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Slide 4.1 Wall, Minocha and Rees, International Business, 3 rd Edition, © Pearson Education Limited 2010 The political, legal, economic and technological environment Chapter 4

The political, legal, economic and technological environment

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Slide 4.1

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

The political, legal, economic and

technological environment

Chapter 4

Slide 4.2

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Political risk

• ‘Uncertainty that stems, in whole or in part, from

the exercise of power by governmental and non-

governmental actors’

(Zonis, M. 2000).

Slide 4.3

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Types of political risk

• Macropolitical risks: affect all firms in the country,

e.g. war, inflation

• Micropolitical risks: affect only certain firms in the

country, e.g. legislation preventing smoking in

public places.

Slide 4.4

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Analysing political risks

Type Impact on firms

Inflation Higher operating costs

Currency

devaluations/depreciation

Reduced value of repatriated

earnings

Currency

revaluations/appreciation

Less competitive in overseas

markets and in competing against

imports in home market

Increased taxation Lower after-tax profits

Slide 4.5

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Quantifying political risk (1)

• Can give a ‘score’ to a particular political risk,

high score meaning greater political risk

• E.g. ‘legal requirements regarding

environmental pollution’ might be given a range

of scores from 4 to 8

• Some legislation is inevitable (4 minimum

score), ‘worst case’ is still more legislation (8

maximum score).

Slide 4.6

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Quantifying political risk (2)

• Can use expected value (EV)

• where pi = probability of outcome i (as a

decimal)

• xi = value of outcome i

• n = number of possible outcomes.

1

EV = n

i i

i

p x

Slide 4.7

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Quantifying political risk (3)

• Firm estimated a 60% probability of a ‘strike’ occurring so that profits are £10 million and a 40% probability of a ‘work to rule’ occurring so that profits are £20 million.

• The expected value (EV) of a labour dispute :

EV (£m) = (0.60 10) + (0.40 20) = £14 m.

• A change in the firm’s assessment of the probabilities of these events occurring or the value of their impact would change the expected value calculation.

Slide 4.8

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Prioritising political risk (1)

Figure 4.1 Prioritising (political) risk

Slide 4.9

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Prioritising political risk (2)

• Responses to political risks

– Improve relative bargaining power

– Adopt integrative techniques

– Adopt protective and defensive techniques

• Drivers of political risk

– External

– Interaction

– Internal.

Slide 4.10

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Improve relative bargaining power

• MNEs may seek to develop a stronger bargaining

position than that of the host country itself.

• E.g. MNE creates a situation in which the host

country loses more than it gains by taking action

against the company.

• MNE may threaten to leave the host country if the

company is forced to meet certain governmental

regulations (with significant job losses) to avoid

such regulations.

Slide 4.11

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Adopt integrative techniques

• Integrative techniques ensure that the subsidiary

is as fully integrated as possible with the local

economy, so that it becomes part of the host

country’s infrastructure.

• Helps generate host country commitment to the

‘success’ of the MNE.

Slide 4.12

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Adopt protective and defensive

techniques • MNE seeks to limit, in advance, the ‘costs’ to the

MNE should the host government interfere in its

activities.

– Little local manufacturing

– Locates R & D outside the host country

– Hires only essential local personnel

– Manufactures the same product in many other

countries

– Etc.

Slide 4.13

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

International legal environment

• Types of legal system

– Common law

– Statutory law

– Code law

– Religious law

– Bureaucratic law.

Slide 4.14

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Common law

• Legal system in the UK and its former colonies, including the USA, Canada, Australia, India, New Zealand, and much of the Caribbean

• Essentially unwritten, developed over long periods of time and is founded on the decisions reached by judges over the years on different cases

• When a judge makes a decision, a legal precedent is then established

• Such case law has evolved over the centuries, which means that there will obviously be legal variations between countries

• E.g. manufacturers of defective goods are more liable to litigation in the USA than they are in the UK.

Slide 4.15

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Statutory law

• Involves legislation, i.e. the laws passed by

government.

• This can also be a source of legal variation

between countries.

• E.g. the US Freedom of Information Act is more

far reaching than similar UK legislation, so that

transactions between the government and

companies have to be more transparent in the

USA than in the UK.

Slide 4.16

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Code law

• This is the world’s most common system.

• It is an explicit codification in written terms of what

is and what is not permissible.

• Such laws can be written down in criminal, civil

and/or commercial codes.

• When a legal issue is in dispute, it can then be

resolved by reference to the relevant code.

• Most continental European countries, together

with their former colonies, follow this type of legal

system.

Slide 4.17

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Religious law

• Based on rules related to the faith and practice of a particular

religion.

• A country that works in this way is called a theocracy.

• E.g. Iran where mullahs (holy men) determine what is legal

or illegal depending on their interpretation of the Koran, the

holy book of Islam.

• May pose problems for firms operating in these countries,

e.g. the Koran says that people should not charge others

interest as this is an unfair exploitation of the poor. Thus

banks charge up-front fees, and owners of bank deposits are

given shares of the bank’s profits rather than interest.

• In countries relying on religious laws there is often an

absence of a due process and appeals procedure.

Slide 4.18

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Bureaucratic law

• This occurs in dictatorships and communist

countries when bureaucrats largely determine

what the laws are, even if these are contrary to

the historical laws of the land.

• MNEs operating in such countries have often

found it difficult to manage their affairs as there

tends to be a lack of consistency, predictability

and appeals procedures.

Slide 4.19

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

National laws and international

business • National laws may impact international business

via:

– Trade restrictions

– Foreign ownership restrictions

– Environmental restrictions

– Exit restrictions

– Etc.

Slide 4.20

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Law making in the EU (1)

An outline of the consultation procedure for law making in the EU

Slide 4.21

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Law making in the EU (2)

• EU law takes four main forms:

– Regulations: apply directly, no national measures

needed to implement them.

– Directives: EU objectives must be met, but the

means to achieve them is left to individual nations.

– Decisions: binding on all members of the EU.

– Recommendations: optional.

Slide 4.22

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

EU competition policy

• Articles 81, 82, 87 and 88 of the Treaty of Rome

1958 give the European Commission powers to

control the behaviour of monopolies and

dominant firms where these are found to restrict

competition.

• European Commission can also intervene to

prevent member governments using tariffs,

subsidies or state aid to distort competition within

the EU.

Slide 4.23

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

EU competition policy and economic

efficiency • No presumption in EU that mergers are against

public interest.

• Each case can be investigated by the European Commission on its own merits.

• ‘European efficiency’ can be broken down into two elements:

– Productive efficiency: larger size may reduce average costs

– Allocative efficiency: larger size may give ‘market power’ to raise prices above marginal costs.

• Key issue is the net outcome of any proposed merger.

Slide 4.24

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Settling international disputes

• Which country’s laws apply?

• In which country should the issue be resolved?

• What techniques to use:

– Litigation

– Arbitration or mediation

– Negotiation?

Slide 4.25

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Litigation

• The principle of comity provides for a country to

honour and enforce within its own territory the

decisions of foreign courts.

• ‘Comity’ requires three conditions to be met:

– Reciprocity between the countries

– Proper notice given to the defendant

– The foreign court’s judgment does not violate

domestic statutes or treaty obligations.

Slide 4.26

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Arbitration or mediation

• Court cases can be costly and time consuming,

so many companies may prefer the process of

arbitration.

• Arbitration: the two conflicting parties agree to

abide by the decisions of a third party.

• Mediation: a third party attempts to bring the

positions of the conflicting parties closer together.

Slide 4.27

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Government disputes

• Sometimes a company may be in dispute with a

national government, so few legal options

• E.g. the Foreign Sovereign Immunities Act of

1976 in the USA provides that the actions of

foreign governments against US firms are beyond

the jurisdiction of the US courts.

• If Germany, say, chose to nationalise IBM’s

German operation or impose taxes on IBM, there

would be no redress for the company.

Slide 4.28

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Negotiations

• International negotiations bring with them a whole new set

of problems over and above those faced when negotiating

domestically.

• Bargaining power of the MNE with host governments or

businesses will depend on:

– The level of technology

– Nature of the goods or services

– Importance of its managerial expertise

– Value of its capital input, etc.

• The bargaining power of the host country depends on:

– The size of the consumer market

– The degree of economic and political stability, etc.

Slide 4.29

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Intellectual Property Rights

• Patents

• Trademarks

• Copyrights

• TRIPS (Trade Related Intellectual Property Rights)

– Developed countries (since 1 Jan 1996)

– Developing/Transitional countries (since 1 Jan 2000)

– Least developed countries (from Jan 2006).

Slide 4.30

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Patents

• Patent law confers ownership rights on the inventor.

• To qualify as the subject matter of a patent the invention must be novel, involve an inventive step and be capable of industrial application.

• ‘Novel’ seeks to exclude granting monopoly ownership rights to something which already exists.

• ‘Inventive’ seeks to establish that a step has been taken which would not be obvious to experts in the field.

• ‘Industrial application’ limits such protection to specific applications of these ideas.

• Patents depend upon registration for their validity.

Slide 4.31

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Trademarks

• Trademarks are ‘any sign capable of being represented graphically which is capable of distinguishing goods or services of one undertaking from those of other undertakings’ (UK, Trade Marks Act 1994). This is sometimes referred to as the ‘product differentiation’ function.

• Trademarks require less intellectual activity than patents or copyright to be deemed protectable, with the focus instead being on the commercial activity associated with such trademarks.

• As with patents, trademarks depend on registration for their validity, which gives the holder the exclusive right to use the mark in the UK for ten years, subject to further renewals in periods of ten years.

• Infringement occurs where others use the trademark without permission.

Slide 4.32

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Copyrights (1)

• Copyright law prevents the copying of forms of

work (e.g. an article, book, play, poem, music

score, etc.) rather than the ideas contained

within these forms.

• However, sometimes the copyright can be

extended to the ‘structure’ underpinning the form

actually used (e.g. the plot of a book as well as

the book itself).

Slide 4.33

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Copyrights (2)

• Copyright (unlike patents and trademarks) applies

automatically and does not require registration.

• Three key conditions: – Work which is ‘original’, in the sense that the work is different

from that of its contemporaries

– Of an appropriate description, i.e. literacy, dramatic, music,

artistic, sound recordings, films and broadcasts all qualify.

Even business letters can receive protection as ‘literacy

works’

– Being sufficiently connected to the country in question, since

copyright is essentially national in character. So in the case

of the UK, the author (or work) must be connected to the UK

by nationality, domicile, source of publication, etc.

• UK copyright extends to the life of the author +50 years.

Slide 4.34

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

TRIPS

• The WTO Agreement on Trade-Related Aspects of

Intellectual Property Rights, is based on a recognition that

increasingly the value of goods and services entering into

international trade resides in the know-how and creativity

incorporated into them.

• TRIPS provides for minimum international standards of

protection for such know-how and creativity in the areas of

copyright and related rights, trademarks, geographical

indications, industrial designs, patents, layout-designs of

integrated circuits and undisclosed information.

• It also provides for the effective enforcement of such

intellectual property rights, and provides for multilateral

dispute settlement.

Slide 4.35

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Economic systems

• Market economy: resources allocated through the

price mechanism, with market prices being

determined by the forces of demand and supply.

• Planned or command economy: the government

makes the decisions about what is produced, how

resources are allocated and how the finished

products are distributed.

• Mixed economy: contains features of both the market

and planned economic systems, with the government

intervening in various ways to influence market prices

and resource allocation.

Slide 4.36

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Market economy: advantages

• Resources allocated automatically via ‘money

votes’.

• Consumers are therefore ‘sovereign’ in deciding

what is to be produced.

• Producers, motivated by profit, will have

incentives to respond to changes in the

preference of consumers.

Slide 4.37

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Market economy: disadvantages

• Those with the highest incomes have most

‘money votes’.

• Competition may be imperfect, so firms may gain

‘market power’ (e.g. monopoly) and so limit

consumer choice.

• Externalities: some costs or benefits to society

may not be reflected in the market system as

costs or benefits to private firms or individuals.

Slide 4.38

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Command economies

• Prices play little or no role in resource allocation.

• National plan gives ‘road map’ with output targets

for industries and firms.

• Input–output analysis is often used in devising the

national plan.

• Inconsistencies in plans and failure to anticipate

real consumer wants often lead to unwanted

production.

Slide 4.39

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Mixed economies

• Use both markets and government intervention

to allocate resources

• Government intervention both direct (public

sector) and indirect (e.g. tax, regulations)

• Government intervention helps correct ‘market

failures’

• 40% of UK expenditure/output involves

government.

Slide 4.40

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

The market

• The market for a product is not a particular place but rather any situation in which the buyer and seller communicate with each other for the purpose of exchange.

• May be local, regional, national or international.

• May have no exact location, as with exchange via the internet.

• Can take a number of different forms: – A product market, e.g. chocolate bars

– A labour market where individuals with particular skills supply their services to firms who demand those skills, and so on.

Slide 4.41

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Demand

• Market demand is the total amount of the product

that consumers are willing and able to purchase

at a particular price over a given period of time.

• Factors influencing demand include:

– Price of the product

– Price of other products

– Household income

– Tastes

– Advertising.

Slide 4.42

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Movement along the demand curve

• Movement along the demand curve is the result

of a rise or fall in the price of the product itself.

• The terminology we use to describe this

movement along the demand curve is to say that

there has been either an expansion or

contraction in demand for the product.

Slide 4.43

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Expansion/contraction in demand

Slide 4.44

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Shift in demand

• The demand curve will shift to the right (increase)

or left (decrease) if there is a change in the

‘conditions of demand’.

• These ‘conditions of demand’ include:

– Price of other products

– Household/national income

– Tastes of consumers

– Etc.

Slide 4.45

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Increase/decrease in demand

Slide 4.46

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Increase in demand

• Shift upwards and to the right.

• Change in conditions of demand

– Rise in price of substitute

– Fall in price of complement

– Rise in real income (normal product)

– Fall in real income (inferior product)

– Change of tastes in favour of product

– Rise in advertising expenditure.

Slide 4.47

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Decrease in demand

• Shift downwards and to left.

• Change in conditions of the demand

– Fall in price of substitute

– Rise in price of complement

– Fall in real income (normal product)

– Rise in real income (inferior product)

– Change of tastes against product

– Fall in advertising expenditure.

Slide 4.48

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Demand function

• QX = F (PX , PO, Y , T , AX . . .)

• Quantity demanded of product X

• Depends upon ( = F)

• PX = own price of X

• PO = price of other products

• Y = real household income

• T = tastes of consumers

• AX = advertising expenditure on X.

Slide 4.49

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Derivation of market demand

• Market demand curve is the total amount that

consumers demand at a particular price over a

given period of time.

• The market demand curve is derived from

summing the individual demand curves

horizontally.

Slide 4.50

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Supply

• Market supply is the total amount of the product

that producers are willing and able to provide at a

particular price over a given period of time.

• Factors influencing supply include:

– Price of the product

– Price of other products

– Costs of production

– Tastes of producers

– Tax on product

– Subsidy on product.

Slide 4.51

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Supply curve

Slide 4.52

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Movement along and a shift in the

supply curve • Movement along the supply curve is result of a

rise or fall in the price of the product.

• Shift in supply is the result of:

– A rise/fall in the price of a substitute in production

– A rise/fall in the price of a complement in production

– A rise/fall in the price of a factor of production

– Change in technology

– Introduction of a tax or subsidy on the product.

Slide 4.53

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Increase in supply

• Shift downwards and to the right.

• Change in conditions of supply

– Fall in price of substitute in production

– Rise in price of complement in production

– Fall in costs of production

– Change of tastes of producers in favour

– Tax reduction

– Subsidy increase, etc.

Slide 4.54

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Decrease in supply

• Shift upwards and to the left.

• Change in conditions of supply

– Rise in price of substitute in production

– Fall in price of complement in production

– Rise in costs of production

– Change of tastes of producers against

– Tax increase

– Subsidy decrease, etc.

Slide 4.55

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Supply function

• QX = F (PX , PO, C , Tn , TX ,TP . . .)

• QX = Quantity supplied of product X

• Depends upon ( = F)

• PX = price of product X

• PO= price of other products

• C = costs of production

• Tn = technology

• TX = tax rates (subsidy is negative tax)

• TP = Tastes of producers.

Slide 4.56

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Derivation of the supply curve

• The market supply curve is derived from

summing the individual firm supply curves

horizontally.

Slide 4.57

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Market equilibrium

• Equilibrium price relates to the price at which

the quantity demanded equals the quantity

supplied.

• Disequilibrium refers to a situation in which

demand does not equal supply.

• This can lead to a situation of either excess

demand or excess supply.

Slide 4.58

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Price determination

Equilibrium price and quantity

Slide 4.59

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Free market economies

• Prices act as ‘signals’ to both consumers and producers.

• Profits aid resource allocation

– Direct resources to the most profitable activities

– Reward risk taking

– Encourage productive efficiency (minimum costs)

– Provide resources (e.g. ploughed-back profits).

Slide 4.60

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Role of price signals

• Price acts as signal to buyers/sellers

Restoring equilibrium price and quantity in a free market

Slide 4.61

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Increase in demand

• Rise in equilibrium price and quantity

Slide 4.62

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Decrease in demand

• Fall in equilibrium price and quantity

Slide 4.63

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Increase in supply

• Fall in equilibrium price, rise in quantity

Slide 4.64

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Decrease in supply

• Rise in equilibrium price, fall in quantity

Slide 4.65

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Maximum price

A maximum price P* set below the equilibrium price P1

Slide 4.66

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Minimum price

A minimum price P* set above the equilibrium price P1

Slide 4.67

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

• Measures the responsiveness of the quantity

demanded (QD) of a product to a change in its

own price

• PED = % change in QD of X

% change in price of X

Price elasticity of demand (PED)

Slide 4.68

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

PED terminology

• Elasticity values (ignoring sign)

0 perfectly inelastic

0–1 relatively inelastic

1 unit elastic

1–infinity relatively elastic

Infinity perfectly elastic

Slide 4.69

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Factors affecting price elasticity of

demand • Availability of close substitutes

• Whether the product is a necessity or a luxury

• Whether the product is habit forming

• The time period under consideration.

Slide 4.70

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

PED and Revenue (1)

• Relatively elastic demand if PED > I (ignoring

sign)

– Fall in price: Total revenue rises

– Rise in price: Total revenue falls

• Relatively inelastic demand if PED < I (ignoring

sign)

– Rise in price: Total revenue rises

– Fall in price:Total revenue falls.

Slide 4.71

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

PED and Revenue (2)

Slide 4.72

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

PED and tax incidence

Lump-sum tax: incidence of tax on consumer when demand is relatively inelastic

and relatively elastic

Slide 4.73

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Tax and government revenue

Price elasticities of demand and government revenue from a lump-sum tax

Slide 4.74

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Cross elasticity of demand (CED) (1)

• Measures the responsiveness of the quantity

demanded (QD) of X to a change in the price of Y

• CED = % change in QD of X

% change in price of Y

• Where X and Y are substitutes in consumption,

CED is positive

• Where X and Y are complements in consumption,

CED is negative.

Slide 4.75

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

• CED involves a shift in the demand curve (here

for product A).

• Where A and B are substitutes in consumption,

fall in price of B results in a decrease in demand

for A.

• Where A and B are complements in consumption,

fall in price of B results in an increase in demand

for A.

Cross elasticity of demand (CED) (2)

Slide 4.76

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

• Measures the responsiveness of the quantity

demanded (QD) of X to a change in

household or national income.

• IED = % change in QD of X

% change in real income

Income elasticity of demand (IED) (1)

Slide 4.77

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Income elasticity of demand (IED) (2)

• Some goods and especially services (e.g.

education, health, leisure) have high positive

IEDs.

• IED may be negative over certain ranges of

income for ‘inferior’ goods and services.

• IED is useful in forecasting shift in demand

when GDP is rising/falling.

Slide 4.78

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Economic variables and

international business • Real income per head (standard of living)

• Economic growth (rate of increase of real income per head)

• Exchange rate

• Inflation rate

• Unemployment rate

• Tax and subsidy levels

• Technological change.

Slide 4.79

Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Technological environment

• Process innovation: new processes of

production, i.e. New ways of doing things which

raise the productivity of factor inputs

• Product innovation: new products (goods or

services) which were not previously available

• Around 80% of technical change is process

innovation.

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Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Technical change and the level of employment

Figure 4.4 Technical change and the level of employment