Chapter 4

Politics and Laws

True/False Questions

1. With expanding globalization activities today, a single political and legal

environment exists to facilitate trade.

ANS: F PAGE: 102

2. Understanding the complexities of the host country’s legal system is a good way
to protect a manager from sanctions imposed by the home country.

ANS: F PAGE: 102

3. Extraterritoriality is a nation’s attempt to set policy outside its territorial limits.

ANS: T PAGE: 102

4. Minimum-wage legislation has a bearing on the international competitiveness of a

firm using production processes that are highly labor intensive.

ANS: T PAGE: 102

5. The cost of domestic safety regulations does not affect the pricing policies of
firms.

ANS: F PAGE: 102

6. A country’s political environment tends to be supportive of the international

business efforts of firms headquartered within the country.

ANS: T PAGE: 102

7. Sanctions refer to specific coercive trade measures aimed at distorting trade flows.

ANS: T PAGE: 103

8. Boycotts and bribery are government actions that distort the free flow of goods,
services, or ideas for decidedly adversarial and political, rather than economic
purposes.

ANS: F PAGE: 103

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9. Embargoes involve specific actions such as the cancellation of trade financing or
the prohibition of high technology trade in an effort to distort the free flow of
goods and ideas.

ANS: F PAGE: 103

10. A sanction deals with bilateral situations, whereas an embargo deals with
multilateral situations.

ANS: F PAGE: 103

11. The League of Nations subscribed to a covenant that contained penalties for
breaching its provisions after World War II.

ANS: F PAGE: 103

12. The basic structure of economic sanctions as set forth by the League of Nations
was regulated by both economic pressure accompanied by the threat of war.

ANS: F PAGE: 103

13. Sanctions usually result in significant gain of business to firms.

ANS: F PAGE: 104

14. Multinational collaboration can strengthen the sanctioning mechanism of the U.N.
greatly.

ANS: T PAGE: 104

15. Dual-use items are goods useful for both military and civilian purposes.

ANS: T PAGE: 104

16. Imposing sanctions more slowly undercuts their chance for success.

ANS: T PAGE: 104

17. Export control systems are designed to expedite the acquisition of strategically
important goods by adversaries.

ANS: F PAGE: 104

18. Export licenses are required of all firms exporting products.

ANS: F PAGE: 104

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19. Unfortunately, a list of individual firms that are considered to be unreliable
trading partners does not exist for each country.

ANS: F PAGE: 105

20. Products that are particularly sensitive to national security or controlled for other
purposes are filed on a critical commodities list.

ANS: T PAGE: 105

21. Most international business activities can be carried out under NLR conditions.

ANS: T PAGE: 105

22. One important change that has altered the parameters of the traditional export
control regime is the increase of foreign availability of high technology products.

ANS: T PAGE: 105

23. One can determine if one’s trading partner is a prohibited trading partner by
accessing the denied persons list published by the U.S. government.

ANS: T PAGE: 105

24. A key export control problem for firms and policymakers is the continued debate
about what constitutes military-use products, civilian-use products, and dual-use
products.

ANS: T PAGE: 107

25. Dissent and disagreement in the export control field is likely to decrease in the
future.

ANS: F PAGE: 107

26. Increasingly, goods are of dual-use nature, meaning that they are domestic
products that have potential global applications.

ANS: F PAGE: 107

27. Anti-trust laws apply to international operations as well as to domestic business.

ANS: T PAGE: 107

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28. The transfer of knowledge and technology is of equal or greater importance than
the export of physical goods.

ANS: T PAGE: 107

29. The Webb-Pomerene Act makes it a crime for U.S. executives of publicly traded
firms to bribe a foreign official in order to obtain business.

ANS: F PAGE: 109

30. The Foreign Corrupt Practices Act excludes from antitrust prosecution firms
cooperating to develop foreign markets.

ANS: F PAGE: 109

31. Firms usually prefer to conduct business in a country with a stable and friendly
government.

ANS: T PAGE: 112

32. Political risk is highest in countries that have a history of stability and consistency
because the history of stability indicates a change in the horizon.

ANS: F PAGE: 112

33. Political risk tends to be highest in countries that do not have a history of stability
and consistency.

ANS: T PAGE: 112

34. Ownership risk refers to interference with the ongoing operations of a firm.

ANS: F PAGE: 112

35. Transfer risk is encountered when attempts are made to shift funds between
countries.

ANS: T PAGE: 113

36. Expropriation is the transfer of ownership by the host government to a domestic

entity with payment of compensation.

ANS: T PAGE: 116

37. The use of expropriation as a policy tool has sharply increased over time.

ANS: F PAGE: 116

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38. Confiscation results in a transfer of ownership from the firm to the host country.

ANS: T PAGE: 117

39. Domestication is one of the subtle forms of control that many countries are
turning to.

ANS: T PAGE: 117

40. Tax increases may raise much needed revenue for a host country, but they do not
usually affect the operations of foreign investors.

ANS: F PAGE: 119

41. Firms doing business internationally can take out insurance to cover losses due to
political and economic risks.

ANS: T PAGE: 120

42. Countries with common law try to spell out all possible legal rules explicitly.

ANS: F PAGE: 120-121

43. The effect of politics on international business is determined by both the bilateral
political relations between home and host countries and by multilateral
agreements governing the relations among groups of countries.

ANS: T PAGE: 123

44. The WTO represents the only real enforceable body of law.

ANS: F PAGE: 124

Multiple Choice Questions

1. U.S. chemical firms paying into the Environmental Superfund

a. are credited for production destined for foreign markets.

b. are at a disadvantage internationally when exporting.
c. are able to use the funds for export promotion.
d. can reduce payments by increasing plant safety programs.
e. All of the above.

ANS: b PAGE: 102

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2. Governments may attempt to aid and protect the business efforts of domestic
companies facing competition from abroad by setting standards for product

a. labor and content.

b. labor and quality.
c. content and quality.
d. content and production.
e. quality and production.

ANS: c PAGE: 102

3. A nation’s attempt to set policy outside its territorial limits is called ______.

a. intraterritoriality
b. interterrioriality
c. international territory
d. extraterritoriality
e. trade territory

ANS: d PAGE: 102

4. One main area of government activity of major concern to the international

business manager is

a. embargoes.
b. territoriality.
c. international competitiveness.
d. environmental deregulation.
e. boycott taxes.

ANS: a PAGE: 103

5. A single international political and legal environment

a. exists but is not recognized.

b. will exist in the future.
c. does not exist.
d. would increase chaos.
e. would decrease production.

ANS: c PAGE: 102

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6. ___________ has a bearing on the international competitiveness of a firm using
production process that are highly labor intensive.

a. Minimum-wage legislation
b. The World Bank
c. Trade Prohibition
d. Tariff
e. Deregulation

ANS: a PAGE: 102

7. The purpose of governmental trade sanctions and embargoes is to

a. limit trade of certain products for political reasons.

b. control the products involved in international trade in order to reduce trade
imbalances.
c. protect domestic industries that are threatened by foreign competition.
d. increase consumption of domestic goods.
e. reduce the nation’s dependence upon sanctioned imports.

ANS: a PAGE: 103

8. Government actions that distort free flows of trade in goods, services, or ideas for
decidedly adversarial and political, rather than economic purposes are known as

a. embargoes and export controls.

b. export controls and trade sanctions.
c. trade sanctions and embargoes.
d. political controls on trade.
e. expropriation.

ANS: c PAGE: 103

9. Trade embargoes

a. prohibit trade entirely.

b. have been used frequently in wartime.
c. have been used to address specific grievances.
d. are a principal foreign policy tool.
e. all of the above.

ANS: e PAGE: 103

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10. Prohibition of trade is referred to as ____________.

a. sanctions
b. embargoes
c. tariffs
d. social barriers
e. quotas

ANS: b PAGE: 103

11. Trying to impose sanctions slowly or making them less expensive _________.

a. immediately enhances their effectiveness.

b. undercuts their short-term chance for success but not the long-term.
c. enhances their effectiveness in the long run.
d. enhances their short and long-term effectiveness.
e. undercuts their ultimate chance for success.

ANS: e PAGE: 104

12. The idea of multilateral use of economic sanctions was incorporated into
international law under the charter of the U.N. However, compared to the League
of Nations, a greater emphasis was placed on the ______ process.

a. training
b. development
c. enforcement
d. research
e. planning

ANS: c PAGE: 104

13. ______ can extend political control over foreign companies operating abroad,
with or without the support of their local government.

a. Close multinational collaboration

b. Economic sanctions
c. Open multinational collaboration
d. Non-economic sanctions
e. Partial multinational collaboration

ANS: b PAGE: 104

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14. ______ are designed to deny or at least delay the acquisition of strategically
important goods by adversaries.

a. Export-control systems
b. Import-control systems
c. Dual use systems
d. Export products
e. Export Trading Companies

ANS: a PAGE: 104

15. Which of the following is not a determinant for export controls in the U.S.?

a. National security
b. Foreign policy
c. Short supply
d. Nuclear nonproliferation
e. Economic security

ANS: e PAGE: 105

16. After an export license has been filed, the first step the Department of Commerce
takes is to match the commodity to be exported to _____.

a. the critical commodities list

b. the country of destination
c. the recipient company
d. foreign policies
e. supply and demand

ANS: a PAGE: 105

17. When exporting products incorporating high level technologies and countries not
friendly to the U.S. are involved, the exporter must obtain ______.

a. a validated export license

b. a general license
c. a specified export license
d. a collateral-based trade license
e. none of the above

ANS: a PAGE: 105

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18. The decision steps in the export licensing process include _________.

a. should a given product be subsidized

b. should a particular country receive the products free
c. should a given company be a recipient
d. do the consumers deserve the product
e. should quality or quantity be emphasized

ANS: c PAGE: 105

19. Which of the following is a change that altered the parameters of the traditional
export control regime?

a. The collapse of the Iron Curtain

b. Rapid dissemination of information and innovation around the world
c. The loosening of mutual bonds among allied nations
d. The increased foreign availability of high technology products
e. All of the above

ANS: e PAGE: 106

20. Implementing export controls is made more difficult because

a. of the ongoing debate about what constitutes military use products, civilian
use products, and dual-use items.
b. of the desire of nations to safeguard other countries’ economic interests.
c. it is easier to control the transfer of knowledge technology.
d. the export of physical goods cannot be monitored.
e. controlling the transfer of components within companies across economic
areas is not considered export transactions.

ANS: a PAGE: 107

21. Nations may attempt to govern international business activities through _______.

a. boycotts
b. greenfield investments
c. bribery
d. corruption
e. All of the above

ANS: a PAGE: 109

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22. ______ watch closely when a firm buys a company, engages in a joint venture
with a foreign firm, or makes a restraint on a competition agreement.

a. Corruption agencies
b. Boycott agencies
c. Labor unions
d. Webb-Pomerene Act
e. Antitrust agencies

ANS: e PAGE: 109

23. The ______ excludes from antitrust prosecution firms cooperating to develop
foreign markets.

a. Foreign Corrupt Practices Act

b. Webb-Pomerene Act
c. Antitrust Laws Act
d. Organization for Economic Cooperation and Development
e. 1988 Trade Act

ANS: b PAGE: 109

24. The Foreign Corrupt Practices Act

a. makes it a crime for U.S. executives of publicly traded companies to bribe

foreign officials in order to obtain business.
b. supports and expands firm efforts to compete internationally.
c. allows firms to pay bribes in locations where it is common place.
d. makes it a crime for foreign nationals to bribe a U.S. official however, allows
U.S. executives to bribe foreign officials where allowed.
e. a and b only.

ANS: a PAGE: 110

25. ____________ tend to increase corruption.

a. Income inequalities and ethical practices

b. Honesty and poverty
c. Poverty and income inequalities
d. Honesty and wealth
e. Income inequalities and competitive markets

ANS: c PAGE: 110

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26. The ______ clarifies the applicability of the Foreign Corrupt Practices legislation.

a. Webb-Pomerene Act
b. 1988 Trade Act
c. Export Trading Company Act
d. Antitrust Laws Act
e. OAS Act of 1999

ANS: b PAGE: 111

27. Firms usually prefer to conduct business in a country with a ______ government,
but such governments can be hard to find.

a. dynamic and friendly

b. stable and friendly
c. stable and harsh
d. dynamic and harsh
e. dynamic and reasonable

ANS: b PAGE: 112

28. The major types of political risk include all of the following EXCEPT

a. ownership risk.
b. operating risk.
c. transfer risk.
d. social risk.
e. all of the above are major types of political risk.

ANS: d PAGE: 112

29. ________ risk exposes property and life.

a. Ownership
b. Commercial
c. Political
d. Transfer
e. Social

ANS: a PAGE: 112

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30. _________ risk refers to the interference with the ongoing operations of a firm.

a. Ownership
b. Commercial
c. Political
d. Transfer
e. Operating

ANS: e PAGE: 112

31. U. S. businesses are a primary target of terrorists because ____________.

a. they have restricted access but lack elaborate security.

b. they have elaborate security but restricted access.
c. they cannot have elaborate security and restricted access.
d. they have elaborate security but lack restricted access.
e. they have elaborate security and regulated access.

ANS: c PAGE: 113

32. _______ risk is encountered when attempts are made to shift funds between
countries.

a. Ownership
b. Commercial
c. Political
d. Transfer
e. Operating

ANS: d PAGE: 113

33. Expropriation _____________.

a. results in a transfer of ownership from the firm to the host country with
compensation
b. results in a transfer of ownership by the host government to a domestic entity
with compensation
c. is a major political risk for foreign investors
d. has no costs to the host country and makes other firms more apt to invest there
e. has become increasingly popular when being used as a policy tool

ANS: b PAGE: 116

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34. The use of expropriation as a policy tool has ____________.

a. increased somewhat over time.

b. decreased somewhat over time.
c. sharply increased over time.
d. sharply decreased over time.
e. remained stable over time.

ANS: d PAGE: 117

35. All of the following are true of confiscation EXCEPT:

a. it is a government action.
b. it results in a transfer of ownership from the firm to the host country without
compensation.
c. it results in a transfer of ownership from the firm with compensation.
d. it is a major political risk for foreign investors.
e. sectors such as mining, energy and public utilities are frequent targets of this
policy tool.

ANS: c PAGE: 117

36. Which of the following are considered detrimental to foreign firms?

a. Expropriation
b. Confiscation
c. Domestication
d. Local content requirements
e. All of the above

ANS: e PAGE: 117

37. Rights to intellectual property involve all of these except

a. patents.
b. trademarks.
c. industrial design rights.
d. copyrights.
e. greenfield investments.

ANS: e PAGE: 118

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38. Government action to weaken or not enforce intellectual property right protection
can result in _______.

a. companies enhancing their core competitive edge

b. permitting domestic firms to become quick innovators
c. encouraging the ongoing transfer of technology and knowledge by
multinational firms
d. reducing the incentive for local firms to invest in innovation and progress
e. all of the above

ANS: d PAGE: 117

39. Domestication often leads to

a. inefficiency due to protection from foreign and domestic competition.

b. increased costs of production because the foreign government often
guarantees labor rates which are higher than in private industry.
c. widespread increases in the perceived quality of the product.
d. increased sales to foreign importers due to the stability and reputation of
government run companies.
e. higher productivity because governments have more resources than private
companies to invest in facilities modernization.

ANS: a PAGE: 117

40. Imposing controls on the movement of capital in and out of the country is referred
to as _______.

a. price controls
b. currency controls
c. exchange controls
d. trade controls
e. none of the above

ANS: c PAGE: 118

41. The international firm can demonstrate that it is concerned with the host country’s
society and that it considers itself an integral part of the host country ________.

a. through bringing managers from home country

b. with lower pay
c. through taking advantage of lower environmental laws
d. through investments useful to society
e. all of the above

ANS: d PAGE: 119

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42. All of the following are true regarding common law EXCEPT

a. common law is based on tradition.

b. common law originated in England.
c. common law is based on a comprehensive set of written statutes.
d. common law is used in the U.S.
e. common law depends on precedent and custom.

ANS: c PAGE: 120

43. The two major legal systems in the world are _________.

a. common law and theocracy

b. common law and code law
c. theocracy and the Roman law
d. theocracy and code law
e. theocracy and the English law

ANS: b PAGE: 120

44. Firms can take out insurance to cover losses due to

a. code law risk.

b. political risk.
c. political and social risk.
d. commercial risk.
e. political and economic risk.

ANS: e PAGE: 120

45. Which of the following is true of code law?

a. It is based on tradition.
b. It is originated in England.
c. It is based on a comprehensive set of written statutes.
d. It is used in the U.S.
e. It depends on precedent and custom.

ANS: c PAGE: 121

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46. Which of the following (is)are options for the international manager in dealing
with politics and laws?

a. To ignore prevailing rules and hope to get away with it

b. To provide input to trade negotiators and expect any problem areas to be
resolved in multilateral negotiations
c. To be involved in the development of coalitions and constituencies that can
motivate legislators and politicians to consider and implement change
d. All of the above
e. b and c only

ANS: d PAGE: 122

47. American firms

a. have been less effective in their domestic lobbying efforts than foreign
companies.
b. are more successful at lobbying foreign governments than foreign
companies are at lobbying the U.S. government.
c. are prohibited from lobbying foreign governments.
d. place a lower priority on information about foreign trade and government
officials than their foreign counterparts.
e. None of the above

ANS: d PAGE: 123

48. The ______ relationship can have a profound influence on international business
in a number of ways, especially if it becomes hostile.

a. firm-to-buyer
b. firm-to-government
c. firm-to-firm
d. government-to-government
e. government-to-buyer

ANS: d PAGE: 123

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49. Well-connected individuals and firms that can provide access to policy makers
and legislators in order to communicate new and pertinent information are called
______.

a. Congressmen
b. lobbyists
c. international politicians
d. government relayers
e. informants

ANS: b PAGE: 122

50. Which of the following sets the framework for international business operations?

a. The WTO
b. The FDA
c. The UNCC
d. The OSHA
e. The World Bank

ANS: a PAGE: 124

51. The Treaties of Friendship, Commerce and Navigation ___________.

a. define the rights of firms doing business in the host country

b. eliminates guarantee that firms will be treated by the host country on the same
manner as domestic firms are
c. provide no stability to the business environment
d. cannot be canceled when relations worsen
e. all of the above

ANS: a PAGE: 124

52. With regard to the complexities of the international legal environment, the WTO
is instrumental in _________.

a. protecting individual firms from unfair trade restrictions

b. increasing the stability and predictability of the international marketplace
c. enforcing international laws
d. facilitating a coordinated global transition to a code law system
e. arbitrating expropriation and domestication cases

ANS: b PAGE: 124

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53. International Law is enforced by _____.

a. the World Bank

b. the IMF
c. the UN
d. the WTO
e. none of the above

ANS: e PAGE: 124

54. In cases of disagreement companies tend to prefer__________.

a. arbitration and litigation.

b. conciliation and arbitration.
c. conciliation and litigation.
d. enforcement and litigation.
e. arbitration and enforcement.

ANS: b PAGE: 125

Short Answer

1. From the home country perspective, which main areas of governmental activities
are of major concern to international business managers?

ANS: There are three main areas of government activity that concern international
managers: (1) embargoes and/or trade sanctions, (2) export controls, and (3) the
regulation of international business behavior.

PAGE: 103

2. What is the difference between a sanction and an embargo?

ANS: Both sanctions and embargoes refer to governmental actions that distort the
free flows of trade for adversarial and political reasons rather than economic
reasons. Sanctions tend to consist of specific coercive trade measures such as the
cancellation of trade financing or the prohibition of high-tech trade, while
embargoes are usually much broader, prohibiting trade entirely.

PAGE: 103

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3. In what manner may sanctions be considered a middle ground?

ANS: The use of sanctions may be considered a middle ground between the
extremes of going to war or doing nothing. Their effective functioning can prove
to be a powerful international policy measure.

PAGE: 104

4. How is an export license issued by the Department of Commerce?

ANS: For any export, specialists in the Department of Commerce match the
exported commodity with the Critical Commodities List, the country of
destination, and the recipient company. If no concerns exist in any one of the
three areas, a license is issued. This process is only carried out if the product or
the recipient country is considered sensitive.

PAGE: 105

5. Why are export controls increasingly difficult to implement and enforce?

ANS: Export controls are increasingly difficult to implement and enforce because
the number of countries that are able to manufacture products of strategic
importance has increased, products that are in need of control are developed and
disseminated very quickly, and because it is very difficult to control the transfer
of technology and know-how.

PAGE: 106

6. Discuss key export control problem areas for firms and policymakers.

ANS: There are several key export control problems areas. First, is the
continuing debate about what constitutes military-use products, civilian-use
products, and dual-use products? Second, even if governments were to agree on
classifications and continuously updated them, the resulting control aspects would
be difficult to implement. Third, conflicts also result from the desire of nations to
safeguard their own economic interests.

PAGE: 107

7. Explain the controls of deemed exports.

ANS: Deemed exports are controls that address people rather than products.
These controls are valuable in instances where knowledge transfer could lead to a
breach of export restrictions.

PAGE: 107

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8. Discuss the area of regulatory activity of antitrust laws.

ANS: Antitrust laws often apply to international operations as well as to domestic

business. In many countries, antitrust agencies watch closely when a firm buys a
company, engages in a joint venture with a foreign firm, or makes an agreement
abroad with a competing firm in order to ensure that the action does not result in
restraint of competition.

PAGE: 109

9. Discuss how public and environmental concerns may prove to be challenging for
the international business manager.

ANS: General standards of behavior and ethics differ among countries.

Increasingly, public concerns are raised about such issues as environmental
protection, global warming, pollution, and moral behavior. However, these issues
are not of the same importance in every country.

PAGE: 111

10. List and explain the political risks the international manager faces when doing
business abroad.

ANS: Political risk refers to the danger a firm incurs with international operations
by being exposed to foreign government actions. It can be categorized into three
major types: ownership risk (transfer of property); operating risk (interference
with the ongoing operations of a firm); and transfer risk (limitations on the
outflow of funds).

PAGE: 112-113

11. Explain expropriation, confiscation, and domestication.

ANS: One of the most drastic political threats facing a foreign country is
confiscation. Confiscation involves the government takeover of a firm without
compensation to the owners. Expropriation is also a form of government
takeover, however the firm’s owners are compensated, although frequently at less
than market value. Domestication is another risk for foreign firms that involves
the transfer of ownership and management of to the government, and restricts the
flow of profits out of the country. These risks are highest in countries where the
political environment is very volatile.

PAGE: 116-117

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12. Discuss the effect of government action to weaken or not enforce intellectual
property right protection.

ANS: Government actions to weaken or not enforce intellectual property right

protection results in companies running the risk of losing their core competitive
edge. While such government actions may temporarily permit domestic firms to
become quick imitators, in the long-term they will not only discourage the
ongoing transfer of technology and knowledge by multinational firms, but they
will also reduce the incentive for local firms to invest in innovation and progress.

PAGE: 117

13. What types of economic regulations might a government impose to control the
international activities of firms?

ANS: Governments, in an effort to control or restrict the activities of foreign

firms, might impose exchange controls, use adverse tax policies, and/or
implement price controls.

PAGE: 118-119

14. Discuss the various methods international firms can use to demonstrate concern
with the host country’s society.

ANS: Methods of demonstrating concern include intensive local hiring and

training practices, better pay, contributions to charity, and societally useful
investments. In addition, the company can form joint ventures with local partners
to demonstrate that it is willing to share its gains with nationals.

PAGE: 119

15. Discuss the Treaties of Friendship, Commerce, and Navigation (FCN).

ANS: A number of countries have signed bilateral Treaties of FCN. The

agreements generally define the rights of firms doing business in the host country,
and guarantee that the host country will treat firms in the same manner in which
domestic firms are treated. While these agreements provide for some sort of
stability, they can also be cancelled when relations worsen.

PAGE: 124

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16. Why do firms avoid litigation in settling international trade disputes?

ANS: To settle disagreements, firms can choose either litigation or arbitration.

Litigation often involves extensive delays and is very costly. In addition, firms
may fear discrimination in foreign countries. Therefore, firms tend to prefer
arbitration because it is quicker, and less expensive. In addition, the limited
judicial recourse available against arbitral awards, as compared with court
judgments, offers a clear reward.

PAGE: 125

Essay

1. Discuss the issue of extraterritoriality.

ANS: Extraterritoriality refers to a nation’s attempt to set policy outside its

territorial limits. Actions implying extraterritorial reach are common because
nations often argue that their citizens and products maintain their nationality
wherever they may be, and therefore they continue to be subject to the rules and
laws of their home country. However, such measures challenge the territorial
sovereignty of other governments.

PAGE: 102

2. Discuss areas of laws and regulations that impact international business issues.

ANS: Minimum-wage legislation has a bearing on the international

competitiveness of a firm using production processes that are highly labor
intensive. The cost of domestic safety regulations may significantly affect the
pricing policies of firms. Governments may attempt to aid and protect the
business efforts of domestic companies facing competition from abroad by setting
standards for product content and quality.

PAGE: 102

3. Discuss the major changes that have fundamentally altered the parameters of the
traditional export regime.

ANS: Six major changes have fundamentally altered the parameters of the
traditional export control regime: (1) the collapse of the Iron Curtain, (2) the focus
of export controls on the Third World, (3) a loosening of mutual bonds among
allied nations, (4) the increased foreign availability of high-tech products, (5) the
speed of change and the rapid dissemination of information and innovation
around the world, (6) the issue of equipment size. Additional details can be found
in the discussion of “a changed environment for export controls.”

PAGE: 106-107

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4. Discuss the bribery restriction place on American companies doing business
abroad. Do the restrictions place U.S. firms at a disadvantage? Should the law be
revised? Why or why not?

ANS: The Foreign Corrupt Practices Act of 1977 prohibits American managers
abroad from bribing foreign officials for business purposes. However, customary
payments to non-policy officials in order to let business transactions go on are
permitted. This is a controversial issue because bribery is part of doing business
in many parts of the world, and Americans often feel that they must comply in
order to compete internationally. The anti-bribery legislation is also controversial
because it is often hard to draw the line between corrupt and acceptable
transactions. Some drawbacks to loosening anti-bribery restrictions are the
possibility that corruption would spread to the U.S., concentration of bribery
rather than fair competition, and a possible decline in performance and
productivity.

PAGE: 110-111

5. Explain the political risk and economic risk a firm may face in operating
internationally. How can these risks be managed?

ANS: Three major types of political risks are: ownership, operating, and transfer
risks. Changes in policy also results in such actions as expropriation, confiscation,
and local content requirements. From economic viewpoint, firms may have to
worry about exchange controls, tax policy toward foreign investors, and price
controls.

Methods of demonstrating concern include intensive local hiring and training

practices, better pay, contributions to charity, and societally useful investments.
In addition, the company can form joint ventures with local partners to
demonstrate that it is willing to share its gains with nationals. Although such
actions will not guarantee freedom from political risk but it will lessen the
exposure. Firms can also monitor the political developments closely and take out
the insurance against the political and economic risks.

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