D270 Midterm: Chapter 3

Question 1

CASE: China

Why do companies rush to China?

Answer 1

• Market potential (1.34 billion citizens)
• Market performance (will become world’s lgst. economy between 2016-2036
• Infrastructure
• Resources (well-educated population)
• Strategic positioning

Question 2

CASE: China

What are complications companies face when entering China’s market?

Answer 2

• “State Capitalism”: gov. manipulates market to achieve political goals
• lg. mix of old vs. new
• v. hard for MNEs to open local operations
• frustrating bureaucratic system
• v. ambiguous legal system
• intellectual property not protected well

Question 3

What is the political system?

Answer 3

Structural dimensions & power dynamics of the gov that…

• Specify institutions, organizations, & interest groups
• Define norms/rules that govern political activities

Question 4

What is the goal of the political system?

Answer 4

To integrate diverse elements of society

Question 5

What is the test of the political system?

Answer 5

Uniting society in the face of diverse viewpoints

Question 6

What is “laissez-faire?”

Answer 6

Belief that the gov. should not intervene in business affairs

Question 7

What are the primary principles of collectivism?

Answer 7

Needs of group > needs of individual

Assumes common goal to improve welfare of all members of society

Question 8

What is political ideology?

Answer 8

• Encapsulates doctrine of political behavior & changes

- Outlines procedures for turning ideas into actions

Question 9

What is pluralism?

Answer 9

There are multiple opinions about an issue, and each contains part of the truth, but none with whole truth

Question 10

How is political freedom measured?

Answer 10

• Degree to which fair & competitive elections occur
• Extent to which individual & group freedoms are guaranteed
• Legitimacy ascribed to Rule of Law
• Freedom of the press

Question 11

What are the key elements of democracy?

Answer 11

• Participation by citizens in fair/just decision-making process
• Authority of the many over the few
• Strongly related to individualism
• MNEs operate on economic (not political) standards

Question 12

What are the key elements of totalitarianism?

Answer 12

• Consolidates power in a single agent who controls political, economic, & social activities
• Focus on collectivism
• Differing opinions to standard political ideology not tolerated

Question 13

What are 2 business implications of totalitarianism?

Answer 13

• Private enterprises support state control of economic activities
• State favors local over foreign companies

Question 14

What was the Third Wave of Democratization?

Answer 14

• 1970’s-80’s

- 30+ countries switched from totalitarianism to democracy

Question 15

What powered the Third Wave of Democratization?

Answer 15

• Regime legitimacy: totalitarian govs. couldn’t deliver economic progress
• Communication innovations: eroded totalitarian states’ control of info
• Freedom’s consequences: led to economic dividends

Question 16

What were implications of the Third Wave of Democratization?

Answer 16

• Stabilized business environments for MNEs
• Industries developed
• Middle class emerged
• Globalization accelerated
• Freedom flourished

Question 17

What 4 political systems does the Economic Intelligence Unit identify?

Answer 17

• Full democracy
• Flawed democracy
• Hybrid regime
• Authoritarian regime

Question 18

What factors are currently promoting authoritarianism?

Answer 18

• Political economy of growth
• Democracy set-backs in major democratic nations
• Global financial crisis

Question 19

What worldwide trends increase political risk for companies?

Answer 19

• Many fast-growing emerging markets have factors that increase instability
• Aftermath of financial crisis increased political risk in all markets

Question 20

What is systemic political risk?

Answer 20

Influences macro business environment & affects all firms

• Shifts in public policy
• New politicians

Question 21

What is procedural political risk?

Answer 21

Institutes impediments that constrain flexibility of local operations

Question 22

What is distributive risk?

Answer 22

Gradual elimination of local property rights of foreign companies
- Creeping expropriation: officials slowly take bigger share of MNE’s rewards

Question 23

What is catastrophic risk?

Answer 23

Devastates companies and countries

Question 24

What characterizes a common law system?

Answer 24

Developed by judges through decisions of courts (stare decisis)

Question 25

What characterizes civil law?

Answer 25

Based on strict application of statutory laws (not bound by precedents)

Question 26

What characterizes theocratic law?

Answer 26

Base don instructions of religious teachings (religious leaders have authority)

Question 27

What characterizes the Rule of Man?

Answer 27

The ruler (in whatever form) commands authority that is above the law (totalitarian states)

Question 28

What characterizes the Rule of Law?

Answer 28

No individual is above laws that are clearly specified, commonly understood, and fairly enforced

Question 29

What are some operational concerns for companies looking to go international?

Answer 29

• Starting a business (process differs)
• Making & enforcing contracts
• Hiring & firing policies
• Getting out or going under

Question 30

How do wealth and regulation correlate?

Answer 30

More wealth = less regulation

Question 31

What are some strategic concerns that a company might have when operating abroad?

Answer 31

• Product origin & local content (affects import/export taxes)
• Product safety and liability (EU shapes worldwide standards)
• Legal jurisdiction (“Choice of law” clauses determine which country’s laws would be used in dispute)
• Intellectual property (not all countries abide by intellectual property rights (IPR)