The Political, Economic and Legal Environment

Question 1

What is the biggest concern in the political environment for international managers?

What can the concern be classified into?

Answer 1

• Political risk

–> political risks can be classified into macro and micro
risks

Question 2

What impact does the legal environment have on international business?

What can national laws function as?

Answer 2

• legal environment impacts way in which international business can be conducted
• -> national laws can function as trade barriers and supranatural regulations

Question 3

How can our economic environment mostly be characterised?

Which economic variables have an impact on international business?

Answer 3

• is mostly a free market economy (freie Marktwirtschaft), in which the market itself is the key mechanism of resource allocation
• GDP, inflation and economic growth impact international business

Question 4

What are major current factors influencing and altering the way in which international business is being conducted?

Answer 4

International politics and economic integration are two major pillars that are altering the way in which international business is currently being conducted.

Question 5

What are different forms of political systems that may affect international business?

Answer 5

1.) Democracy

2. ) Fake Democracy
   - -> elected representatives maintain most power in decision making while citizens don’t
3. ) Totalitarianism
   - Communism (Cuba)
   - Secular totalitarianism (North Korea)
   - Theocratic totalitarianism (Iran)

Question 6

Name different types of economic sytems that may affect the way in which international business is conducted.

Characterise them briefly

Answer 6

1. ) Market driven economy
   - private ownership
   - goods allocated on basis of consumer demands
2. ) Centrally determined economy
   - public ownership
   - goods allocated based on plan created by a committee
3. ) Mixed economies
   - privately owned & publicly owned commercial entities
   - Goverment usually owns infrastructure industry

Question 7

What effects can the establishment of transnational rules and regulations have? (As a part of International Economic Integration)

Explain these effects briefly

Answer 7

1. ) Trade creation
   - Focus on production of goods for which one has competitive advantage
   - -> efficient & low cost producers gain market share
2. ) Trade diversion (Ablenkung)
   - Decreased trade with non-members who are actually in favour of trade with each other
   - -> loss of production & exports from efficient non-members, to less efficient members who are being protected

Question 8

What are the Pros and Cons of International Economic Integration?

Answer 8

Pro

• internal & external economies of scale
• specialisation & increased competition among members
• -> lower prices, higher efficiency

Con

• outside countries less competitive with members
• members with greater efficiency may dominate industry inside group in short run (Germany with premium cars)

Question 9

Name the 5 levels of Economic Integrations!

Name examples and characterize them briefly

Answer 9

1. ) Free Trade Area (NAFTA, Mercosur, TTIP, TPP)
   - -> barriers of trade are removed
2. ) Customs Union (Andean Community)
   - -> tariffs eliminated & common trade policy toward non-members established
3. ) Common Market (EU)
   - -> not trade barriers, common external trade policy, mobility of production factors among members
4. ) Economic Union (Euro-zone)
   - -> Unified monetary and fiscal policy, common currency
5. ) Political Union (US)
   - -> Introduction of single political govt.

Question 10

What are the effects of economic integration at the example of China + ASEAN

Answer 10

• Elimination of 90% of all customs duties

- -> therefore increase of trade volume from 39.5bn to 200bn in 10 years

Question 11

What are 2 possibilities of how multi national corporations can benefit from economic integration?

Answer 11

1. ) Through cooperation
   - -> joint ventures, equity strategic alliances, contractual alliances

2.) Through localisation of operations (Walmart)

Question 12

In what 3 dimensions can a MNC benefit from localisation of operations?

Answer 12

1. ) Products –> development, manufacturing and marketing best adapted to local needs
2. ) Profits –> Re-investment of local earnings
3. ) Production –> Manufacturing of products in host market

Question 13

What are the 2 most important factors for companies when choosing a foreign investment?

Answer 13

1. ) The security environment

2. ) The legal & regulatory process in country of investment

Question 14

How have Risks and Opportunities of FDI changed ?

Answer 14

2010 - Risks –> International supply chains

2015 -
Risks –> Cyber security
Opportunities –> Big Data, Predictive analysis, Mobile Technology

Question 15

What does a country risk analysis do?

What sources of change does it try to predict?

Answer 15

Country risk analysis
- examines the chances of economic/political/legal events causing strategic/financial/personnel losses to firms following FDI

–> tries to predict macroeconomic and political sources of change

Question 16

What are the types of political risk and what do these risks consist of?

Answer 16

Macro risks

• Legal/Governmental (newly elected govt./law changes regarding FDI)
• Non-legal/Non-Govt. (Civil War, attacks, corruption)

Micro risks

• Legal/Govt. (firm specific legislation/protection or subsidies for local competitors)
• Non-legal/Non-Govt. (firm specific sabotage/targeted corruption)

Question 17

What does the PEST(LE) Analysis for Country Analysis stand for?

Answer 17

P --> Political
E --> Economic
S --> Sociocultural
T --> Technological
L --> Legal
E --> Environmental

Question 18

What do the different components of the PEST(LE) Analysis entail?

Answer 18

Political

• Regulations
• Taxation
• political stability

Economic

• GDP trends
• Financial Market stability
• Infrastructure
• Labour situation

Sociocultural

• Demographics
• Lifestyle/health
• Income distribution

Technological

• Govt. R&D
• Science/Tech. infrastructure
• Tech. level of home industries

Legal
- National institutions and policies

Environmental
- Policies on waste, energy consumption, pollution

Question 19

How can a SWOT-Analysis be used for a country risk analysis?

Answer 19

By using:
- company capability analysis and competitor analysis for STRENGTHS & WEAKNESSES

AND

• PEST(LE) and Market Analysis for THREATS & OPPORTUNITIES

Question 20

What are two different approaches to evaluating country risks?

Answer 20

Qualitative and Quantitative

Question 21

What concept belongs to a qualitative approach of country risk evaluation? (name examples)

Answer 21

qualitative risk evaluations are possible through country reports 
Examples: 
-BFAI Country Reports
-AGEFI Country Index
-Risk Profiles

Question 22

How can a quantitative approach to country risk evaluation be differentiated?

Answer 22

The quantative evaluation can be differentiated into an objective and subjective evaluation

Question 23

Name possible models of objective and subjective evaluation concepts (name examples)

Answer 23

Objective
- Statistical indicators
(debt ratios/need for credit)

• Econometric models
  (two gap world bank model/US-Exim Bank model)

Subjective
- One dimensional point evaluation models
(Institutional investor country rating/economic survey internationl)

• Multi-dimensional point evaluation models
  (Business Environment Risk Index (BERI)/international country risk guide/hermes risk categories)

Question 24

Explain the Risk profiles concept for qualitative risk evaluation and the BERI index for a quantitative, subjective country risk evaluation

Answer 24

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