The political, legal, economic and technological environment

PowerPoint PresentationWall, 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
the exercise of power by governmental and non-
governmental actors’
Types of political risk
e.g. war, inflation
country, e.g. legislation preventing smoking in
public places.
Slide 4.4
Analysing political risks
imports in home market
Slide 4.5
Quantifying political risk (1)
high score meaning greater political risk
• E.g. ‘legal requirements regarding
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
• where pi = probability of outcome i (as a
decimal)
1
• 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
Prioritising political risk (1)
Slide 4.9
Prioritising political risk (2)
• Responses to political risks
– Improve relative bargaining power
• Drivers of political risk
Improve relative bargaining power
• 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
Adopt integrative techniques
is as fully integrated as possible with the local
economy, so that it becomes part of the host
country’s infrastructure.
‘success’ of the MNE.
Adopt protective and defensive
techniques • MNE seeks to limit, in advance, the ‘costs’ to the
MNE should the host government interfere in its
activities.
– Hires only essential local personnel
– Manufactures the same product in many other
countries
– Etc.
International legal environment
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
Statutory law
government.
between countries.
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
Code law
• 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.
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.
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
Bureaucratic law
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.
National laws and international
via:
Law making in the EU (1)
An outline of the consultation procedure for law making in the EU
Slide 4.21
Law making in the EU (2)
• EU law takes four main forms:
– Regulations: apply directly, no national measures
needed to implement them.
means to achieve them is left to individual nations.
– Decisions: binding on all members of the EU.
– Recommendations: optional.
Slide 4.22
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.
prevent member governments using tariffs,
subsidies or state aid to distort competition within
the EU.
Slide 4.23
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
Settling international disputes
• In which country should the issue be resolved?
• What techniques to use:
Litigation
honour and enforce within its own territory the
decisions of foreign courts.
– Reciprocity between the countries
– The foreign court’s judgment does not violate
domestic statutes or treaty obligations.
Slide 4.26
Arbitration or mediation
arbitration.
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
Government disputes
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
Negotiations
domestically.
businesses will depend on:
– The level of technology
– 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
Intellectual Property Rights
Slide 4.30
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
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
Copyrights (1)
score, etc.) rather than the ideas contained
within these forms.
extended to the ‘structure’ underpinning the form
actually used (e.g. the plot of a book as well as
the book itself).
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’
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
TRIPS
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.
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
Economic systems
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.
and planned economic systems, with the government
intervening in various ways to influence market prices
and resource allocation.
Market economy: advantages
votes’.
what is to be produced.
• Producers, motivated by profit, will have
incentives to respond to changes in the
preference of consumers.
Market economy: disadvantages
‘money votes’.
‘market power’ (e.g. monopoly) and so limit
consumer choice.
may not be reflected in the market system as
costs or benefits to private firms or individuals.
Slide 4.38
Command economies
• National plan gives ‘road map’ with output targets
for industries and firms.
national plan.
production.
Mixed economies
to allocate resources
sector) and indirect (e.g. tax, regulations)
• Government intervention helps correct ‘market
failures’
government.
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
Demand
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
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
Expansion/contraction in demand
Shift in demand
or left (decrease) if there is a change in the
‘conditions of demand’.
Increase/decrease in demand
Increase in demand
• 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.
Decrease in demand
• 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.
Demand function
• Quantity demanded of product X
• Depends upon ( = F)
• Y = real household income
• T = tastes of consumers
Slide 4.49
Derivation of market demand
given period of time.
summing the individual demand curves
horizontally.
Supply
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
Supply curve
Slide 4.52
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
Slide 4.53
Increase in supply
• 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
Decrease in supply
• 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
Supply function
• QX = Quantity supplied of product X
• Depends upon ( = F)
• C = costs of production
• TP = Tastes of producers.
Derivation of the supply curve
• The market supply curve is derived from
summing the individual firm supply curves
horizontally.
Market equilibrium
the quantity demanded equals the quantity
supplied.
demand does not equal supply.
• This can lead to a situation of either excess
demand or excess supply.
Price determination
Free market economies
• Profits aid resource allocation
– Reward risk taking
Slide 4.60
Role of price signals
Restoring equilibrium price and quantity in a free market
Slide 4.61
Increase in demand
Slide 4.62
Decrease in demand
Slide 4.63
Increase in supply
Slide 4.64
Decrease in supply
Slide 4.65
Maximum price
A maximum price P* set below the equilibrium price P1
Slide 4.66
Minimum price
A minimum price P* set above the equilibrium price P1
Slide 4.67
• Measures the responsiveness of the quantity
demanded (QD) of a product to a change in its
own price
% change in price of X
Price elasticity of demand (PED)
Slide 4.68
PED terminology
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
PED and Revenue (1)
sign)
• Relatively inelastic demand if PED < I (ignoring
sign)
– Fall in price:Total revenue falls.
Slide 4.71
PED and Revenue (2)
PED and tax incidence
Lump-sum tax: incidence of tax on consumer when demand is relatively inelastic
and relatively elastic
Tax and government revenue
Price elasticities of demand and government revenue from a lump-sum tax
Slide 4.74
Cross elasticity of demand (CED) (1)
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
CED is negative.
• 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.
Slide 4.76
demanded (QD) of X to a change in
household or national income.
% change in real income
Slide 4.77
Income elasticity of demand (IED) (2)
• Some goods and especially services (e.g.
education, health, leisure) have high positive
IEDs.
income for ‘inferior’ goods and services.
• IED is useful in forecasting shift in demand
when GDP is rising/falling.
Economic variables and
• Economic growth (rate of increase of real income per head)
• Exchange rate
• Inflation rate
• Unemployment rate
Technological environment
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.
Technical change and the level of employment
Figure 4.4 Technical change and the level of employment

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