Global Business Management (MGT380) Lecture #5: Politics and Law
Jan 18, 2018
Global Business Management(MGT380)
Lecture #5: Politics and Law
Learning Objectives To understand the importance of the
political and legal environments in both the home and host countries for GB.
To learn how governments affect business through legislation and regulations.
To see how the political actions of countries expose firms to international risks.
Summary of the lecture Rationale of trade policies
The domestic policy actions of most governments aim to increase the standard of living of citizens and to improve the quality of life, and to achieve full employment.
These policies goals and international trade relates indirectly.
Each country develops its own domestic policy, which varies, may cause conflict. E.g., Cattle, Cars
ITO, GAAT (Most Favored Nation clause), WTO
Three major changes have occurred over time in the global policy environment: a reduction of domestic policy influence; a weakening of traditional international
institutions Focus was shifted towards non-tariff barriers which
are more complex Right to establishment within countries without
personal presence Disputes in areas like agriculture or intellectual
property rights protection continue to rise. Inclusion of ‘social causes’ such as labour laws,
competition, emigration Sharpening of the conflict between
industrialized and developing nations.
Trade restrictive measures: Tariffs are taxes on the value of imported
goods Quotas are restrictions on the no of foreign
products that can be imported Non-tariff barriers include testing,
certification, simply bureaucratic hurdles which result in restricting imports.
Anti-dumping law, Nontariff barriers (preference to domestic bidders, incompatibility of international standards) and tightening market access
Effects: high cost, shift of product/mode, efficiency loss
Mini-case study: Shrimps, Turtle and the WTO There are seven species of sea turtle in the world, six of
them are on the list of engendered species in the US. A major cause of the decline of sea turtle has been poor fishing practices, particularly in shrimp boats. It is estimated that almost 150,000 sea turtles/year are trapped in the nets of sea boats. To limit this, in 1989, US congress passed a law which required shrimp boats to the equipped with a turtle excluder. The law also banned the importation of shrimp from countries that fail to mandate the use of turtle excluders. In 1996, US placed an embargo on importation from India, Pakistan and Malaysia. In response, these countries filed a complaint in WTO against it, Thailand also joined them on principle grounds.
US claimed that WTO rules include provisions for taking restrictive measures if they are related to the conservation of exhaustible resources. Its US obligation and therefore US took reasonable measures.
The four countries argue that US violating WTO rules by applying domestic legislation outside its boundaries and applying it in a discriminatory manner. It is unfair restraint on trade.
WTO ruled that US was wrong to prohibit shrimp imports from countries that failed to protect sea turtle. WTO state that while environmental protection is important but the primary aim of international agreements on trade is promotion of economic development through unfettered free trade. US would not be allowed to force other nations to adopt policies to protect an engendered species.
Questions: Do you think it is correct for the WTO to decouple trade
policy from environmental policy. Why?(It is one of the challenges WTO is facing, It is good to disentangle trade and social cause policies)
Do you think other countries are correct to accuse the US of hypocrisy on the environmental issue? (Yes, for instance, KOYOTO treaty)
A Look at Three Segments The Home-Country Perspective Host Country Political and Legal
Environment International Relations and Laws
The Home Country Perspective Many laws and regulations may not
specifically address GB issues, yet they have impact of GB.
Countries make legal and regulatory measures for BG which have +/- impact
Major areas of governmental activity that are of concern to the international business manager: Embargoes and Sanctions Export Controls Regulation of International Business
Behavior
Sanctions and Embargoes: Refers to Gov actions that distorts free flows of trade in goods/services for political purpose rather than economic purpose.
Origin started in 1284, the Hansa, German association of merchants believed that one of their ship is attached and looted by Norwegians.
It is a principle tool of the foreign policy in hope that foreign country would change the policy.
Later, multilateral use of economic sanctions was introduced
UN faced two problems in it: How to explain ‘peace’ and ‘breach of
peace’ Mutual consensus across the countries
Sanctions means significant loss of business to firms. it is around $20 billion in lost exports to US.
Export Controls: Most countries have export control system designed to deny or at least delay the acquisition of strategically important goods rivals.
The legal basis varies across countries. For instance, in Germany arm export comes under war-weapons and comes under War Weapon Control law, normal items are controlled by German Export list, Dual use items are controlled by Joint list of EU.
Determinants of Export control: National security, foreign policy, nuclear non-proliferation
Steps: Should a given product be exported? To a given country? For use by a given firm?
Environment for export control has been changed over the years. Major changes are as follows:
Collapse of Soviet Union and Eastern Block
Focus is shifted to third world countries Loosing bond between allied nations Availability of technology from other
resources Speed of change and rapid
dissemination of information and innovation around the world. The issue of equipment size
Export control problems and conflicts: (i) continuing debate about what
constitutes military-use products, civil use and dual use products. E.g., harmless screws.
(ii) transfer of knowledge is uncontrollable (iii) nations have their desires to safeguard
their national interests
Regulating International behaviour: regulations on firms varies substantially among nations.
Nations may employ boycotts to govern business activities. Firms are forced to either loose the business or pay fines.
Antitrust Laws are a regulatory activity.
General standard of behaviour and ethics. E.g. Rain forest, China cheap labor, Mexico’s low safety standards
Bribery is an another area. Firms operating abroad are affected by laws against bribery and corruption.
International businesses may bribe to counterbalance poor product quality, to create a market for goods, or to stay competitive with other firms that bribe.
Host Country Political Action and Risk: Varies widely
from country to country Confiscation
The government takeover of a firm without compensation to the owners.
Expropriation A form of government takeover in which the
firm’s owners are compensated. Domestication
The government demands transfer of ownership and management responsibility.
Intellectual property right Risk of loosing their core competitive edge.
Economic Risk Less dangerous, but more common Exchange controls may be imposed Tax policies may be used to control
corporations and their capital Price controls may employed to control
prices of imported products or services. E.g. products in food and health care
Political risks: Ownership Risk
Exposes property and life Operating Risk
Interference with the ongoing operations of a firm
Transfer Risk Limitations on the outflow of funds
Managing the Risk Demonstration of concern with host
country’s society can be effective. Hiring of local people Close monitoring of situation Firms can take out insurance to
cover losses due to political and economic risk.
Legal Differences and Restraints Countries differ in their laws as as
well as in their use of the law. There are two major legal systems worldwide: Common Law: Based on tradition and
dependent upon precedent and custom. Pakistan, India, US, Canada
Code Law: Based on a comprehensive set of written statutes. EU, China
International Relations and Laws International Politics: The effect
of politics on international business is determined by both the bilateral political relations between home and host countries and by multilateral agreements governing the relations among groups of countries.
International Law: Plays an important role in the conduct of international business. Treaties and agreements have a strong influence on international business operations.
International Law The World Trade Organization defines
internationally acceptable economic practices for its member nations.
The Patent Cooperation Treaty (PCT) provides procedures for filing patent applications.
The United Nations has developed codes and guidelines that affect international business.
Arbitration: Procedures are quicker and often spelled out in the original contract
Litigation: Often involves extensive delays and is very costly
Summary of the lecture The Home-Country Perspective, Host
Country Political and Legal Environment, International Relations and Laws
Major areas of governmental activity that are of concern to the international business manager: Embargoes and Sanctions Export Controls Regulation of International Business
Behavior
Sanctions and Embargoes: Refers to Gov actions that distorts free flows of trade in goods/services for political purpose rather than economic purpose.
Export Controls: Most countries have export control system designed to deny or at least delay the acquisition of strategically important goods rivals. Steps:
Should a given product be exported? To a given country? For use by a given firm?
Collapse of Soviet Union and Eastern Block Focus is shifted to third world countries Loosing bond between allied nations Availability of technology from other resources Speed of change and rapid dissemination of
information and innovation around the world. The issue of equipment size
Regulating International behaviour through boycotts, anti-trust laws, bribery, general acceptable standards and ethics
Political Action and Risk: Confiscation: The government takeover of
a firm without compensation to the owners. Expropriation: A form of government
takeover in which the firm’s owners are compensated.
Domestication: The government demands transfer of ownership and management responsibility.
Intellectual property right: Risk of loosing their core competitive edge.
Economic risk: currency control, taxes, prices control
Political risk: ownership, operating and transfer risks
Managing risk, & legal systems(code and common)