PTM – Differences in Political Economy 08-Sep-14 INTERNATIONAL BUSINESS

PTM – Differences in Political Economy 08-Sep-14

INTERNATIONAL BUSINESS

Pham To Mai

Faculty of Economics

National University of HCMC


Part II

INTERNATIONAL

BUSINESS ENVIRONMENT


NATIONAL ENVIRONMENT


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Main contents

Domestic environment

Foreign environment

Natural environment

Political environment

Economic environment

Legal environment

Cultural environment


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Domestic environmentPolitical and legal forces:

Restrictions on trading with unfriendly countries (sanction, embargo...)Indirect effects of domestic laws on international competitiveness.Extraterritoriality of domestic laws.

Economic climate:Stable internal economic development, low interest rate, domestic currency appreciation outward FDI increases and vice versa.Internal economic condition deteriorate restrictions against outward FDI and foreign purchasing may be imposed.

Competition:High competitive presure and threat of market share loss in the domestic market may force firms to direct energy and resources abroad back to defend their market shares in home country.


FOREIGN

ENVIRONMENT


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Natural Environment

Geographical location:Neighbor countries normally have close economic and trade relation

Seaside location with seaports is an important condition for economic development (80% – 90% of trading goods are transported by sea).


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Natural Environment

Topography:Altitude affects the uses and functions of products and equipment.

Transportation costs are higher in the mountainous regions and lower in the plains and plateaux.

Market partition: High mountains and large deserts normally separate population from one another and form isolated communities with different styles of living and different characteristics.


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Natural Environment

Climate:Humidity and temperature extremes force the product modification.

May affect business strategy of firms.

Natural resourcesDevelopment of mining industry, industries that use resources as material inputs, hydroelectricity...

Problems:

Excessive exploitation

Environmental deterioration.


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Natural Environment

PopulationDetermination of demand of goods and services

Source of labor supply.

Problems:

Population explosion, controlling population growth and job creation issues in the developing world.

Population decline and aging, worker shortage and immigration in developed countries.


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Three areas of political environment:

Political system

Political stability

Political risks

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Political Environment


Democracy

Totalitarianism

Individualism

Collectivism


Political System: the system of government in a nation.”

Two Dimensions of a Political System:


Political Systems

Collectivism:A political system that stresses the primacy of collective goals over individual goals.Advocated by Plato in the “Republic”.In modern times, the Socialists advocate Collectivism.

Individualism: Individual should have freedom in political and economic pursuits. Advocated by Aristotle. Private property is more highly productive thancommunal property and will thus stimulate progress.


Political Systems

DemocracyGovernment by the people, exercised either directly or through elected representatives.

TotalitarianismGovernment in which one person or political party exercises absolute control over all spheres of human life and opposing political parties are prohibited.


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Political stability: Top political concern of firmsTwo aspects of political stability: Stability of government and stability of policies.

For international businesses: Stability of government policies is of more concern than stability of the government itself.

Nationalism: National interest and security are more important than international consideration.

Threats of expropriation, confiscation or nationalization of foreign companies and industries.

Restrictive investment policies.

Campaigns against foreign goods.


Political Risks

Macro political risk: affects all business conducted in a country.

Micro political risk: affect only selected sectors of economy or specific foreign businesses.

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Any changes in political environment that may

adversely affect value of firms’ business activities.


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Examples of Political Risks

Type of risks:Confiscation

Expropriation

Domestication

Political sanctions & campaign against foreign goods

Kidnapping, terrorist threats & other forms of violence

Civil wars

Impacts on firms:Loss of assets & future profits.

Loss of future profits.

Increased operating costs

Loss of sales; increased costs of PR campaigns to improve public image.

Disrupted production; increased security and managerial costs; lower productivity.

Destructed property; lost sales; disrupted production; increased security costs; lower productivity.


Reducing Political Vulnerability

Political risk assessment: an attempt to forecast political instability and their influence on current and future international business decision.

Good corporate citizenship: acting appropriately, contributing to the community benefit...

Managing external affairs: managing a positive public image well designed and executed external affairs programs are never better than the behavior of the company.

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Economic EnvironmentEconomic Systems

Centrally planned (or command) economy:All resources and businesses are state owned.Goods and services produced, their quantity, and prices are determined by the government.

Market economy:All productive activities are privately owned.Goods and services produced, their quantity, and prices are determined by supply and demand.

Mixed economy: Parts of the economy are left to private ownership and free market mechanisms while other sectors are state-owned and have government planning.


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Economic Environment

Economies in TransitionIn process of transformation from centrally planed and mixed economies towards market-based economies.Potentials and business opportunities are enormous, so are risks because of:

Social unrest and political instability;Lacks of well-established laws for regulating business practice;Undeveloped infrastructure and supporting businesses;Differences in thinking and working style and culture.


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Nature of Economic TransformationDeregulation: removing legal restrictions to the free play of markets, the establishment of private enterprises, and the manner in which private enterprises operate Privatization: transfers the ownership of state property into the hands of private investorsCreation of a legal system to safeguard property rights


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Determinants of Economic DevelopmentGNP/GDP: Measure of the size of an economy.

GNP/GDP per capita: Relative estimation and comparison of living standards and purchasing powers of countries.

Purchasing Power Parity (PPP): More direct comparison of living standards in different countries.

Human Development Index (HDI): Measure of quality of human life in different nations by combining three measures: access to health care, education attainment, and average income (PPP).

Economic Growth Rate: Assessment of market development potential.


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Level of Economic Stability

Economic instability: Economic mismanagement by the government.

Causes social unrest and may give rise to political instability.

Determinant of Economic Stability:Inflation rate

Foreign debts


Legal Environment

Different legal systems

Differences in legal systems that are in the top concern of international businesses

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Legal Systems

Common Law

Derived from English law since 13th century

Based on tradition, precedent and custom

Judges serves as a neutral referee; lawyers are responsible for developing cases and choosing evidence to submit

Judges have the power to interpret the law

Civil Law

Originated from Roman law since biblical times

Based on a detailed set of laws organized into codes: commercial, civil and criminal

Judges take part in determining evidence to be collected and presented to the court

Judges have the power only to apply the law

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Theocratic Law: based on religious teaching.Islamic Law: most widely practiced

Interpretation of the Koran, a system that prescribes specific patterns of social and economic behavior for all individuals.

Aspects that strongly affect international business activities:

Prohibition against payment of interest.

Absence of due process and appeals procedures regional courts can interpret Islamic law differently.

Legal Systems (cont.)


Differences in Legal Systems in The Top Concern of International Businesses

Differences in contract law

Property rights and corruption

The protection of intellectual property

Product safety and product liability

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Differences in Contract Law

Common Law

Contracts tend to be very detailed with all contingencies spelled out

More expensive to draw up contracts

Resolving contract disputes can be very adversarial

More flexible

Civil Law

Contracts tend to be much shorter and less specific

Less expensive to draw up contracts

Resolving contract disputes is less adversarial

More rigid

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Contract law: the body of law that governs contract

enforcement.

UN Convention on Contracts for the International Sales of Goods (CISG): 76 member-countries without Viet Nam


Property Rights and Corruption

Private action: theft, piracy, blackmail... by individuals or groups.

Public action and corruption: public officials extort income, resources or the property itself from property holders.

High level of corruption significantly reduce the FDI, level of international trade, and economic growth rate in a country.

Many countries have passed anti-corruption laws and regulations

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Protection of property rights: the extent to which legal system define and protect property rights from the violation of private and public actions


Protection of Intellectual Property

Protection of intellectual property: the extent to which legal system define and protect intellectual property.

Ownership rights over intellectual property are established by patents, copyrights, and trademarks.

Protection of intellectual property rights differs greatly from country to country, and becomes increasingly problematic

Stringent regulations, but lax enforcement

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Product Safety and Product Liability

Product safety laws: set safety standards for products.

Product liability holds firms and its officers responsible when a product causes injury, death, or damage

Country differences in product safety and product liability laws raise issues for firms

Competitiveness

Business ethics


Implication for Managers33

BenefitsSize of Economy

Likely Economic Growth

Overall Attractiveness

RisksPolitical risks: Social Unrests/Anti-Business Trends

Economic Risks: Economic MismanagementLegal Risks: Failure to Safeguard Property Rights

CostsCorruption

Lack of InfrastructureLegal Costs

PTM – Differences in Political Economy 08-Sep-14 INTERNATIONAL BUSINESS

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