
freedom are paramount
 Individual diversity is encouraged
 Private ownership is guaranteed

By promoting individuals’ “self-

interest” productivity is enhanced and
progress is stimulated
Totalitarianism
 No personal freedoms (expression,
organization) or media freedom, No
Opposition, Control over people’s lives
 Main types: Bureaucratic-Military (Secular) &
Religious
 COMMUNIST TOTALITARIANISM
 TRIBAL TOTALITARIANISM
 RIGHT WING TOTALITARIANISM (some
individual economic freedoms)
 THEOCRATIC TOTALITARIANISM (most
common today: totalitarianism based on Islamic
principles - Iran)
Democracy Form of
government
in Canada?
 Pure – representative (pls. see separate
file on Moodle)
 Safeguards – in Constitution:
 Individual’s right to freedom of expression, opinion
and organization; Free media
 Minority rights

 Regular elections – all eligible citizens allowed to

vote
 Limited terms for elected representatives

 Fair court system independent from government

 Non-political bureaucracy, police force and army

 Economic Systems
MARKET ECONOMY
COMMAND
Ownership of the factors of
ECONOMY


production is open to all

who have the ability and
the interest
 Distribution of resources is
based on supply & demand
 Buyers and sellers have
freedom of choice
 The market is the
mechanism for the
exchange of goods and
services
The government owns
ALL/MOST/MANY of
the factors of
production
 The government
makes all decisions
regarding distribution
of resources (“for the
common good”)
Legal Systems
The legal system includes:
the rules and standards of conduct (including
rights, privileges, responsibilities) that an
organized community has established, i.e., “The
Law”, and
the methods and mechanisms that – based on
such rules and standards – settle the disputes
between the members of the community with
respect to each other or between members of the
community and the community as a whole, i.e.,
the “judiciary” or “The Court System”.
 Different Legal
Systems
CIVIL LAW
COMMON LAW THEOCRATIC LAW
Based on Tradition Based on Based on
(history),Precedent
(previous cases), “Codes” (from Religious
custom (situations)
Justinian & teachings
Judges interpret the
law & set precedent (Hindu, Islam,
Consistency but also
Napoleon) Jewish)
Flexibility
Judges apply the Based on holy
documents, the
law foundations
cannot be
Less flexibility, changed
but Mainly directed at
Predictability moral behaviour
Less adversarial
International Law & Treaties
 Differences in Contract
Law
 Contracts (oral or in writing) – include the terms &
conditions that the parties intend to apply to their
business transaction and the rights & obligations
of 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 THE
INTERNATIONAL 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 IN
PARIS
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 FROM
“RESOURCES” 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
 Protection of Intellectual
Property
Please visit the following sites (MANDATORY READING):
http://users.trytel.com/~pbkerr/copyright.html and
http://www.cipo.ic.gc.ca/eic/site/cipointernet-internetopic.nsf/eng/wr00090.htm

 Product Safety and Product

Liability
 Enormous differences from country to
country
 Safety standards
 Product liability
 companies
 directors & officers
POLITICAL ECONOMY & ECONOMIC
PROGRESS - 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 A

DEMOCRACY AS FORM OF GOVERNMENT
 Strong correlation between democracy/freedom and
prosperity
 Economic Systems

Centrally Planned Mixed Market

Government ownership of Mostly private (individual

economic resources and or business) ownership of
state planning economic resources
Government and private
ownership of economic
resoures split rather evenly

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

 Centrally Planned Economy

Government owns most land,

factories, and other economic Asia
resources and plans nearly all Central Europe
economic activity Eastern
Europe
Latin America
 Welfare of the group
is paramount Russia (1917)
 Economic and social
Eastern
equality is the goal
Europe
(1945/1947)
 Communist system China (1949)
is needed Cuba (1959)

© Prentice Hall, 2008 International Business 4e Chapter 4 - 18

 Decline of Central Planning

Central planning failed to:

 Create economic value
 Provide incentives
 Achieve rapid growth
 Satisfy consumer needs

Copyright © 2010 Pearson Education, International Business 5e Chapter 4 - 19

Inc. publishing as Prentice Hall
 Mixed Economy

Government and private parties share ownership of land,

factories, and other economic resources rather evenly

Noble goals: But stagnant:

 Low unemployment  State-owned businesses
and poverty uncompetitive
 Steady economic growth  Prices and taxes higher,
living standards mixed
 Equitable distribution
of wealth  Privatized state firms to
boost competitiveness

© Prentice Hall, 2008 International Business 4e Chapter 4 - 20

 Market Economy

Private parties (individuals or businesses) own vast

majority of land, factories, and other economic resources

Supply Demand
Quantity of a good or Quantity of a good or
service that producers service that buyers are
are willing to provide at a willing to purchase at a
specific selling price specific selling price

© Prentice Hall, 2008 International Business 4e Chapter 4 - 21

 Government’s Role in a
Market Economy

 Enforce antitrust laws

 Preserve property rights

 Provide fiscal and

monetary stability

 Preserve political stability

© Prentice Hall, 2008 International Business 4e Chapter 4 - 22

 Economic Development

Economic well-being of one

nation’s people relative to
another nation’s people


Economic output (agricultural,
industrial, service)


Infrastructure (communications,
Productivity is key
transportation, power)
Ratio of outputs (goods &
services created)

People (physical health, to inputs (resources used to
education level) create output)

© Prentice Hall, 2008 International Business 4e Chapter 4 - 23

POLITICAL ECONOMY & ECONOMIC
PROGRESS - II

 The spread of democracy since late 1980s

has been accompanied by a spread of
market-based economies
 Command (and mixed) economies have not
performed anywhere near the market
economies
 The HDI mirrors this reality!
 The Heritage Foundation’s index of economic
freedom mirrors this reality too!
 The top ten economies in the rankings
include Canada
 At the lower end of the rankings come:
North Korea, Cuba, etc.
 Economic Freedom & Wealth

© Prentice Hall, 2008 International Business 4e Chapter 4 - 25

 Classifying Countries

Developed Country Highly industrialized, highly efficient, and

whose people enjoy a high quality of life

Emerging Market Newly industrialized countries plus those

with potential to be newly industrialized

Newly Industrialized Recently greater national production and

Country exports from industrial operations

Developing Country Poor infrastructure and extremely low

personal income

© Prentice Hall, 2008 International Business 4e Chapter 4 - 26

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

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 39,300  

31 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

Copyright © 2006 Pearson Education Canada Inc.

2-27
Developed Countries –
Emerging Markets
NARROW VIEW
 BRIC
 Brazil, Russia,
India, China
 TRIAD
 US

 Japan

 Europe
 WIDE VIEW
DEVELOPED
COUNTRIES
EMERGING
MARKETS  G-8
 China, India,  North
Indonesia
 Brazil,
America
Argentina,  EU - 27
Mexico  OECD
 Russia, Poland,
 G-20
Turkey
 Focus on China

Socialism with
Chinese Challenges ahead:
characteristics:
 Political problems and
 Communist after civil social unrest
war ended in 1949  Unemployment and
 Agricultural reforms migrant labor
began in 1979  Eventual(?)
 Township and Village reunification
Enterprises legal in with Taiwan
1984  Advanced
 Aggressive reform entrepreneurial
since that time and management
Copyright © 2010 Pearson Education, International Business 5e Chapter 4 - 30
Inc. publishing as Prentice Hall skills
 Focus on Russia


Operated under a staunchly communist system for
about 75 years

Underwent a rough transition of simultaneous
economic and political reform

But the economy is
improving and foreign
investment is returning

Challenges include
developing managerial
talent and fostering political and social stability

Copyright © 2010 Pearson Education, International Business 5e Chapter 4 - 31

Inc. publishing as Prentice Hall
 Obstacles to Transition

Lack of
Capital
managerial
shortage
expertise

Environmental Cultural
degradation differences

Copyright © 2010 Pearson Education, International Business 5e Chapter 4 - 32

Inc. publishing as Prentice Hall
 Economic Transition
Fundamental reorganization of an economy and the
creation of new free-market institutions

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
Copyright © 2010 Pearson Education, International Business 5e Chapter 4 - 33
Inc. publishing as Prentice Hall
Ethics & Human
Rights
 Ethics of doing business in countries that
violate 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…”)
 Philosophies of Ethics
and Social Responsibility
ETHICS
Personal behavior in accordance with rules
or
standards for right conduct or morality
Friedman View Cultural Relativism

Righteous Moralism Utilitarianism

Copyright © 2010 Pearson Education, International Business 5e Chapter 3 - 35

Inc. publishing as Prentice Hall
 Corporate Social
Responsibility
Go beyond legal obligations to balance commitments to
investors, customers, communities, and other companies

 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

Copyright © 2010 Pearson Education, International Business 5e Chapter 3 - 36

Inc. publishing as Prentice Hall
IMPORTANCE OF POLITICAL ECONOMY
ANALYSIS FOR THE CANADIAN
EXPORTER

 EVALUATION OF TARGET MARKET LEVEL OF

ATTRACTIVENESS

 ASSESSMENT OF RISKS AND ETHICAL ISSUES

IN THE TARGET MARKET
 Attractiveness
 BENEFITS
from POLITICAL ECONOMY REALITIES
(assess/calculat
e benefits both short and long term)
 COSTS
(visible & hidden)
(assess
economic, financial inputs, legal factors, local practices – e.g. unclear
structures, endless negotiations)
 Assess and
apply corrections for RISKS (including long term)
FACTORS TO
CONSIDER:
 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)
 Types of Political Risk

Conflict and violence

Terrorism and kidnapping
Property seizure
Policy changes
Local content requirements

© Prentice Hall, 2008 International Business 4e Chapter 3 - 39

 Conflict and Violence

Arises from: Reduces ability to:

 People’s resentment  Obtain materials
toward government and equipment
 Territorial disputes  Manufacture and
between nations distribute products
 Ethnic, racial, or  Protect employees’ lives
religious disputes and firm’s assets

© Prentice Hall, 2008 International Business 4e Chapter 3 - 40

 Property Seizure

Confiscation
Forced transfer of assets from
a company to the government
without compensation

Expropriation
Forced transfer of assets from
a company to the government
Nationalization
with compensation
Forced asset transfer to the
government of an entire
industry

© Prentice Hall, 2008 International Business 4e Chapter 3 - 41

 Policies and Laws

Policy changes restrict: Local content

requirements:

 Foreign ownership Specify the portion

of a good or service
 Investment levels to be supplied
 Business activities by local firms

© Prentice Hall, 2008 International Business 4e Chapter 3 - 42

 Managing Political Risk

Local equity / debt

Localization
Adaptation
Adaptation
Incorporaterisk
Incorporate riskinto
into Development assistance
businessstrategies
business strategies

Partnerships

Insurance and
Hiring specialized agencies
© Prentice Hall, 2008 International Business 4e Chapter 3 - 43
Recap of Objectives
 Different Political Systems
 Different Economic Systems
 Different Legal Systems
 Political Economy & Economic
Progress
 Political Economy and:
 The “attractiveness” of a potential
market
 The assessment of a country’s political
& economic systems as well as its ethical
framework.
 The risks
Looking forward
 Please Read: CHAPTER 5
 Prepare presentation assignments
 Prepare the chapter-end case of Ch.5:
“First in Asia and the World” – the
questions will be discussed in class
 Work continually & diligently on Group
Term Projects – Follow carefully the MESP
requirements in each chapter