MGT 207:

International Business

BBA 5th Semester

Mechi Multiple Campus
Bhadrapur, Jhapa

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Unit 3: Global Business Environment

In this unit, we discuss about
❶ Political and legal systems; Actors in political and legal systems; Political
risks;
❷ E-commerce and intellectual property rights;
❸ Government interventions and investment barriers;
❹ Cultural environment – concept, why culture matters in international
business?;
❺ Regional economic integration – types, leading economic blocs;
❻ Emerging foreign markets; The changing demographics of the global
economy;
❼ International monetary and financial environment –
currencies and exchange rate systems; The floating exchange rate system.;
Modes of payment in international trade; Global financial system;
❽ International economic institutions; WTO and free trade policies.

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Political system
• A political system is a set of formal institutions
that constitute a government.
• Political systems can be assessed according to
two dimensions: Collectivism And individualism.
• These dimensions are interrelated; systems that Collectivism
emphasize collectivism tend toward totalitarian,
whereas those that place a high value on vs
individualism tend to be democratic. Individualism
• However, a large gray area exists in the middle.
• It is possible to have democratic societies that
emphasize a mix of collectivism and
individualism.
• Similarly, it is possible to have totalitarian
societies that are not collectivist.
• There are three major types of political systems:
totalitarianism, socialism, and democracy

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Political Ideology
Collectivism Individualism
It stresses the primacy of collective goals It holds that interests of the individual
over individual goals should take precedence over the interests
of the state.
Needs of society as a whole are generally An individual should have freedom in his
viewed as being more important than or her economic and political pursuits.
individual freedoms.
Root: Greek philosopher Plato (427-347 Root: Plato's disciple Aristotle (384-322
BC), argued that individual rights should BC) who argued that individual diversity
be sacrificed for the good of the majority and private ownership are desirable.
and that property should be owned in private property receive the greatest care
common. and therefore more highly productive
than communal property and will thus
stimulate progress.

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Political system
There are three major types of political systems. However, these categories
are not mutually exclusive.
Political System Description

Totalitarianism Form of government in which one person or political party exercises absolute
control over all spheres of human life and prohibits opposing political parties. It
seeks to control not only all economic and political matters but the attitudes,
values, and beliefs of the citizen. Four major forms of totalitarianism exist in the
world today. Communist, theocratic, tribal, right wing totalitarianism.
Socialism Capitalists receive a disproportionate amount of society’s wealth relative to
workers. the pay of workers does not represent the full value of their labor. To fully
compensate for their labor, Marx advocated state ownership of the basic means of
production, distribution, and exchange (i.e., businesses).
Democracy It is characterized by two key features. Private property rights and Limited
government. People and firms can acquire property, use it, buy or sell it, These
rights are important because they encourage individual initiative, ambition, and
innovation, as well as desire to accumulate wealth.
State control and intervention in the economic activities of private individuals or
firms is minimal.
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Economic system
Political ideology and economic systems are connected.
Economic Description
System
Market Economy Consistent with the ideology of Individualism, all productive activities are privately
owned. Production is determined by the interaction of supply and Demand.
Government intervention in the marketplace is limited, and economic decisions
are left to individuals and firms. Private ownership encourages vigorous
competition, economic efficiency, and innovation.
Command Consistent with the ideology of Collectivism, all businesses are state owned for the
Economy good of the society. In a command economy, state-owned enterprises have little
incentive to control costs and be efficient. Dynamism and innovation are absent
from command economies. Instead of growing and becoming more prosperous,
such economies tend to stagnate.
Mixed Economy It COMBINES state intervention and market mechanisms for organizing production
and distribution. In a mixed economy, certain sectors of the economy are left to
private ownership and free market mechanisms while other sectors have
significant state ownership and government planning. State-owned enterprises
operate in key sectors such as transportation, telecommunications, and energy.
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Legal system
It refers to the rules, or laws, that regulate behavior along with the processes by
which the laws are enforced
Legal System Description
Common law Common law is based on tradition, previous cases, and custom. Judges in a common
(Case law) law system have the power to interpret the law so that it applies to the unique
circumstances of an individual case. Originated in England and spread to Australia,
Canada, the United States, and former members of the British Commonwealth. It is
more flexible than other legal systems.
Civil Law A civil law system is based on a detailed set of laws organized into codes. When law
(Code Law) courts interpret civil law, they do so with regard to these codes. It is found in France,
Germany, Italy, Japan, Turkey, and Latin America. Its origins go back to Roman law and
the Napoleonic Code. Judges under a civil law system have less flexibility than those
under a common law system. Judges in a civil law system have the power only to
apply the law.
Theocratic Law Theocratic law is based on religious teachings and moral values. Islamic law is widely
practiced, found mainly in the Middle East and North Africa. Because It is seen divinely
ordained, it is relatively static and absolute. In Islamic law, payment or receipt of
interest, is considered sinful and therefore outlawed by Koran. Most Muslim countries
currently maintain a dual system, wherein both religious and secular courts coexist.
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Actors of Political and Legal system

Actors play great role in transforming political and legal system and influencing global
business environment.

Actors Description
Government It is the most important actor, operating at national, state, and local
levels. It has the power to enact and enforce laws. It strongly influence
how firms enter host countries and how they conduct business there.
Governments regulate international business activity through a
complex system of institutions, agencies, and public officials such as
Ministry of Foreign Affairs, Ministry of Finance, and the Export and
Import Controls Bureau.
International World Trade Organization, the United Nations, and the World Bank
Organizations strongly influence international business. They facilitate free and fair
trade, providing administrative guidance and financial support.
Regional Regional trade organizations, such as EU, NAFTA, and ASEAN, aim to
Economic Blocs advance the economic and political interests of their members. They
enacts and enforces laws and regulations that directly affect business.
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Actors of Political and Legal system

Actors Description
Special Special interest groups (such as OPEC) serve the interests of particular
Interest countries, industries, or causes. Special interest groups engage in political
Groups activity to advance specific causes, ranging from labor rights to
environmental protection.
For Example: Labour unions (US Steel workers union opposed imports of
steel from China.)
Competing Rival domestic firms with a strong presence in the host country naturally
Firms have an interest in opposing the entry of foreign firms into the local
market and may lobby their government for protection.
For example: U.S. Automakers opposed BMW’s construction of a factory in
South Carolina. However, the state Government supported the BMW
facility on the grounds that it would generate jobs and increase tax
revenues.

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Political Risk
• Political risk has been defined as the likelihood that
political forces will cause drastic changes in a country's
business environment that adversely affect the profit and
other goals of a business enterprise.
• Business environment may be affected by social unrest
such as strikes, demonstrations, terrorism, and violent
conflict, political revolution.
• Such unrest is more likely to be found in countries
– where there is more than one ethnic nationality, in countries
– where competing ideologies are battling for political control
– where economic mismanagement has created high inflation and
falling living standards.
• Social unrest can result in abrupt changes in government
and government policy which tends to have negative
economic implications for the profit goals of business
enterprises.

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Political Risk
• For example, in the aftermath of the 1979 Islamic revolution in Iran, the
Iranian assets of numerous U.S. companies were seized by the new Iranian
government without compensation. A change in political regime can result in
the enactment of laws that can be less favorable to international business.
• For example: As a move against American imperialism, Hugo Chavez increased
the royalties foreign oil companies operating in Venezuela have to pay the
government from 1 to 30 percent of sales.
• There are different forms of Political risks such as
– Government Takeover of Corporate Assets,
– Embargoes (Official ban on export to or import from a particular countries, political punishment)
– Sanctions (type of trade penalty imposed on countries in the form of tariffs, quota, duties etc.)
– Boycotts against Firms or Nations, (voluntary refusal to use the product of particular company or
nation; example France boycotting McDonald, as an anti-globalization movement.)
– War, Insurrection, and Violence, Terrorism
• The overall attractiveness of a country as a potential market or investment site
for an international business depends on balancing the benefits, costs, and
risks associated with doing business in that country. Generally, the costs and
risks associated with doing business in a foreign country are typically LOWER
in economically advanced and politically stable democratic nations and
GREATER in less developed and politically unstable nations.

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What is Intellectual Property Rights?

• Intellectual property is the product of intellectual activity, such as
computer software, a screenplay, a music score, or the chemical formula
for a new drug.
• It refers to ideas or works created by individuals or firms and includes a
variety discoveries and inventions; artistic, musical, and literary works;
and words, phrases, symbols, and designs.

• Intellectual property rights refers to the legal claim through which the
proprietary assets of firms and individuals are protected from
unauthorized use by other parties.

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Examples of Intellectual Property

Rights
• Trademarks, copyrights, and patents are examples of intellectual
property rights.

• Trademarks are distinctive signs and indicators that firms use to

identify their products and services.

• Copyrights grant protections to the creators of art, music, books,

software, movies, and TV shows.

• Patents grant exclusive right to manufacture, use, and sell

products.

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Philosophy: Intellectual Property

Rights
• In 1995, the WTO’s agreement on Trade-Related Aspects of Intellectual Property Rights
(TRIPS) was approved by approximately 150 WTO member countries.
• The philosophy behind intellectual property laws is to reward the originator of a new
invention, book, musical record, clothes design, restaurant chain, and the like, for his
or her idea and effort.
• Such laws stimulate innovation and creative work.
• They provide an incentive for people to search for novel ways of doing things, and
they reward creativity. For example,
• In the pharmaceutical industry, a patent will grant the inventor of a new drug a 20-year
monopoly in production of that drug. This gives pharmaceutical firms an incentive to
undertake the expensive, difficult, and time-consuming basic research required to
generate new drugs (it can cost $800 million in R&D and take 12 years to get a new
drug on the market).
• Without the guarantees provided by patents, companies would be unlikely to commit
themselves to extensive basic research.
• Weak enforcement encourages the piracy (theft) of intellectual property.
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Intellectual Property Rights

• Intellectual property rights are not
guaranteed equally in all the countries.
• China and Thailand have been among
the worst offenders in Asia.
• Piracy in music recordings COSTS the
industry more than $4.5 billion annually.
• Piracy in personal computer software
cost the industry equal to $51.4 billion in
2009
• Regional piracy rates for software vary
from region to region.
• The worst region was Central and
Eastern Europe where the piracy rate
was 64 percent.
• International business firm should lobby
their respective governments to push
for international agreements to ensure
that intellectual property rights are
protected.

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E-commerce
• E-commerce drives the firm’s globalization efforts by helping it BEAT geography
and time zones, and do business around the world all day, every day.
• It LEVELS the playing field for all types of firms, large and small. E-commerce
greatly enhances competitive advantages in the global marketplace.
• E-business provides many benefits.
1. It increases productivity and reduces costs in worldwide value-chain activities through
online integration and coordination of production, distribution, and after-sale services.
2. It creates value for existing customers and uncovers new sales opportunity.
3. E-business facilitates and improves the flow of information and knowledge throughout
the firm’s worldwide operations.
4. Internet enhances the ability to interact with customers, suppliers, and partners
worldwide.
5. The firm can accommodate real-time changes in market conditions almost as quickly as
they occur. Managers can make instantaneous changes to strategies and tactics in value-
chain activities.

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E-commerce
• Most countries lack adequate legal protections for E-commerce.
• Individuals or firms that place information, photographs, or music online may be violating the
intellectual property laws
• Consumers who use the Internet to make purchases with credit cards may risk identity theft and
fraud.
• Taxation of international e-commerce is complex because of the difficulty of defining
merchandise sold online. (Are they selling product or service?)
• E-commerce can also circumvent tariffs and other trade barriers. Most e-commerce is free of
customs duties because it is too difficult to apply them. A related problem is identifying the
location of a sale. For example: A customer in Japan buys software from Microsoft’s Web site,
which is based in the United States, does the sale originate in Japan or the United States?
• Inadequate legal frameworks are hindering the growth of global ecommerce.
• E-commerce laws are evolving differently in different countries. The resulting inconsistency
creates conflicts between national jurisdictions. When creating e-commerce law, some
governments favor strong control and regulation. Others opt for a liberal. Those who favor a
more liberal approach argue the Internet has the potential to transform national economies and
ease global poverty.
• Governments must devise frameworks that ENSURE The SECURITY of electronic payment systems
and the privacy of online data.
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Government Interventions and

Investment Barriers
• Free trade refers to a situation
in which a government does
not attempt to restrict what
its citizens can buy from or sell
to another country.

• However, the political reality of

International trade is not free
trade oriented.

• Although many nations are

U.S. Tariffs on Tier Imports from China
nominally committed to free
trade, they tend to INTERVENE
in international trade to
protect the interests of
politically important groups or
promote the interests of key
domestic producers.

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Tariffs
Tariff is a tax commonly levied on imports. It is of two kinds. Government Intervention
Tariffs
Specific Tariffs is levied as fixed charge for each unit of a good
imported. Example: $3 per barrel of oil Subsidies
Import Quotas & VER

Ad valorem tariffs are levied as a percentage of the value of the Local Content Requirement
imported product. Administrative Policies
Antidumping Policies
In most cases, tariffs are placed on imports to protect domestic
producers from foreign competition by raising the price of
imported goods;

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Tariffs
Who suffers? Who Gains? Government Intervention
In 2002 the U.S. government placed an ad valorem tariff of 8 percent to 30
percent on imports of foreign steel. The idea was to protect domestic steel Tariffs
producers from cheap imports of foreign steel. The effect, however, was to raise Subsidies
the price of steel products in the United States between 30 and 50 percent. A
number of U.S. steel consumers, ranging from appliance makers to automobile Import Quotas & VER
companies, objected that the steel tariffs would raise their costs of production
and make it more difficult for them to compete in the global marketplace. Local Content Requirement
Administrative Policies
o Government ...... Why? (The tariff increases government
Antidumping Policies
revenues.).
o Domestic producers ........ Why? (Tariff affords them some
protection against foreign competitors by increasing the cost of
imported foreign goods)
o Consumer ............ Why? (Restriction of supply raises domestic
prices.)
Conclusion: Effect of Import tariffs.
1. Tariffs are generally pro-producer and anti-consumer.
2. Import tariffs reduce the overall efficiency of the world
economy because a protective tariff encourages domestic firms
to produce products at home that, in theory, could be produced
more efficiently abroad. Inefficient utilization of resource!! ©Suman Ghimire 20
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Subsidies
A subsidy is a government payment to a domestic producer. Government Intervention
Subsidies take many forms, such as cash grants, low-interest loans, tax
Tariffs
breaks, and government equity participation in domestic firms.
Subsidies
By lowering production costs, subsidies help domestic producers in two Import Quotas & VER
ways:
(1) competing against foreign imports and (2) gaining export markets. Local Content Requirement
Administrative Policies
• According to the World Trade Organization, in the mid-2000s countries
Antidumping Policies
spent some $300 billion on subsidies, $250 billion of which was spent
by 21 developed nations. During financial crisis, some developed
nations gave $45 billion in subsidies to their automobile makers.

• Agriculture tends to be one of the largest beneficiaries of subsidies in

most countries. Subsidies historically were given to Boeing (tax credit
on R&D) and Airbus (Government loan) as well to help them lower the
cost of developing new commercial jet aircraft.
• Many subsidies are not that successful at increasing the international
competitiveness of domestic producers. (Case: Japan Wheat ). Rather,
they tend to protect the inefficient!
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Import Quotas & VER

An import quota is a direct restriction on the
quantity of some good that may be imported
into a country. For example, the United States
has a quota on cheese imports.

The international agreement governing the

imposition of import quotas on textiles, the
Multi-Fiber Agreement, expired in December
2004.

A common hybrid of a quota and a tariff is

known as a tariff rate quota. Under tariff rate
quota, a lower tariff rate is applied to imports
within the quota than those over the quota.

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Import Quotas & VER

• A voluntary export restraint (VER) is a quota on trade imposed by Government Intervention
the exporting country, typically at the request of the importing
Tariffs
country's government.
Subsidies
• Example: limitation on auto exports to the United States Import Quotas & VER
enforced by Japanese automobile producers in 1981.
• A response to direct pressure from the U.S. government, this VER Local Content Requirement
limited Japanese imports to no more than 1.68 million vehicles Administrative Policies
per year. The agreement was revised in 1984 to allow 1.85 million
Antidumping Policies
Japanese vehicles per year. The agreement was allowed to lapse
in 1985.

• Foreign producers agree to VERs BECAUSE they fear more

damaging punitive tariffs or import quotas might follow if they
do not. Agreeing to a VER is seen as a way to make the best of a
bad situation.

• Both import quotas and VERs benefit domestic producers by

limiting import competition. As with all restrictions on trade,
quotas do not benefit consumers. An import quota or VER always
raises the domestic price of an imported good. ©Suman Ghimire 23
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Local Content Requirement

• It is a requirement which specifies that some specific fraction of a Government Intervention
good be produced domestically.
Tariffs
• The requirement can be expressed either in physical terms (e.g.,
75 percent of component parts for this product must be Subsidies
produced locally) or in value terms (e.g., 75 percent of the value Import Quotas & VER
of this product must be produced locally).
• Local content regulations have been widely used by developing Local Content Requirement
countries to promote domestic industry producing component Administrative Policies
parts.
Antidumping Policies
• They have also been used in developed countries to try to protect
local jobs and industry from foreign competition.
• Example: Buy America Act which specifies that government
agencies must give preference to American products when
putting contracts for equipment out to bid unless the foreign
products have a significant price advantage. The law specifies a
product as "American" if 51 percent of the materials by value are
produced domestically.

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Administrative Policies
• It is an informal instrument of government intervention to restrict Government Intervention
imports and boost exports.
Tariffs
• Administrative trade policies are bureaucratic rules designed to
make it difficult for imports to enter a country. Subsidies
Import Quotas & VER
• Japanese are the masters of this trade barrier.
• In recent decades Japan's formal tariff and nontariff barriers have Local Content Requirement
been among the lowest in the world. However, informal barriers Administrative Policies
restricts import.
Antidumping Policies
• For example, at one point the Netherlands exported tulip bulbs to
almost every country in the world except Japan. In Japan, customs
inspectors insisted on checking every tulip bulb by cutting it
vertically down the middle, and even Japanese ingenuity could not
put them back together.
• For example, France once required that all imported videotape
recorders arrive through a small customs entry point that was both
remote and poorly staffed. The resulting delays kept Japanese VCRs
out of the French market until a VER agreement was negotiated.
• Administrative instruments benefit producers and hurt consumers,
who are denied access to possibly superior foreign products.
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