Session 5 International Business and National Business Systems · International Business and...
Transcript of Session 5 International Business and National Business Systems · International Business and...
18/06/2010
1
INTERNATIONAL BUSINESS
ENVIRONMENT(Political Economy of International Business)
Session 5
International Business and National
Business Systems
2
Learning goals
Understand the importance of economic analysis of foreign markets
Identify the major dimensions of international economic analysis
Compare and contrast macroeconomic indicators
Profile the characteristics of the types of business systems
Determine opportunity and risk variables a company should consider when deciding whether and where to expand abroad
18/06/2010
2
COUNTRY ANALYSIS – PURPOSE AND TOOLS
Section 1
4
Country analysis - Purpose
Host country's business environment
Potential/attractivenessSize of the economy, growth potential, demography, income distribution, labour
market, ...
RisksPolitical, legal, economic
CostsLabour, transport, transaction, ...
18/06/2010
3
6
EIU's business environment rating
7
Country attractiveness: M. Porter's diamond
Firm strategy, structure and rivalry
Demand conditions
Related and supporting industries
Factor endowments
18/06/2010
4
8
The Global Competitiveness Index
http://www.weforum.org/en/initiatives/gcp/Global%20Competitiveness%20Report/index.htm
9
The economic freedom Index
18/06/2010
5
10
Various types of country risk
Political riskRisk that political decisions or events
negatively affect a business profitability or sustainability
Economic riskChange in the state of economy that will
result in lower incomes or higher expenditures than expected
Legal riskArises from an uncertainty in legal action or in the applicability or interpretation of
contracts, laws or regulations
11
COFACE's country risk rating
Political and institutional instability
Growth vulnerability
Foreign currency liquidity crisis
External over indebtedness
Sovereign financial vulnerability
Banking sector's fragilities
Companies' payment behaviour
French COFACE: http://www.trading-safely.com/
http://www.trading-safely.com/sitecwp/ceen.nsf
Caux Roundtable: http://www.cauxroundtable.org/countryprofilescountries.htm
Ratings: A1 – A2 – A3 – A4 – B – C – D
18/06/2010
6
COUNTRY RISK AND NATIONAL BUSINESS
SYSTEMS
Section 2
14
Political economy and country attractiveness(CW Hill)
The overall attractiveness of a country as a potential market and/or investment site for an international business depends on balancing the benefits, costs, and risks associated with doing business in that country
Other things being equal, the benefit-cost-risk trade-off is likely to be most favorable in politically stable developed and developing nations that have free market systems and no dramatic upsurge in either inflation rates or
private sector debt
18/06/2010
7
15
The political economy of nations
The political economy of a nation refers to how the political, economic, and legal systems of a country are interdependent; they interact and influence each
other, and in doing so they affect the level of economic well-being
Political systemSystem of government
Legal systemRules that regulate behaviour and
processes by which they are enforced
Economic systemAllocation of resources and wealth in the
national community
16
Political and legal risks in a nutshell
Political and legal environments
Stability TransparencyRespect of
contractual rules
... by private andpublic players
18/06/2010
8
17
Various types of political systems (Daniels & Radebaugh)
18
Political systems and political ideology
Emphasis of political systems
Individualism
Totalitarianism
Collectivism
Democracy
18/06/2010
9
19
Political systems in Europe
All EU-27 MS are representative democracies (Copenhagen criteria)
Greece, Portugal, Spain, Romania are former dictatorships
Central European countries are former totalitarian/socialist regimes .
Other European countries are either democracies or on the way to
democracy.
Belarus remains the only European dictatorship
20
Political systems: business implications
Human rights
Product safety
Worker safety
Environmental protection
Corruption and bribes
Government regulations
18/06/2010
10
21
Political risks: details (Rugman)
22
Example: corruption in Bulgaria
By almost any measure, Bulgaria is the most corrupt country in the 27-member European Union. Since it joined last year, it has emerged as a cautionary tale for
Western nations confronting the stark reality and heavy costs of drawing fragile post-Communist nations into their orbit, away from Russia’s influence.
European Union membership has done little to tame the criminal networks in Bulgaria. […] The European Union, eager to improve the lives of the 7.5 million Bulgarians, has
promised 11 billion euros, or nearly $15 billion, in aid. Far from halting crime and violence, the money effectively spread the corruption. Once Bulgaria’s shady
businessmen realized how much European Union money was at stake, said many of Sofia’s advocates for reform, they moved from buying off politicians to being directly
involved in politics themselves. […]
The nation’s homegrown mobs of men in black — the “mutri,” or mugs — control construction projects in city halls. And questionable business networks have moved
from declining black markets for smuggled cigarettes and alcohol to legal investments in booming real estate.
New York Times, 16 October 2008
18/06/2010
11
23
Legal systems
Mixed systems
Theocratic law
Based on religious teaching
Civil law
Based on detailed set of laws organized into
codes
Common law
Based on tradition, precedent, and custom
24
The European case
Continental Western European countries' legal systems are based on civil law (Roman-Germanic origin, Napoleonic legacy)
British islands' systems are based on common law
Central European systems are mostly based on civil law but tend to blend elements of common and civil law (mixed systems)
Most European countries are secular, whether de jure (France, Turkey) or de facto (Germany, Britain).
The religion and the Church still play a key political and social role in countries like Ireland, Italy, Poland (Catholic Church), or Greece (Orthodox church)
18/06/2010
12
25
Key legal issues for international business
Contract law
Competition law
Employment law
Management and labour relations
Product safety and liability
Property rights (incl. intellectual property)
26
Legal risks: details
Contractual risks in overseas markets
Protection of intellectual property
Liability for injuries or defective products, and subsequent litigation
Infringement of data protection requirements
Corruption in dealings with local officials
Specific regulations related to trade, foreign ownership, environment, competition
18/06/2010
13
27
Market economy Command economy
Transition economy Mixed economy
Economic systems
28
A variety of market economies ...
Laissez-faire
Entrepreneurial, individualistic culture
Limited government intervention in markets
Little state ownership
Social legislation as a "safety net"
Corporate governance based on shareholder
value
Social market
Bureaucratic regulation of business
Significant state involvement in economy
Closed system of corporate control, little takeover
market
Extensive social welfare programmes
Corporate governance based on social priorities
Asian
Bureaucratic regulation of business
Strong state intervention
Corporate culture based on the company as family
Weak welfare-state provisions
Groups of companies, formal and informal, act as
barriers to new entrants and barriers to takeovers
18/06/2010
14
29
Economic transition: from plan to market
Since the end of the 1980s, most command economies have experienced the spread of democratic systems and the transformation from centrally-planned into market-based economies, that is :
Deregulation
Remove legal restrictions
Encourage the free play of market systems
Allow establishment and operations of private firms
Privatization
Transfer of ownership of state owned enterprise to private individuals
Provide new private owners with profit incentive
Legal Systems
Laws that protect property rights and contracts
30
European economic systems
All EU-27 MS are mixed economies, combining market mechanisms and various levels of government intervention. The role of the government has been diminishing and changing over the last 20 years.
Central European economies are former command economies.
Most other European countries (except for Belarus) are said to be "transitional" economies
18/06/2010
15
32
Economic risks
Change in the state of economy that will result in lower incomes or higher expenditures than expected
Economic mismanagement(related to political risk)
Economic downturn
(exogenous vs. endogenous shocks)
33
Economic crisis, social and political unrest
Reykjavik, Iceland, 21 January 2009: Protesters burn an effigy of the Icelandic prime minister, Geir Haarde, during a demonstration over the handling of the financial crisis
Kulata, Bulgaria, 27 January 2009: A man walks past a line of trucks as they wait to
cross the border into Greece. Bulgaria requested "urgent help" from the EU the
day before to help reopen border crossings shut for nearly a week by Greek farmers
protesting against low food prices
http://www.guardian.co.uk/world/gallery/2009/jan/31/credit-crunch-protest-europe
18/06/2010
16
34
Government and economic management
A government is the body within a community, political entity or organization which has the authority to make and enforce rules, laws and regulations
Economic policies are measures taken by a government that aim to influence the economy in order to achieve various objectives
Economic growth
Full-employment
Price stability
External account balance
35
Economic policies
Structural policies aim to influence the long-term conditions of economic activity, generally by means of regulation
Competition policy
Other market regulation policies (financial, labour)
Industrial policy (loans, subsidies)
Education and research policies
Trade policy (see previous sessions)
Macroeconomic policies consists of the triad of fiscal, monetary and exchange rate policy
Fiscal policy: management of government spending and revenues
Monetary policy: management of interest rates and money supply
Foreign exchange policy: exchange rate management (see previous sessions)
18/06/2010
17
36
Business implications
Businesses can benefit direct or indirectly from government spending
Monetary policies affect global demand and the cost of investment
Foreign exchange policy affects competition on the domestic and global markets
Government policy can also:
→ Affect demand through product standards
→ Influence rivalry through regulation and antitrust laws
→ Impact the availability of highly educated workers and advanced transportation infrastructure
Governments finally provide support through advisory bodies, especially for small businesses
18/06/2010 JG DITTER 36
37
Fiscal policy debates
Keynesian multiplier effect : expansionary fiscal policy will have a positive impact on aggregate demand (DY = kDG; k = [1/(1-c)])
Monetarist theory: excess public spending will only fuel inflation (M*V = P*Q)
Ricardo's equivalence: tax cuts or increased public spending will not affect consumers' spending as the money will be saved in anticipation of future tax rise
Crowding out effect: additional government spending will be funded through government borrowing, that will lead to higher interest rates and capital shortage on lending markets
Snowball effect: increased public spending will generate a growing public debt and further public spending
Laffer curve: tax rise (cuts) will negatively (positively) affect tax revenues: "too much tax kills the tax"
18/06/2010
18
38
Fiscal policy debates : tax competition
Tax competition is a government strategy aiming to attract foreign direct investment and high value human resources by minimizing the overall taxation level and/or providing special tax preferences, thus creating a national competitive advantage
The consequences of (harmful) tax competition have been subject to debate:
It has been argued that tax competition is carried out at the expense of those countries where high tax levels are used to fund high levels of transfer payments and infrastructure development
Tax competition is also criticised for putting governments under harmonisation pressure and creating a "race-to-the-bottom" context
For tax competition partisans, the pressure exerted on government will push them to "reengineer" national tax systems and make them more efficient.
39
Fiscal policy debates : the stimulus dilemma
[…] a purely political headache […] explains some of Europe’s resistance to fresh stimulus plans. Many EU governments face the same sources of pain: rising unemployment and a corresponding rise in welfare bills, falling tax receipts, soaring deficits and public debt. If they are lucky and come up with the right
stimulus packages, this pain could lead to gain, through a return to sustainable growth. But here is the catch: all the sources of pain are national, yet the
potential gains are all international.
Individual EU governments set their own (very different) tax rates and run their own (equally diverse) welfare systems. Unemployment is a national problem.
National public accounts will end up groaning under the weight of public debt. But thanks to the EU’s single market, the gains from a return to growth will not remain within one country’s borders, nor will that growth be controlled by any
one government. Such paradoxes make many national politicians anxious.http://www.economist.com/research/articlesBySubject/displaystory.cfm?subjectid=3856661&story_id=13325391
18/06/2010
19
40
The fiscal stimulus dilemma (ctd)
Extra growth Germany
Stimulus package No stimulus package
Other European countries
Stimulus package5
5
2
-2
No stimulus package
-2
2
0
0
41
The sovereign debt issue
Loose fiscal policy
Budget deficit
Public debt
Inflation Snowball effect
Payment default
Crowding out effect
interest rates
18/06/2010
20
42
Sovereign debt ratings
43
Monetary policy debates
A discretionary monetary policy is a monetary policy that is based on the judgments of the policy makers about the current needs of the economy
Monetarist economists believe that fluctuations in the quantity of money are the main source of economic fluctuations and therefore advocate that the quantity of money grow at a constant rate (fixed-rule policy)
Keynesian activists believe that fluctuations in investment are the main source of economic fluctuations: they support the idea of a "feedback-rule" monetary policy that changes money supply or interests rate in response to the state of the economy
18/06/2010
21
44
Political vs. economic risk: the Ukrainian case
IMF Ukraine mission chief Ceyla Pazarbasioglu, left, and Ukraine's Prime Minister Yulia Tymoshenko talk during a Kiev news conference in July [2009].
A $10.6 billion bailout from the International Monetary Fund has pulled Ukraine back from what many feared was near-default this spring. But with
fiercely contested presidential elections set for January, the next big economic risk looks to be political as potential candidates fight over economic policy.
http://online.wsj.com/article/SB125244740974493607.html