Download The political, legal, economic and technological environment

Slide 4.1
Chapter 4
The political, legal, economic and
technological environment
Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010
Slide 4.2
Political risk
• ‘Uncertainty that stems, in whole or in part, from
the exercise of power by governmental and nongovernmental actors’
(Zonis, M. 2000).
Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010
Slide 4.3
Types of political risk
• Macropolitical risks: affect all firms in the country,
e.g. war, inflation
• Micropolitical risks: affect only certain firms in the
country, e.g. legislation preventing smoking in
public places.
Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010
Slide 4.4
Analysing political risks
Type
Impact on firms
Inflation
Higher operating costs
Currency
Reduced value of repatriated
devaluations/depreciation
earnings
Currency
Less competitive in overseas
revaluations/appreciation
markets and in competing against
imports in home market
Increased taxation
Lower after-tax profits
Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010
Slide 4.5
Quantifying political risk (1)
• Can give a ‘score’ to a particular political risk,
high score meaning greater political risk
• E.g. ‘legal requirements regarding
environmental pollution’ might be given a range
of scores from 4 to 8
• Some legislation is inevitable (4 minimum
score), ‘worst case’ is still more legislation (8
maximum score).
Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010
Slide 4.6
Quantifying political risk (2)
• Can use expected value (EV)
n
EV =  pi xi
i 1
• where pi = probability of outcome i (as a
decimal)
• xi = value of outcome i
• n = number of possible outcomes.
Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010
Slide 4.7
Quantifying political risk (3)
• Firm estimated a 60% probability of a ‘strike’
occurring so that profits are £10 million and a
40% probability of a ‘work to rule’ occurring so
that profits are £20 million.
• The expected value (EV) of a labour dispute :
EV (£m) = (0.60  10) + (0.40  20) = £14 m.
• A change in the firm’s assessment of the
probabilities of these events occurring or the
value of their impact would change the expected
value calculation.
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Slide 4.8
Prioritising political risk (1)
Figure 4.1
Prioritising (political) risk
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Slide 4.9
Prioritising political risk (2)
• Responses to political risks
– Improve relative bargaining power
– Adopt integrative techniques
– Adopt protective and defensive techniques
• Drivers of political risk
– External
– Interaction
– Internal.
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Slide 4.10
Improve relative bargaining power
• MNEs may seek to develop a stronger bargaining
position than that of the host country itself.
• E.g. MNE creates a situation in which the host
country loses more than it gains by taking action
against the company.
• 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.
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Slide 4.11
Adopt integrative techniques
• Integrative techniques ensure that the subsidiary
is as fully integrated as possible with the local
economy, so that it becomes part of the host
country’s infrastructure.
• Helps generate host country commitment to the
‘success’ of the MNE.
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Slide 4.12
Adopt protective and defensive
techniques
• MNE seeks to limit, in advance, the ‘costs’ to the
MNE should the host government interfere in its
activities.
–
–
–
–
Little local manufacturing
Locates R & D outside the host country
Hires only essential local personnel
Manufactures the same product in many other
countries
– Etc.
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Slide 4.13
International legal environment
• Types of legal system
–
–
–
–
–
Common law
Statutory law
Code law
Religious law
Bureaucratic law.
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Slide 4.14
Common law
• Legal system in the UK and its former colonies, including
the USA, Canada, Australia, India, New Zealand, and
much of the Caribbean
• Essentially unwritten, developed over long periods of time
and is founded on the decisions reached by judges over
the years on different cases
• When a judge makes a decision, a legal precedent is then
established
• Such case law has evolved over the centuries, which
means that there will obviously be legal variations
between countries
• E.g. manufacturers of defective goods are more liable to
litigation in the USA than they are in the UK.
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Slide 4.15
Statutory law
• Involves legislation, i.e. the laws passed by
government.
• This can also be a source of legal variation
between countries.
• E.g. the US Freedom of Information Act is more
far reaching than similar UK legislation, so that
transactions between the government and
companies have to be more transparent in the
USA than in the UK.
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Slide 4.16
Code law
• This is the world’s most common 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.
• When a legal issue is in dispute, it can then be
resolved by reference to the relevant code.
• Most continental European countries, together
with their former colonies, follow this type of legal
system.
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Slide 4.17
Religious law
• Based on rules related to the faith and practice of a particular
religion.
• A country that works in this way is called a theocracy.
• E.g. Iran where mullahs (holy men) determine what is legal
or illegal depending on their interpretation of the Koran, the
holy book of Islam.
• May pose problems for firms operating in these countries,
e.g. 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 bank’s profits rather than interest.
• In countries relying on religious laws there is often an
absence of a due process and appeals procedure.
Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010
Slide 4.18
Bureaucratic law
• This 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 operating in such countries have often
found it difficult to manage their affairs as there
tends to be a lack of consistency, predictability
and appeals procedures.
Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010
Slide 4.19
National laws and international
business
• National laws may impact international business
via:
–
–
–
–
–
Trade restrictions
Foreign ownership restrictions
Environmental restrictions
Exit restrictions
Etc.
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Slide 4.20
Law making in the EU (1)
An outline of the consultation procedure for law making in the EU
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Slide 4.21
Law making in the EU (2)
• EU law takes four main forms:
– Regulations: apply directly, no national measures
needed to implement them.
– Directives: EU objectives must be met, but the
means to achieve them is left to individual nations.
– Decisions: binding on all members of the EU.
– Recommendations: optional.
Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010
Slide 4.22
EU competition policy
• Articles 81, 82, 87 and 88 of the Treaty of Rome
1958 give the European Commission powers to
control the behaviour of monopolies and
dominant firms where these are found to restrict
competition.
• European Commission can also intervene to
prevent member governments using tariffs,
subsidies or state aid to distort competition within
the EU.
Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010
Slide 4.23
EU competition policy and economic
efficiency
• No presumption in EU that mergers are against
public interest.
• Each case can be investigated by the European
Commission on its own merits.
• ‘European efficiency’ can be broken down into two
elements:
– Productive efficiency: larger size may reduce average
costs
– Allocative efficiency: larger size may give ‘market
power’ to raise prices above marginal costs.
• Key issue is the net outcome of any proposed
merger.
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Slide 4.24
Settling international disputes
• Which country’s laws apply?
• In which country should the issue be resolved?
• What techniques to use:
– Litigation
– Arbitration or mediation
– Negotiation?
Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010
Slide 4.25
Litigation
• The principle of comity provides for a country to
honour and enforce within its own territory the
decisions of foreign courts.
• ‘Comity’ requires three conditions to be met:
– Reciprocity between the countries
– Proper notice given to the defendant
– The foreign court’s judgment does not violate
domestic statutes or treaty obligations.
Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010
Slide 4.26
Arbitration or mediation
• Court cases can be costly and time consuming,
so many companies may prefer the process of
arbitration.
• 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 together.
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Slide 4.27
Government disputes
• Sometimes a company may be in dispute with a
national government, so few legal options
• E.g. the Foreign Sovereign Immunities Act of
1976 in the USA provides that the actions of
foreign governments against US firms are beyond
the jurisdiction of the US courts.
• If Germany, say, chose to nationalise IBM’s
German operation or impose taxes on IBM, there
would be no redress for the company.
Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010
Slide 4.28
Negotiations
• International negotiations bring with them a whole new set
of problems over and above those faced when negotiating
domestically.
• Bargaining power of the MNE with host governments or
businesses will depend on:
–
–
–
–
The level of technology
Nature of the goods or services
Importance of its managerial expertise
Value of its capital input, etc.
• The bargaining power of the host country depends on:
– The size of the consumer market
– The degree of economic and political stability, etc.
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Slide 4.29
Intellectual Property Rights
•
•
•
•
Patents
Trademarks
Copyrights
TRIPS (Trade Related Intellectual Property
Rights)
– Developed countries (since 1 Jan 1996)
– Developing/Transitional countries (since 1 Jan
2000)
– Least developed countries (from Jan 2006).
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Slide 4.30
Patents
• Patent law confers ownership rights on the inventor.
• To qualify as the subject matter of a patent the
invention must be novel, involve an inventive step
and be capable of industrial application.
• ‘Novel’ seeks to exclude granting monopoly
ownership rights to something which already exists.
• ‘Inventive’ seeks to establish that a step has been
taken which would not be obvious to experts in the
field.
• ‘Industrial application’ limits such protection to specific
applications of these ideas.
• Patents depend upon registration for their validity.
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Slide 4.31
Trademarks
•
•
•
•
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.
Trademarks require less intellectual activity than patents or
copyright to be deemed protectable, with the focus instead
being on the commercial activity associated with such
trademarks.
As with patents, trademarks depend on registration for their
validity, which 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.
Infringement occurs where others use the trademark without
permission.
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Slide 4.32
Copyrights (1)
• 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).
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Slide 4.33
Copyrights (2)
• Copyright (unlike patents and trademarks) applies
automatically and does not require registration.
• Three key conditions:
– Work which is ‘original’, in the sense that the work is different
from that of its contemporaries
– Of an appropriate description, i.e. literacy, dramatic, music,
artistic, sound recordings, films and broadcasts all qualify.
Even business letters can receive protection as ‘literacy
works’
– Being sufficiently connected to the country in question, since
copyright is essentially national in character. So in the case
of the UK, the author (or work) must be connected to the UK
by nationality, domicile, source of publication, etc.
• UK copyright extends to the life of the author +50 years.
Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010
Slide 4.34
TRIPS
• 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.
• TRIPS provides for minimum international standards of
protection for such know-how and creativity in the areas of
copyright and related rights, trademarks, geographical
indications, industrial designs, patents, layout-designs of
integrated circuits and undisclosed information.
• It also provides for the effective enforcement of such
intellectual property rights, and provides for multilateral
dispute settlement.
Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010
Slide 4.35
Economic systems
• Market economy: resources allocated through the
price mechanism, with market prices being
determined by the forces of demand and supply.
• Planned or command economy: the government
makes the decisions about what is produced, how
resources are allocated and how the finished
products are distributed.
• Mixed economy: contains features of both the market
and planned economic systems, with the government
intervening in various ways to influence market prices
and resource allocation.
Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010
Slide 4.36
Market economy: advantages
• 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.
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Slide 4.37
Market economy: disadvantages
• 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.
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Slide 4.38
Command economies
• Prices play little or no role in resource allocation.
• National plan gives ‘road map’ with output targets
for industries and firms.
• Input–output analysis is often used in devising the
national plan.
• Inconsistencies in plans and failure to anticipate
real consumer wants often lead to unwanted
production.
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Slide 4.39
Mixed economies
• Use both markets and government intervention
to allocate resources
• Government intervention both direct (public
sector) and indirect (e.g. tax, regulations)
• Government intervention helps correct ‘market
failures’
• 40% of UK expenditure/output involves
government.
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Slide 4.40
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, and so on.
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Slide 4.41
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
Tastes
Advertising.
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Slide 4.42
Movement along the demand curve
• Movement along the demand curve is the result
of a rise or fall in the price of the product itself.
• The terminology we use to describe this
movement along the demand curve is to say that
there has been either an expansion or
contraction in demand for the product.
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Slide 4.43
Expansion/contraction in demand
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Slide 4.44
Shift in demand
• The demand curve will shift to the right (increase)
or left (decrease) if there is a change in the
‘conditions of demand’.
• These ‘conditions of demand’ include:
–
–
–
–
Price of other products
Household/national income
Tastes of consumers
Etc.
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Slide 4.45
Increase/decrease in demand
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Slide 4.46
Increase in demand
• Shift upwards and to the right.
• Change in conditions of demand
–
–
–
–
–
–
Rise in price of substitute
Fall in price of complement
Rise in real income (normal product)
Fall in real income (inferior product)
Change of tastes in favour of product
Rise in advertising expenditure.
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Slide 4.47
Decrease in demand
• Shift downwards and to left.
• Change in conditions of the demand
–
–
–
–
–
–
Fall in price of substitute
Rise in price of complement
Fall in real income (normal product)
Rise in real income (inferior product)
Change of tastes against product
Fall in advertising expenditure.
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Slide 4.48
Demand function
•
•
•
•
•
•
•
•
QX = F (PX , PO, Y , T , AX . . .)
Quantity demanded of product X
Depends upon ( = F)
PX = own price of X
PO = price of other products
Y = real household income
T = tastes of consumers
AX = advertising expenditure on X.
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Slide 4.49
Derivation of market demand
• Market demand curve is the total amount that
consumers demand at a particular price over a
given period of time.
• The market demand curve is derived from
summing the individual demand curves
horizontally.
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Slide 4.50
Supply
• Market supply is the total amount of the product
that producers are willing and able to provide at a
particular price over a given period of time.
• Factors influencing supply include:
–
–
–
–
–
–
Price of the product
Price of other products
Costs of production
Tastes of producers
Tax on product
Subsidy on product.
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Slide 4.51
Supply curve
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Slide 4.52
Movement along and a shift in the
supply curve
• Movement along the supply curve is result of a
rise or fall in the price of the product.
• Shift in supply is the result of:
– A rise/fall in the price of a substitute in production
– A rise/fall in the price of a complement in
production
– A rise/fall in the price of a factor of production
– Change in technology
– Introduction of a tax or subsidy on the product.
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Slide 4.53
Increase in supply
• Shift downwards and to the right.
• Change in conditions of supply
–
–
–
–
–
–
Fall in price of substitute in production
Rise in price of complement in production
Fall in costs of production
Change of tastes of producers in favour
Tax reduction
Subsidy increase, etc.
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Slide 4.54
Decrease in supply
• Shift upwards and to the left.
• Change in conditions of supply
–
–
–
–
–
–
Rise in price of substitute in production
Fall in price of complement in production
Rise in costs of production
Change of tastes of producers against
Tax increase
Subsidy decrease, etc.
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Slide 4.55
Supply function
•
•
•
•
•
•
•
•
•
QX = F (PX , PO, C , Tn , TX ,TP . . .)
QX = Quantity supplied of product X
Depends upon ( = F)
PX = price of product X
PO= price of other products
C = costs of production
Tn = technology
TX = tax rates (subsidy is negative tax)
TP = Tastes of producers.
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Slide 4.56
Derivation of the supply curve
• The market supply curve is derived from
summing the individual firm supply curves
horizontally.
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Slide 4.57
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 supply.
• This can lead to a situation of either excess
demand or excess supply.
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Slide 4.58
Price determination
Equilibrium price and quantity
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Slide 4.59
Free market economies
• Prices act as ‘signals’ to both consumers and
producers.
• Profits aid resource allocation
–
–
–
–
Direct resources to the most profitable activities
Reward risk taking
Encourage productive efficiency (minimum costs)
Provide resources (e.g. ploughed-back profits).
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Slide 4.60
Role of price signals
• Price acts as signal to buyers/sellers
Restoring equilibrium price and quantity in a free market
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Slide 4.61
Increase in demand
• Rise in equilibrium price and quantity
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Slide 4.62
Decrease in demand
• Fall in equilibrium price and quantity
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Slide 4.63
Increase in supply
• Fall in equilibrium price, rise in quantity
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Slide 4.64
Decrease in supply
• Rise in equilibrium price, fall in quantity
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Slide 4.65
Maximum price
A maximum price P* set below the equilibrium price P1
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Slide 4.66
Minimum price
A minimum price P* set above the equilibrium price P1
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Slide 4.67
Price elasticity of demand (PED)
• Measures the responsiveness of the quantity
demanded (QD) of a product to a change in its
own price
• PED = % change in QD of X
% change in price of X
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Slide 4.68
PED terminology
• Elasticity values (ignoring sign)
0
0–1
1
1–infinity
Infinity
perfectly inelastic
relatively inelastic
unit elastic
relatively elastic
perfectly elastic
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Slide 4.69
Factors affecting price elasticity of
demand
•
•
•
•
Availability of close substitutes
Whether the product is a necessity or a luxury
Whether the product is habit forming
The time period under consideration.
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Slide 4.70
PED and Revenue (1)
• Relatively elastic demand if PED > I (ignoring
sign)
– Fall in price: Total revenue rises
– Rise in price: Total revenue falls
• Relatively inelastic demand if PED < I (ignoring
sign)
– Rise in price: Total revenue rises
– Fall in price:Total revenue falls.
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Slide 4.71
PED and Revenue (2)
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Slide 4.72
PED and tax incidence
Lump-sum tax: incidence of tax on consumer when demand is relatively inelastic
and relatively elastic
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Slide 4.73
Tax and government revenue
Price elasticities of demand and government revenue from a lump-sum tax
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Slide 4.74
Cross elasticity of demand (CED) (1)
• Measures the responsiveness of the quantity
demanded (QD) of X to a change in the price of Y
• CED = % change in QD of X
% change in price of Y
• Where X and Y are substitutes in consumption,
CED is positive
• Where X and Y are complements in consumption,
CED is negative.
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Slide 4.75
Cross elasticity of demand (CED) (2)
• CED involves a shift in the demand curve (here
for product A).
• Where A and B are substitutes in consumption,
fall in price of B results in a decrease in demand
for A.
• Where A and B are complements in consumption,
fall in price of B results in an increase in demand
for A.
Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010
Slide 4.76
Income elasticity of demand (IED) (1)
• Measures the responsiveness of the quantity
demanded (QD) of X to a change in
household or national income.
• IED = % change in QD of X
% change in real income
Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010
Slide 4.77
Income elasticity of demand (IED) (2)
• Some goods and especially services (e.g.
education, health, leisure) have high positive
IEDs.
• IED may be negative over certain ranges of
income for ‘inferior’ goods and services.
• IED is useful in forecasting shift in demand
when GDP is rising/falling.
Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010
Slide 4.78
Economic variables and
international business
• Real income per head (standard of living)
• Economic growth (rate of increase of real
income per head)
• Exchange rate
• Inflation rate
• Unemployment rate
• Tax and subsidy levels
• Technological change.
Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010
Slide 4.79
Technological environment
• Process innovation: new processes of
production, i.e. New ways of doing things which
raise the productivity of factor inputs
• Product innovation: new products (goods or
services) which were not previously available
• Around 80% of technical change is process
innovation.
Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010
Slide 4.80
Technical change and the level of employment
Figure 4.4
Technical change and the level of employment
Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010