Chapter 1

Assessing the Environment –

Political, Economic, Legal,
Technological
PowerPoint by
Kristopher Blanchard
North Central University

© 2006 Prentice Hall

1-1
 The Global Business Environment
The Global Marketplace is complex,
interdependent, and dynamic
Challenges include politics, culture, and
technology
Managers must find a balance between
social responsibility, company image, and
competitive strategies
More focused on Global Management

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The Global Business Environment
Global competition is characterized by
networks that bind countries to one another
Globalism trends
– A borderless world
– Increase in exports
– Increase in direct foreign investment
– Dominance of trading blocs

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 Regional Trading Blocs
“The dominance of the
United States is already
over. What is emerging is
a world economy of blocs
represented by NAFTA,
The European Union, and
ASEAN. There’s no one
center in this world
economy.”
- Peter Drucker
Fortune, January 12, 2004

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 Regional Trading Blocs
TRIAD Market
European Union
Asian Market
– China, Japan, South Asia
NAFTA
CAFTA

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 The TRIAD
Three regional free-trade blocs
– Western Europe, Asia, and North America
Grouped around three dominant currencies
– Euro, Yen, and Dollar
In 2004, these trade blocs were expanding
their boarders to include neighboring
countries

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Comparative Management in Focus -
India
India has witnessed a change in values,
habits and options during the last decade
The economy, second fastest growing in the
world, is expected to grow close to 7% this
year
Fastest growing telecom market with more
than one million new mobile phone
subscriptions per month

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 Comparative Management in Focus
- India
Indians are buying 10,000 motorcycles a
day
India had 192 million households in 2001
– Only 31.6% have a television
– Only 2.5% have a car, jeep or van
Foreign investors have invested $5 billion
into the Indian stock market

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 Information Technology
Information Technology is transforming the
international manager’s agenda more than
any other item
Information is no longer centrally or
secretly controlled by governments
Information technology is boosting
productivity and electronic commerce
around the world

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 The Globalization of Human Capital

Globalization means we share

jobs as well as goods.
- FINANCIAL TIMES,
August 27, 2003

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 The Globalization of Human Capital

Forrester Research predicts that 3.3 Million

US jobs will move offshore by 2015
45% of the 500 US companies surveyed
state that they use a global sourcing model

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 The Global Manager’s Role

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 The Political and Economic
Environment
One important aspect is the phenomenon of
ethnicity
– Driving force behind political instability
Firms must assess political risks
– Government actions that could adversely affect
the long-run profitability or value of a firm

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 Political Risk – 7 Typical risk events
Expropriation of corporate assets without
prompt and adequate compensation
Forced sale of equity to host-country
nationals, usually at or below depreciated
book value
Discriminatory treatment against foreign
firms in the application of regulations or laws
Barriers to repatriation of funds (profits or
equity)

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 Political Risk – 7 Typical risk events

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

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 Managing Political Risk
Avoidance – either the avoidance or withdrawal of
investment in a particular country
Adaptation – adjust to the political environment
Dependency – keeping the host nation dependent
on the parent corporation
Hedging – minimizing the losses associated with
political risk events

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 Economic Risk
A country’s level of economic development
generally determines its economic stability
Economic risk falls into 2 categories
– Government changes its fiscal policies
– Government modifies its foreign-investment
policies
Managers are constantly reassessing
economic risk

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 The Legal Environment
Manager’s will comply with the host
country’s legal system
– Common Law – past court decisions act as
precedents to the interpretation of the law
– Civil Law – comprehensive set of laws
organized into codes, interpretation is based on
reference to codes and statues
– Muslim law – based on religious beliefs, it
dominates all aspects of life

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 The Legal Environment
Commenting on Contract Law

“In China, the old joke goes, a contract is a

pause in the negotiation.”

- VANESSA CHANG, KPMG PEAT MARWICK

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 The Technological Environment
Corporations must consider the accelerating
macro-environmental phenomenon of
technoglobalism (rapid developments in
information and communication
technologies)
Corporations must consider the
appropriability of technology

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 Global E-Business
E-business – 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 via the Internet

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 Global E-Business
Convenience in conducting business worldwide;
facilitating communication across borders
contributes to the shift toward globalization and a
global market.
An electronic meeting and trading place, which
adds efficiency in conducting business sales.
A corporate Intranet service, merging internal and
external information for enterprises worldwide.
Power to consumers as they gain access to
limitless options and price differentials.
A link and efficiency in distribution.

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 Looking Ahead
Chapter 2 – Social Responsibility and
Ethics
– The Social Responsibility of MNC’s
– Ethics in Global Management
– Managing Interdependence

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

Return
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 European Union
Comprised of 25 nations
400 million people
Elimination of tariffs has not eliminated national
pride
Global Managers face two major tasks
– Strategic – how to deal with the EU as an non-
European company
– Cultural – How to deal with multiple sets of national
cultures, traditions and customs
Return

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 Asia
Japan and the Four Tigers - Singapore,
Hong Kong, Taiwan, and South Korea,
– Each has an abundance of natural resources and
labor
China
– A new east Asian economy is emerging,
focused on greatly increased trade within the
region and based on China rather than Japan.
Return

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 North America
The goal of NAFTA was to bring the US,
Canada, and Mexico together to create more
jobs, better working conditions and a
cleaner environment
421 Million Consumers
Has been very beneficial to Mexico

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 Adaptation
Equity sharing includes the initiation of joint ventures with
nationals (individuals or those in firms, labor unions, or
government) to reduce political risks.
Participative management requires that the firm actively
involve nationals, including those in labor organizations or
government, in the management of the subsidiary.
Localization of the operation includes the modification of the
subsidiary’s name, management style, and so forth, to suit local
tastes. Localization seeks to transform the subsidiary from a
foreign firm to a national firm.
Development assistance includes the firm’s active involvement
in infrastructure development (foreign-exchange generation,
local sourcing of materials or parts, management training,
technology transfer, securing external debt, and so forth)

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 Dependency
Input control means that the firm maintains
control over key inputs, such as raw materials,
components, technology, and know-how.
Market control requires that the firm keep
control of the means of distribution
Position control involves keeping certain key
subsidiary management positions in the hands of
expatriate or home-office managers.
Staged contribution strategies mean that the firm
plans to increase, in each successive year, the
subsidiary’s contributions to the host nation
Return

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 Hedging
Political risk insurance is offered by most industrialized
countries. Insurance minimizes losses arising from specific
risks—such as the inability to repatriate profits,
expropriation, nationalization, or confiscation— and from
damage as a result of war, terrorism, and so forth.
– The Foreign Credit Insurance Association (FCIA) also covers
political risks caused by war, revolution, currency inconvertibility,
and the cancellation of import or export licenses.
Local debt financing (money borrowed in the host
country), where available, helps a firm hedge against being
forced out of operation without adequate compensation. In
such instances, the firm withholds debt repayment in lieu
of sufficient compensation for its business losses.

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