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READING 13 National policies and domestic politics

-Trade is still a political activity and the firms that conduct it are political actors .
-states still use trade to achieve noncommercial aims and firms can still get
entangled in the pursuit of these goals .

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When firms from one country invest directly into the territory of another , they are
physically transplanting the means of production from one place to another ,
taking with them the jobs , technology , taxes , and suppliers that their operation
produces .


There is five different kinds of domestic policy :
Trade policy Foreign direct invest - Capital controls Regulation Competition
policy .
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This list is by no means exhaustive . indeed , there is far wider set of policies that
shape the environment in which firms trade and invest .
Yet these are some of the most common policies to affect firms , and some of the
most important .
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1-Trade policy .

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The rule of trade impinge upon the conduct of international business because trade crosses
national borders and can affect a national economy so deeply .
Governments always tried to govern the trading economy and shape the performance of
trading firms .


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International institution such as GATT , WTO has blunted some of sharper instrument of
trade policy , But government still maintain a considerable arsenal of policy tools , they
create rules that directly and indirectly affect the ability of firms to compete across borders .
(economic policy at some levels for different ends (for example , affects relative costs or
demand , favor some firms )

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Three kinds of rules demand particular attention :
Export controls protectionism strategic trade policy .
A-Export controls
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Export controls rank among the oldest tools of trade policy .

States have tried to limit from time to time the goods that producers can ship across their
border , sometimes these controls serve an economy object , insulating the domestic
economy from inflationary impact of excess foreign demand .and more often serve
political purpose .(e.i.to prevent a rival state from access to key resource or to punish a
state for some wrongdoing)
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States impose specific sanctions or embargoes protest the actions of a rival state ,
During the period of apartheid many countries prohibited their firms from exporting to
South Africa .

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The aim of sanctions or export controls is to force the target country to change its behavior .
Firms also need to be aware of the political forces and particular rules that drive sanction policy

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B- Protectionism
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Protectionist policies are a common feature of the international economy .

States employ protectionism in one style or another .
The challenge for managers is to understand as precisely as possible where protectionism
lies , and how best to avoid or exploit its rules .


Protectionism is tariffs , quotas , and other mechanical barriers to trade because it want to
protect its domestic producers from the strains of international competition , or because it
wants to support domestic production .


Under international pressure to reduce tariffs eliminate quotas , many states resort to
more discreet means . they offer research funding or export credits to their own firms , or
impose regulatory conditions that disadvantage foreign firms against their domestic rivals

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protectionism is not necessarily bad for firms , in fact , it often presents firms distinct
opportunities to mold and employ the rules to serve their own commercial interest .

C- Strategic trade policy
- Strategic trade policy rests on a series of well-formulated propositions about the national
advantages of protecting certain large and critical industries .

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-In these industries the presence of externalities and scale economies means that firms must be
global to compete , and that only a handful of competitors will survive in the global
marketplace .


-in these industries therefore, trade approaches a zero-sum game .either countries foster growth
of their own firms or they risk losing the industry entirely .if they want to compete they need to
government support and also willingness to fight and negotiate at the international level .
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2 . Rules of foreign direct investment

The second type of rules that affect the environment of international business are rules of foreign
direct investment . these rules that influence the conditions under which firms can invest directly
in the territory of foreign states .
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Recently , many states are anxiously competing to attract investors , offering them financial
incentives and the promise of preferential treatment , however , foreign investment remains
inherently political , and rules can have a dramatic impact on the success of investing firms .

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Rules shape the investment climate in a number of ways ,
First , even as states increasingly welcome foreign investments , they still customarily restrict it
(not single country in the world permitted an unrestricted right of entry to all sectors and
activities .) United Kingdom limits foreign participation in the radio , telecommunications ,
mining , fishing and tourist sectors .

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Second ,even where investment is permitted , it may nevertheless be conditional (the import of
certain technologies , or promise to manufacture for export .
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On the other cases the politics of foreign investment can create a far more hostile
environment and discouraging set of rules .

3- Capital controls
Countries use capital controls to buffer the domestic economy from the free-flowing
forces of the international capital market .
As this market grows in size and intensity , with over a trillion dollars streaming daily
across national borders ,
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All developed countries allow free repatriation of capital invested abroad and , generally , the
free transfer of profits and dividends from overseas subsidiaries .

In the developing world , however , capital controls are more far prevalent . they constitute
another area of rules that impinge upon the conduct of international trade and investment .


After Mexicos peso collapse in 1995 . repercussions swept across the developing countries ,
causing Morgan Stanleys emerging market index to fall 14.91 percent in just two months .

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To blunt the impact of such external shocks , developing countries often maintain a series of
controls on capital and foreign exchange flows .

4- Regulation
The rules of regulation directed to the domestic economy , and to the mass of policy objectives
that economic activity both facilitates and demands . because these policies vary so widely
across national borders , however they important to the conduct of international business .
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Governments regulate in order to promote a public good or redress a public bad , known more
formally as positive and negative externalities .
They regulate to improve economic efficiency by correcting naturally existing market
imperfections , or by controlling egregious excesses that the market has produced .
They also regulate in order to guide market forces towards certain noneconomic , socially
desirable ends : clear air , for example , or more effective medical treatments .




The rules and politics of regulation affect foreign firms in a number of different ways
First , they establish which specific industries are subject to regulation , and thus which firms
will need to participate in a direct and ongoing relationship with the state

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Second , even when firms move from one regulated market to another , the forms of regulation
can still be radically different . take the pharmaceutical . in USA it is regulated through a
combination of patent , approval procedures , and strictly defined distribution .
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Antitrust and competition policy.

A final set of rules that impinge upon firms foreign activities are rules of competition and
antitrust . these are rules that provide the basic guidelines for market activity , rules that deeply
embedded in the political culture of a country and thus tend to vary widely across national
borders .
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The foundation for this policy lies with the economics of industrial organization and the belief
that market forces can occasionally produce anti-competitive outcomes .


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Antitrust is a form of state intervention directed almost entirely at the domestic market .states
employ antitrust to gain what they believe to be a more efficient use of national resources ,
higher levels of domestic growth , greater stability in prices , output , or employment .


Sometimes governments also use it to limit the reach of firms they perceive as being too large or
powerful

Domestic politics
firms need to understand the domestic politics of the countries in which they
trade or invest

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these policies depend in some countries according to some scholars , rules emerge through
rational and predictable process of rent-seeking . various interest groups express their
preferences to political system which arbitrates their interests and rewards those with the most
votes , the greatest clout , or the staunchest coalition.
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The role of international forces

a final aspect of national policy Is the growing array of external groups .

states have always defined their rules of trade in relation to those of their neighbors : political
alliances and enmities have long shaped the policy options available to any individual state
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in recent years ,new actors have appeared on the world stage , armed with a distinctly
international agenda and explicitly determined to shape the ways in which national rules are
created and enforced .


The first of these developments is the advent of international institutions such as GATT and the
WTO .devoted to the expansion of global trade , these institutions contain their own complex sets
of rules and their own mechanisms for enforcement .


the second development is less obvious but perhaps even more powerful and enduring . it is the
dramatic growth of nongovernmental organizations , transnational groups that form around a
particular shared interest : in human right for instance or environmentalism (no official political
standing

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