Ch 3 4 Fall 09 Politics Law Ethics Emerging Ec Moodle

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 with the dominant goal

 In accordance with the

way governments are organized – exercised  TOTALITARIANISM

 COLLECTIVISM  INDIVIDUALISM Totalitarianism

 DEMOCRACY

(PLURALISM) Anarchism

Pluralism

Both private and public groups need to balance Every aspect of each other’s power people’s lives must be controlled to preserve order

Only individuals and private groups can preserve personal liberties

Collectivism State ownership  Restricts

individuals’ rights in favour of the “common good” (Plato, Marx) – Socialism  Communism  Social-democracy

of the means of production, distribution & exchange  No competition  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’ “selfinterest” 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  Pure – representative  Safeguards – in Constitution:

Form of government in Canada? (pls. see separate file on Moodle)

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 Ownership of the factors of 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 

COMMAND ECONOMY 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 Based on Tradition (history),Precedent (previous cases), custom (situations) Judges interpret the law & set precedent Consistency but also Flexibility

Based on “Codes” (from Justinian & Napoleon) Judges apply the law Less flexibility, but

THEOCRATIC LAW Based on Religious teachings (Hindu, Islam, Jewish) Based on holy documents, the foundations cannot be changed Mainly directed at moral behaviour

Predictability 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 resources and plans nearly all economic activity

Asia Central Europe Eastern Europe Latin America

 Welfare of the group is paramount  Economic and social equality is the goal  Communist system is needed

© Prentice Hall, 2008

International Business 4e

Russia (1917) Eastern Europe (1945/1947) China (1949) Cuba (1959) 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, Inc. publishing as Prentice Hall

International Business 5e

Chapter 4 - 19

Mixed Economy Government and private parties share ownership of land, factories, and other economic resources rather evenly

Noble goals:

But stagnant:

 Low unemployment and poverty

 State-owned businesses uncompetitive

 Steady economic growth

 Prices and taxes higher, living standards mixed

 Equitable distribution of wealth

© Prentice Hall, 2008

 Privatized state firms to boost competitiveness

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 service that producers are willing to provide at a specific selling price

Quantity of a good or service that buyers are willing to purchase at a 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, transportation, power)



People (physical health, education level) © Prentice Hall, 2008

Productivity is key Ratio of outputs (goods & services created) to inputs (resources used to create output)

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 Rank

Country

(Source: CIA – The World Factbook) GDP/Capita (US$)

 

7

Norway

55,200

 

9

Singapore

52,000

 

10

U.S.A.

11

Ireland

46,200

 

14

Hong Kong

43,800

 

18

Netherlands

40,300

 

21

Canada

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

47,000

39,300

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

China, India, Indonesia  Brazil, Argentina, Mexico  Russia, Poland, Turkey 

G-8  North America  EU - 27  OECD  G-20 

Focus on China Socialism with Chinese characteristics:

Challenges ahead:  Political problems and social unrest

 Communist after civil war ended in 1949

 Unemployment and migrant labor

 Agricultural reforms began in 1979  Township and Village Enterprises legal in 1984  Aggressive reform since that time Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

 Eventual(?) reunification with Taiwan

 Advanced entrepreneurial and management International Business 5e Chapter 4 - 30 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, Inc. publishing as Prentice Hall

International Business 5e

Chapter 4 - 31

Obstacles to Transition Lack of managerial expertise

Capital shortage

Environmental degradation

Cultural differences

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

International Business 5e

Chapter 4 - 32

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, Inc. publishing as Prentice Hall

International Business 5e

Chapter 4 - 33

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, Inc. publishing as Prentice Hall

International Business 5e

Chapter 3 - 35

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, Inc. publishing as Prentice Hall

International Business 5e

Chapter 3 - 36

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 

from POLITICAL ECONOMY REALITIES e benefits both short and long term) (visible & hidden)

BENEFITS

(assess/calculat  COSTS

(assess economic, financial inputs, legal factors, local practices – e.g. unclear structures, endless negotiations)

apply corrections for RISKS (including long term) CONSIDER:

 Assess and FACTORS TO

 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 toward government

 Obtain materials and equipment

 Territorial disputes between nations

 Manufacture and distribute products

 Ethnic, racial, or religious disputes

 Protect employees’ lives 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 with compensation

© Prentice Hall, 2008

Nationalization Forced asset transfer to the government of an entire industry

International Business 4e

Chapter 3 - 41

Policies and Laws Local content requirements:

Policy changes restrict:

 Foreign ownership  Investment levels  Business activities

© Prentice Hall, 2008

Specify the portion of a good or service to be supplied by local firms

International Business 4e

Chapter 3 - 42

Managing Political Risk Local equity / debt Localization

Adaptation Adaptation Incorporaterisk riskinto into Incorporate businessstrategies strategies business

Development assistance 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 