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• 2004 – Czech Republic joined EU
• Fiscal and monetary policy aims to align its macroeconomic
conditions with the rest of the EU.
• The earliest date to join eurozne is unknown ...may be 2012
"Economics is the social science that examines how people
choose to use limited or scarce resources in attempting to
satisfy their unlimited wants."
The Basic Factors of Prodution
The four basic factors (resources) of production are:
1) Land- such as land, trees and minerals
2) Labor- the mental and physical skills of individuals
3) Capital- such as tools, machines and factories used in
production or to facilitate production
4) Entrepreneurship -The availability of natural resources, labour and
capital is not sufficient to ensure economic success. These factors of
production have to be combined and organised by people who see
opportunities for making a profit and who are willing to take risks by
producing goods and services in the expectation that they will be sold.
 It is not just a matter of what resources we have but
also of how well we use them.
Scarcity, Choice, and Opportunity Cost
Limited Resources & Unlimited Wants
Scarcity
Choices
Opportunity Cost
• Defines the boundary of what is possible for a country to
produce with its given resources. It represents all efficient
combinations of products in a two product economy.
• All inefficient combinations are contained within the boundary
curve.
Point R lies outside the PPC
and is impossible to achieve
during the time period
assumed.
Production possibilities curve illustrates
two essential principles:
1-Scarce resources
2-Opportunity costs
Unattainable
If the nation is at point
S, it means that its resources
are not being fully utilized. We
have unemployment.
Attainable
Point S is called an inefficient
point, which is defined as any
point below the PPC.
Resource Ownership
• Communism
– Most resources are owned in common
• Socialism
– Most resources are owned by state
• Capitalism
– Most resources are owned privately
Types of Economic Systems
• An economic system is composed of two
features
– Mechanism for allocating resources
• Market
• Command
– Mode of resource ownership
• Private
• State
Types of Economic Systems
Resource Allocation
Private
Market
Command
Market
Capitalism
Centrally
Planned
Capitalism
Market
Socialism
Centrally
Planned
Socialism
Resource
Ownership
State
Political Systems
Totalitarian state
Imposed authority
Lack of constitutional guarantees
Restricted participation
 Companies might need to pay
bribes to government
 The business law is vague
Doing business seems
to be a risky proposition
Democratic state
Freedom Rights
 Stable business environment
thanks to laws
 Freedom and no censorship
Doing business in a democratic
state seems to be safer
than in a totalitarian state
• Relative factor endowments
– The theory states that a country will have a comparative
advantage in producing products that intensively use
resources (factors of production) that it has in abundance.
The Heckscher-Ohlin Theorem
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Definition: A nation will export the commodity whose production
requires the intensive use of the nation’s relatively abundant and
cheap factor and import the commodity whose production requires
the intensive use of the nation’s relatively scare and expensive
factor.
Entry Modes
 Exporting
 Turnkey Projects
 Licensing
 Franchising
 Joint Ventures
 Wholly Owned Subsidiaries
Advantages and disadvantages of entry modes
• Differences in Technology
• Differences in resources endowments - Factors cost and
competitivness
• Differences in demand
• Existence of economies of scale in production
• Existence of government policies, security - The international business
environment
• Market size and distance between markets - Market factors
• Cultural environment
• Demographic environment
• Econmic environment
• Natural environment
• Technological environment
• Political Environmnet
• The political environment includes all laws,
government agencies, and lobbying groups that
influence or restrict individuals in the society. The
international business is also subject to political
decrees made by government both in „home“ and
„host“ countries.
Political environment
• The political environment has an important
impact on the business
• There is a large field with many factors which
the companies have to consider if they want
to expand overseas
• Political environment is not stable and can
change quickly
• The political environment creates advantages
and disadvantages
Political Environment
 Rapid and uncertain change
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China’s transition to a market economy
European expansion and integration
Russia’s unstable political institutions
The emergence of political Islam in the Middle
East
 Significant differences across countries
◦ Less stable governments increase political risk
◦ Uncertain responses to democratization
 Change in government policies
◦ Adjusting to adjust to new perspectives and
changing requirements
◦ Assessing political risks
The Political Risk
Government actions that could adversely affect the
long-run profitability or value of a firm.
The risk that political decisions or events in a country
negatively affect the profitability or sustainability of an
investment.
What are the 6 dimensions of the Governance
Indicators?
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Voice and Accountability includes in it a number of indicators measuring various
aspects of the political process, civil liberties, political and human rights, measuring the
extent to which citizens of a country are able to participate in the selection of
governments.
Political Stability and Absence of Violence combines several indicators which
measure perceptions of the likelihood that the government in power will be destabilized
or overthrown by possibly unconstitutional and/or violent means, including domestic
violence and terrorism.
Government Effectiveness combines responses on the quality of public service
provision, the quality of the bureaucracy, the competence of civil servants, the
independence of the civil service from political pressures, and the credibility of the
government's commitment to policies.
Regulatory Quality instead focuses more on the policies themselves, including
measures of the incidence of market-unfriendly policies such as price controls or
inadequate bank supervision, as well as perceptions of the burdens imposed by
excessive regulation in areas such as foreign trade and business development.
Rule of Law includes several indicators which measure the extent to which agents
have confidence in and abide by the rules of society. These include perceptions of the
incidence of crime, the effectiveness and predictability of the judiciary, and the
enforceability of contracts.
Finally, Control of Corruption is a measure of the extent of corruption, conventionally
defined as the exercise of public power for private gain. It is based on scores of
variables from polls of experts and surveys.
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Stability of the government.
Government type (dictatorship, democratic, monarchy,etc).
Economic policies of the government.
Trade policy.
Supply side policies
Diplomatic events in surrounding countries.
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Institutional environment
Property rights
Taxation
Movement of equity and expropriation threats
• Intellectual Property
Property that results from people’s intellectual talent and
abilities.
• Industrial Property
Industrial property includes patents and trademarks.
• Copyrights
Copyrights give creators of original works the freedom to
publish or dispose of them as they choose.
Three Types of Political Risk
• Ownership Risk
– Exposes property and life
• Operating Risk
– Interference with the ongoing operations of a firm
• Transfer Risk
– Limitations on the outflow of funds
Political Risk May Involve
• Confiscation
– The government takeover of a firm without
compensation to the owners.
• Expropriation
– A form of government takeover in which the firm’s
owners are compensated.
• Domestication
– The government demands transfer of ownership
and management responsibility. Forced sale of
equity to host-country nationals, usually at or
below depreciated book value
Political Risk May Involve
• Loss of technology or other intellectual property (such
as patents, trademarks, or trade names)
• Interference in managerial decision making
• Dishonesty by government officials, including
canceling or altering contractual agreements,
extortion demands, and so forth
Political Risk May Involve
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Discriminatory treatment against foreign firms in the
application of regulations or laws
• Barriers to repatriation of funds (profits or equity)
What is Political Risk?
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The firm´s own country´s relations with other
countries
Sensetivity of the product or industry
Size and location of operation – the bigger the more
vulnerable
Host country´s political situation
Contribution to host country, for example employment
Localisation of operations
Subsidiary dependence
Firms can take out insurance to cover losses due to
political and economic risk.
Managing Political Risk
• Avoidance – either the avoidance or withdrawal of
investment in a particular country
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Adaptation – adjust to the political environment
• Dependency – keeping the host nation dependent on
the parent corporation
• Hedging – minimizing the losses associated with
political risk events
Favorable political relationships
 foster stable business environments
 increase international cooperation in many areas
 lead to increase business opportunities and lower risk
The World Trade
relationships
Organisation
can
facilitate
political
 The WTO ensures that trade flows as smoothly, predictably
and freely as possible.
International Law
• The World Trade Organization defines internationally
acceptable economic practices for its member
nations.
• The Patent Cooperation Treaty (PCT) provides
procedures for filing patent applications.
• The United Nations has developed codes and
guidelines that affect international business.
In cases of disagreement, the parties can choose:
• Arbitration: Procedures are quicker and often spelled out
in the original contract
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Litigation: Often involves extensive delays and is very
costly
Bribery
• Firms operating abroad are affected by laws against
bribery and corruption.
• International businesses may bribe to counterbalance
poor product quality, to create a market for goods, or to
stay competitive with other firms that bribe.
Trade Barriers
What is a Trade Barrier
 Import
duties
 Import quotas
 Import licenses
 Tariffs
 Export licenses
 Subsidies
 Non-tariff barriers to trade
 Voluntary Export Restraints
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Ad valorem duties: This duty is a percentage of the value
of goods.
Specific duties: These duties are expressed as a specific
amount of currency per unit of weight, volume, length or
number of other units of measurements….one dollar per
pair.
Alternative duties: In this case both ad valorem and
specific duties are set out in the custom tarrif for a given
product.Normally, the applicable rate is the one that yeilds
the higher amount of duty.
Compound or mixed duties: These duties provide for
specific plus ad valorem rates to be levied on the same
articles.
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Anti-dumping dunes: The term dumping refers to the sale
of a product at a price lower than normally charged in a
domestic market or country of origin.
Variable import levies: Apply to the imports of various
agricultural products. The objective of these levies is to
raise the price of imported products to the domestic price
level.
Temporary import surcharges: From time to time to
provide additional protection for local industry and, in
particular, in response to balance of payments deficits.
Compensatory import taxes: In the theory these taxes
correspond with various international taxes, such as valueadded taxes and sales taxes.
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Single – column tarrif: single rate of duty for each item
applicable to all countries.
Two column tarrif: reduced rates agreed through
negotiations with other countries. (under GATT).
A preferential tarrif is a reduced tarrif rate applied to
import from certain countries. GATT prohibits the use
of preferential tarrifs with the major exceptions of
historical peference schemes, such as the British
Commonwealth preferences…or free trade areas
Trade Restrictions
• Arguments for Trade Restrictions
– National Defense
• Certain industries need protection
• Imports may not be available during wartime. Domestic production
essential to provide war materials.
• Prevent valuable technologies from being used to strengthen
competition, especially militarily
• National Security Is threatened by trade.
– Sanctions to Punish Offending Nations
• Inflict economic damage to encourage, to modify behavior
– Protect Infant or Dying Industry
• In the long run will have a comparative advantage
• Special Industries with Unique and Substantial Economic Potential
will not mature without Protection from Trade.
Trade Restrictions
• Arguments for Trade Restrictions
- Jobs are destroyed by trade. Protect Domestic Jobs from Cheap Foreign Labor.
- Worker wages are hurt by trade. Greatest problem for low-skilled workers.
- Infant Industry Argument: Special Industries with Unique and Substantial Economic
Potential will not mature without Protection from trade.The contention that tariffs
should be imposed to protect from import competition an industry that is trying to
get started. After the industry becomes technologically efficient, the tariff can be
lifted.
-Unfair competition undermines the benefits of trade. Fair competition brings cost of
imported goods up to domestically produced goods to prevent unfair advantage
Trade Restrictions
• Protection to reduce trade deficit
– Deficits due to Macroeconomic imbalance  national saving <
national investment.
– Direct effect of protection is lower imports, but also appreciates
currency  exports fall, imports rise  no reduction in trade
deficit!
• Protection as bargaining Device
– Trade barriers as bargaining chip in trade negotiations.
– Gains from unilateral liberalization
– More threats, but how much trade liberalization?
Trade Restrictions
Retaliation
• Import restrictions placed by another country may
result in similar restrictions by domestic government.
(EU ban on hormone treated U.S. beef).
What is Dumping?
Normal Value in the
Exporting Market
Export Price
If a product is exported at a price (Export
Price) lower than the price (Normal Value)
it normally charges on its own home
market, it constitutes “dumping”
Reasons for Retaliation
• Dumping is the selling of a product abroad for less
than
– The average cost of production in the exporting nation
– The market price in the exporting nation
– The price to third countries
• Result of
– Excess production
– Cyclical or seasonal factors
– Attempt to force domestic producers out of business
The Impact of dumping
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Loss of Sales
Reduced Profits
Loss of market share
Reduced returns on investments
Decline in output
Under utilization of capacity
Adverse Effect On
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Cash flow
Inventories
Employment
Wages
Growth
New Investment
Ability to raise capital
Other Reasons for Retaliation
• Subsidies
– Government provides to domestic firm to encourage exports or
protect from imports
– Can be
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Cash payment
Government participation in ownership
Low-cost loans
Preferential tax treatment
• Countervailing Duties
– Set by importing nation to offset effects of subsidy
– Equal to the subsidy amount
Anti-Dumping and Countervailing Duties
• Anti-Dumping and Countervailing Duties
– in response to foreign firms “unfairly” selling goods in
the U.S. at “less than fair value.”
– Countervailing duty meant to offset foreign subsidies.
• Restrictions on Services
– aircraft landing rights; sea transport restrictions;
insurance
• Domestic Content Provisions
– particularly important in Preferential Trade Areas, e.g.,
NAFTA
Types of Restrictions - Nontariff
• Quantitative
– Quotas
– Voluntary Export Restraints
• Nonquantitative Nontariff
– Direct government participation in trade
Quota System
– A government-imposed restriction
on the quantity of a specific good that another country
is allowed to sell in the Czech Republic
– In other words, quotas are restrictions on imports,
usually applied to one or several specific countries.
Quotas
• Quota is a set maximum on imports in volume or value terms.
• Similarities to tariff that results in same level of imports:
– increase domestic sale price and production; reduce
consumption.
– transfer from consumer to producer.
• Quotas do not generate any tariff revenue!
– quota rent  domestic sale price in excess of cost of
imports. Quota rent is pure profit.
• Quotas likely welfare inferior to tariff due to lost quota rent.
– wasted in costly lobbying for quota licenses.
– given to foreign governments.
Other Barriers to Trade
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Government Procurement Policies
Administrative Classification
Health and Safety Standards
Social Policies
Performance Requirements (typically applying to
foreign direct investment)
Levels of Regional Integration
Political Union
Coordinate aspects of members’ economic and
political systems
Remove barriers to trade, labor, and capital;
Economic Union set a common trade policy against nonmembers;
and coordinate members’ economic policies
Remove all barriers to trade, labor, and capital
Common Market among members; and set a common trade policy
against nonmembers
Customs Union
Remove all barriers to trade among members, and
set a common trade policy against nonmembers
Free-Trade Area Remove all barriers to trade among members, but
each country has own policies for nonmembers
International Trade Organizations
• General Agreement on Tariffs and Trade (GATT)
An international agreement established in 1947 to further world trade
by reducing barriers and tariffs. Several “Rounds” of Liberalization.
first few on tariff reductions, admitting new members; many quotas eliminated.
GATT was replaced by the World Trade Organization in 1995.
International Trade Organizations
• World Trade Organization (WTO)
• Reductions in Tariffs Worldwide - Trade Liberalization
• New Rules to Promote Trade in Services
• Reduction in Agricultural Subsidies
• Intellectual Property Protections
• Phasing Out Textile Quotas and Tariffs
Principles of the Multilateral Trading System (Applies to Goods)
Non-Discrimination
Treat members no worse than any other member.
National Treatment: treat imports no worse than domestic goods once
inside border.
Reciprocity
Mutual, reciprocal, equivalent trade concessions.
Negotiated reductions in trade barriers.
Limits free riding; overcomes Protectionist Bias.
Political Environment - China
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Emerging economic power
Government’s desire to balance
– National, immediate needs
– Challenge of a free market economy and globalization
Government attempting to open up the economy
1. Speed up conversion of state enterprises into
corporations
2. Expand capital markets by authorizing new stock
listings
3. Sell off most of the 305,000 state enterprises (or let go
bankrupt)
4. Reduce tariffs to 10 percent
Political Environment - Europe
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Privatization and economic liberalization reinforce EUwide political and economic integration
Political power is variable and complex
Strong opposition to U.S.- sometimes spill over into
business relationships and dealings
Europe is a large interwoven region economically, but
contains vast cultural differences
Political Environment - Russia
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Neglect, corruption, and confusing changes in
economic policy
• Infrastructure is weak and a political quagmire
– Legal
– Financial
– Trade sectors
• Corruption interferes with attraction of more foreign
investment
Political Environment – The Middle East
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Doing business requires knowledge of
– Regulations
– Legal environment
– Tax regimes
– Accounting methods
– Business structures
– Import/export regulations
– Manpower and labor regulations
– Restrictions on foreign capital investment
Political Environment – The Middle East
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Doing business in Middle Eastern countries is risky
and potentially dangerous
– War on terrorism
– Afghanistan, and Iraq wars
– Israel—Arab conflicts
– Rising tensions and arab spring
• Business requires knowledge of Islam
– Religion and way of life
– Framework of life and society
– Islamic fundamentalists have become aggressive
toward U.S. and its allies.