The Global Perspective

Part 1: Government, Politics & Law in International Business

Political Systems

Politics and Culture

Political Participation

Political instability

Poor leadership
Frequent changes in Govt Role of military leaders

Political Systems During Change

Internal/external conflicts

Political Dimensions in Intl Business

Collectivism Individualism

Democracy

Totalitarianism

Collectivism
Needs of the society as a whole are generally viewed

more important than individual freedom. Types : 1. Socialism 2. Communists 3. Social Democrats

Socialism
Trace their intellectual roots to Marx Argued that Capitalists accumulate considerable

wealth & pay subsistence wages in return Advocated State ownership of Production, distribution & Exchange Idea is to manage State owned enterprises for the benefit of the society as a whole

Socialism
Communists
Socialism could be

Social Democrats
Nationalization of

achieved only through violent revolution. Soviet Union, Eastern Europe & South East Asian countries embraced this model. Now China, N Korea & Cuba are the major Communist Nations.

Private enterprises in many countries. Australia, France, Germany, Great Britain, Norway, Spain, Sweden, India & Brazil are few ex Later Every country gave away to private players

Individualism
Individuals interest takes precedence over the

interests of the state Private property is more highly productive than communal property, since the care received is more This philosophy led to free market economics Emphasis on self expression & individual freedom, welfare of society is best served by letting people pursue their own economic self-interest. Led to Democratic political system coupled with free market economics.

Democracy
Representative Democracy This form of political system has a number of

safeguards enshrined in constitutional law And this law weakens the success of certain countries too

Totalitarianism
Individuals right to freedom of expression, a free

media, regular election, basic civic liberties are denied. Four forms are, 1. Communist 2. Theocratic 3. Tribal and 4. Right-wing totalitarianism.

Communist Totalitarianism
Typically Communist states which deny basic civic

liberties They believe in totalitarian dictatorship, which is no more prevalent Ex China, N Korea, Cuba, Vietnam and Laos

Theocratic Totalitarianism
Found in states where political power is monopolized

by a party, group or individual that governs according to religious principles Ex Laws of the state are based on Islamic principles in Iran & Saudi Arabia Varies from conservative Arabia to liberal UAE SHARIA law not much impact but affects operational areas Ex HR Sharjah Dress Code Saudi Riyadh vs Jeddah Malaysia & Indonesia Success story!!! MNCs fate in Muslim nations Ex Holidays

Tribal Totalitarianism
1 bn 15% of global population 3000 tribes

speaking 1500 languages Found in African countries such as Zimbabwe, Tanzania, Uganda & Kenya Borders drawn are by European colonial powersTribes continue to dominate Occurs when one political party represents the interests of a tribe Internally displaced refugees 9mn

Right-wing Totalitarianism
Permits individual economic freedom but restricts

political freedom on the grounds that it would lead to communism Primarily the Government in these RW nations are run by Military officials Germany & Italy during the 30s were RW nations Fascist nations Now they are on the decline Ex NK

Forms of Political Risk

Conflict and Violence Terrorism and Kidnapping

Policy Changes

Local Content Requirements

Property Seizure

Political Environment
The political system of a country influence the

business from multi-angles, viz., deciding, promoting, fostering, encouraging, sheltering, directing and controlling the business activities. The political environment includes the policies and characteristics of political parties, the nature of the constitution and government system.

Political Environment
Some countries are highly bureaucratic in decision

making regarding foreign investment, technology imports etc., while some countries have simple and quick decision-making mechanisms with their democratic approach.

Political Environment

The characteristics of bureaucratic and communistic countries include

Limitations, controls and curbs on private enterprises Rule of the trade is state trading and counter trading Many restrictions on imports and foreign capital both inflow and out flow.

Political risks:
International business firms face political risks as

and when there are changes in government policies and/or changes in political parties in power. Risks are based on hosts government actions like confiscation, expropriation, nationalization, domestication, general industry risk and operation risk.

Political risks:
Confiscation: Confiscation the process of

nationalization of property with out compensation. Ex. Chinese government seizure of US property in 1949 when Chinese communist party took power. Expropriation: Expropriation is the process of nationalization of property with compensation. Ex. Indian government nationalized commercial banks with compensation in July 1969.

Political risks:
Nationalization: Nationalization is the process

of shifting the ownership of private property from private individuals or institution to the Government. Ex. Burma nationalized entire foreign trade. Poland and Czech communist nationalized 100% of their economy.

Political risks:
Domestication: in domestication, foreign

business firms relinquish control and ownership in favour of domestic investors either partly or fully. Ex. Pepsi, GM, and Barclays Bank in South Africa. Indian Leaf Tobacco Development Company Ltd., in India.

Political risks:
General industry risk: general industry risk is

due to social, political, religious unrest in the host country. Operation risk: These risks are due to the imposition of controls on the foreign business operation (like production levels, marketing, finance, human resources) by the host Government.

Indicators of Political Instability

Political instability can be viewed from Social Unrest: is caused by clashes between or among community groups, religious groups and ethnic groups. Ex. Hindu-Muslim conflict in India, White-Black in USA, Christian-Muslim conflict in Lebanon.

Indicators of Political Instability

Political instability can be viewed from Attitude of Nationals: The negative attitude of nationals towards foreign business and foreigner is a greater risk. The negative attitude includes exploitation, colonialism, repatriation, employment to foreigners etc.

Indicators of Political Instability

Political instability can be viewed from Policies of the Host Government: These affect the operation of international business firms directly and internally or externally. Ex. China Japan over capture of a fisherman.

How to minimize the political risks?

Political risk can be reduced by Stimulation of the Local Economy Employment of Nationals Sharing Ownership Being Civic Minded Political Neutrality Behind-the-Scenes Lobby

Avoidance Adaptation Dependency Maintenance Information Gathering

Managing Political Risk

Influencing Local Policies

Case Study: China

Since joining WTO in 2001, made trade

liberalization a priority If the Growth goes below 7%, then they cant accommodate the 10mn+ workforce that comes out every year Inflation has lead to increase in labor costs and many MNCs are preferring Thailand, Vietnam & Malaysia Govt programs aimed to attracting FDI The problem is, the Govt is not sure of what it wants from the MNCs Ex Qualcomm and Auto cos

ECONOMIC ENVIRONMENT

PART 2

Market Economy

Command Economy

Types of Economic Systems

Mixed Economy
State-Directed Economy

Economic Systems

Market economy: pure market

economy sees all goods and services produced privately Ex US Free price system
Command economy: here the government is in

charge of allocating resources for the good of society -Transition to market economy is very difficult Ex Poland, Iraq

Economic Systems
Mixed economy: is simply a mix between market

economies and command economies - India PPP model

State-directed economy:

directing investment activities of private enterprises through industrial policy with national goals

Nature of the Economy

Countries & even regions within a country show

great differences in the level & pattern of economic development Widely used method is GNP or GNI Accordingly countries are classified as low, middle & high income economies

Low Income Economies

All economies with per capita GNI of $995 or less There are 59 low income economies

Middle Income Economies

Includes economies with per capita income between

$996 to $12195 Lower middle income economies - $996 to $3945 Upper middle income economies - $3946 to $12195 94 middle income eco majority of them are Lower middle inc

High Income Economies

With per capita GNI of $12196 or above There are 56 high income economies Two categories:

Industrial economies 2. Oil exporters

1.

Points to be noted.
GNI is not the final reflection of purchasing power &

living standards Nominal currency varies with domestic currencys purchasing power Better to calculate GNI @ PPP

Based on Development Factor

Developing
Developed
Not all High income

Sectoral distribution of

income, employment generation, social development indicators etc Inequality in the distribution of income is very high
LDCs /newly industrializing

economies are developed. Only Industrial economies & not oil exporting economies.
share of primary & dominance by secondary and tertiary sector, market friendly economic policies, competition & consumer choice etc

Use of modern technology, low

eco/transition economies

Conclusion
Low-income and middle-income economies are

sometimes referred to as developing economies Classification by income does not necessarily reflect development status Its purely for WBs convenience sake..\WB List.XLS

Human Development Index

The UN HDI is a statistical measure that gauges a

country's level of human development Strong correlation between having a high HDI score and a prosperous economy HDI takes into account how income is turned "into education and health opportunities and therefore into higher levels of human development. IMF rates countries with an overall score of 0.788 and above as Developed countries & with a score above 0.9 as Advanced economies

Economic Policies
Industrial policy Trade policy Foreign exchange policy

Foreign investment policy

Fiscal policy Monetary policy Technology policy

LEGAL ENVIRONMENT

PART 3

Global Legal Systems

Common Law Civil Law Theocratic Law

Common Law
Basis for common law is tradition, past practices &

legal precedents set by the courts through interpretations of statutes, legal legislation & past rulings. Judges can interpret the common law so that it applies to unique circumstances of an individual case. Such interpretations become a reference for future cases. Ex Britain & US contracts here would be very lengthy

Code Law
Very detailed set of laws organized into codes Based on how the law is applied to facts Three types Commercial, Civil & Criminal

Many common law contracts are covered under civil

code Civil law is less adversarial since judges rely on facts than precedent Unlike Common law Judges here can only apply law and not interpret them Care should be exercised in signing contracts abroad

Theocratic Law
Based on religious percepts Ex Islamic Law Based on Koran & the teachings of Prophet

Mohammad Sometimes laws which follow the consensus of Muslim countries legal communities Ex Interest component in Islamic financial system is considered Haram Since 2002, this has become a rule.

Standardization

Antitrust Regulations

Intellectual Property

Global Legal Issues

Taxation

Product Safety and Liability

Property Rights
Property is a resource owned by an Individual or

business firms Property rights refer to the bundle of legal rights to use the resource or allowing others to make use of it mostly for a price Violation of Property rights : 1. Private action Ex Mafia rule in Russia 2. Public action and Ex Higher taxes by Govt 3. Corruption - Ex Bribery for obtaining License

Protection of Intellectual Property Rights

Patents : provides exclusive rights to the inventor of

a new product or process for a particular period to produce & market the product/process Copyrights : provides exclusive right to the authors, publishers, composers and the like to publish and market their works Trademarks : are designs, icons and names used by the producers and marketers to differentiate their products. They are registered by the manufacturers.

Case : WIPO Sony vs LG

World Intellectual Property Organization (WIPO) In 2010, China filed 12,337 patents under WIPO's

Patent Cooperation Treaty system, up from 7,900 cases registered in the previous year The United States, the top international patent applicant, filed 44,855 applications Japan followed the US with 32,156 patent filings and Germany came third with 17,171 For example, no Chinese university has entered the top rankings of patent filers, which is dominated by universities from the US

Product Safety & Product Liability

Products must adhere to certain safety standards as

prescribed by law Differences in the coverage of these laws among the countries result in variation in competitive advantage as well as non conformity of ethical standards Countries where these laws are less comprehensive can reduce its cost and possess more competitive advantage Labor laws According to ILO

E-waste Maintenance!! Where Is ILO??!!

Part 4: Culture in Business

Culture Definition
A Classical definition: ...that complex whole which includes knowledge, belief, art, morals, law, custom, and any other capabilities and habits acquired by (individuals as members) of society

Values

Beliefs

What Is Culture?

Rules

Institutions

Structure of Culture

Self reference criterion

unconscious reference to ones own cultural values fall back on ones prior experiences

Static and dynamic elements

static: religion, social structures, language, value systems

Influences product policies dynamic: work and leisure, art, music

Structure of Culture
Learned by all people and passed on (cultivated) Shared by individuals May differ based on religion/language Consists of both Material (man made) & Non

Material culture

Understanding Culture

Values and Attitudes Manners and Customs Social Structure Education

Ideas

Beliefs

Customs

Values and Attitudes

Use of Time

Work Ethic

Cultural Change

Values & Attitudes

Americans attitude towards leisure time

Swedish decision making style Consensus

oriented vs French Takaful & Hibah in Islamic banks Rejection of offer from Saudis Gifting watch to Chinese bad idea word similar to funeral

Behavior Speech

Manners and Customs

Dress

Folk Customs
Popular Customs

Manners & Customs - UAE

Avoid admiring an item to an excess, your host may feel obligated to

give it to you. When offered a gift, it is impolite to refuse. Often shoes are removed before entering a building. Follow the lead of your host. Alcohol and pork are not consumed by those that observe the Muslim religion. In the Muslim world, Friday is the day of rest. Do not cross your legs when sitting, showing the bottom of your shoe or foot is offensive. The "thumbs up" gesture can also be considered offensive by some. Gifts are not necessary, but appreciated. If you do give a gift, it will be open in private.

Manners & Customs - France

France is a highly stratified society, with strong definition and

competition between classes. The French handshake is brief, and is accompanied by a short span of eye contact. The French have a great respect for privacy. Knock and wait before entering into a room. Additionally, do not "drop in" unannounced. Always give notice before your arrival. Business can be conducted during any meal, but lunch is best. Avoid drinking hard liquor before meals or smoking cigars between courses. The French believe this permeates the taste buds, compromising the taste of the meal. The French frequently interrupt each other, as the argument is a form of entertainment

Manners & Customs - Russia

Do not stand with your hands in your pockets. This is

considered rude. As a foreigner, you are expected to be on time to all business appointments. However, your Russian counterpart may be late, as this may be a test of your patience. Do not expect an apology from a late Russian, and do not demonstrate any kind of attitude if your business appointments begin one or two hours late. This may also be a test of your patience. Be sure to have plenty of business cards with double sides of information. One side should be printed in English, the other side in Russian.

Manners & Customs - SA

Meals at the home of a white South African will

include a barbecue by the pool--called a braaivleis (Afrikaans for roasted meat) or braai Do not rush deals. South Africans are very casual in their business dealings Gifts will be opened upon receipt. Business meetings can be held over lunch or dinner in a good restaurant.

Manners & Customs - Japan

Women should only wear low-heeled shoes to avoid towering over men Avoid the "OK" sign; in Japan it means money A smile can have double meaning. It can express either joy or

displeasure. Use caution with your facial expressions. They can be easily misunderstood Japanese rarely entertain in the home. If you are invited to the home of your Japanese host, consider it a great honor and display a tremendous amount of appreciation In Japan the number 14 is bad luck, because in Japanese it sounds like the word shuh-shuh, which sounds like the word for death It is highly inappropriate to touch someone of the opposite sex in public.

Social Structure
Group Associations Social Status Social Mobility

Role of Competence

Gender-Based
Age-Based Family-Based
Occupation

Social Stratification Systems

Cultural Traits
Low context vs High context cultures Monochronic vs polychronic Neutral vs Emotional (Japan vs Mexico)

Specific vs Diffuse (UK vs Venezuela)

Achievement vs Ascription

Education
Education Level Brain Drain Phenomenon

Language & Education

High context: (e.g. China, Arabic countries)

words convey part of meaning background, associations and values personal relationships important who is speaking, position in society contracts based on relationships, less paperwork

Low Context (e.g. German, Swiss)

words carry explicit message contracts do not regard character of individual more paperwork & legal contract

Context of Language & Learning

High
Japanese Arab Latin American Italian/Spanish French English North American Scandinavian German

Low

Swiss

Explicit

Implicit Analogic

Digital

Education - Scientists and Engineers

Technical People (per Million)

Nigeria

India

Indonesia

Country

Peru

Brazil Egypt

China

Russia

1000

2000

3000
Per Million

4000

5000

6000

Questionsif any??!!

TRADE THEORIES
SURANA P G CENTRE

Intro(duction)(spection)
If international trade is beneficial to one & all, why

do countries place so many barriers to trade???

Why are Governments so watchful about imports &

exports??
Would there be any specific product/service that a

country should export and/or import??

With whom should a country trade??!!!

International Trade Theories

Mercantalism:

-------- 16th-17th Century Carried till mid 19th century A Nations Gold & Silver stock as mainstay of wealth & prestigefor commerce.. -State intervention by tariffs on imports and subsidies for exports.. to maintain trade surplus and earn gold & silver for the country Colonizing countries played a Zero Sum Game

Example :Mercantilism
Trade between India & Brazil If India holds a surplus by exporting more and

accumulates Gold leads to inflation Prices rise & becomes costlier for Brazil to import further Gold reserves fall in Brazil & leads to less consumption Ultimately the Surplus of India gets exhausted cos Brazilian goods become cheaper & increases Import Nobody gains at the End

International Trade Theories

Theory of Absolute Advantage: 1776 Adam Smith .in Wealth of Nations Real wealth of a country is in the goods /services

available to citizens & not in gold/silver stock Specialize in the production of goods in which a nation has an absolute advantage and trade the same with the goods from another nation in which the latter has an absolute advantage.Both countries stand to gainprinciple of positive-sum game.

Absolute Advantage contd

Mutual Benefit through trade. Ex Britain Textiles & France Wine.two

countries should trade this for mutual benefit. Idea is to focus a countrys resources into producing goods in which it has an absolute advantage. A country should not produce goods that it can produce less efficiently and which can be bought from other countries. Types Natural adv ex Oman Acquired adv Indian software /Japanese steel

Rice

Wheat 10 40 20 10

Example: Absolute Advantage

Assuming 200 units of resources available in both the countries to manufacture Rice & Wheat.
Tab 1 Total Resources available for each Commodity Tab 2 Total Prod & Con without Trade

India Russia

Rice India Russia Rice India Russia 20 0 10 2.5

Wheat 5 10 Wheat 0 20

Rice India Russia

Rice India Russia 4 3.5

Wheat 14 6
Wheat 1 4

Ta b 3 Prod with Specialization

Tab 4 After trade Tab 5 Increase in Con

6 14

International Trade Theories

Theory of Comparative Advantage : Extension of the earlier theory Ricardoin Principles of Political economy..It

makes sense to specialise in the goods a nation can produce most efficientlyand import the goods which it may be able to produce,but less efficiently, from another nation which can produce the latter more efficiently Concept of the best of relative advantage..both stand to gain

Example: Comparative Advantage

Assuming 200 units of resources
Tab 1 Resources required to produce 1 ton

Rice India Russia

Wheat 10 13.33 40 20

Rice India Russia

Rice India Russia

Wheat 10 2.5 7.5 5

Tab 2 Total Prod & Con without Trade

Ta b 3 Prod with Specialization

Wheat 15 3.75 0 10

Rice India Russia Rice India Russia

Tab 4 After trade

Tab 5 Increase in Con

Wheat 11 7.75 4 6 Wheat 1 0.25 1.5 1

International Trade Theories

Factor Endowments

(Hecksher-Ohlin)Theory: Further modification of Comparative Theory19th centuryEli Hecksher and then later Bertil Ohlin ..argued that the comparative advantage arises from difference in national factor endowments which are what a country is endowed with like resources as land,labour and capital.. abundant a factor ..cost is lower

International Trade Theories

Hecksher-Ohlin

Developed countries

--- beneficial to all trading partners .....Unlike Ricardos basis on relative productivity, the theory is based on differences in factor endowments..relative but not absolute.

endowed with money capital.(and land too).seeking trade with developing countries endowed with cheaper labour and intellectual capital

International Trade Theories

The International Product Life cycle Theory

(IPLC): - New product phase - Mature product stage Standardised product phase Theory by Vernon..Product produced by the parentthen by its foreign subsidiariesthen anywhere in the world where the costs are low... Export ending up as Import!!!!!!!...Photo-Copiers as classic example

Example: GM
Cars initially manufactured in US Once the market reached its maturity back home, US

firms started exporting them to other markets(developing & developed) like Japan Those Developed markets slowly started Production in their local markets after learning the know-how As Factors of production were low and the demand was high, unit cost of Cars were too low in Japan Finally ended up importing from Japan Now Japanese car cos ruling in US

Strategic International Trade Theories

The New Trade Theory: Economies of scale - ability to spread Fixed costs

over a large output Learning effects First-Mover advantage (role of industry initiatives /entrepreneurship /innovation (role of Govt. policy initiatives) ...The added dimension of Technology The example of Boeing US Govt Backing- & 707 jetliner came out of Defense programme.

Learning Effects
Ex Boeings 777 - $5 bn If it produces 100 units - $50mn FC + $80mn VC

=$130mn If it produces 500 units - $10 mn FC + $80 mn VC =$90mn But learning effect leads to reduction in VC due to accumulated output in assembly line(process in documented) In Boeing VC came down by 80% when volumes doubled- $60mn for 500 units, so only $70mn/unit

International Trade Theories

National Competitive Advantage Theory:

Michael Porter (1990) Why some countries succeed and some fail in international trade?(Why Japan in Automobiles?Why Germany in Chemicals?..Why Swiss in precision Instruments? Four broad attributes of a nation shape the environment

International Trade Theories

Factor endowments Demand conditions Firm strategy,structure and rivalry

Related and supporting industries(Semi-

conductors in US,ball bearings & cutting tools in Sweden,Dye industry in Switzerland,Auto-ancillaries in India) These attributes promote or impede the creation of competitiveness of a nations firms

Porters Diamond

Examples
Factor Endowments: Japan's relative lack of raw materials

has spurred miniaturization and zero-defect manufacturing

Related & Supporting Industry : For example, Silicon Valley

in the USA and Silicon Glen in the UK are techno clusters of high-technology industries which includes individual computer software & semi-conductor firms. In Germany, a similar cluster exists around chemicals, synthetic dyes, textiles and textile machinery .

Examples
Domestic Demand : The case of Germany which has some

of the world's premier automobile companies like Mercedes, BMW, Porsche. German auto companies have dominated the world when it comes to the highperformance segment of the world automobile industry.
However, their position in the market of cheaper, mass-

produced autos is much weaker. This can be linked to a domestic market which has traditionally demanded a high level of engineering performance.

Questions.if any??!!!