Chapter 6 Flashcards
Sovereignty
Refers to both the powers exercised by a state in relation to other countries and the supreme powers exercised over its own members. So it sets its own rules regarding citizenship , trade, movement of people or goods across borders and citizens are subject to this law beyond national borders.
A sovereign state
Independent and free from all external control, enjoys full legal equality with other states, governs it’s own territory, selects its own political, economic, social systems & has the power to enter agreements with other nations.
What are the Forms of Governments?
And the greek saying :
Monarchy (dictatorship)
Aristocracy (oligarchy)
Democracy
Rule by one, rule by few , rule by many
Examples of Sharing Sovereignty
Membership in: NAFTA EU NATO WTO
What are the political risks of global business?
Confiscation
Expropriation
Domestication
Nationalization
Describe the stability of government policies
Radical shifts in government philosophy can occur when:
An opposing political party ascends to power
Pressure from nationalist and self-interest groups
Weakened economic conditions
Bias against foreign investment or conflicts between governments
Describe instability of governments and policies
Some forms of government seem to be inherently unstable (e.g. Coalition governments)
Changes in political parties during elections can have major effects on trade conditions
Nationalism
Animosity targeted toward specific countries
Trade disputes
What are some economic risks that international businesses face and few can avoid?
Exchange Controls Local Content Laws Import Restrictions Tax Controls Price Controls Labor Problems
What is a political sanction and what are three examples?
Cuban crisis of the 1960s
The Iranian revolution in the 1980s
The Persian Gulf War in the 1990s
What are some political vulnerabilities?
Changes in Government Policies – banned products
Politically Sensitive Products – fast food
Politically Sensitive Issues – Franken foods
U.S. Lodges WTO Complaint against Europe over GM Food
Political Risk due to change in government
How could you forecast poltical risk?
Monitor changes
Subscribe to reports that asses political risk
Device an early warning system
Develop contingency plans
Build a database of past political events for use in predicting future
Risk insurance?
How can a firm lessen political risk ?
Joint Ventures Control Marketing and International Distribution Expanding the investment base Licensing Planned Domestication Political Bargaining Political Payoffs Be a good corporate citizen
What does a good relation between government and MNC look like?
improves the balance of payments by increasing exports or reducing imports through import substitution
uses locally produced resources
transfers capital, tech, and or skills
creates jobs
makes tax contributions
why do governments encourage foreign direct investment (FDI)
The key reason to encourage foreign investment is to accelerate the country’s economic growth
How do governments provide incentives for foreign direct investment (FDI)
Provide incentives for Foreign Direct Investment (FDI)
Tax holidays
Free land, roads, schools
How do governments remove disincentives for foreign direct investment (FDI)
Remove disincentives for FDI Red tape Government guarantees Political Stability Local-content requirement Export requirements
What are other encouragement of global business by us gov?
Export Promotion by the Dept. of Commerce
Export-Import Bank
Insurance against political risk
Agency for International Development (AID)
“USAID provides economic and humanitarian assistance in more than 100 countries to provide a better future for all.”
Protection against political risk for “essential” projects
Exchange Controls
Exchange Controls This happens when there is a shortage of foreign exchange in the country and the government restricts the spending in foreign currency. This may result in the imposition of differential exchange rates for different products entering the country
Local Content Laws
Local Content Laws All countries and regions may have local content laws, for example NAFTA has a 62.5% local content requirement for cars originating from the NAFTA region, the EU has a 45% local content requirement so that it forces companies to use local components.
Import Restrictions
Import Restrictions Countries may impose import restrictions to protect local farmers or industries, but this may be detrimental to the local economy if it interrupts production in certain industries.
Tax Controls
Tax Controls Taxes that are imposed on foreign companies but not on domestic companies and caused their products to be more expensive in the country because it is passed on to the consumer.
Price Controls
Price Controls Countries can impose price controls on foreign companies selling essential products such as food or gasoline, especially during inflationary periods.
Labor Problems
Labor Problems Unionism and labor laws are different in different countries and there are especially strict rules for laying off employees by foreign companies. China’s new labor laws have been revamped and require foreign companies to provide a lot more benefits as well as lifelong employment after a certain number of years of service.
nationalism
An intense feeling of national pride and unity
This pride can take an anti-foreign business bias where minor harassment and controls of foreign investment are supported. National interest and security are more important than international relations.
expropiation
When the government seizes an investment but makes some reimbursement of assets.
In 2008 the Chavez regime in Venezuela expropiated Mexico’s CEMEX operations, paying a negotiated price. Often the expropiated investment is nationalized, that is, it becomes a government run entity.
domestication
This occurs when host countries gradually cause the transfer of foreign investments to national control and ownership through a series of government decrees that mandate local ownership and greater national involvement in a company’s management.
