International Business PDF

Hannah Mayr International Business 1. Introduction: What is International Business? International Business (= cross-border business): Performance of trade and investment activities by firms across national borders. → Touches our daily experiences. Firms seek foreign customers and exchange physical...

Hannah Mayr International Business 1. Introduction: What is International Business? International Business (= cross-border business): Performance of trade and investment activities by firms across national borders. → Touches our daily experiences. Firms seek foreign customers and exchange physical and intellectual assets (e.g., products, capital, know-how) Globalization of markets: Ongoing economic integration and growing interdependency of countries worldwide. (Amazon, Instagram) Internationalization: the tendency of companies to deepen their international business activities systematically. Gross Domestic product (GDP): value of products and services produced in a country, in a year. → Exports surpass GDP, due to rise of emerging markets (China, India) Entrepot economies: Singapore, Hong Kong, Netherlands → Import a large volume of products, which they process into higher value-added products and re-export to other destinations. 1.1 Elements of International International Business: Trade 1. International Trade: Globalization of International Exchange of products and markets Investement services across national borders, typically through exporting (outbound flow) and importing Elements of International (inbound activity). Business Foreign market International entry strategies business risks 2. International Investment: The Transfer of assets (=factors Participants: Firms, of production) to another intermediaries, facilitators, country or the acquisition of governments assets in that country. o International portfolio investment: Passive ownership of foreign securities such as stocks and bonds to generate financial returns. → short-term invest interest. o Foreign direct investment (FDI): An internationalization strategy in which the firm establishes a physical presence abroad through acquisition of productive assets such as capital ,technology, labor, land, plant, and equipment. → long-term invest interest. E.g., European firms invest in China for low-cost labor. 1 Hannah Mayr Services: ¼ of all international trade, face greater challenges and barriers in cross-border trade than merchandise goods → must establish a physical presence through direct investment, to operate internationally. Service sectors that are internationalizing: Industry Representative Activities Architectural, construction and Construction, design, engineering for engineering airports Banking, finance, and insurance Banks, insurance Education, training, and publishing Management training Entertainment Movies, recorded music Information services E-commerce, E-mail Professional business services Accounting, legal Transportation Ocean shipping, trucking Travel and tourism Transportation, lodging Domestic business: economic transactions are conducted within the geographical boundaries of a country. → Buyer and seller belong to the same country. International business: economic transactions are conducted across borders with several countries in the world. → Buyer and seller belong to different countries. 3. The 4 International business risks: o Cross-cultural risk: Cultural misunderstanding puts some human value at stake. Arises from differences in language, lifestyles, mind-sets, customs, and religion. E.g., shopping patterns of buyers. o Country risk (=political risk): Potentially adverse effects on company operations and profitability caused by developments in the political, legal, and economic environment in a foreign country. E.g., governments may restrict access to markets. Critical legal dimensions of country risks include intellectual property protection, product liability and taxation policies. o Currency risk (= financial risk): Risk of adverse fluctuations in exchange rates. → value of the firm’s earnings can be reduced. o Commercial risk: Firms’ potential loss or failure from poorly developed or executed business strategies, tactics, or procedures. E.g., poor selection of business partners, timing of market entry, pricing, and promotional themes. → Marketing inferior or harmful products can damage the firm’s reputation and profitability. → 4 risks are omnipresent! → Can be anticipated and managed. 2 Hannah Mayr 4. Participants: o Focal firm: The initiator of an international business transaction, which conceives, designs, and produces offerings intended for consumption by customers worldwide. Focal firms are primarily MNEs and SMEs. → center stage in international business. o Distribution channel intermediary: A specialist firm that provides various logistics and marketing services for focal firms as part of international supply chains, both in the home country and abroad. → typically include independent distributors and sales representatives. o Facilitator: A firm or an individual with special expertise in banking, legal advice, customs clearance or assist focal firms in the performance of international business transactions. → Include logistics service providers, freight forwarders and banks. Freight forwarders: A specialized logistics service provider that arranges international shipping on behalf of exporting firms. o Governments: active as suppliers, buyers, and regulators. → Governments in advanced economies (France, Australia, Sweden), have significant ownership of companies in telecommunications, banking and natural resources. → activities of the 4 participants overlap to some degree. Customers consist of: Individuals (consumers and households) Retailers (purchase finished goods for the purpose of resale) Organizational buyers (need to run a business or organization) Focal Firms in International Business: o MNE (Multinational Enterprise): A large company with substantial resources that performs various business activities through a network of subsidiaries and affiliates located in multiple countries. (Coca-Cola, Nestlé, DHL, …) Largest MNEs in the oils industry (Royal Dutch Shell), and in retailing (Walmart). About 80.000 in total. → are best known for their foreign direct investment (FDI) activities. o SME (Small and medium-sized enterprise): A company with 500 or fewer employees (as defined in the USA) (fewer than 250 employees in the EU) SMEs make up the majority of companies active in international business. They are often more adaptable and sustain entrepreneurship and innovation in national economies. → SMEs have limited financial and human resources, they often choose exporting as the main strategy for entering foreign markets and don’t undertake FDI, as it is too expensive. → SMEs often target specialized products to market niches. 3 Hannah Mayr Born Global Firms (=one type of international SME): A young entrepreneurial company that initiates international business activity early in its evolutions, moving rapidly into foreign markets. → despite scarce resources born globals usually internationalize within three years of their founding and generate over 25% of their sales from abroad. (e.g., Vix Technology makes fare management equipment for public transit) Born globals offer leading-edge products with strong potential to generate international sales. Nongovernmental Organizations: Nonprofit organizations conduct cross-border activities, including charitable groups and nongovernmental organizations (NGOs) They work on behalf of special causes, such as education or health care, operating internationally either to conduct their activities or to raise funds. (e.g., British Wellcome Trust (health care), CARE (poverty)) Why do Firms Internationalize? strategic/proactive motive: acquire knowledge reactive motive: serve a key customer that has expanded abroad Specific motivations: o Seek opportunities for growth through market diversification. (Foreign markets can extend the marketable life of products.) o Earn higher margins and profits. o Gain new ideas about products, services, and business methods. o Serve key customers better that have relocated abroad. o Be closer to supply sources, or benefit from global sourcing advantages. o Gain access to lower-cost or better-value factors of production. o Develop economies of scale in sourcing, production, marketing, and R&D. (reduce per unit costs) o Confront international competitors more effectively. (Entering a competitor’s home market.) o Invest in a potentially rewarding relationship with a foreign partner. (e.g., Joint Ventures) Why Study International Business? BRICs: Brazil, Russia, India, China International Business provides: Access to a range of products and services. Job creation Interconnectedness to the world economy Advantages for the firm: Sustain a competitive advantage. Acquire the necessary skills and knowledge. 4 Hannah Mayr 2. Globalization of Markets and the Internationalization of the Firm. 5. Globalization of Markets: Ongoing economic integration and growing interdependency of national economies Phases of Globalization: Phase of Approximate Triggers Key Characteristics Globalization Period First phase 1830 to late Introduction of railroads Rise of manufacturing 1800s, peaking and ocean transport in 1880 Second Phase 1900 to 1930 Rise of electricity and Emergence and dominance of steel production early MNEs in manufacturing, extractive, and agricultural industries Third phase 1948 to 1970s Formation of General Focus by industrializing Agreement on Tariff and Western countries to reduce Trade (GATT); trade barriers; rise of MNEs conclusion of World from Japan; development of War II; Marshall Plan to global capital markets; rise of reconstruct Europe global trade names Fourth phase 1980s to Privatization of state Rapid growth in cross-border present enterprises in transition trade of products, services, and economies; revolution capital ; rise of internationally in information, active SMEs and services firms communication, and transportation technologies GATT led to the formation of the World Trade Organization (WTO): A multilateral governing body empowered to regulate international trade and investment. Market Globalization: Organizing Framework o Drivers or causes. o Dimensions or manifestations o Firm-level consequences o Societal consequences 5 Hannah Mayr 1. Drivers of Globalization Worldwide reduction in barriers to trade and investment. Market liberalization and adaption of free markets Industrialization economic development and modernization (measured through GNI (gross national income)) Integration of world financial markets Advances in technology Technological Advances and Globalization: o Information Technology (IT): science and process of creating and using information resources. → enables firms to interact with foreign partners in a more timely and cost-effective way. o Communications: Internet, and Internet-dependent system such as intranets, extranets, social media, and e-mail, connect billions of people and companies. Firms use the Internet to promote their products → social media provide various means to reach important audiences in markets around the world. o Manufacturing: Computer-aided design (CAD) of products, robotics and production lines have transformed manufacturing, mainly by reducing production costs. o Transportation: advances in transportation and low freight costs have helped spur market globalization. → increasing threat to the natural environment 2. Dimensions of market Globalization Integration and interdependence of national economies. (Collective activities of firms give rise to economic integration =trade and other commercial activities) Rise of regional economic integration blocs. (Countries that facilitate reduced trade and investment barriers e.g., EU) Growth of global investment and financial flows. (Free movement of capital around the world.) Convergence (=Annäherung) of consumer lifestyles and preferences. Globalization of production (Firms are forced to reduce costs of production) Globalization of services (e.g., people go abroad for medical procedures) 3. Firm Level Consequences of Market Globalization: Internationalization of the Firm’s Value Chain Countless new business opportunities for internationalizing firms New risks and intense rivalry from foreign competitors More demanding buyers who source from suppliers worldwide Greater emphasis on proactive internationalization Internationalization of firm’s value chain 6 Hannah Mayr Value chain: The sequence of value-adding activities the firm performs in the course of developing, producing, marketing, and servicing a product. 4. Societal Consequences of Globalization Contagion: Rapid Spread of Monetary or Financial Crises (danger of a recession) Loss of National Sovereignty (=ability of a nation to govern its own affairs) → large MNEs can a apply a lot of pressure on governments. Offshoring and the flight of jobs Effect on the poor (child labor, exploiting workers) & Effect on the natural environment Effect on national culture Contagion: The tendency of a financial or monetary crisis in one country to spread rapidly to other countries. Offshoring: is the relocation of manufacturing and other value-chain activities to cost- effective locations abroad. Reshoring: The return of manufacturing and services aback to the home country. 7 Hannah Mayr 3. The Cultural Environment of International Business Culture: The values, beliefs, customs, arts and other products of Cross-cultural human thought and work that risk characterize the people of a given society. Managerial Dimensions Culture is: implications Relative (not right or wrong) About groups (not about individual behavior) Culture Not inherited (comes from Models and Language people’s social explanations environment. Relegion Cross-cultural risk: A situation or event in which a cultural misunderstanding puts some human value at stake. Socialization: process of learning the rules and behavioral patterns appropriate to one’s society. Acculturation: The process of adjusting and adapting to a culture other than one’s own. Dimensions of Culture: Iceberg concept of culture: High culture Folk culture Deep culture 1. Values and Attitudes: Values: represent a person’s judgment about what is good or bad; acceptable or unacceptable. Attitudes: similar to opinions, but often not based on logical facts Prejudices: rigidly held attitudes, usually aimed at particular groups of people 2. Manners and customs: → ways of behaving and conducting in public and business situations. 8 Hannah Mayr 3. Perception of time: Monochronic: A rigid orientation to time, in which the individual is focused on schedules, punctuality, and time as a resource. (time is linear) Polychronic: A flexible, nonlinear orientation to time, in which the individual takes a long-term perspective and emphasizes human relationships. 4. Perception of Space: 5. Symbolic Productions (logos) 6. Material Productions and Creative Expressions Material Productions: artifacts, objects and technological systems that people construct to function within their environment. (e.g., infrastructures, systems that provide health care or education) Creative expressions: arts, folklore, music, dance , theater 7. Education (literacy = important indicator of education level) 8. Social Structure = pattern of social arrangements and organized relationships that characterize a society. → how a society is organized in terms of individuals, families, groups, and socioeconomic strata (= classification of individuals depending on occupation, income level, …). Role of Language and Religion in Culture Verbal language: 7000 active languages Most common primary languages: Jargon: vocabulary unique to a particular country Idiom: an expression whose symbolic meaning is different from its literal meaning. e.g., on cloud nine = extremely happy about something Nonverbal language: → facial expressions and gestures Religion: = a system of common beliefs or attitudes concerning a being or a system of thought that people consider sacred. → for major religions: Christianity, Islam, Hinduism, Buddhism 9 Hannah Mayr Culture’s Effect in International Business: Cross-cultural proficiency is important in: Managing employees. Communicating and interacting with foreign business partners. Negotiating and structuring international business ventures. Developing products and services. Preparing advertising and promotional materials Preparing for international trade fairs. Screening and selecting foreign distributors and other partners. Interacting with current and potential customers from abroad. Cross-cultural differences that may complicate company activities: o Developing products and services o Providing services o Organizational structure o Teamwork o Pay-for-performance system (facing the pay-for-age system in Asia) o Lifetime employment o Union-management relationships (equality of employer and employee) o Attitudes toward ambiguity (= vague instructions) o Negotiations o Technology Models and Explanations of Culture: Cultural Metaphors: a distinctive tradition or institution strongly associated with a particular society. (e.g., American football → cultural metaphor in the US of being a team player) Low-context culture: A culture that relies on elaborate verbal explanations, putting much emphasis on spoken words. High context culture: A culture that emphasizes nonverbal messages and views communication as a means to promote smooth, harmonious relationships. (Indirect and polite style) 10 Hannah Mayr Hofstede’s Research on national Culture: o Individualism versus collectivisms: Describes whether a person functions primarily as an individual or as part of a group. o Power distance: Describes how a society deals with the inequalities in power that exist among people. (Low power distance → gaps between powerful and weak are small (e.g., Sweden)) o Uncertainty avoidance: the extent to which people can tolerate risk and uncertainty in their lives. o Masculinity versus femininity: Refers to a society’s orientation based on traditional male and female values. Masculine cultures tend to value competitiveness, assertiveness, ambitions, and the accumulation of wealth. Feminine cultures emphasize nurturing roles, interdependence among people, and taking care of less fortunate people. o Long-term versus short-term orientation: Refers to the degree to which people and organizations defer pleasure and gratification to achieve long-term success. o Indulgence versus restraint: The extent to which people try to control their desires and impulses. Managerial Implications of Culture: Nature of culture: distinction between national, professional, and corporate culture Cultural Orientations: Ethnocentric orientation: using our own culture as the standard for judging other cultures. (Home-country orientation) Polycentric orientation: A host-country mindset in which the manager develops a strong attachment of the country in which she or he conducts business. Geocentric orientation: A global mindset by which the manager can understand a business or market without regard to country boundaries. How to acquire Cross-Cultural Competence: 1. Acquire factual knowledge about the other culture and try to speak the language. 2. Avoid cultural bias. 3. Develop cross-cultural skills: ▪ Tolerance for ambiguity ▪ Perceptiveness (observe closely) ▪ Valuing personal relationships ▪ Flexibility and adaptability Self-reference criterion: The tendency to view other cultures through the lens of our own culture. Critical incident analysis: A method for analyzing awkward situations in cross-cultural encounters by becoming more objective and developing empathy for other points of view. Cultural Intelligence (CQ): a person’s capacity to function effectively in situations characterized by cultural diversity. 11 Hannah Mayr 4. Ethics, Corporate Social Responsibility, Sustainability, and Governance in international Business Components of Ethical Behavior: o Ethics: Moral principles and values that govern the behavior of people, firms, and governments, regarding right and wrong. Ethics o Corporate social responsibility (CSR): A manner for operating a business that meets or exceeds the ethical, legal, Coporate commercial, and public expectations of Governance Corporate customers, shareholder, employees, and Social Responsibility communities. o Sustainability: meeting humanity’s needs without harming future generations. o Corporate governance: The system of Sustainability procedures and processes by which corporations are managed, directed, and controlled. Value of Ethical Behavior: o It is the right thing to do. o It is often prescribed within laws and regulations. o Customers, governments, and the media demand ethical behavior. o Ethical behavior is good business, leading to enhanced corporate image and selling prospects. Examples of Unethical Behavior: Falsify contracts. Pay or accept bribes. Tolerate sweatshop conditions. Undertake false advertising. Engage in pricing that is deceptive. Deceive or abuse intermediaries. Engage in activities that harm the natural environment. Pyramid of Ethical behavior: Corporate social How managers should respond to ethical responsibility challenges. Ethical behavior Complying with laws and regulations 12 Hannah Mayr Relativism: The belief that ethical truths are not absolute but differ from group to group. Normativism: The belief that ethical behavioral standards are universal, and firms and individuals should seek to uphold them around the world. → is encouraged from the UN. Ethical Challenges: o Corruption: extreme form of unethical behavior to obtain power, personal gain, or influence. ▪ Bribery: occurs when a person offers or gives another person a gift, cash or a favor to act dishonestly in exchange for personal gain. ▪ Embezzlement: is the theft or misuse of funds typically placed in one’s care. ▪ Fraud: involves wrongfully deceiving a person or other party to give up assets or cash. ▪ Extortion and blackmail: involve treats of harm against another person or party unless payment is received. ▪ Money laundering: is the concealment of the origins of funds obtained through illegal means, typically by transferring the funds through banks or other legitimate businesses. o Unethical management practices o Harmful global sourcing o Illicit products and marketing o Intellectual property infringement (e.g., piracy or counterfeiting = unauthorized reproduction or use of copyrighted or patented work, for financial gain.) Intellectual property: Ideas or works that individuals or firms create, including discoveries and inventions; artistic, musical, and literary works; and words, phrases, symbol, and designs. Intellectual property rights: The legal claim through which the proprietary assets of firms and individuals are protected from unauthorized use by other parties. (e.g., trademarks, copyrights, and patents. Corporate Social Responsibility: →emphasizes the development of shared value for both shareholders and stakeholders. Firms that practice CSR behave ethically. Examples of CSR: Avoiding human rights abuses. Eliminating child labor. Avoiding workplace discrimination Protecting the natural environment. Guarding against corruption. 13 Hannah Mayr Sustainability: Sustainable practices: Beneficial agricultural practices (use of natural pesticides) Water conservation (minimize water waste) Air quality protection Reduced energy and fuel consumption (use renewable energy sources) Increased use of solar and wind energy Improved work processes Three types of sustainable business interests: 1. Economic interests (e.g., job creation, tax flows, wages) 2. Social interest (= social impact, e.g., health insurance, educational opportunities) 3. Environmental interests (= environmental impact, e.g., use of recycled or renewable raw materials) Corporate Governance: Code of ethics: A document that escribes the values and expectations that guide decision- making by all employees in the firm. Code of conduct: A document that translates the code of ethics into specific rules regarding behaviors and practices that are prohibited or required. It also identifies consequences for specific violations. → Often more than one code of conduct for each country or region. Embracing Ethical Behavior: Enhance the firm’s contribution to the local community and global environment. Ensure that diverse voices are heard. Develop global ethical standards. Train managers in global ethical principles. Develop closer relations with foreign stakeholders. Ethical Standard Approaches for Corporate Governance: Utilitarian Rights Fairness Common Good Virtue Approach Approach Approach Approach Approach The best ethical The best The best The best action The best action action is the one action action treats emphasizes emphasizes virtues that that provides the protects the everyone the welfare of provide for the full most good or the moral rights equally. the entire development of our least harm. of everyone. community or humanity (love, trust, …) nation. A Global Consensus: o International Chamber of Commerce o Organization for Economic Do-operation and Development (OECD) o United Nations Global Compact o Global Reporting Initiative 14 Hannah Mayr Benefits of Corporate Governance: Increased employee commitment. Increased customer loyalty and sales. Improved reputation and brand image. Reduced likelihood of government intervention. Reduced business costs. Improved financial performance. A Framework for Making Ethical Decisions: 15 Hannah Mayr 5. Theories of International Trade and Investment Comparative advantage: Superior features of a nation that provide unique benefits in global competition. These features typically are derived from either natural endowments or deliberate national policies. → country-specific advantage (e.g., petroleum reserves) Competitive advantage: Assets or capabilities of a firm that are difficult for competitors to imitate. They are typically derived from specific knowledge, competencies, skills, or superior strategies. → firm-specific advantage Why do nations trade? Classical Theories: o Mercantilism: The belief that national prosperity is the result of a positive balance of trade, achieved by maximizing exports and minimizing imports. o Absolute advantage principle: The idea that a country benefits by producing only those products it can produce using fewer resources than any other country. o Comparative advantage principle: It may be beneficial for two countries to trade with each other as long as one is relatively more efficient at producing a product needed by the other. o Factor proportions theory and the Leontief Paradox: ▪ Products differ in the types and quantities of factors (labor) required for production. ▪ Countries differ in the type and quantity of production factors they possess. → each country should export products that use abundant factors and import goods with scarce factors. (e.g., US exports capital-intensive pharmaceuticals.) o International product life cycle theory: each product and its manufacturing technologies go through three stages: introduction, maturity and standardization. →In introduction phase the product is produced in the inventing country → in the maturity phase inventors start to mass-produce it and export → competitors get knowledge of product and produce it themselves. → In standardized phase mass production becomes dominant → inventor may become importer. o New trade theory: trade was growing fastest among industrialized countries → 16 Hannah Mayr Trades surplus: Export more goods than import.(supported by neo-mercantilism) Free trade: Relative absence of restriction to the flow of goods and services between nations. → outcomes of free trade: Consumers and firms can more readily buy the products they want. Imported products may be cheaper than domestically produced ones. Lower-cost imports can help reduce company expenses → raising profits. Lower-cost imports help consumers save money → increase living standards. Increases the overall prosperity of poor countries. Limitations of Absolute and comparative Advantage Theories: ▪ Government restrictions such as tariffs (taxes on imports) ▪ International shipping and insurance make goods more expensive. ▪ Many services, such as banking and retailing, cannot be exported → RDI is necessary. How Can Nations Enhance Their Competitive Advantage? 1. The Competitive Advantage of Nations: Most top firms spend half or more of their total R&D in countries other than where they are headquartered to: Gain access to talent Cut costs by hiring lower-paid engineers and scientists abroad. To relocate certain R&D activities abroad, to gain specific need of target markets. 2. Determinants of National Competitiveness (Porter Diamond): o Demand conditions (demand of specific products in home-market) o Firm strategy, structure, and rivalry (nature of domestic rivalry) o Factor conditions (nations’ resources such as labor, natural resources or capital and technology) o Related and supporting industries (presence of clusters of suppliers, competitors, and skilled workforce) Industrial Cluster: A concentration of business, suppliers, and supporting firms in the same industry at a particular location, characterized by a critical, or other factor endowments. (e.g., fashion industry in northern Italy, footwear industry in Vietnam) The most important sources of national advantage are knowledge and skills → Important factor in deciding where companies will locate. 3. National Industrial Policy =A proactive economic development plan a government initiates to build or strengthen a particular industry. → Governments play a key role in influencing each of the four components of the Porter diamond. E.g.: Tax incentives, Monetary and fiscal policies, Educational Systems, Infrastructure, Legal systems 17 Hannah Mayr Why and How Do Firms Internationalize: Stages in the Internationalization Process of the Firm: How Can Internationalizing Firms Gain and Sustain Competitive Advantage: FDI-Based Explanations: Internationalization theory: An explanation of the process by which firms acquire and retain one or more value-chain activities inside the firm. This minimizes the disadvantages of dealing with external partners and allows for greater control over foreign operations. Non-FDI-Based Explanations: o International Collaborative Ventures: Cooperation between two or more firms to gain access to resources unavailable within the own organization. (Joint Venture) o Networks and Relational Assets: Beneficial long-term relationships the firm undertakes with other business entities, that can provide needed capabilities. 18 Hannah Mayr 6. Political and Legal Systems in National Environments: Country risk: (=political risk) Exposure to potential loss or adverse effects on company operations and profitability caused by developments in a country’s political and/or legal environments. Dimensions: o Harmful or unstable political system o Laws and regulations unfavorable to foreign firms o Inadequate or underdeveloped legal system o Bureaucracy and red tape o Corruption and other ethical blunders o Government intervention, protectionism, and barriers to trade and investment o Mismanagement or failure of the national economy. Political and Legal Environments in International Business: Political system: A set of formal institutions that constitute a government. It includes legislative bodies, political parties, lobbying groups, and trade unions. Functions: Provide protection from external threats. Ensure stability based on laws. Govern the allocation of valued resources among the members of a society. Define how a society’s members interact with each other. Constituents: the people and organizations that support the political system and receive government resources. Legal system: A system for interpreting and enforcing laws. Functions: Ensure order, Resolve disputes in civil and commercial activities, Tax economic output. Provide protections for private property, including intellectual property and other company assets. Political Systems: o Totalitarianism: the state regulates most aspects of public and private behavior. (Mostly led by dictator) 19 Hannah Mayr o Socialism: Capital should be vested in the state and used for production rather than profit. Collective welfare is seen to outweigh the welfare of the individual. Governments frequently intervene in the private sector and in business activities. o Democracy: two major factors: o Private property rights o Limited governments, functions: national defense, maintenance of law, constructing and maintaining infrastructure. Political freedom: ▪ Free and fair elections ▪ The right to form political parties, ▪ Fair electoral laws ▪ Existence of a parliament o other legislative body, ▪ Freedom from domination by the military, foreign powers, or religious hierarchies. ▪ Self-determination for cultural, ethnic, and religious minorities. Economic freedom: ▪ The extent of government interference in business, ▪ The strictness of the regulatory environment. ▪ The ease with which commercial activity is carried out according to market forces. Countries with the highest living standards → have the most political and economic freedoms. The Relationship Between Political Systems and Economic Systems: o Command Economy (associated with totalitarianism): state is a dominant force in the production and distribution of goods and services. → bad efficiency in synchronizing supply and demand o Market Economy (associated with democracy) : Interaction of supply and demand determines prices in the market economy. Governments intervention is limited. o Mixed Economy (associated with socialism): Exhibits the features of both a market economy and a command economy. Most industries under private ownership, but government also controls for example labor regulation or environmental regulations. Legal Systems: = provide a framework of rules and norms, to limit or permit specific relationships and provide punishments for violations. Rule of law: A legal system in which rules are clear, publicly disclosed, fairly enforced, and widely respected by individuals, organizations, and the government. 4 basic legal systems: o Common law: more flexible than other law systems → open to interpretation by courts. Primarily judicial in origin. 20 Hannah Mayr o Civil law: all-inclusive system of laws that have been codified; laws are clearly written and accessible. Division in commercial, civil, and criminal code. Primarily legislative in origin. Differences: Legal Issues Civil Law Common Law Ownership of intellectual Determined by Determined by prior use. property registration. Enforcing agreements Commercial agreements Proof of agreement is become enforceable only sufficient for enforcing if properly notarized or contracts. registered. Specificity of contracts Contracts tend to be briefContracts tend to be very because many potential detailed, with all possible problems are already contingencies spelled out. covered in the civil code.Usually more costly to draft a contract. Compliance with contracts Noncompliance is Acts of God (floods, extended to include hurricanes) are the only unforeseeable human acts justifiable excuses for such as labor strikes and noncompliance with the riots. provisions of contracts. o Religious law: strongly influenced by religious beliefs, ethical codes, and moral values. o Mixed Systems: consist of two or more legal systems operating together. Participants in Political and Legal Systems: Government (enacts and enforces law) International Organizations (e.g., WTO, UN; facilitate free and fair trade) Regional Trade Organizations (e.g., EU; two or more countries within a region form an alliance to reduce barriers for trade and investment) Special Interest Groups (e.g., OECD; supports economic development of a particular community) Competing firms Special Interest Group Typical Issue Labor unions Oppose imported goods and global sourcing Competing businesses Dislike competition from foreign firms Customers May avoid foreign-made products. Dislike improper marketing practices. Conservationists Fight against wildlife loss and destruction of the natural environment 21 Hannah Mayr Types of Country Risk Produced by Political Systems: 1. Government Takeover of Corporate Assets: (mostly natural resources) Confiscation: seizure of corporate assets without compensation. Expropriation: seizure with compensation Nationalization: government seizure of an entire industry, with or without compensation 2. Embargoes and Sanctions: Sanction: type of trade penalty, e.g., tariffs, trade barriers, import duties, import or export quotas. Embargo: an official ban on export to or imports from a particular country to isolate it and punish its government. (More political) 3. Boycotts Against Firms or Nations: Boycott: a voluntary refusal to engage in commercial dealings with a nation or company. -→ lost sales, increased costs for the company or nation 4. Terrorism = the threat or actual use of force or violence to attain a political goal through fear, coercion, or intimidation. 5. War, Insurrection, and Violence → pose significant problems for business operations. Types of Country Risk Produced by Legal Systems: Commercial law: covers business transactions. Private law: regulates relationships between persons and organizations. (Including contracts and liabilities) 1. Country Risk Arising from the Host-Country Legal Environment: a. Foreign investment laws: affect the entry strategy firms choose → as many nations impose restriction on inward FDI. b. Controls on operating forms and practices: governments impose laws and regulations on how firms can conduct production, marketing, and distribution activities within their borders. (e.g., joint ventures in China) c. Marketing and distribution laws: determine which practices are allowed in advertising, promotion, and distribution. d. Laws on income repatriation: restrict transfers back to the home country , to preserve hard currencies. (€,$) e. Environmental laws: to preserve natural resources. f. Contract laws: attach rights, guties, and obligation to the contracting parties; used in five main types of business transactions: ▪ Sale of goods or services ▪ Distribution of products ▪ Licensing and franchising ▪ FDI ▪ Joint Ventures 22 Hannah Mayr g. Internet and E-Commerce Regulations: e-signature laws offer protections for online contracting. h. Inadequate or underdeveloped legal systems: poor enforcement of existing laws 2. Country Risk Arising from the Home-Country Legal Environment Extraterritoriality: Application of home-country laws to persons or conduct outside national border. → Such laws are intended to prosecute individuals or firms located abroad for some type of wrongdoing. a. The Foreign Corrupt Practices Act (FCPA): banned firms from offering bribes to foreign parties to secure or retain business. b. Accounting and reporting laws c. Transparency in financial reporting: improves business decision making and the ability of citizens to hold companies accountable. Transparency: The degree to which companies regularly reveal substantial information about their financial condition and accounting practices. Grease payments: small-scale bribes intended to speed up telephone hookups, government paperwork, and other everyday matters in international commerce. Managing Country Risk: o Proactive Environmental Scanning: to assess potential risks and threats to the firm. o Strict Adherence to Ethical Standards o Alliances with Qualified Local Partners o Protection Through Legal Contracts Three approaches for resolving international disputes: Conciliation: A formal process of negotiation with the objective to resolve differences in a friendly manner. Arbitration: A neutral third party hears both sides of a case and decides in favor of one party or the other, based on an objective assessment of the facts. Litigation: One party files a lawsuit against another to achieve desired ends. 23