Political Environments & International Business Flashcards
What is a political system?
- The complete set of institutions, political organisations and interest groups
- The relationships among institutions and the political norms and rules that govern their functions
What is individualism?
- 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
What is collectivism?
Primacy of the rights and role of the community
What is democracy?
Wide participation by citizens in the decision making process
What are the key features of democracy?
- 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
What is totalitarianism?
- Subordinates the individual to the interest of the collective
- Dissent in eliminated through indoctrination, persecution, surveillance, propaganda, censorship and violence
- Authoritarianism, fascism, secular, theocratic
What are a business’s risks in the broadest sense?
- Commercial Risk
- Environmental Risk
- Legal-Political Risk
What is commercial risk?
Competitive pressures, technolgical change, market changes
What is environmental risk?
Culture, legal-political, general economic forces
What is legal-political risk and how can it be divided?
- aka Country Risk
- Macro risk: affects all companies
- Micro risk: affects specific regions, sectors, industries, firms
What is political risk?
The risk that poetical decisions or events in a country negatively affect the profitability or sustainability of an investment
What kinds of political risk are there?
- Systemic
- Procedural
- Distributive
- Catastrophic
What is systemic risk?
- Affects all firms
- Changes to tax rates, weakened property rights, freedom restrictions
- Where foreign firms are not treated the same as local firms
What is procedural risk?
- Affects some firms
- Excessive red tape, corruption, breaches of contract
What is distributive risk?
- Foreign firms seen as agents of prosperity
- Tax discrimination, unilateral trade barriers, expropriation of assets
What is catastrophic risk?
- Affects all firms
- Civil disorder, coups, wars
What are the effects of political risk?
- 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
What are examples of macro political risk?
- Political instability
- Corrupt or poor leadership
- Frequent change in government
- Racial, religious or ethnic conflicts
- Poor relations with other countries
What are examples of micro political risk?
- 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
What are examples of micro-macro political risk?
Expropriation, indigenisation laws
What is true of the risk and profit?
- Low risk environment = low profits
- High risk environment = high profits
What is a risk premium?
cost of minimising risk
How can political risk be managed?
- Diversification
- Risk insurance
- Joint Business Ventures
- Lobbying
- Community initiatives
- Fiancail hedging
- Supply chain resilience
What kinds of legal systems are there?
- Common
- Civil law
- Theocratic
- Customary
- Mixed
What is a common law system?
- Based on tradition, precedent and custom
- Degree of flexibility /interpretation
- Contracts tend to be very detailed with all contingencies accounted for
What is a civil law system?
- 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
What are the most important aspects of host country laws?
- Constraints on foreign ownership
* Property Rights
What is the purpose of contains on foreign ownership?
- Control of economy by foreigners
- Limit ability of foreign owned firms to undermine a nations
industrial policy
In what two ways can property rights be violated?
- Private Action
- Theft, piracy, balckmail
- Public Action
- Excessive taxation, requiring licenses, taking assets,
redistribution of assets
- Excessive taxation, requiring licenses, taking assets,
What is true of non-enforaceble property rights?
high transaction costs
What are the operational concerns of host country laws?
- Starting a business
- Entering and enforcing contracts
- Hiring and firing local workers
- Closing down the business
What are the strategic concerns of host country laws?
- Product safety and liability
- Marketplace behaviour
- Product origin and local content
- Legal juristiciton
- Arbitration
What is governance?
traditions and institutions by which authority in a country is exercised
What are the dimesnions of the world bank governance project?
- Voice and accountatblity
- Political stability and absence of violence
- Government effectiveness
- Regulatory quality
- Rule of law
- Control of corruption
