Topic 2 - Political Environments and International Business

What is the core takeaway

the space you are in, changes the game

What are the two different ways that business can operate in another country

rationally pursue their interests within the formal and informal constraints, where formal constraints are unclear, informal constraints will play a larger role to reduce uncertainty

What formal institutions combine to create the political economy

political systems, economic systems, legal systems

What are the two types of a political system

individualism and collectivism

What are the different types of totalitarianism

communist, theocratic, tribal, right wing

What is theocratic totalitarianism

political power is monopolised by a party, group, or individual that governs according to religious principles

What is tribal totalitarianism

where a political party that represents the interests of a particular tribe monopolises power

What is right wing totalitarianism

individual economic freedom is allowed by individual political freedom is restricted

What are the different risks that firms have to assess

commercial risk, environment risk, political risk

What is considered a commercial risk

competitive pressures, technological change, market changes

What is considered a environmental risk

culture, legal-political, general economic forces

What are the different broad types of political risks

macro and micro

Macro risk - def

affects all companies

Micro risk - def

affects specific regions, sectors, industries and firms

What companies don’t need to worry about micro risk

companies that take up majority of the market e.g. apple

What are the different types of political risk

systematic, procedural, distributive, catastrophic

Systematic political risk - def

affects all firms e.g. weakened property rights, restrictions on freedom

Procedural political risk

affects some, not all firms e.g. excessive red tape, corruption, breaks of contract

Distributive Political risk - def

foreign firms seen as agents of prosperity (more seen in developing countries) e.g. tax discrimination, unilateral trade barriers, expropriation of assets

Catastrophic political risk - def

affects all firms e.g. civil disorder, coups, war

What are the effects of macro-political risk

costs investors some or all of the value of their investments, forces them to accept lower-than-projected rates of return, threatens the sustainability of local activities

What is an example of macro-political risk

political instability, corrupt of poor leadership, frequent changes in government, racial, religious, tribal or ethnic conflicts, poor relations with other countries

Examples of micro political risk

industry regulation, taxes on specific business activities, various restrictive local law

What is an example of micro-macro political risk

expropriation, indigenisation law

What is the effect of micro political risk

reduced operating profitability due to regulations, require the use of domestic suppliers, restricts repatriation of profits

Expropriations Example (1)

South africa passed the expropriation bill which allowed the government to seize property, compensation was well below market values

Expropriations Example - effect (1)

detterred investment in agribusiness and slowed production, banks will raise mortgage costs or reduce or withhold loans, famers won’t invest into their land when they think it will be taken

Indigenisation Law in the UAE - overview

in 2005, the UAE introduced emiratization laws, banks, insurance forms and trading companies were required to increase their Emirati workforce by 5% each year, intented to encourage local employment and skill development

Indigenisation Law in the UAE - effects

high wages for low skilled workers, unable to dismiss poor performers, quotas met by granting scholarship to students who are then listed as employees

What types of MNC’s are most affected by political risk

highly dependent on a global supply chain, heavy concentration of assets in a single country, reliant on international growth

How to manage political risk

diversify asset portfolio, hold political risk insurance, form joint business venture

Why is a country’s legal system important

regulate business practice, define manner in which business transactions are executed, how contracts confer rights and obligations

What are the different types of laws

common, civil, theocratic, customary

What are some examples of legal conventions

UN convention on contracts for the international sale of goods, foreign corrupt practices act

What is the UN convention on contracts for the international sale of goods

rules governing everyday commercial contracts between different nations

What should businesses be aware of about a host country law

constraints on foreign ownership, property rights to resoueces and the income they can generate, operating concerns, strategic concerns

Host country laws - property rights

need to know about land, property, intellectual property rights

Host country laws - operating concerns

starting a business, entering and enforcing contracts, hiring and iring local workers, closing down the business

Host country laws - Strategic concerns

product safety and liability, marketplace behaviour, product origin and local content, legal jurisdiction, arbitration