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National Differences in the

Political Economy
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Overview
1. What is country risk?
2. What are Political and Legal systems?
3. Types of Political systems
4. Types of Legal systems
5. Participants in Political and Legal systems
6. Types of country risk produced by political systems
7. Types of country risk produced by legal systems
8. Managing country risk
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Realities of Doing Business in Russia
High rate of piracy in software, music, DVDs, and other goods.
Anti-piracy laws and law enforcement are weak.
Obtaining business licenses requires bribing officials.
SMEs may spend 20% of their net income on bribes.
There is substantial organised crime and killings.
Criminal raiders may seize independent businesses.
Conditions in Russia are typical of many emerging
markets and developing economies.

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What is Country Risk?
Exposure to potential loss or adverse effects on company
operations and profitability caused by developments in a
countrys political and/or legal environments.

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Also known as
political risk
Each country
has unique
political
and legal
systems that
often pose
challenges for
company
performance
Example
Coca-Colas business fell off in
Germany when the government
enacted a recycling plan. New laws
required consumers to return
nonreusable soft drink containers
to stores for a refund of 0.25
euros. Rather than cope with the
unwanted returns, big supermarket
chains pulled Coke from their
shelves.
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Country Risk in Selected Countries
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Political and Legal Systems
Political system: A set of formal institutions that
constitute a government. It includes legislative bodies,
political parties, lobbying groups, and trade unions.
The system also defines how these groups interact
with each other.
Varies between countries on the basis of
Totalitarianism and Democracy
Collectivism and individualism




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Collectivism
Primacy of collectivist over individual
goals
Emphasis on good of society, common
good
Plato,427-347 BC, to Socialists, Marx,
1818 - 83
Communists, Social Democrats

8
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Individualism
Individual freedom over economic and
political action
- consumer sovereignty
individual diversity and private ownership
are desirable
private property is more productive -
communal property receives little care
9
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Democracy
Government is by the people, exercised
either directly or through elected
representatives
Safeguards hold elected representatives
accountable

11
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Political Systems: Totalitarianism
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Government controls all economic and political matters.
Either theocratic (religion-based) or secular.
A state party is led by a dictator.
Membership is mandatory for those wanting to advance.
Power is sustained via secret police, propaganda, and
regulation of free discussion and criticism.
Today: Some countries in the Middle East and Africa; Cuba,
North Korea.
Former totalitarian states tend to
have much government
intervention and bureaucracy.
China (19491980s)
Germany (19331945)
Soviet Union (1918991)
Spain (19391975)
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The Extent of Totalitarianism

13
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Spread of Democracy
totalitarian regimes failed to deliver economic
progress
New communication technologies have
reduced the ability of the state to control
information
prosperous middle and working classes
14
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Ideology
a reasonably coherent and shared set of
values
Ideology is a set of values and beliefs that
justifies certain behaviours and guides
economic and political actions.
three common ideological traditions:
conservatism, liberalism and socialism.
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Liberalism
A political ideology concerned with protecting the
rights and liberties of individuals from government
interference
The individual is more important than the state or
community in which they live
Equality of opportunity
Small role for government
1-16
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Socialism
The political ideology which emphasises the importance of
social cohesion and equality
Seek to create a more equal distribution of wealth, alleviate
poverty and create a higher standard of living for all
Equality of outcome
Larger role for government
1-17
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Conservatism
A political ideology that is critical of rapid change and progress
Conservative support traditional values, the church and family
Critical of modern social trends including abortion, feminism and gay rights.
1-18
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Why Government?
Maintaining competition
Groceries retail
Externalities
Positive vaccinations
Negative pollution
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Why Government?
Public goods
Military & roads
Common property resources
rivers
Income distribution
Stabilisation (macro)
Inflation, BOP, unemployment
20
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Red Tape and Cost of Compliance
for individuals, the cost of acquiring sufficient knowledge to meet their legal
requirements; of compiling the necessary receipts and other data and of completing tax
returns; payments to professional advisors for tax advice; and incidental costs of
postage, telephone and travel in order to communicate with tax advisors or the tax
office. For a business, the compliance costs include the cost of collecting, remitting
and accounting for tax on the products or profits of the business and on the wages and
salaries of its employees together with the costs of acquiring the knowledge to enable
this work to be done including knowledge of their legal obligations and penalties

1-21
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Red Tape and Cost of Compliance
Taxation compliance
Pope et al (1991) estimated that the gross taxation compliance costs were between
11.4 percent and 23.7 percent of revenue yield for the period 1986 to 1987.
Evans et al (1997) however, suggests that the Pope studies had overestimated the
compliance cost of taxation. They estimated these costs to be just 7 percent of revenue
yield.
Small businesses
They suggest that the regulatory costs are some 35 percent higher for firms with less
than 20 employees compared to firms with over 500 staff
Competing levels of government
Local, state and federal
1-22
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Excessive paperwork
Information quantity and quality
Outsourcing the role of government
Taxation, the role of government and paperwork
Industrial relations and equality
OH&S, paperwork and forcing compliance
Superannuation and the role of government
1-23
Red Tape and Cost of Compliance
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Democracy and Openness
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Democracy is associated with openness, the lack of
regulation and barriers to the entry of firms in foreign
markets.
Openness is associated with:
Successful market entry
Increased market demand
Competition on quality, which
improves overall product
quality
Increased competition, leading
to efficiencies and lower prices
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Political and Economic Systems
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Totalitarianism is associated with command
economies, wherein the state makes all decisions
about what to produce, how much to produce, and
what prices to charge.
Democracy is associated with market economies and
capitalism, in which decisions are largely left to market
forces, that is, supply and demand.
Socialism is associated with mixed economies, which
have features of both market and command
economies, combining state intervention and market
mechanisms (e.g., Sweden, Singapore).
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Ideology and FDI
The radical view
Exploitation and imperial domination
Free market view
Comparative advantage informing the distribution of
production
Pragmatic nationalism
Recognising the costs and benefits of FDI
http://www.youtube.com/watch?v=ctB9TlCWdk0

26
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Political and Legal Systems (cont.)
Legal system: A system for interpreting and
enforcing laws. The laws, regulations, and rules
establish norms for conduct. It incorporates
institutions and procedures for ensuring order and
resolving disputes in commercial activities, as well as
protecting intellectual property and taxing economic
output.
Four major types of legal systems:
Common law
Civil law
Religious law
Mixed systems
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The Rule of Law
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Existence of a legal system where rules are clear, publicly
disclosed, fairly enforced, and widely respected by
individuals, organisations, and the government.
Common in the advanced economies.
The legal system is: (i) applied to all citizens equally; (ii) issued
via recognised government authorities; and (iii) enforced fairly
and systematically by police forces and formally organised
judicial bodies.
Economic activity suffers and uncertainty increases when the
rule of law is weak.
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Legal Systems: Common Law
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A legal system that originated in England and spread
to Australia, Canada, the U.S., and other former
members of the British Commonwealth (also known
as case law).
The basis of law is tradition, past practices, and legal
precedents set by courts via interpretation of
statutes, legislation, and past rulings.
Judges have much power to interpret laws based on
the circumstances of individual cases. Thus, common
law is relatively flexible.

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Legal Systems: Civil Law
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Found in France, Germany, Italy, Japan, Turkey, and
much of Latin America.
Based on an all-inclusive system of laws that have been
codifiedclearly written by legislative bodies.
Laws are more cast in stone than common law and not
strongly subject to interpretation by courts.
A key difference is that common law is mainly judicial in
origin and based on court decisions, whereas civil law is
mainly legislative and based on laws passed by national
and state legislatures.
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Dominant legal systems in selected countries
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Sampling of Differences
Between Common Law and Civil Law
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Legal Systems: Religious Law
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Strongly influenced by religious beliefs, ethical codes, and
moral values, which are viewed as mandated by a
supreme being.
Most important religious legal systems are based on
Hindu, Jewish, and Islamic law.
Islamic law spells out norms of behaviour regarding
politics, economics, banking, contracts, marriage,
and many other social and business issues.

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Country Risk Produced by Political Systems:
Government Takeover of Corporate Assets
Confiscation: Seizure of corporate assets without
compensation
Expropriation: Asset seizure with compensation
Nationalisation: Takeover of an entire industry, with or
without compensation


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Examples
In Venezuela, President Hugo Chavez confiscated
an oil field owned by the French petroleum firm
Total.
In 2006, the Bolivian government nationalised the
oil and gas industries.
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Country Risk Produced by Political Systems:
Creeping Expropriation
The most common expropriation today.
The government gradually modifies regulations and laws
after foreign MNEs have made big local investments in
property and plants.


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Examples
Abrupt termination of contracts.
Creation of laws that favour local
firms.
The governments in Bolivia, Russia,
and Venezuela have modified tax
regimes to extract revenues from
coal, oil, and gas companies.
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Country Risk Produced by Political Systems:
Embargoes and Sanctions
Governments may respond to offensive
activities of foreign countries by
imposing embargoes and sanctions.
Sanctions are bans on international
trade, usually undertaken by a country,
or a group of countries, against another
country judged to have jeopardised
peace and security.
Embargoes are bans on exports or
imports that forbid trade in specific
goods with specific countries. Example:
The U.S. has enforced embargoes
against Iran and North Korea, labelled
as state sponsors of terrorism.

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Country Risk Produced by Political Systems:
Boycotts against Firms and Nations
Boycott: A voluntary refusal to engage in commercial dealings
with a nation or a company


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Examples from France
Citizens boycotted Disneyland Paris to express opposition
to globalisation and takeover of French farmland.
French farmers boycotted McDonalds, and crashed a
tractor into a shop, to vent their anger with agricultural
policies and globalisation.
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Country Risk Produced by Political Systems:
Wars, Insurrection, and Violence
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War and insurrection: Indirect effects can be disastrous
for company activities.
Terrorism: The threat or actual use of force or violence
to attain a political goal through fear and intimidation.
Some terrorism is sponsored by national governments.
Terrorism particularly affects certain industries, such as
tourism, hospitality, aviation, finance, and retailing.
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Types of Country Risk Produced by Legal Systems
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Country risk arising from the host countrys legal
environment:
Foreign investment laws
Controls on operating forms and practices
Marketing and distribution laws
Laws regarding income repatriation
Environmental laws
Contract laws
Convergence towards an international standard for
international sales contracts.
Internet and e-commerce regulations
Inadequate or underdeveloped legal systems


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Country Risk Produced by Legal Systems (cont.)
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Country risk arising from the home countrys legal
environment:
The Foreign Corrupt Practices Act (FCPA)
Antiboycott regulations
Accounting and reporting laws
Transparency in financial reporting


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Critical Thinking
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1. Globalisation is an ideology of supporting liberal
economics and corporate interests as it promotes
weakening trade unions, reducing business regulation and
curbing public spending and welfare budgets. Discuss.

2. What is the appropriate role of government in business
activities? Examine this role from different ideological
perspectives.