Chapter 4 Government and Global Business

Democracy - Usually Market Economy

All citizens have opportunity to take.

part in making the rules that govern them.

Emphasizes individual’s needs and interest.

People have equal rights-right to vote.

People have freedom - of speech, religion, etc.

Freedom to own and operate a private business.

United States is a market economy.

Totalitarianism

Most people cannot make rules by which they live.

Political control is by one person, group, or political party.

People’s rights and freedoms are restricted.

May not be able to express their opinions, travel, or participate in religion of their choosing.

Usually Command Economies - government owns and controls most businesses.

Monarchy

Right to absolute rule for life - based on heredity.

Dictatorship

Military Dictatorship - member of armed forces makes all decisions.

Mixed Systems

Not democracy or totalitarian.

Most political systems are mixed.

They have characteristics of both.

Majority of businesses are privately owned.

Some industries are run by the government.

Most European countries have mixed economies.

Host Country

Country in which a multinational enterprise is a guest.

-Stimulate economic activity

-Purchase land, goods, and services locally

-Employ citizens of the host country

-Introduce more advanced technologies to help development

Home Country

Country where a multinational enterprise is headquartered.

Expected to comply with: Societal Expectations and Standards

Social

Economic

Legal

Social Responsibility

Process whereby people function as good citizens and are sensitive to their surroundings.

How Government Discourages Global Business

Thousands of Laws and Regulations

Goal to Protect 

-Workers (labor laws)

-Consumers

-Domestic Business

Prtectionism

Government policy of protecting local or domestic industries from foreign competition.

Tariffs

Duty or tax.

Quotas

Limit on quantity or monetary amount to import.

Boycotts

Absolute ban on import.

Licensing Requirements

Import license.

Political Risks

Possibility of government actions or political policies adversely affecting foreign companies.

Trade Sanctions

Expropriation - Most serious risk

Economic Nationalism

Civil Unrest/Rar

Trade Sanctions

Government imposed trade restrictions against another country to protect that country’s behavior.

Result of Political Disputes

Example: 1990s - US banned technology sales to China.

Protesting China’s sale of missile technology to Pakistan - violated an international arms-control agreement.

Trade Embargo

Stops all import-export trade with a country.

Expropriation - Most Serious Risk

Government takes control and ownership of foreign-owned assets and companies.

Example: 2009 - President of Venezuela ordered expropriation of US owned rice processing plant. Company allegedly violated government price controls.

Economic Nationalism

Trend of some countries to restrict foreign ownership of companies and to establish laws protecting against foreign imports. (Protectionism)

Encourage people to “Buy Domestic”

Symptoms of Civil Unrest or War

Social disorder, extreme income unevenness, frequent changes in political party activities/structure.

Interrupts production, sales, and business activities.

When unrest escalates to war, massive destruction of property and goods occurs.

Customs Duty

Import tax.

Sales Tax

On products sold - regressive (Lower income pay larger % of income) CHARES SAME % TO ALL REGARDLESS OF ABILITY TO PAY

Excise Tax

on Sale or consumption of specific products.

Payroll Taxes

(Employee & Employer)

Value-Added Tax

(VAT) Increase w/value

Income Tax

Progressive - based on “ability to pay” (Wealthy pay a larger % than less wealthy)

How Government Encourges Global Business

Establishes free-trade zones.

Granting most-favored-nation status.

Establishing free-trade agreements.

Providing export insurance to guarantee against risk.

Provide free or subsidized export marketing.

Provide tax incentives for foreign companies to invest & locate there.

Reducing or eliminating trade barriers.

Free Trade Zones

A designated area, usually around a seaport or airport, where products can be imported duty-free and then stored, assembled, and used in manufacturing. Only when the product leaves the zone does the importer pay duty.

Duties are not collected when goods are imported.

Most Favored Nation

Allows a country to export into the granting country under the most favorable trade conditions that the importing country offers to any of its trading partners.

Subject to lowest duty rate - sometimes 0%

Free Trade Agreements

Member countries agree to eliminate duties and trade barriers on products traded among members.

Result- increased trade

Example: NAFTA 1992-US, Canada and Mexico North American Free Trade Agreement

Common Markets

Countries join together in a common market

Promotes Trade among members

Eliminates duties and other trade barriers

Allows investment in other countries

Common external duty on products imported from non-members

Government Protection from International Risk

Two U.S. Government Insurance Agencies: Insures against damage or destruction from wars, revolutions, etc.

Export-Import Bank of the US (EXIM)

Overseas Private Investment Corporation (OPIC)

Export-Import Bank of the U.S. (EXIM)

Helps finance the export sales of U.S. Products.

If exports are damaged due to war, it is covered.

Overseas Private Investment Corporation (OPIC)

Provides investment insurance to U.S. companies to establish operations in developing countries.