Political Environments & International Business

Question 1

What is a political system?

Answer 1

• The complete set of institutions, political organisations and interest groups
• The relationships among institutions and the political norms and rules that govern their functions

Question 2

What is individualism?

Answer 2

• Primacy of the rights and role of the individual
• The welfare of society is best served by letting people pursue their own economic self interest
• Built on the importance of individual freedom and self-expression

Question 3

What is collectivism?

Answer 3

Primacy of the rights and role of the community

Question 4

What is democracy?

Answer 4

Wide participation by citizens in the decision making process

Question 5

What are the key features of democracy?

Answer 5

• Freedom of opinion, expression, religion, media, association and access to information
• Exercise of citizen power through elected representatives
• Citizen equality in opportunity and treatment under law
• Free, fair and regular elections
• Protection of individual and property rights
• Fair and independent court system
• Subordination of government to the rule of law

Question 6

What is totalitarianism?

Answer 6

• Subordinates the individual to the interest of the collective
• Dissent in eliminated through indoctrination, persecution, surveillance, propaganda, censorship and violence
• Authoritarianism, fascism, secular, theocratic

Question 7

What are a business’s risks in the broadest sense?

Answer 7

• Commercial Risk
• Environmental Risk
• Legal-Political Risk

Question 8

What is commercial risk?

Answer 8

Competitive pressures, technolgical change, market changes

Question 9

What is environmental risk?

Answer 9

Culture, legal-political, general economic forces

Question 10

What is legal-political risk and how can it be divided?

Answer 10

• aka Country Risk
• Macro risk: affects all companies
• Micro risk: affects specific regions, sectors, industries, firms

Question 11

What is political risk?

Answer 11

The risk that poetical decisions or events in a country negatively affect the profitability or sustainability of an investment

Question 12

What kinds of political risk are there?

Answer 12

• Systemic
• Procedural
• Distributive
• Catastrophic

Question 13

What is systemic risk?

Answer 13

• Affects all firms
• Changes to tax rates, weakened property rights, freedom restrictions
• Where foreign firms are not treated the same as local firms

Question 14

What is procedural risk?

Answer 14

• Affects some firms

- Excessive red tape, corruption, breaches of contract

Question 15

What is distributive risk?

Answer 15

• Foreign firms seen as agents of prosperity

- Tax discrimination, unilateral trade barriers, expropriation of assets

Question 16

What is catastrophic risk?

Answer 16

• Affects all firms

- Civil disorder, coups, wars

Question 17

What are the effects of political risk?

Answer 17

• 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

Question 18

What are examples of macro political risk?

Answer 18

• Political instability
• Corrupt or poor leadership
• Frequent change in government
• Racial, religious or ethnic conflicts
• Poor relations with other countries

Question 19

What are examples of micro political risk?

Answer 19

• Government policies influencing chosen sectors of the economy or specific foreign firms
• Industry regulation, taxes on specific types of business activities, various restrictive local laws
• Reduced operating profitability due to regulations
  
  • Requiring use of domestic suppliers
  • Restricting repatriation of profits

Question 20

What are examples of micro-macro political risk?

Answer 20

Expropriation, indigenisation laws

Question 21

What is true of the risk and profit?

Answer 21

• Low risk environment = low profits

- High risk environment = high profits

Question 22

What is a risk premium?

Answer 22

cost of minimising risk

Question 23

How can political risk be managed?

Answer 23

• Diversification
• Risk insurance
• Joint Business Ventures
• Lobbying
• Community initiatives
• Fiancail hedging
• Supply chain resilience

Question 24

What kinds of legal systems are there?

Answer 24

• Common
• Civil law
• Theocratic
• Customary
• Mixed

Question 25

What is a common law system?

Answer 25

• Based on tradition, precedent and custom
• Degree of flexibility /interpretation
• Contracts tend to be very detailed with all contingencies accounted for

Question 26

What is a civil law system?

Answer 26

• Based on detailed set of laws organised into codes
• Less adversarial than common as judges use less interpretation
• Contracts tend to be much shorter and less specific because many issues are already covered in civil law codes

Question 27

What are the most important aspects of host country laws?

Answer 27

• Constraints on foreign ownership

* Property Rights

Question 28

What is the purpose of contains on foreign ownership?

Answer 28

• Control of economy by foreigners
• Limit ability of foreign owned firms to undermine a nations
  industrial policy

Question 29

In what two ways can property rights be violated?

Answer 29

• Private Action
  
  • Theft, piracy, balckmail
• Public Action
  
  • Excessive taxation, requiring licenses, taking assets,
    redistribution of assets

Question 30

What is true of non-enforaceble property rights?

Answer 30

high transaction costs

Question 31

What are the operational concerns of host country laws?

Answer 31

• Starting a business
• Entering and enforcing contracts
• Hiring and firing local workers
• Closing down the business

Question 32

What are the strategic concerns of host country laws?

Answer 32

• Product safety and liability
• Marketplace behaviour
• Product origin and local content
• Legal juristiciton
• Arbitration

Question 33

What is governance?

Answer 33

traditions and institutions by which authority in a country is exercised

Question 34

What are the dimesnions of the world bank governance project?

Answer 34

• Voice and accountatblity
• Political stability and absence of violence
• Government effectiveness
• Regulatory quality
• Rule of law
• Control of corruption