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PESTLE Analysis

International Business, Week 4

Dr Craig Duckworth,
Ukraine, ISIS
Political, Economic, Legal or Social
What do you think?

(from 1 minute)
An Environmental or an Economic issue?..

It has been claimed..that trade between two countries with

different levels of environmental regulations will lead to the low
regulation country specialising in pollution intensive production
(Baumol and Oates 1988).
In the developed world the cost of complying with environmental
regulations appears to be steadily increasing over time and, for the
USA alone, was estimated to be $184 billion in 2000, equivalent to
2.6% of US GNP.
Since the stringency of environmental regulations increases with
income (Dasgupta et al. 1995), this line of reasoning suggests that
developing countries possess a comparative advantage in
pollution intensive production.
If so, then we may see dirty industries relocating from the North to
the South (foreign direct investment)..
Todays China is the leading bearer of the mercantilist torch,
though Chinese leaders would never admit itMuch of Chinas
economic miracle is the product of an activist government that
has supported, stimulated, and openly subsidized industrial
producers both domestic and foreign.
..the government has managed the exchange rate to maintain
manufacturers profitability, resulting in a sizable trade surplus
(which has come down recently, but largely as a result of an
economic slowdown). Moreover, export-oriented firms continue to
benefit from a range of tax incentives.
Dani Rodrik

Dorothy Hawkins June 2014

The Political, Economic, Social,
Technological, and Legal aspects of..


An example of creative destruction?

Apple versus Microsoft:

First published 1942

Starbucks in China

In the video, the chief executive officer (CEO) of Starbucks says that,
when he in a Starbucks in China, it is easy to imagine he is in Seattle.
Why is this the case?

(Related and of interest: )

Political Risk

Uncertainty that stems, in whole or in

part, from the exercise of power by
governmental and non-governmental
actors (eg. terrorists,..)
Political risk in China 4 min:
Russia: https://
Types of Political
Macropolitical risks: affect all
firms in the country, e.g. war,
Micropolitical risks: affect only
certain firms in the country, e.g.
legislation preventing smoking in
public places.
Dorothy Hawkins June 2014
Analysing Political
Type Impact on firms

Inflation Higher operating costs

Currency devaluations/depreciation Reduced value of repatriated


Currency revaluations/appreciation Less competitive in overseas

markets and in competing against
imports in home market

Increased taxation Lower after-tax profits

Dorothy Hawkins June 2014

Prioritising Political Risk

Dorothy Hawkins June 2014

Responses to Political
1. Improve relative bargaining power
2. Adopt integrative techniques
3. Adopt protective and defensive

Dorothy Hawkins June 2014

Improve Relative
Bargaining Power
MNEs may seek to develop a stronger bargaining
position than that of the host country itself ie MNE
creates a situation in which the host country loses more
than it gains by taking action against the company.

For example, MNE may threaten to leave the host

country if the company is forced to meet certain
governmental regulations (with significant job losses) to
avoid such regulations.

Dorothy Hawkins June 2014

Adopt Integrative
Integrative techniques ensure that the
subsidiary is as fully integrated as possible
with the local economy, so that it becomes part
of the host countrys infrastructure eg uses
local suppliers.

This helps generate host country commitment

to the success of the MNE.

Dorothy Hawkins June 2014

Adopt preventative/defensive
MNE seeks to limit, in advance, the costs to the
MNE should the host government interfere in its
activities by :
little local manufacturing
locating R & D outside the host country
hiring only essential local personnel
manufacturing the same product in many other

Dorothy Hawkins June 2014

The Rule of Law
The rule of law is defined by the World Justice Project as a system in which
the following four universal principles are upheld:
The government and its officials and agents as well as individuals and
private entities are accountable under the law.
The laws are clear, publicized, stable, and just; are applied evenly; and
protect fundamental rights, including the security of persons and property.
The process by which the laws are enacted, administered, and enforced
is accessible, fair, and efficient.
Justice is delivered timely by competent, ethical, and independent
representatives and neutrals who are of sufficient number, have adequate
resources, and reflect the makeup of the communities they serve.
The Rule of Law continued..
Economists became fascinated by the rule of law after the
crumbling of the Washington consensus. This consensus, which
was economic orthodoxy in the 1980s, held that the best way for
countries to grow was to get the policies righton, for example,
budgets and exchange rates.
But the Asian crisis of 1997-98 shook economists' confidence that
they knew which policies were, in fact, right. This drove them to
re-examine what had gone wrong. The answer, they concluded,
was the institutional setting of policymaking, especially the rule of
If the rules of the game were a mess, they reasoned, no amount
of tinkering with macroeconomic policy would produce the
desired results.
World Governance Indicators


Here we can compare the rule

of law in high income and low
income countries:
Technological Environment
Product innovation: new products (goods or services) which were not
previously available

Process innovation: new processes of production, i.e. new ways of

doing things which raise the productivity of factor inputs

Around 80% of technological change is PROCESS innovation.

Dorothy Hawkins June 2014

Technology, Infrastructure and
Science and technology infrastructure
Level of patent protection
Telephony/Internet capacity
Air, water & surface transport links
Power supply and reliability
Distribution & Logistics network

Abu Dhabi

Dorothy Hawkins June 2014

The Impact of Technology

Some Useful Links

The Social Media Revolution 2012 4 min
Mercedes Benz 15 min
Samsungs innovation process 11 min

Online v traditional marketing

Dorothy Hawkins June 2014

Intellectual Property Rights
TRIPS (Trade Related Intellectual Property
Developed countries (since 1 Jan 1996)
Developing/Transitional countries (since 1
Jan 2000)
Least developed countries (from Jan 2006)
Dorothy Hawkins June 2014
The WTO Agreement on Trade-Related
Aspects of Intellectual Property Rights, is
based on a recognition that increasingly the
value of goods and services entering into
international trade resides in the know-how
and creativity incorporated into them.

Dorothy Hawkins June 2014

TRIPS provides for minimum international
standards of protection and enforcement of
IPR - copyright and related rights, trademarks,
geographical indications, industrial designs,
patents, layout-designs of integrated circuits
and undisclosed information.

Dorothy Hawkins June 2014

Patent law confers ownership rights on the
To qualify as the subject matter of a patent the
invention must be novel, involve an
inventive step and be capable of industrial
Inventive seeks to establish that a step has
been taken which would not be obvious to
experts in the field.
Patents depend upon registration for their
Dorothy Hawkins June 2014

Trademarks are :
any sign capable of being represented
graphically which is capable of distinguishing
goods or services of one undertaking from
those of other undertakings (UK, Trade
Marks Act 1994)
This is sometimes referred to as the product
differentiation function.
Infringement occurs where others use the
trademark without permission.
Dorothy Hawkins June 2014
The focus for registering trademarks is
on the commercial activity associated
with them, rather than on innovation.
As with patents, trademarks depend on
registration for their validity.

Registration of a trademark gives the

holder the exclusive right to use the
mark in the UK for ten years, subject to
further renewals in periods of ten years.
Dorothy Hawkins June 2014
Copyright law prevents the copying of forms of
work (e.g. an article, book, play, poem, music
score, etc.) rather than the ideas contained
within these forms.
However, sometimes the copyright can be
extended to the structure underpinning the
form actually used (e.g. the plot of a book as
well as the book itself).
Copyright applies automatically and does
not require registration.
Dorothy Hawkins June 2014
Extra slides:
Political Ideologies and
Democracy: A system of government in
which the people directly or through their
elected officials, decide what is to be done.
Totalitarianism: A system of government in
which one individual or party maintains
complete control and either refuses to
recognize other parties or suppresses them.
Dorothy Hawkins June 2014
Government Control of
Privatization: The process of selling government
assets to private buyers.
Divestiture: A government (or business) sells assets.
Contract Management: An organization (such as the
government) transfers operating responsibility of an
industry without transferring the legal title and
Nationalization: A process by which the government
takes control of business assets, with or without
remuneration of the owner.
Dorothy Hawkins June 2014
Government Business Co-
Although governments are privatizing assets, this does not mean that
they are not involved in business.

Business-government cooperation continues to be beneficial,

particularly in the EU and Japan.

Dorothy Hawkins June 2014

International Legal
Types of legal system
Common law
Statutory law
Code law
Religious law
Bureaucratic law

Dorothy Hawkins June 2014

Common Law
The legal system in the UK and its former colonies,
including the USA, Canada, Australia, India, New
Zealand, and much of the Caribbean.
Based on a legal precedent.
There is some legal variation between countries.
For example, manufacturers of defective goods are
more liable to litigation in the USA than they are in
the UK.
Dorothy Hawkins June 2014
Statute Law

Law passed by governments.

There is much legal variation between

countries. Depends on strength and stability of

Dorothy Hawkins June 2014

Code Law
The worlds most common system. Most
continental European countries, together
with their former colonies, follow this
type of legal system.
It is an explicit codification in written terms of
what is and what is not permissible.
Such laws can be written down in criminal, civil
and/or commercial codes.
Dorothy Hawkins June 2014
Religious Law
Based on rules related to the faith and practice
of a particular religion - a theocracy. In many
Islamic states mullahs (holy men) determine
what is legal or illegal depending on their
interpretation of the Koran, the holy book of

In countries relying on religious laws there is

often an absence of a due process and
appeals procedure.
Dorothy Hawkins June 2014
Religious Law
May need a change in practice for firms
operating in these countries.

For example, the Koran says that people

should not charge others interest as this
is an unfair exploitation of the poor. Thus
banks charge up-front fees, and owners
of bank deposits are given shares of the
banks profits rather than interest.
Dorothy Hawkins June 2014
Bureaucratic Law
Occurs in dictatorships and communist
countries when bureaucrats largely determine
what the laws are, even if these are contrary to
the historical laws of the land.

MNEs find it difficult to manage their affairs

under this system as there tends to be a lack
of consistency, predictability and appeals
Dorothy Hawkins June 2014
National Laws
International Business
National laws may impact international
business via, for example:

Trade restrictions
Foreign ownership restrictions
Environmental restrictions
Entry/Exit restrictions

Dorothy Hawkins June 2014

Settling International Legal
Which countrys laws apply? In which
country should the issue be resolved?
What techniques to use?
Arbitration or mediation
Japan v China 2 min

Dorothy Hawkins June 2014

Settling International Legal
Court cases can be costly and time-
consuming, so many companies may prefer
the process of arbitration or mediation.
Arbitration: the two conflicting parties agree to
abide by the decisions of a third party.
Mediation: a third party attempts to bring the
positions of the conflicting parties closer
Dorothy Hawkins June 2014
Sometimes a company may be in dispute
with a national government - legal options
Glaxo v USA

Dorothy Hawkins June 2014

International Negotiations
All negotiations depend on the bargaining
power of the relevant parties.

International negotiations are obviously more

complex than negotiating domestically.

The bargaining power of the MNE must be

balanced against the bargaining power of the
host country.
Dorothy Hawkins June 2014
Bargaining Power of the
Some issues affecting the bargaining
power of the MNE are :
The level of technology
Nature of the goods or services
Importance of its managerial
Value of its capital input
Dorothy Hawkins June 2014
Economic Ideologies
Market-driven economy: An economy in which
goods and services are allocated on the basis of
consumer demand.
Centrally determined economy: An economy in
which goods and services are allocated based on a
plan formulated by a committee that decided what is
to be offered.
Mixed economies: Economic systems
characterized by a combination of market-and
centrally-driven planning.
Dorothy Hawkins June 2014
Market Economy -
Resources allocated automatically via
money votes.
Consumers are therefore sovereign in
deciding what is to be produced.
Producers, motivated by profit, will have
incentives to respond to changes in the
preference of consumers.
Dorothy Hawkins June 2014
Market Economy -
Those with the highest incomes have most money votes.

Competition may be imperfect, so firms may gain market power (e.g.

monopoly) and so limit consumer choice.

Externalities: some costs or benefits to society may not be reflected in

the market system as costs or benefits to private firms or individuals.

Dorothy Hawkins June 2014

Global move
towards market-
driven economies
Over the last two decades there has been a
dramatic change in the political systems of many
In particular, there has been a move towards
market-driven economies in Eastern Europe and

Ian Bremmer, inventor of Global Political Risk Index start at min 7

Dorothy Hawkins June 2014

Command Economy
Prices play little or no role in resource allocation.

National plan gives road map with output targets for industries and

Inputoutput analysis is often used in devising the national plan.

Inconsistencies in plans and failure to anticipate real consumer wants

often lead to unwanted production.

Dorothy Hawkins June 2014

Mixed Economy
Uses both markets and government intervention to allocate resources

Some government intervention, both direct (public sector) and indirect

(e.g. tax, regulations)

Government intervention aims to help correct market failures

40% of UK expenditure/output involves government.

Dorothy Hawkins June 2014

The Market
The market for a product is not a particular place
but rather any situation in which the buyer and
seller communicate with each other for the purpose
of exchange.
May be local, regional, national or international.

May have no exact location, as with exchange via

the internet.
Can take a number of different forms:
A product market, e.g. chocolate bars
A labour market where individuals with particular skills supply their services to
firms who demand those skills.
Dorothy Hawkins June 2014
Market Demand
Market demand is the total amount of the product
that consumers are willing and able to purchase at
a particular price over a given period of time.

Factors influencing demand include:

Price of the product
Price of other products
Household income
Promotion, including brand.

Dorothy Hawkins June 2014

Market Equilibrium
Equilibrium price relates to the price at which the quantity demanded
equals the quantity supplied.

Disequilibrium refers to a situation in which demand does not equal


This can lead to a situation of either excess demand or excess supply,

which affects prices in the market.

Dorothy Hawkins June 2014

In Free Market and Mixed
Prices act as signals to both consumers and producers.

Profits aid resource allocation

Direct resources to the most profitable
Reward risk taking
Encourage productive efficiency (minimum
Provide resources (e.g. ploughed-back

Dorothy Hawkins June 2014