IBUS2101_S1 2011_WK5_Political%2C Legal %26 Economic Environments_Gracy Stu

8/3/2019 IBUS2101_S1 2011_WK5_Political%2C Legal %26 Economic Environments_Gracy Stu

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n erna ona us nessStrategy

Week5: Political, Legal & EconomicEnvironments

Semester 1, 2011

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Agenda

Part I: Political & legal environments

Part II: Economic environment

Part II: A tale of two countries in Asia

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Part I: Political and legal environments

What is a political system?

- A political system is the system of government in

a nat on.

- It comprises the relationships and institutions by which

governments generate policies in response to the demands or

support of the general public.

- Government refers to the formal institutions and processes that

are responsible for making and enforcing the collective decisions

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.

Political systems can be assessed according to:

- the degree to which they emphasise collectivism as opposedto individualism

- the degree to which they are democratic or totalitarian.

Political systems

o Collectivism

- Stresses the primacy of collective goals over individual goals; In moderntimes, this collectivist mantle has been icked u b socialists.

- Socialism is a political system that believes in state ownership of acountrys means of production, distribution and exchange so that all canbenefit.

o Individualism

- Holds that an individual should be free to determine his or her economicand political pursuits.

- Focuses on uaranteein individual freedom and self-ex ression and

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letting people pursue their own self-interest in order to achieve the bestoverall good for society.

- Translates into an advocacy fordemocratic political systems and freemarket economics.

- Since the late 1980s, democratic ideals and free market economics haveswept away socialism and communism in many states.


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Political systemso Democracy

- Refers to a political system in which government is by the people,exercised either directly or through elected representatives.

- The most common form of democracy today is representativedemocracy, where elected representatives vote on behalf ofconstitutes.

o Totalitarianism

- Is a form of government in which one person or political partyexercises absolute control over all spheres of human life, andopposing political parties are prohibited.

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- Four major forms of totalitarianism:

- Communist totalitarianism- Theocratic totalitarianism- Tribal totalitarianism- Right-wing totalitarianism

Implications on FDI

Shifting ideology and FDI The radical view

- traces its roots to Marxist political and economic theory;

- The MNE is an instrument of imperialist domination and a tool for

exploiting host countries to the exclusive benefit of their capitalist-

imperialist home countries. The free market view

- traces its roots to the international trade theories of Smith andRicardo; FDI by MNEs increases the overall efficiency of the world

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economy

Pragmatic nationalism

- FDI has both benefits and costs; Recognising this, countries adopting a

pragmatic stance engage in policies that actively pursue FDI in a belief

that FDI serves the national interest, as benefits outweigh the costs.


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Legal systems

What is a legal system?

- Refers to the rules, or laws, that regulate behaviour, along with

the processes by which the laws of a country are enforced and

through which redress for grievances is obtained.

Different legal systems

- Common law: based on tradition, precedent and custom, a common

law system is found in most of Great Britains former colonies,

including the US.

- Civil law: based on a very detailed set of laws organised into codes.Over 80 countries, including Germany, France, Japan and Russia,

operate with a civil law system.

- Theocratic law: Islamic law is the most widely practiced theocratic law

system (based on religious teachings) in the modern world.

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Legal systems

Various laws related with IB:

Contract law: is the bod of law that overns contract enforcement.

Product Origin laws: frequently determine duties and tariffs to be

paid.

Product Liability laws: determine liability and allowable damages

for product safety, also vary widely.

Competition laws: like antitrust regulations and insider trading laws,

vary w e y rom coun ry o coun ry.

Marketing and Distribution laws: determine allowable practices,

vary widely across countries.

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Legal systemsProperty rights (and corruption):

- legal rights to use an economic property (resource) and to deriveincome and benefits from it

- important for the functioning of business, but can be violated byeither private action or public action.

Intellectual property (IP) right and protection:- Intellectual property (IP) refers to property, such as computersoftware, a screenplay or the chemical formula for a new drug that isthe product of intellectual activity.

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- a en : roug exc us ve use r g s, pro ec s e nven orof a product for a certain period of time

- Copyright: Gives exclusive rights to authors, composers,playwrights and artists to publish and dispense their work.

- Trademark: Officially registered designs and names thatprotect owners product designations.

Legal systems

Protection of IP rights- differs greatly from country to country.

- While many countries have stringentintellectual property regulations on their books,the enforcement of these regulations has oftenbeen lax.

Losses due to counterfeiting:1)

2)

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3)

4)


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Managerial implicationsThe political and legal environments of a country clearly

influence the attractiveness of that country as a marketand/or investment site.ocreates uncertainty

ocontributes to costs & risks of doing business

o influences skills/capabilities required to compete

Sources of political risk

- Macro-political risks: arise from the political forces in thebroader or macro-political environment and affect all businesses

n e coun ry.- Micro-political risks arise from political forces that are specific to

a firm or industry.

- Legal risk arises when the legal system fails to provide adequatesafeguards for the conduct of business, e.g. the lack ofenforcement of contracts or protection of IP rights.

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Managerial implications

3 types of political risk to which IB is likely to be exposed:- Ownership risk

- pera ona r s

- Transfer risk

Political risk can be managed- first assessing the extent of the exposure (quantify the degree of

olitical risk b identif in and ratin olitical events that are likel to

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impact business operations and decisions).

- taking measures to reduce the extent of risk: requires knowledgeand application of that knowledge


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Accessing political risk Two types of measures:

Political riskoa subjective rating of the political environment that can help

assess where and when a firm might encounter difficulties inmanaging the political environment.

oNumerous agencies produce political risk rankings

Euromoney World Economic Forum Institute for International Management Development

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an ngs Based on surveys of knowledgeable individuals in a region Countries with high political risk (Afghanistan, Rwanda,

North Korea, etc) Countries with low political risk (Norway, Switzerland, UK,

USA, etc)

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Accessing political risk

oConcept is fine

But it is perceptual

Political hazardsoBetter way to measure uncertainty in the political environment?

oReturn to definition of uncertainty in political environmentStability of policies and regulationsUncertainty in policies and regulations

oBased on

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Stability of preferences of actorsAbility of actors to enact policy change when preferences

change

oPolitical hazards (feasibility of policy change) emerges when:No, or few, political constraints

oWhat defines extent of political constraints?


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Political hazards:

Levels in a political system

ExecutiveExecutiveKey Features

UpperUpperLegislatureLegislature

LowerLowerLegislatureLegislature

Independence Each level effectively

independent?

Number Number of effectively

independent levels.

n epen enn epen enJudiciaryJudiciary

uu --na onana onaActorActor

The higher thenumber, the greater

the political

constraints, and the

lower the political

hazards.

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Ke Feature

Political hazards:Preferences in a political system

LiberalLiberal

ConservativeConservative

NationalisticNationalistic

SocialistSocialist

Aligned

Actor preferences

similar or not.

The less the similarity,

the greater the

political constraints,

and the lower the

political hazards.

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Key Features

High Political Hazards

One Level

No constraints.

No opposition

Change policy as actors

preferences change.

ExecutiveExecutive

rea er c ance o po cyinstability.

Uncertain environment

for foreign investors

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High Political Hazards

Key Features


Potential for constraints.

No effective opposition Preferences aligned.

Executives preferences

match others.

IndependentIndependentJudiciaryJudiciary

Uncertain environment

for foreign investors

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Moderate Political Hazards

Key Features

ExecutiveExecutive


Multiple Levels


Effective opposition

Preferences not aligned.

More difficult to enact

IndependentIndependentJudiciaryJudiciary

.

Less uncertain

environment for foreign

investors

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Low Political Hazards

ExecutiveExecutive Key Features

IndependentIndependent

Multiple Levels


Substantial opposition

Preferences not aligned.

Certain environment for

LowerLower

LegislatureLegislature

UpperUpper

LegislatureLegislature

JudiciaryJudiciary Has a status quo bias.

SubSub--nationalnationalActorActor

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Reduce contract risk

- Sign treaties that encourage and protect mutual investment; Createsettings where investment can be seized when threatened

Effective risk management strategy

Slow input & speed output

- Minimize outright investment; Create staggered technology transferpolicies; Accelerate profit repatriation

Seek third partys safeguard

Utilize insurance agencies that specialize in political risk; Build politicalsupport at home and in the host through political action, lobbying, or otherroactive measure

Embed with local economy ?

- Utilize host country financing; Create local sourcing arrangements;Create alliances with powerful local partners

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Remember that business is international, but all politics are local. Try tomanage political relationships at the local levels.

Part II: Economic environment

Economic endowments:

oA firms reliminar assessment of the otential of a countr aseither a location for production or a market for a firms productwould consider the economic variables of its:

Size

Geography: natural and created resource

People

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Infrastructure

Competitiveness.


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Three Economic Systems

the set of structures and processes that guides theallocation of scarce resources and shapes the conduct of

us ness ac v es n a na on

Spectrum of Economic Systems

Centrally-planned Free-market

N. Korea China Brazil Japan USA

Cuba Russia India Germany Canada

Vietnam S. Korea France UK

Types:

Market economy

Command economy (centrally-planned economy)

Mixed economy

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Economic Transition

The shift from a command or mixed economy to a freermarket economy involves least three distinct activities:eregu a on, pr va sa on an ns u on eve opmen .

- Deregulation: removes restrictions on the free operation of

product and factor markets.- Privatisation: transfers the ownership of state property into the

hands of private investors. Privatisation is seen as a way ofincreasing the economic efficiency of the organisation.

- Institution development: requires the development ofsupporting institutions such as a reliable legal system and aviable financial system that underpin a market-based economy.

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Managerial implicationsThe economic environment of a country clearly

influences the attractiveness of that country as a marketand/or investment site.o The overall attractiveness of a country depends on balancing the

likely long-term benefits of doing business in that country againstthe likely costs and risks.

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Managerial implications

Three factors that are reasonably good predictors of acountrys future economic prospects:

- ,

- property rights regime, and

- the quality of its deep institutions.

Benefits

- Resource endowments, both created and natural.

- A stable and buoyant economy.

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- The size of the market, the present wealth of consumers, and thelikely future wealth of consumers.

- The phase of the business cycle.

- A potential future economic star, and gain first-mover advantagesand establish loyalty and experience in a country.


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Managerial implications Costs (of living and doing businesses)

Macroeconomic instability

n a on ra e

Tax burden

Redistribution of income

Risks

Economic risk is the likelihood that economic mismanagement

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an econom c ns a y w cause ras c c anges n a coun ry sbusiness environment that adversely affects the profit and othergoals of a business enterprise.

Two very visible indicators of economic mismanagement:inflation rate and the related policy actions of governments, andthe level ofbusiness and government debt in the country.

Part III: A tale of two countries in Asia

Geography

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Source: http://www.map168.com/ Play


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Legal systems

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Political Risk Scores

Country

Political Risk

Country

Political Risk

1992 2002 1992 2002

Ban ladesh 5.3 9.1 Mala sia 15.3 16.72

Brunei 17.7 17.9 Mongolia 4.8 5.74

Cambodia 1.3 4.3 New Zealand 17.3 22.35

China 13.3 16.9 Pakistan 8.2 8.46

Hong Kong 16.2 19.9 Philippines 8.0 12.60

India 6.4 14.8 Singapore 18.0 23.25

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n ones a . . a wan . .

Japan 20.0 21.5 Thailand 13.6 14.73

Korea North 3.2 0.0 Vietnam 5.5 11.12

Korea South 16.6 18.3

Sources: Euromoney, Nowhere to Lend to, Euromoney, September 1992, pp. 65-71;

Euromoney, Country Risk, Euromoney, September 2003, pp. 287-292.


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Political Hazards Scores

Country

Political Hazard

Country

Political Hazard

1992 2002 1992 2002

Bangladesh 0.56 0.61 Malaysia 0.70 0.46

Brunei 1.00 1.00 Mongolia 0.80 0.93

Cambodia 1.00 1.00 New Zealand 0.75 0.52

China 1.00 1.00 Pakistan 0.54 1.00

Hong Kong 1.00 -- Philippines 0.83 0.46

India 0.41 0.59 Singapore 0.94 0.97

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Indonesia 1.00 0.50 Taiwan 0.78 0.68

Japan 0.46 0.42 Thailand 1.00 0.49

Korea North 1.00 1.00 Vietnam 1.00 1.00

Korea South 0.52 0.76

Source: Witold J. Henisz, POLCON Database ( http://www-management.wharton.upenn.edu/henisz/),

April 02, 2003.

China Surpassed Japan in 2010

Source: IMF

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GDP composition

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Widening gap between Rich and Poor

Source: Chinatells.com

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Population: Labour supply to Shrink?

Page 35

Source: United Nation

China: Manufacturing

macro-environment

culture

government

Factor (input)

conditions

infrastructure

finance

human resources

Demand conditions institutional buyers

individual buyers

export buyers

law and regulation

politics

economy

Conditions for

China to develop

manufacturing?

Related and supporting

Cluster

suppliers

distribution channels

transport and communications

Competitive context

law and regulation

entry barriers

exit barriers

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India: Manufacturing

Indias labor regulations - among the most restrictive and complex inthe world - have constrained the growth of the formal manufacturingsector, where these laws have their widest application.

World Bank, 200937

India: Manufacturing

macro-environment

restrictive law and regulations

politics

Factor (input)

conditions poor energy infrastructure

powerful unions

Demand conditions* no obstacle

What conditions were

wrongfor India todevelop

manufacturing?


cluster

poor transport and comms

Competitive context

highly protected from imports

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India: Outsourcingmacro-environment

new industry little

government regulation

Factor conditions

skilled engineers

English speaking

university graduates

low salaries

not tied to old cities

Demand conditions

sophisticated U.S.

clients

Indians overseas

new n ustry not

unionized

What conditions were

rightfor India to

develop out-

sourcin ?


cluster

good intl communications

could self-provide electricity

Competitive context

positive externalities

service providers

validating each other

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You should now understand

Key features of political, legal, and economic

Managerial implications of understanding

these country differences on IB

Key differences between Chinas and Indiasenvironments

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Documents

IBUS2101_S1 2011_WK5_Political%2C Legal %26 Economic Environments_Gracy Stu