The Political, Economic and Legal Environment Flashcards
What is the biggest concern in the political environment for international managers?
What can the concern be classified into?
- Political risk
–> political risks can be classified into macro and micro
risks
What impact does the legal environment have on international business?
What can national laws function as?
- legal environment impacts way in which international business can be conducted
- -> national laws can function as trade barriers and supranatural regulations
How can our economic environment mostly be characterised?
Which economic variables have an impact on international business?
- 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
What are major current factors influencing and altering the way in which international business is being conducted?
International politics and economic integration are two major pillars that are altering the way in which international business is currently being conducted.
What are different forms of political systems that may affect international business?
1.) Democracy
- ) Fake Democracy
- -> elected representatives maintain most power in decision making while citizens don’t - ) Totalitarianism
- Communism (Cuba)
- Secular totalitarianism (North Korea)
- Theocratic totalitarianism (Iran)
Name different types of economic sytems that may affect the way in which international business is conducted.
Characterise them briefly
- ) Market driven economy
- private ownership
- goods allocated on basis of consumer demands - ) Centrally determined economy
- public ownership
- goods allocated based on plan created by a committee - ) Mixed economies
- privately owned & publicly owned commercial entities
- Goverment usually owns infrastructure industry
What effects can the establishment of transnational rules and regulations have? (As a part of International Economic Integration)
Explain these effects briefly
- ) Trade creation
- Focus on production of goods for which one has competitive advantage
- -> efficient & low cost producers gain market share - ) 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
What are the Pros and Cons of International Economic Integration?
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)
Name the 5 levels of Economic Integrations!
Name examples and characterize them briefly
- ) Free Trade Area (NAFTA, Mercosur, TTIP, TPP)
- -> barriers of trade are removed - ) Customs Union (Andean Community)
- -> tariffs eliminated & common trade policy toward non-members established - ) Common Market (EU)
- -> not trade barriers, common external trade policy, mobility of production factors among members - ) Economic Union (Euro-zone)
- -> Unified monetary and fiscal policy, common currency - ) Political Union (US)
- -> Introduction of single political govt.
What are the effects of economic integration at the example of China + ASEAN
- Elimination of 90% of all customs duties
- -> therefore increase of trade volume from 39.5bn to 200bn in 10 years
What are 2 possibilities of how multi national corporations can benefit from economic integration?
- ) Through cooperation
- -> joint ventures, equity strategic alliances, contractual alliances
2.) Through localisation of operations (Walmart)
In what 3 dimensions can a MNC benefit from localisation of operations?
- ) Products –> development, manufacturing and marketing best adapted to local needs
- ) Profits –> Re-investment of local earnings
- ) Production –> Manufacturing of products in host market
What are the 2 most important factors for companies when choosing a foreign investment?
- ) The security environment
2. ) The legal & regulatory process in country of investment
How have Risks and Opportunities of FDI changed ?
2010 - Risks –> International supply chains
2015 -
Risks –> Cyber security
Opportunities –> Big Data, Predictive analysis, Mobile Technology
What does a country risk analysis do?
What sources of change does it try to predict?
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
What are the types of political risk and what do these risks consist of?
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)
What does the PEST(LE) Analysis for Country Analysis stand for?
P --> Political E --> Economic S --> Sociocultural T --> Technological L --> Legal E --> Environmental
What do the different components of the PEST(LE) Analysis entail?
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
How can a SWOT-Analysis be used for a country risk analysis?
By using:
- company capability analysis and competitor analysis for STRENGTHS & WEAKNESSES
AND
- PEST(LE) and Market Analysis for THREATS & OPPORTUNITIES
What are two different approaches to evaluating country risks?
Qualitative and Quantitative
What concept belongs to a qualitative approach of country risk evaluation? (name examples)
qualitative risk evaluations are possible through country reports Examples: -BFAI Country Reports -AGEFI Country Index -Risk Profiles
How can a quantitative approach to country risk evaluation be differentiated?
The quantative evaluation can be differentiated into an objective and subjective evaluation
Name possible models of objective and subjective evaluation concepts (name examples)
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)
Explain the Risk profiles concept for qualitative risk evaluation and the BERI index for a quantitative, subjective country risk evaluation
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