Ideological Forces  Communism  Government should own all the major factors of production  Labor unions are government-controlled  This ideology persists in few countries  Capitalism  An economic system in which the means of production and distribution are for the most part privately owned and operated for private profit LO1

Ideological Forces  Socialism  In an extreme form socialist governments can control public utilities and some basic means of production  Socialist governments rarely perform in ways consistent with a “pure” doctrine  Many European countries including Great Britain, France, Spain, Greece, Germany, Italy, Austria, and others have practiced a form of socialism LO1

Conservative or Liberal  Conservative  In recent U.S. terms a conservative believes in minimizing government oversight of economic activity and maximizing the independence of the private sector  Liberal  In recent U.S. terms a liberal urges greater government regulation and oversight of the economy  These terms usually have entirely different meanings outside the U.S. LO1

 The government suspects that the firms are concealing profits  To increase the firm’s profitability  For ideological reasons - countries have national, government run utility companies, control strategic industries (petroleum in Mexico), etc.  To preserve jobs by supporting failing industries that are important to the economy  As a consequence of previous government’s support to protect the public investment Why Firms are Nationalized LO2

Unfair Competition?  Privately owned companies complain that government owned companies  Can cut prices because maximizing profit is not their main purpose  Get cheaper financing  Get government contracts  Get export assistance  Can hold down wages with government assistance LO2

Privatization Anywhere Any Way  Privatization does not always refer to ownership transfer from government to private entities  Activities previously conducted by the state may be contracted out  Governments may lease state-owned plants to private entities  Governments may combine a joint venture with a management contract with a private group to run a previously government- operated business LO2

Government Protection  Any government, regardless of ideology, must protect the nation’s economic welfare  National defense  Protection from banditry, piracy  Terrorism LO3

Government Protection  Terrorism  Unlawful acts of violence committed for a wide variety of reasons,  Economic gain: ransom  To overthrow a government  To gain release of imprisoned colleagues  To exact revenge for real or imagined wrongs  To punish nonbelievers of the terrorists' religion LO3

Government Protection  World wide terrorist groups: a new trend  Government-sponsored terrorism: act of war  Countries finance, sponsor, and train terrorists and/or provide sanctuaries for them LO3

Government Protection  Kidnapping for Ransom  Victims held for large ransoms  Columbia and Peru are dangerous places for American executives  U.S. executives practice “commando management” to avoid kidnap risk  Arrive secretly, meet for a few days and fly off before kidnappers learn of their presence  Such behavior is suggested when operating in countries that are on the U.S. State Department’s warning list LO3

Countermeasures by Industry  KRE (kidnap, ransom, and extortion)  Insurance to cover ransom payments, antiterrorist schools  Cassidy and Davis  The world’s largest kidnapping and extortion underwriting firm is located in London  Antiterrorist Schools LO3

Terrorism Developments  Nuclear Terrorism  Failing security standards at former Soviet installations permit uranium to be stolen, then sold to terrorists  Chemical and Biological Terrorism  Recipes from self-taught terrorists that can be downloaded from the Internet

Government Stability  Stable Government  Maintains itself in power and whose fiscal, monetary and political policies are predictable and not subject to sudden, radical changes  Unstable Government  Cannot maintain itself in power or makes sudden, unpredictable, or radical policy changes LO5

Traditional Hostilities  Traditional hostilities refer to long-standing enmities between tribes, races, religions, ideologies, or countries  Arab countries -Israel  Hutus and Tutsis in Burundi and Rwanda  Tamils and Sinhalese in Sri Lanka LO5

International Companies and Political Forces  International companies  are powerful and can influence their destiny  make decisions about where to invest, where to conduct research and development, and where to manufacture products  The financial size of many international companies relative to the host economy or economic sector gives them a strong negotiating position LO5

Country Risk Assessment  A country risk assessment (CRA) is an evaluation by the firm that assesses a country’s economic situation, policies and politics to determine how much risk exists of losing an asset or not being paid LO6

Country Risk Assessment  Types of Country Risks  Political: wars, revolutions, coups  Economic  Financial: BOP deficits  Labor: low productivity, militant unions  Legal: underdeveloped laws concerning business  Terrorism LO6

Trade Restrictions  Government officials sensitive to interest groups that are being hurt by international competition  Arguments for trade restrictions  National defense  Sanctions to punish offending nations  Protect infant or dying industry  Protect domestic jobs from cheap foreign labor  Scientific tariff or fair competition LO7

Dumping  Dumping is within the domain of the WTO  The WTO defines dumping as selling a product abroad for less than  the average cost of production at home  home market price  the price to third countries LO7

Subsidies and Countervailing Duties  Subsidies are economic actions by a government to support exports or hinder imports  Countervailing duties are additional import taxes levied by the importing nation’s government on imports that have benefited from export subsidies offered by the exporting nation’s government LO7

Tariff Barriers  Tariffs or import duties are taxes levied on imported goods to reduce their competitiveness  Ad valorem duties are assessed as a percentage of invoice value  Specific duties are assessed as a fixed sum per unit  Compound duties are a combination of ad valorem and specific duties  A variable levy may guarantee the market price of the import is equal to that of the domestic product LO8

Non-Tariff Barriers  Forms of discrimination against imports other than import duties such as  Specifications  Customs procedures  Quotas are numerical limits on specific classes of imports  Absolute: once number is reached imports stop  Global: no regard to source  Allocated or discriminating: assigned to specific countries LO8

Non-Tariff Barriers  Voluntary export restraints (VERs) are export quotas imposed by the exporting country  Orderly marketing arrangements are VERs based on formal agreements between exporting and importing countries LO8

Non-Quantitative Non-Tariff Barriers  Government participation in trade  Procurement policies  Local content requirements  Customs and other administrative procedures  Standards LO8