Slide 4.

Chapter 4

International politics

Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 4.2

International politics
• Objectives
• Introduction
• Economic integration
• The European Union (EU)
• Other examples of economic integration
• Economic integration and strategic management.

Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 4.3

Objectives
• Compare and contrast major political and
economic systems and note the linkage among
them.
• Examine the primary reasons for the current
privatization movement and the economic impact
that this movement is having on selected
countries.
• Describe the five major levels of economic
integration and how each works.
• Discuss how MNEs are using strategic planning
to benefit from current worldwide economic
integration efforts.
• Discuss the impact of NGOs on international
business.
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 4.4

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

Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 4.5

Political ideologies and economics

• Political systems
– 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.

Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 4.6

Political ideologies and

economics (Continued)
• Economic systems
– 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.
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 4.7

Government control of assets

• Privatization: The process of selling government
assets to private buyers.
– Divestiture: A process by which a government or
business sells assets.
– Contract Management: A process by which an
organization (such as the government) transfers
operating responsibility of an industry without
transferring the legal title and ownership.
• Nationalization: A process by which the
government takes control of business assets,
with or without remuneration of the owner.
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 4.8

Government – business cooperation

• 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.

Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 4.9

Economic integration
• The establishment of transnational rules and
regulations that enhance economic trade and
cooperation among countries.

Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 4.10

Trade creation and diversion

• Trade creation: A process in which members of
an economic integration group begin to focus
their efforts on those goods and services for
which they have a comparative advantage and
start trading more extensively with each other.
• Trade diversion: A process in which members
of an economic integration group decreases
trade with non-member countries in favor of trade
with each other.

Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 4.11

Levels of economic integration

• Free Trade Area: barriers to trade (such as
tariffs) among member countries are removed
(e.g. NAFTA).
• Customs Union: tariff between member
countries are eliminated and a common trade
policy toward nonmember countries is
established.
• Common Market: elimination of trade barriers
among member countries, a common external
trade policy and mobility of factors of production
among member countries.
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 4.12

Levels of economic
integration (Continued)
• Economic union: A deep form of integration
characterized by free movement of goods
services, and factors of production among
member countries and full integration of economic
policies.
• Political union: An economic union in which
there is full economic integration, unification of
economic policies and a single government.

Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 4.13

Ethics, environment,
MNEs and the civil society
• The civil society is a group of individuals,
organizations and institutions that act outside the
government and the market to advance a diverse
set of interests, including opposition to global
business.
• Non-governmental organizations (NGOs) are
private-sector groups that act to advance diverse
social interests.

Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 4.14

The European Union: formation

• European Coal and Steel Community (ECSC):
A community formed in 1952 by Belgium, France,
Italy, Luxembourg, the Netherlands and West
Germany.
• European Union (EU): A treaty-based
institutional framework that manages economic
and political cooperation among its 27 member
countries.
• European Free Trade Association (EFTA): A
free trade area currently consisting of Iceland,
Liechtenstein, Norway and Switzerland.
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 4.15

The European Union: organization

• European Council
• Council of the European Union
• European Commission
• European Parliament
• Court of Justice
• Court of Auditors.

Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 4.16

Figure 4.1 The European Union’s institutions

Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 4.17

Other examples of economic

integration
• Andean Community: An economic union that
consists of Bolivia, Colombia, Ecuador, Peru and
Venezuela.
• Mercosur: A free trade group that consists of
Argentina, Brazil, Paraguay and Uruguay.
• ASEAN: Founded by Indonesia, Malaysia, the
Philippines, Singapore and Thailand.
• FTAA: A free trade agreement of the Americas
that has not yet been implemented.

Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 4.18

Economic integration
and strategic management
• A strategic alliance is a business relationship in
which two or more companies work together to
achieve a collective advantage.
• These alliances can take a number of forms:
– research cooperation;
– marketing cooperation;
– licensing of a product or technology for a specific
market region.

Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 4.19

Localization of business operations

• MNEs must adapt their offering, their
expectations and the way in which they do
business to each market in which they operate.
• These efforts result in the localization of business
operations and typically focus on four areas:
– Products
– Profits
– Production
– Management.

Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009