IBG - National Differences in the Political Economy s2 2014

8/10/2019 IBG - National Differences in the Political Economy s2 2014

1/41

National Differences in thePolitical Economy


2/41

Replace with slice from book cover height = 1cm

Overview

1. What is country risk?

2. What are Political and Legal systems?

3. Types of Political systems

4. Types of Legal systems

5. Participants in Political and Legal systems6. Types of country risk produced by political systems

7. Types of country risk produced by legal systems

8. Managing country risk

2 Copyright 2012 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781442533561/Cavusgil/International Business


3/41


Realities of Doing Business in Russia

High rate of piracy in software, music, DVDs, and other goods. Anti-piracy laws and law enforcement are weak.

Obtaining business licenses requires bribing officials.

SMEs may spend 20% of their net income on bribes.

There is substantial organised crime and killings. Criminal raiders may seize independent businesses.

Conditions in Russia are typical of many emergingmarkets and developing economies.



4/41


What is Country Risk?

Exposure to potential loss or adverse effects on companyoperations and profitability caused by developments in acountrys political and/or legal environments.


Also known aspolitical risk

Each countryhas uniquepoliticaland legalsystems thatoften pose

challenges forcompanyperformance

ExampleCoca-Colas business fell off in

Germany when the governmentenacted a recycling plan. New lawsrequired consumers to returnnonreusable soft drink containersto stores for a refund of 0.25euros. Rather than cope with the

unwanted returns, big supermarketchains pulled Coke from theirshelves.


5/41




6/41


Country Risk in Selected Countries



7/41


Political and Legal Systems

Political system: A set of formal institutions thatconstitute a government. It includes legislative bodies,political parties, lobbying groups, and trade unions.The system also defines how these groups interactwith each other.

Varies between countries on the basis of Totalitarianism and Democracy

Collectivism and individualism



8/41


Collectivism

Primacy of collectivist over individualgoals

Emphasis on good of society, common

good

Plato,427-347 BC, to Socialists, Marx,1818 - 83

Communists, Social Democrats

8

R l i h li f b k h i h 1


9/41


Individualism

Individual freedom over economic andpolitical action

- consumer sovereignty individual diversity and private ownership

are desirable

private property is more productive -communal property receives little care

9

R l ith li f b k h i ht 1


10/41





11/41


Democracy

Government is by the people, exercised

either directly or through elected

representatives

Safeguards hold elected representatives

accountable

11



12/41


Political Systems: Totalitarianism


Government controls all economic and political matters.

Either theocratic(religion-based) or secular.

A state party is led by a dictator.

Membership is mandatory for those wanting to advance.

Power is sustained via secret police, propaganda, and

regulation of free discussion and criticism.

Today: Some countries in the Middle East and Africa; Cuba,

North Korea.

Former totalitarian states tend to

have much government

intervention and bureaucracy.

China (19491980s)

Germany (19331945)

Soviet Union (1918991)

Spain (19391975)



13/41


The Extent of Totalitarianism

13



14/41

Replace with slice from book cover height 1cm

Spread of Democracy

totalitarian regimes failed to deliver economicprogress

New communication technologies have

reduced the ability of the state to controlinformation

prosperous middle and working classes

14



15/41

p g

Ideology

a reasonably coherent and shared set ofvalues

Ideology is a set of values and beliefs that

justifies certain behaviours and guides

economic and political actions.

three common ideological traditions:

conservatism, liberalism and socialism.

15



16/41

Liberalism

A political ideology concerned with protecting the

rights and liberties of individuals from government

interference

The individual is more important than the state or

community in which they live Equality of opportunity

Small role for government

1-16



17/41

Socialism

The political ideology which emphasises the importance ofsocial cohesion and equality

Seek to create a more equal distribution of wealth, alleviate

poverty and create a higher standard of living for all

Equality of outcome

Larger role for government

1-17



18/41

Conservatism

A political ideology that is critical of rapid change and progress

Conservative support traditional values, the church and family

Critical of modern social trends including abortion, feminism and gay rights.

1-18



19/41

Why Government?

Maintaining competition

Groceries retail

Externalities

Positive vaccinations

Negative pollution

19



20/41

Why Government?

Public goods

Military & roads

Common property resources

rivers

Income distribution

Stabilisation (macro)

Inflation, BOP, unemployment20



21/41

Red Tape and Cost of Compliance

for individuals, the cost of acquiring sufficient knowledge to meet their legal

requirements; of compiling the necessary receipts and other data and of completing tax

returns; payments to professional advisors for tax advice; and incidental costs of

postage, telephone and travel in order to communicate with tax advisors or the tax

office. For a business, the compliance costs include the cost of collecting, remittingand accounting for tax on the products or profits of the business and on the wages and

salaries of its employees together with the costs of acquiring the knowledge to enable

this work to be done including knowledge of their legal obligations and penalties

1-21



22/41


Taxation compliance

Pope et al (1991) estimated that the gross taxation compliance costs were between

11.4 percent and 23.7 percent of revenue yield for the period 1986 to 1987.

Evans et al (1997) however, suggests that the Pope studies had overestimated the

compliance cost of taxation. They estimated these costs to be just 7 percent of revenueyield.

Small businesses

They suggest that the regulatory costs are some 35 percent higher for firms with less

than 20 employees compared to firms with over 500 staff

Competing levels of government

Local, state and federal

1-22



23/41

Excessive paperwork

Information quantity and quality

Outsourcing the role of government

Taxation, the role of government and paperwork Industrial relations and equality

OH&S, paperwork and forcing compliance

Superannuation and the role of government

1-23




24/41

Democracy and Openness


Democracy is associated with openness, the lack ofregulation and barriers to the entry of firms in foreignmarkets.

Openness is associated with:

Successful market entry

Increased market demand

Competition on quality, whichimproves overall productquality

Increased competition, leadingto efficiencies and lower prices



25/41

Political and Economic Systems


Totalitarianism is associated with commandeconomies, wherein the state makes all decisionsabout what to produce, how much to produce, andwhat prices to charge.

Democracy is associated with market economies andcapitalism, in which decisions are largely left to market

forces, that is, supply and demand.

Socialism is associated with mixed economies, whichhave features of both market and commandeconomies, combining state intervention and marketmechanisms (e.g., Sweden, Singapore).



26/41

Ideology and FDI

The radical view

Exploitation and imperial domination

Free market view

Comparative advantage informing the distribution of

production

Pragmatic nationalism

Recognising the costs and benefits of FDI http://www.youtube.com/watch?v=ctB9TlCWdk0

26

http://www.youtube.com/watch?v=ctB9TlCWdk0http://www.youtube.com/watch?v=ctB9TlCWdk0


27/41

Political and Legal Systems (cont.)

Legal system: A system for interpreting andenforcing laws. The laws, regulations, and rulesestablish norms for conduct. It incorporatesinstitutions and procedures for ensuring order andresolving disputes in commercial activities, as well asprotecting intellectual property and taxing economic

output. Four major types of legal systems:

Common law

Civil law

Religious law

Mixed systems




28/41

The Rule of Law


Existence of a legal system where rules are clear, publicly

disclosed, fairly enforced, and widely respected byindividuals, organisations, and the government.

Common in the advanced economies.

The legal system is: (i) applied to all citizens equally; (ii) issued

via recognised government authorities; and (iii) enforced fairlyand systematically by police forces and formally organisedjudicial bodies.

Economic activity suffers and uncertainty increases when therule of law is weak.



29/41

Legal Systems: Common Law


A legal system that originated in England and spreadto Australia, Canada, the U.S., and other formermembers of the British Commonwealth (also knownas case law).

The basis of law is tradition, past practices, and legal

precedents set by courts via interpretation ofstatutes, legislation, and past rulings.

Judges have much power to interpret laws based onthe circumstances of individual cases. Thus, commonlaw is relatively flexible.



30/41

Legal Systems: Civil Law


Found in France, Germany, Italy, Japan, Turkey, and

much of Latin America.

Based on an all-inclusive system of laws that have beencodifiedclearly written by legislative bodies.

Laws are more cast in stone than common law and notstrongly subject to interpretation by courts.

A key difference is that common law is mainlyjudicial inorigin and based on court decisions, whereas civil law ismainly legislative and based on laws passed by nationaland state legislatures.



31/41

Dominant legal systems in selected countries




32/41

Sampling of DifferencesBetween Common Law and Civil Law




33/41

Legal Systems: Religious Law


Strongly influenced by religious beliefs, ethical codes, and

moral values, which are viewed as mandated by asupreme being.

Most important religious legal systems are based onHindu, Jewish, and Islamic law.

Islamic law spells out norms of behaviour regarding

politics, economics, banking, contracts, marriage,and many other social and business issues.



34/41

Country Risk Produced by Political Systems:Government Takeover of Corporate Assets

Confiscation: Seizure of corporate assets withoutcompensation

Expropriation: Asset seizure with compensation

Nationalisation: Takeover of an entire industry, with orwithout compensation


Examples

In Venezuela, President Hugo Chavez confiscatedan oil field owned by the French petroleum firmTotal.

In 2006, the Bolivian government nationalised theoil and gas industries.



35/41

Country Risk Produced by Political Systems:Creeping Expropriation

The most common expropriation today. The government gradually modifies regulations and laws

after foreign MNEs have made big local investments inproperty and plants.


Examples

Abrupt termination of contracts.

Creation of laws that favour localfirms.

The governments in Bolivia, Russia,and Venezuela have modified taxregimes to extract revenues fromcoal, oil, and gas companies.



36/41

Country Risk Produced by Political Systems:Embargoes and Sanctions

Governments may respond to offensiveactivities of foreign countries byimposing embargoes and sanctions.

Sanctionsare bans on internationaltrade, usually undertaken by a country,or a group of countries, against another

country judged to have jeopardisedpeace and security.

Embargoes are bans on exports orimports that forbid trade in specificgoods with specific countries. Example:

The U.S. has enforced embargoesagainst Iran and North Korea, labelledas state sponsors of terrorism.




37/41

Country Risk Produced by Political Systems:Boycotts against Firms and Nations

Boycott: A voluntary refusal to engage in commercial dealingswith a nation or a company


Examples from France

Citizens boycotted Disneyland Paris to express oppositionto globalisation and takeover of French farmland.

French farmers boycotted McDonalds, and crashed atractor into a shop, to vent their anger with agriculturalpolicies and globalisation.



38/41

Country Risk Produced by Political Systems:Wars, Insurrection, and Violence


War and insurrection: Indirect effects can be disastrousfor company activities.

Terrorism: The threat or actual use of force or violenceto attain a political goal through fear and intimidation.

Some terrorism is sponsored by national governments.

Terrorism particularly affects certain industries, such astourism, hospitality, aviation, finance, and retailing.



39/41

Types of Country Risk Produced by Legal Systems


Country risk arising from the host countrys legalenvironment:

Foreign investment laws

Controls on operating forms and practices

Marketing and distribution laws

Laws regarding income repatriation

Environmental laws

Contract laws

Convergence towards an international standard forinternational sales contracts.

Internet and e-commerce regulations

Inadequate or underdeveloped legal systems



40/41

Country Risk Produced by Legal Systems (cont.)


Country risk arising from the home countrys legal

environment: The Foreign Corrupt Practices Act (FCPA)

Antiboycott regulations

Accounting and reporting laws

Transparency in financial reporting



41/41

Critical Thinking


1.Globalisation is an ideology of supporting liberaleconomics and corporate interests as it promotesweakening trade unions, reducing business regulation andcurbing public spending and welfare budgets. Discuss.

2. What is the appropriate role of government in businessactivities? Examine this role from different ideologicalperspectives.

IBG - National Differences in the Political Economy s2 2014

Documents