Assessing the Environment – Political, Economic, Legal, Technological Chapter 1

Assessing the Environment – Political, Economic, Legal, Technological

Chapter 1

The Field of International Business

International Business refers to profit-related activities conducted across national boundaries.

Why Companies Engage in International Business

–Expand sales–Acquire resources–Diversify sources of sales and

supplies–Minimize competitive risk

Reasons for Recent International Business Growth

Expansion of technology• Business is becoming more global because

– Transportation is quicker– Communications enable control from

afar– Transportation and communications

costs are more conducive for international operations

Reasons for Recent International Business Growth

Liberalization of cross-border movements

• Lower governmental barriers to the movement of goods, services, and resources enable companies to take better advantage of international opportunities

Reasons for Recent International Business Growth

• Development of supporting institutional arrangements• Institutional arrangements

– Are made by business and government

– Ease flow of goods

– Reduce risk

Reasons for Recent International Business Growth

• Increase in global competition• More companies operate internationally

because– New products quickly become global– Companies can produce in different

countries– Domestic companies’ competitors,

suppliers, and customers become international

The Usual Pattern of Internationalization

What is Global Management?

Global management is the process of developing strategies, designing and operating systems, and working with people around the world to ensure sustained competitive advantage.

OrganizingPlanning

LeadingControlling

The Process of International Management

HomeM arket

Oriented

EthnocentricM anagem ent

IndividualForeignM arkets

PolycentricM anagem ent

IntegratedWorldw ideM arketing

GeocentricM anagem ent

M an ager ia l A ttitu d es

An Open Systems Model: The Global Manager’s Role and the International Environment

Regional Trading Blocs

The Triad: Much of today’s world trade takes place within three regional free-trade blocs: Western Europe

A unified market of over 400 million people in 27 nations

North AmericaNorth American Free Trade Agreement (NAFTA)

Central American Free Trade Agreement (DR-CAFTA)

Free Trade Area of the Americas (FTAA)

AsiaJapan; The Four Tigers; China; India; South Asia

The European Union (EU)

The Euro is now a legally tradable currency. The EU is the most integrated common market in

the world with over 400 million consumers. The creation of EU has not eliminated national

pride. Most people in W. Europe still think of themselves first as British, French, Danish or Italian, and are wary of giving up too much power to centralized institutions, or of giving up their national culture.

Global Managers and the E.U.

Global managers face two major tasks with respect to the E.U.– How firms outside of Europe can deal with a market

giving preference to insiders– How to deal effectively with multiple sets of national

cultures, traditions, and customs within Europe.

North America

The North American Free Trade Agreement (NAFTA) between the United States, Canada and Mexico has created a single market of 421 million consumers.

The “One America” trading bloc has the potential for expansion in South America as trade liberalization among the Latin American countries progresses.

North America (contd.)

Maquiladoras are U.S. manufacturing facilities that have operated just south of the Mexican-American border since the 1960s under special tax concessions.

Joint ventures between Mexican and American companies are common. Examples include the one between Wal-Mart and Cifra, which in 2001 was Mexico’s biggest chain.

Asia

Japan and the Four Tigers – Singapore, Hong Kong, Taiwan, and South Korea – provide most of the capital and expertise for Asia’s developing countries. Japan is the world’s second largest economy.

China has the fastest growth rate in the world, offers a large population of low-wage workers and a large consumer market. China is known as the world’s factory.

India is the fastest growing free-market democracy, and it is known as the world’s services supplier. It is the world’s leader in outsourced back-office and high-tech services.

What is Political Risk?

Political risks are any governmental action or politically motivated event that could adversely affect the long-run profitability or value of a firm.

Example:

Venezuela recently forced oil companies to accept a minority stake in fields they owned and to pay more in taxes and royalties

Terrorism Risk

Terrorism is “the use, or threat of use, of anxiety-inducing … violence for ideological or political purposes” (Micklous).

The increasing incidence of terrorism around the world concerns MNCs.

Typical Political Risk Events

Expropriation of corporate assets without prompt and adequate compensation (Confiscation: no compensation is provided).

Forced sale of equity to host-country nationals, usually at or below depreciated book value (Nationalization).

Discriminatory treatment against foreign firms in the application of regulations or laws.

Barriers to repatriation of funds (profits or equity).

Typical Political Risk Events (Contd.)

Loss of technology or other intellectual property (such as patents, trademarks, or trade names).

Interference in managerial decision making. Dishonesty by government officials, including

canceling or altering contractual agreements, extortion demands, and so forth.

Political Risk Assessment

Helps companies manage exposure to risk and minimize financial loss

Two forms:– Consultation with experts– Development of internal staff capabilities

Techniques for Managing Political Risk

Computer ModelingExample: American Can’s Primary Risk

Investment Screening Matrix (PRISM)

Ranking systemsEarly warning systems

Managing Political Risk(Taoka and Beeman’s suggestions)

AdaptationEquity sharing

Participative management

Localization of the operation

Development assistance

Managing Political Risk

DependencyInput Control

Market Control

Position Control

Staged Contribution Strategies

Managing Political Risk

Hedging Political Risk Insurance

Local Debt Financing

Avoidance/Withdrawal

Economic Risk

Is closely related to political risk

Is determined by a country’s ability or intention to meet its financial obligations

Economic Risk in LDCs

LDCs tend to pose more risk than developed countries

For example, expectations that Argentina’s economy would shrink by 15% in 2002 negatively affected foreign firms doing business there

Types of Economic Risk

The economic risk incurred by a foreign corporation usually falls into one of two main categories: its subsidiary (or other investment) in a specific country may become unprofitable

if the government abruptly changes its domestic monetary or fiscal policies or

if the government decides to modify its foreign-investment policies.

Example: Devaluation of Peso in 1990s

Approaches to Assessing Economic Risk

Quantitative

Qualitative

Checklist

A combination of these methods

The Legal Environment

Consists of the local laws and legal systems of those countries in which an international company operates and of international law, which governs relationships between sovereign countries

A host country’s legal system may be derived from common law, civil law, or Islamic law, and is a reflection of the country’s culture, religion, and traditions.

Legal Systems A common law system is based on tradition, precedent,

custom and usage, and interpretation by courts. It uses past court decisions as precedents. It is used in the US and 26 other countries of English origin or influence.

A civil law system is based on a very detailed and comprehensive set of laws organized into code. It is used in about 70 countries, including Japan and many in Europe.

A theocratic law system is based on religious beliefs and combines common, civil, and indigenous laws to varying degrees. It is used in Islamic countries, such as Saudi Arabia.

Impact of Laws on Business

National laws affect all local business activities

National laws affect cross-border activities

International treaties and conventions govern cross-border transactions

Key Legal Issues in International Business

Trade and investment regulation Intellectual property protectionFinancial flows regulationTaxationReporting requirementsOwnership regulation

Key Legal Issues in International Business

Contractual relationshipsInternational treatiesDispute resolution

The Technological Environment

Technoglobalism is the phenomenon in which rapid developments in information and communication technologies are propelling globalization and vice-versa.

An MNC’s major concern is the appropriability of technology – that is, the ability of the innovating firm to profit from its own technology by protecting it from competitors.

Global E-Business

E-business is “the integration of systems, processes, organizations, value chains and entire markets using Internet-based and related technologies and concepts.”

E-commerce refers directly to the marketing and sales process

The Internet and e-business provide a number of uses and advantages in global business.

The Environment of the Global Manager

Political Environment• Form of government• Political stability• Foreign policy• State companies• Role of military• Level of terrorism• Restrictions on

imports/exports

Economic Environment• Economic system• Stage of development• Economic stability• GNP• Int’l financial standing• Monetary/fiscal

policies• Foreign investment

The Environment of the Global Manager (contd.)

Regulatory Environment• Legal system• Prevailing int’l laws• Protectionist laws• Tax laws• Role of contracts• Protection for

proprietary property

Technological Environment• Level of technology• Availability of local

technical skills• Technical requirements of

country• Appropriability• Transfer of technology• Infrastructure• Environmental protection