Download 9.3 Economic Factors Related to International Business

Chapter 9
Political
and
Economic
Factors
Affecting
Internation
al Business
Prior Knowledge
 How does a country’s political system affect
the country’s participation in international
business?
 What are some political and financial risks
faced by Canadian companies in the
international business world?
 How are economic systems throughout the
world becoming more interdependent and
more global?
9.1 The Political Process: Government’s
Role in International Trade
 Types of Political Systems
1. Democracy - government for and by the people
2. Totalitarian Systems - centralize power and often
use the military to control the state
3. Mixed Economy - purely democratic or totalitarian
political system is theoretical; most countries show
characteristics of both
9.1 The Political Process: Government’s
Role in International Trade
 Political Interdependence countries start
to feel pressure to change their political,
economic, and cultural practices
9.1 The Political Process: Government’s
Role in International Trade
 Trade War - governments act aggressively
in international markets and other forums to
promote their own countries’ trading
interests
 Economic Imperialism exploitation of
developing countries by more developed
countries
9.2 Assessing Global Political Risks
 POLITICAL RISK
 Refers to political decisions, conditions,
events or activities in a country that affect
the business climate
 Types of political risk
1.Ownership Risk
2.Operations Risk
3.Transfer Risk
9.2 Assessing Global Political Risks
 TYPES OF POLITICAL RISK
1. Ownership Risk
 Threatened by government takeover
 Done by government taking back property
9.2 Assessing Global Political Risks
 TYPES OF POLITICAL RISK
2. Operations Risk
 Government policies create delays
 i.e. new taxes, import restrictions,
government regulations
9.2 Assessing Global Political Risks
 TYPES OF POLITICAL RISK
3. Transfer Risk
 Government policy affects currency
exchange rates
 Policies cause currency devaluation or
economic downturn
Brainstorming Activity
 In groups of three select a global event/issue
and identify an industry that would be
affected.
- Be sure to explain the reason as to why this industry
would be affect.
Identifying the Risks of International Trade
 Political – War, embargo
 Examples: 2006 Mexican Drug War, 2003 Iraq
War, Gaza War, Military controls government,
high corruption index
 Economic/Financial – Non-payment, exchange
rate fluctuations
 Examples: Great depression, current recession,
2007 Canadian dollar at par with US dollar
Identifying the Risks of International Trade
 Social – Kidnapping, terrorism, labour strike,
religious
 Examples: New York 9/11, July 2005 London
bombings (also called the 7/7 bombings),
Madrid – Spain, March 11 2004 Train bombing
 Natural – Typhoons, earthquakes
 Examples: April 6, 2009 – Abruzzo region - Italy,
May 2, 2008 Cyclone Nargis tore across the
Irrawaddy Delta in southern Burma, 2004 Indian
Ocean tsunami
9.3 Economic Factors Related to
International Business
 Economic Systems – include all the factors
and the rules and regulations involving
production and consumption of
goods/services
Three most common economic systems:
1.Market Economy
2.Centrally Planned (command) Economy
3.Mixed Economy
9.3 Economic Factors Related to
International Business
Market Economy
 individual companies and consumers make the
decisions about what, how, and whom goods
and services are produced
 Forces of supply and demand control market
economies
9.3 Economic Factors Related to
International Business
Market Economy
 Law of Supply states as price of a product
increases, producers will be willing to produce
more of that product
 Law of Demand states that as the price of a
product increases, consumers will demand less
of that product
9.3 Economic Factors Related to
International Business
Centrally Planned (command) Economies
 government regulates the amount,
distribution, and price of goods and services
 Society is considered before individual needs
 State controls prices, wages, production
quotas, and distribution of raw material
 Guaranteed basic standard of living, health
benefits, and education
 Examples: North Korea and Cuba
9.3 Economic Factors Related to
International Business
Mixed Economy
 combines government involvement and
private ownership of businesses
 Canada is considered a mixed economy for
the following reasons:
 plays a major role in important industries
(transportation, health care, and
communications)
 PRIVATIZATION
 sell state-owned enterprises into private
ownership
 It can occur in all types of economies
 Ex. 407 ETR
Business Cycle
Business Cycles
 DEPRESSION
 Economy slows and consumers buy less
 Factories shut down and high unemployment
 RECOVERY
 Economy starts to improve
 Business begin to resume production
 Consumers start to spend money
Business Cycles
 PROSPERITY
 Economy at its best
 Investment is strong
 Job opportunities increase
 RECESSION
 Economy starts to slow
 Consumers buy less
 Occurs when total economic output shrinks for
at least six months
World Markets
 Stock exchanges discussing ability to create
24 hour stock trading around the world, this is
known as GLOBAL EQUITY MARKET