The Political and Economic Environment

Economic and political systems and policies are interrelated and always changing. There are many different types of economic and political systems. These systems play a large role for a business that is deciding which international markets to pursue. Introduction

Countries active in international trade naturally have an interest in protecting politically powerful elements in their own economies. As such, trade policies and economic controls have come into existence, creating both tariff and nontariff barriers to free trade. Introduction

Stability of Government Policies Five main political causes of international market instability – Some forms of government seem to be unstable – Changes in political parties during elections can have major effects on trade conditions – Nationalism – Animosity targeted toward specific countries – Trade disputes 4

Worst Case Political Risks Confiscation – the seizing of a company’s assets without payment Expropriation – where the government seizes an investment but makes some reimbursement for the assets Domestication – when host countries gradually cause the transfer of foreign investments to national control and ownership through a series of government decrees – Mandating local ownership – Greater national involvement in a company’s management – An example of domestication is given on the next slide 5

Domestication - Example A good example of domestication can be seen in the nationalization of Air-India (formerly called as Tata Airlines). Tata owned and operated Air-India and Indian Airlines until they were nationalized by the Indian Government, against Tata’s wishes. Very recently, the Indian government has asked Mr. Ratan Tata, chairman of the Tata group, to head an advisory panel to revive Air India. sarchive&sid=ag_NJBLk6TVo sarchive&sid=ag_NJBLk6TVo 6

Political and Social Activists (PSAs) Not usually government sanctioned Can interrupt the normal flow of trade Range from those who seek to bring about peaceful change to those who resort to violence and terrorism to effect change – Worldwide boycott of Nestle products The Internet has become an effective tool of PSAs to spread the word – Protest rallies against the U.S. – Iraq War 7

Cyberterrorism and Cybercrime (1 of 2) The internet is a vehicle for terrorist and criminal attacks to inflict damage on a company with little chance of being caught – By foreign and domestic antagonists It is hard to determine if a cyber attack has been launched – By a rogue state – A terrorist – A hacker as a prank 8

Cyberterrorism and Cybercrime (2 of 2) Each wave of viruses – Gets more damaging – Spreads so rapidly that considerable harm is done before it can be stopped Tools for cyberterrorism - can be developed to do considerable damage – To a company, – An entire industry – A country’s infrastructure Mounting concern over the rash of attacks – Business leaders and government officials addressed a Group of Eight conference 9

Nongovernmental Organizations (NGOs) Nongovernmental organizations (NGOs) are increasingly affecting policy decisions made by governments – Protests – Lobbying – Collaborations with governmental organizations Many also are involved in mitigating much of the human misery plaguing parts of the planet – Red Cross and the Red Crescent – Amnesty International – Oxfam – UNICEF – Care and Habitat for Humanity 10

Violence and Terrorism International warfare is fast becoming obsolete as the number of wars have declined steadily since the end of the Cold War The greatest threat to peace and commerce for the twenty-first century remain civil strife and terrorism Tourism and International education are two industries that have been affected by terrorism. An example of terrorism is the attacks by Sudanese terrorists on ships. 11

Politically Sensitive Products and Issues Politically sensitive products – Are perceived to have an effect on the environment, exchange rates, national and economic security, and the welfare of people – Are publicly visible or subject to public debate Health is often the subject of public debate, and products that affect or are affected by health issues can be sensitive to political concern The European Union has banned hormone- treated beef for more than a decade 12

Political Risk Insurance Political risk insurance companies can also provide protection against: 1.Contract repudiation 2.Negative government actions Equity restrictions Repatriation restrictions Taxation discrimination Non-tariff barrier imposition Payment delays

Political Risk Insurance 3.Event intervention Kidnapping of executives Strikes or sabotage for political reasons 4.Process deterioration Lack of enforcement of copyright agreements Government interference in operations Bribery and systematic corruption

Lessening Political Vulnerability (1 of 2) Relations between governments and MNCs are generally positive if the investment – Improves the balance of payments by increasing exports or reducing imports through import substitution – Uses locally produced resources – Transfers capital, technology, and/or skills – Creates jobs – Makes tax contributions Political parties often focus public opinion on the negative aspects of MNCs whether true or false – As scapegoats for their own failure – To serve their own interests 15

Lessening Political Vulnerability (2 of 2) Strategies that MNCs use to minimize political vulnerability and risk – Joint ventures – Expanding the investment base – Licensing – Planned domestication – Political bargaining – Political payoffs – Insurance – Adding a risk premium to investments 16

Name 3 types of political risk? Give an example of how a company could be negatively affected by terrorism? Give an example of a politically sensitive product? Give 3 examples of how companies try to lessen political risk Questions

Economic Risks (1 of 2) Exchange controls – Stem from shortages of foreign exchange held by a country Local-content laws – Countries often require a portion of any product sold within the country to have local content Import restrictions – Selective restrictions on the import of raw materials to force foreign industry to purchase more supplies within the host country and thereby create markets for local industry 18

Economic Risks (2 of 2) Tax controls – A political risk when used as a means of controlling foreign investments Price controls – Essential products that command considerable public interest Pharmaceuticals, Food, and Gasoline Labor problems – Labor unions have strong government support that they use effectively in obtaining special concessions from business 19

Economic Intelligence Unit (EIU) Country Risk Service –Complete internationally comparable and regularly update country risk reports for 100 developing and highly indebted countries. –Generate credit ratings. –Quantifies risks that affect institutions that lend money or finance trade.

Economic Intelligence Unit (EIU) Assesses composite country risk through 4 types of risk: 1.Political (22%) 2.Economic policy (28%) 3.Economic structure (27%) 4.Liquidity (23%)

Economic Intelligence Unit (EIU) Political Risk –Political stability War Social unrest Orderly political transfer Politically motivated violence International disputes

Economic Intelligence Unit (EIU) Political Risk –Political effectiveness Change in government or pro-business orientation. Institutional effectiveness Bureaucracy Transparency Corruption Crime

Economic Intelligence Unit (EIU) Economic Policy Risk –Monetary policy Inflation rate Direction of inflation Policies favorable to savers Ability to boost interest rates Monetary stability Real lending rates Boom/bust scenario Financial liberalization

Economic Intelligence Unit (EIU) Economic Policy Risk –Exchanger Rate Policy Real appreciation Exchange rate regime Change in prospects Expectations of regime change Interest differentials Black market or dual exchange rate

Economic Intelligence Unit (EIU) Economic Policy Risk –Fiscal policy Public-sector budget/GDP Cumulative years of public-sector budge t balance Government’s ability to generate tax rev enue Public debt/GDP Direction of public debt/GDP

Economic Intelligence Unit (EIU) Economic Policy Risk –Trade Policy Trade liberalization Exports/GDP –Regulatory Environment Official date (quality and timeliness) Policy towards foreign capital Popular attitudes towards foreign capital Restrictions on transfers

Economic Intelligence Unit (EIU) Economic Structure RiskEconomic Structure Risk –Growth National savings/GDP Fixed investment/GDP Pension system Investment efficiency Real GDP growth, average Real GDP growth, latest Real GDP growth, volatily

Economic Intelligence Unit (EIU) Ratings Bands –Band A (0 to 20 points) Countries which have no FX constraints on debt-service ability. No problems financing their trade. Economic policies deemed to be effectiv e. Have working government capable of ef fective policy implementation. No constraints on international transacti ons.

Economic Intelligence Unit (EIU) Ratings Bands –Band B (21 to 40 points) Countries which have no significant FX constraints, but whose economic policie s or political structure may be a cause f or concern. No major risks with financial transaction s, but political and economic risks need to be watched closely.

Economic Intelligence Unit (EIU) Ratings Bands –Band C (41 to 60 points) Countries which have a record of period ic FX crises and political problems. Usually in a state of flux with persistent, but controllable, internal and external im balances. These countries offer exciting opportunit ies for foreign investors, but with caution.

Economic Intelligence Unit (EIU) Ratings BandsRatings Bands –Band D (61 to 80 points) Countries which are currently suffering from serious economic and political problems. Frequent debt rescheduling. Restricted access to official lending. Narrow commodity export-dependent base. Any investment should be carefully considered and would best be postponed.

Economic Intelligence Unit (EIU) Ratings Bands –Band E (81 to 100 points) Countries which have severe fiscal imba lances. Hyperinflation. FX will be scarce. Might be on verge of war or civil war. Risk is extremely high.

Euromoney Provides a full country risk rating based on 9 individual variables. –These reports include Corruption Perception Index.

world-factbook/ -world-factbook/ See country notebook. Economic Environment

What country has a high enrollment in tertiary education? Find the GDP per capita of Malaysia? Make a short report on the political and economic risk for any country mainly based on the EIU data. Internet tasks

Legal Environment – Chapter 7

Companies may face various legal and regulatory hurdles. Local legal systems determine how business is conducted in a foreign country. International regulations exist only to the extent that individual countries agree to follow certain standards of conduct. Introduction

Bases for today’s legal systems The important factors in jurisdiction of legal disputes The various methods of dispute resolution The unique problems of protecting intellectual property rights internationally Cyber law Commercial law within countries Overview

Four heritages form the basis for the majority of the legal systems of the world – Common law – Civil or code law – Islamic law – Marxist-socialist tenets Even though a country’s laws may be based on the doctrine of one of the four legal systems its individual interpretation may vary significantly Bases for Legal Systems

Common law – Makes decisions through the past decisions of higher courts. – Applies established and customary law principles to a similar set of facts – Are recognized as not being all-inclusive – Ownership is established by use Code law – Legal system is generally divided into three separate codes Commercial Civil Criminal – Ownership is determined by registration Common and Code Law

The basis for Islamic law is interpretation of the Koran Islamic law defines a complete system that prescribes specific patterns of social and economic behavior for all individuals – Property rights – Economic decision making – Types of economic freedom Among the unique aspects of Islamic law is the prohibition against the payment of interest The Islamic system – Places emphasis on the ethical, moral, social, and religious dimensions to enhance equality and fairness for the good of society Islamic Law

No judicial body exists to deal with legal commercial problems arising between citizens of different countries – Legal disputes can arise in three situations Between governments Between a company and a government Between two companies Jurisdiction is generally determined on the basis of: – Jurisdictional clauses included in contracts – Where a contract was entered into – Where the provisions of the contract were performed Most clear-cut decisions can be made: – When contracts or legal documents supporting a business transaction include a jurisdictional clause Jurisdiction in International Legal Disputes

The best advice is to seek settlement Deterrents to litigation – Fear of creating a poor image and damaging public relations – Fear of unfair treatment in a foreign court – Difficulty in collecting a judgment that may otherwise have been collected in a mutually agreed settlement through arbitration – The relatively high cost and time required when bringing legal action – Loss of confidentiality Litigation

A mediator is appointed, acceptable to both sides. The mediator listens to both sides and offers a reasonable solution Both parties should accept the decision of the mediator and agree. It is not legally binding Mediation

An arbitrator is appointed, usually a person with expertise in the area. Both sides legally agree to accept the arbitrators decision. Much cheaper than litigation and less public. Arbitration

What is intellectual property? Companies spend millions of dollars establishing brand names or trademarks to symbolize quality and design and to entice customers Millions are spent on research to develop products, processes, designs, and formulas - patents Intellectual or industrial properties are among the most valuable assets New technologies developed to prevent piracy Protection of Intellectual Property Rights – A Special Problem

Lost sales from the unauthorized use of U.S. patents, trademarks, and copyrights – Amount to more than $100 billion annually The piracy industry has grown so sophisticated – Many counterfeit goods are indistinguishable from original Piracy actually can serve come companies – Microsoft Counterfeit pharmaceuticals – 2% of the $327 billion worth of drugs sold each year Counterfeiting and Piracy

Failing to adequately protect intellectual property rights can lead to the legal loss of rights in potentially profitable markets There have been many cases where companies have legally lost the rights to trademarks and have had to buy back these rights or pay royalties for their use – McDonald’s in Japan, Coach in Korea Many businesses fail to take proper steps to legally protect their intellectual property Inadequate Protection

Prior Use – whoever can show first use is typically considered the rightful owner Registration – the first to register a trademark or other property right is considered the rightful owner A company that believes it can always establish ownership in another country by proving it used the trademark or brand name first is wrong and risks the loss of these assets It is best to protect intellectual property rights through registration For example Jordan. Prior Use Versus Registration

Three major international conventions – Paris Convention for the Protection of Industrial Property (100 countries) – Inter-American Convention – Madrid Arrangement (26 European countries) World Intellectual Property Organization (WIPO) – Responsible for the promotion of the protection of intellectual property and for the administration of the various multilateral treaties through cooperation among its member states Patent Cooperation Treaty (PCT) European Patent Convention (EPC) The Trade-Related Aspects of Intellectual Property Rights (TRIPs) International Conventions

Apart from the US usually there are regulations that the holder of the patent should share the knowledge within their country. If patent is not used within an average of 3 years then it expires. Us idea – encourage and protect innovation Korean Idea – one persons idea should benefit all. Patents

1. Register IP with relevant agencies 2. Try mediation and arbitration 3. Complain to the host government 4. Complain to the WTO Microsoft – see piracy as a free trial Warner Bros – Change what the market will bear Protecting IP

All countries have laws regulating marketing activities – Promotion – Product development – Labeling – Pricing – Channels of distribution Marketing Laws

Differences across markets cause problems for trade negotiators – particularly for managers and their firms – Some countries only have a few marketing laws with poor enforcement – Others have detailed, complicated rules that are strictly enforced e.g. Sweden, France, Canada, China, EU Marketing Laws

Domain names – usually can company can only buy a name already registered Taxes – Amazon and EBay, TV, movies services. Jurisdiction: If the e-commerce seller advertises the consumers country then the consumers country hears the case. Digital signatures – Legal acceptance becoming more widespread. Cyber law

What are the main differences between common and code law and where are they mainly practiced? What should you do before making a contract to protect yourself legally? Why might a company prefer mediation or arbitration to litigation? How should we protect our intellectual property in an overseas market? Questions

1. What legal system does Bulgaria use? -world-factbook/fields/2100.htmlhttps:// -world-factbook/fields/2100.html 2. What does the PCT help with? 3. What service does the ICC arbitration provide? services/arbitration-and-adr/ services/arbitration-and-adr/ Internet tasks