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125 Cards in this Set

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Country Risk = ________ Risk
Political Risk
Country Risk defined
Exposure to potential loss or adverse effects on company operations and profitability caused by developments in a country’s political and/or legal environments.
What is each country characterized by?
diverse political and legal systems that pose significant challenges for strategy and performance
EX of Country Risk
Preferential subsidies, government incentives, and protection from competition reduce business costs and influence strategic decision making
What does a political system consist of?
a set of formal institutions that constitute a government.
includes legislative bodies, political parties, lobbying groups, and trade unions.
defines how these groups interact with each other.
What does a legal system consist of?
a system for interpreting and enforcing laws.
-laws, regulations, and rules establish norms for conduct.
-Incorporates institutions and procedures for
-ensuring order
-resolving disputes in commercial activities
protecting intellectual property and taxing economic output.
What are the principle functions of a political system?
The principal functions of a political system are to establish stability based on laws, provide protection from external threats, and govern the allocation of valued resources.
What are the major types of Political Systems?
Totalitarianism
Socialism
Democracy
Tolatarianism
Controls all economic & political matters

Power is sustained by military force, propaganda, regulation of free discussion & criticism
Socialism
Capital & wealth is controled by the state & is used primarily as a means of production rather than profit

based on collective ideology

believe capitalists receive a disproportionate amount of society's wealth relative to workers

GOV should control the basic means of production, distribution, and commercial activity
Private Property Rights
ability to own property & assets and to increase one's asset base by gaining private wealth
Limited Government
government performs only essential functions that serve all citizens

-national defense, law, diplomatic relations, construction etc.
Social Democracy
virtually all democracies include elements of socialism such as gov. intervention in the affairs of individuals & firms

socialist tendencies emerge because of abuses or negative externalities that occur in purely democratic systems
Mixed Political Systems
characterized by a strong private sector & a strong public sector

-contains considerable gov. regulation & control
What kind of economies do Totalitarian governments usually obtain?
Command economies
-state is responsible for making ALL decisions
What kind of economic system does a Democracy tend to have?
Market economies
-decisions regarding production levels, consumption, investment, and savings resulting from the interaction of supply & demand (market forces)
What kind of economic system does a Socialist government tend to have?
Mixed economies
-exhibits market & command economy features
What do legal systems provide?
a framework of rules and norms of conduct that mandate, limit, or permit specified relationships among people and organizations, and provide punishments for those who violate these rules and norms.
rule of law
-businesses flourish

-the existence of a legal system where rules are clear, publicly disclosed, fairly enforced, and widely respected by individuals, organizations, and the government.
common law
tradition, past practices, and legal precedents set by the nation’s courts through interpretation of statutes, legislation, and past rulings.
-more flexible
-Judges have substantial power to interpret laws

-primarily JUDICIAL in origin & base on court decisions
civil law
Divides the legal system into three separate codes: commercial, civil, and criminal.

Rules and principles form the starting point- the codified rules emerge as specific laws and codes of conduct produced by a legislative body or some other supreme authority.

primarily LEGISLATIVE
Which two legal systems are most commonly utilized in mixed legal systems?
common & civil law
Actors in Political & Legal Systems
Political and legal systems evolve from the interplay among various societal institutions, at both the national and international levels:

Government
__International organizations__ :
World Trade Organization (www.wto.org), United Nations (www.un.org)
Regional economic blocs: NAFTA; EU
Special interest groups: OPEC; ACLU
Competing firms
confiscation
refers to the seizure of foreign assets without compensation
Expropriation
refers to the seizure of corporate assets with compensation
Nationalization
refers to government takeover of an entire industry, with or without compensation
Privatization
selling of state-owned enterprises to private interests.
The trend has been especially notable in China and Eastern Europe
Governments may resort to ______ and ______ to respond to offensive activities of foreign countries.
_Sanctions_ are a type of ban on international trade,
usually undertaken by a country, or a group of countries, against another judged to have jeopardized peace and security

_Embargoes_ are official bans on exports or imports that forbid trade in specific goods with specific countries.
-U.S. has embargoes against Cuba, Iran, and North Korea
voluntary refusal to engage in commercial dealings with a nation or a company
Boycott
These laws affect the type of entry strategy firms choose, as well as their operations and performance.
Foreign Investment Laws

-Many nations impose restrictions on inward FDI.
Marketing and Distribution Laws determine which practices are allowed in ________, _______, and _______.
advertising, promotion & distribution
Laws Regarding Income Reparation
limit what?
preserve what?
limit the amount of net income or dividends that firms can remit to their home-country headquarters-aiming to preserve hard currencies
pollution and the abuse of air, earth, and water resources, and ensure health and safety.
_Evironmental_ laws
International contracts attach rights, duties, and obligations to the contracting parties
_Contract__ Laws
Extraterritoriality
-who does it affect?
-what is it applied to?
application of home-country laws to persons or conduct outside national borders

laws are applied in an attempt to prosecute individuals or firms located abroad for some type of wrongdoing
Transparency in Financial Reporting

is the degree .....

____ & _____ of FR vary widely around the world
the degree to which firms regularly reveal substantial financial & accounting information.

The timing and transparency of financial reporting vary widely around the world.
What does ENVIRONMENTAL SCANNING develop?

What is SCANNING?
develops a comprehensive understanding of the political & legal environment in target countries

_Scanning_ assess potential risks/threats to the firm- good sources of intelligence
operating a business in a manner that meets or exceeds the ethical, legal, commercial, and public expectations of stakeholders (customers, shareholders, employees, and communities).
Corporate Social Responsibilty

ex:
not discriminating in hiring & promoting
providing fair & adequate wages
-providing adequate protection of the environment
Ethical behavior is essential for what two things?
Ethical behavior is essential not only for its own sake, but also because it helps insulate the firm from country risks.
Problems with safeguarding IPRs
IPRs = intellectual property rights

Despite protections by the WTO, the World Intellectual Property Organization (WIPO) and various international treaties, the protection of intellectual property rights—is not guaranteed in much of the world.
Laws enacted in one country are enforceable only within that country.
Enforcement is a challenge.
Individual country laws and practices differ widely.
Governments intervene in trade and investment to achieve what three objectives?
Governments intervene in trade and investment to achieve political, social, or economic objectives.
What do barriers benefit?
specific interest groups, such as domestic firms, industries, and labor unions
Government intervention alters what?
the competitive landscape - hinders or helps the ability of its firms to compete internationality
Government intervention is an important dimension of _______.
country risk
refers to national economic policies designed to restrict free trade and protect domestic industries from foreign competition
Trade Barriers
what form does government intervention typically arise from?
Tarrifs, or duties

-tax imposed on imports, effectively increasing the cost to the buyer
___________ refers to a government policy, regulation, or procedure that impedes trade.
nontariff trade barrier
_______is a quantitative restriction placed on imports of a specific product over a specified period of time.
quota
________ poclicies may lead to price inflation
Protectionist policies may lead to price inflation- when supply is restricted, domestic prices increase.
by restricting ______ tariffs may also reduce the choices available to buyers
variety
Tariffs and other forms of intervention can generate a substantial amount of _____.
revenue
Intervention can ensure the ______, ______, and _______.
safety, security & welfare of citizens
barriers that safeguard industries, workers, special interest groups, protect infant industries and to promote national security (export controls).
defensive barriers

-Protection of the National Economy
-Protecting an Infant Industry
-National Security Arguments
-Preserving National Culture and Identity
barriers that pursue a strategic or public policy objective, such as increasing employment or generating taxes.
offensive barriers

-National Strategic Priorities – Develop Industries
-Increasing Employment
most common type of tariff
Import tariffs
tariffs are assessed as a percentage of the value of the imported product.
Ad valorem
flat fee or fixed amount per unit of the imported product—based on weight, volume, or surface area (such as barrels of oil or square meters of fabric).
Specific Tariff
intended to raise money for the government, e.g. by taxing cigarette imports.
Revenue Tariff
protects domestic industries from foreign competition.
Protective tariff
so high that no one can import any of the items.
Prohibitive tariff
How do countries bypass tariffs?
firms may enter countries via FDI
Government policies that restrict trade without imposing a direct tax or duty
Nontariff Trade Barriers

e.g., quotas and licenses, local content requirements, regulations, and bureaucratic redtape
Upside of Quotas
domestic producers are protected from cheaper imports.
Downside of Quotas
domestic consumers and producers of certain products pay more for the product.
Firms can save money by...
moving production to countries that do not impose quotas or tariffs on imports.
voluntary quotas imposed by governments whereby firms agree to limit exports or imports of certain products.
Voluntary Export Restraint - VER
formal permission to import, which restricts imports in a way that is similar to quotas- a complicated, bureaucratic process in some countries
import license
what stipulates that the production must include a certain percentage of local value added?
Local Content Requirements

-usually imposed in countries that are members of an economic bloc
What do currency controls restrict?
the outflow of hard currencies & occasionally the inflow of foreign currencies
Currency controls also restrict the ability of MNEs to ______ their profits.
repatriate their profits - or transfer revenues from profitable operations back to the home country
government grants (monetary or other resources) to firm(s), intended to ensure their survival by facilitating production at reduced prices, or encouraging exports.
Subsidies
Unfortunately, subsidies reduce the _____ __ ______, providing it with ______ ________.
Subsidies reduce the cost of business for the recipient, providing it with unfair advantage. The WTO prohibits subsidies when it can be proven that they hinder free trade.
What do subsidies encourage?
overproduction
-this lowers food prices, making agricultural imports from developing countries less competitive.
Countervailing Duties
government retaliation against subsidies by imposing a duty on imported products to offset subsidies in the exporting country.
Dumping
subsidies enable manufacturers to charge a lower price for exported products, sometimes even below manufacturing cost.
related to subsidies- transfer payments or tax concessions made directly to individual foreign firms to entice them to invest in the country.
Investment Incentives

ex: tax exemptions, offering business developmental services
Economic freedom flourishes with what?
Economic freedom flourishes with an appropriate level of intervention; excessive regulation of business activity is detrimental to economic growth.
GATT
most favored nation policy
-each nation agreed to extend the tariff reductions covered in a trade agreement with a trading partner to all other countries

-eventually taken over by WTO in 1995 to include 150 nations: greatest global decline in trade barriers in history
Purpose of researching to gather knowledge and intelligence
to understand the extent and nature of trade & investment barriers abroad
Firms should of _____ ______ ______
foreign trade zones

-FTZs create jobs & stimulate local economic development
-FTZs are areas where imports receive preferential tariff treatment
Take advantage of ______ ______ and other government ______ programs.
Take advantage of INVESTMENT INCENTIVES incentives and other government SUPPORT programs.
-Government assistance in the form of subsidies and incentives helps reduce the impact of protectionism.
What are nations increasingly doing to create jobs and increase tax revenues?
Liberalizing their markets
To increase the effectiveness of their lobbying efforts, foreign firms may....
fire former government officials
In the long run, firms should take a seat with _____ ____ decision makers who negotiate the ________ activities with foreign governments.
In the long run, firms should take a seat with public-sector decision makers who negotiate interventionist activities with foreign governments
Regional Economic Integration
-refers to what?
the growing economic interdependence that results when countries within a geographic region form an alliance aimed at reducing barriers to trade and investment
What is the premise for Regional Economic Integration?
mutual advantages for cooperating nations within:
common geography
history
culture
language
economics
and/or politics
a geographic area that consists of two or more countries that agree to pursue economic integration by reducing tariffs and other restrictions to cross-border flow of products, services, capital, and, in more advanced stages, labor
regional integration bloc
why are blocs much easier than a system of worldwide free trade?
blocs involve smaller number of countries & are much easier to negotiate with
Simplest & most common type of regional integration
free trade area
regional bloc - common external tariffs
customs union
regional integration - free movement of products, labor & capital
common market (single market)
regional integration - unified monetary & fiscal policy by a central authority
Economic & (sometimes) Monetary Union
regional integration - perfect unification of all policies by a common organization; submersion of all separate national institutions
Political Union - ideal, not yet achieved
Tariffs and most nontariff barriers have been eliminated for trade in products and services, and rules of origin favor manufacturing that uses parts and other inputs produced in the EU
Market Access
The EU removed barriers to the cross-national movement of production factors—labor, capital, and technology.
Common Market
The member countries have largely eliminated customs procedures and regulations, which streamlines transportation and logistics within Europe.
Trade Rules
The EU is harmonizing technical standards, regulations, and enforcement procedures that relate to products, services, and commercial activities.
Standards harmonization
Fifth feature of a full-fledged EU
Common fiscal, monetary, taxation, and social welfare policies
EU's main decision-making body. Makes decisions regarding economic policy, budgets, and foreign policy, and admission of new member countries
Council of the EU
represents the interests of the EU as a whole. Proposes legislation and is responsible for implementing the decisions of the Parliament and the Council.
European Commission
European Parliament
consists of elected representatives that hold joint sessions each month. Up to 732 representatives. Three main functions:
Form EU legislation,
Supervise EU institutions, and
Make decisions about the EU budget.
interprets and enforces EU laws and settles legal disputes between member states.
European Court of Justice
challenges faced by the EU
giving up independence
combining resources across national borders
less developed countries have catching up to do
CAP
CAP
Common Agricultural Policy
-system of agricultural subsidies and programs that guarantees a minimum price to EU farmers and ranchers
-increased food prices in Europe
-imposes high tariffs
NAFTA
Canada Mexico & US

maquiladora - US firms locate manufacturing facilities south of border & utilize low cost labor without paying significant tariffs

-bye tariffs
-*prohibitied standards/technical regulations to be used as trade barriers*
-rules for investment & IPRs
NAFTA results
3x trade among members
^1 trillion per year
^ PP of mexican consumers
NAFTA workers can unionize

-negative
job losses due to falling trade barriers & low cost labor
EFTA
2nd largest free trade area in Europe

-four countries - not in EU
ECO
Economic Cooporation Organization
-10 Middle Eastern & Asian countries
has been hindered by political instability, civil unrest and war, military dictatorships, corruption, and infectious diseases.
Economic development in many African countries
Economic Integration ______ market size
EXPANDS market size
increases scale of the market place - customers, products & services
Economic Integration achieves _______ and _______ productivity
achieves SCALE ECONOMIC & ENHANCED productivity
-expansion of market size gives members opportunities to gain economies of scale in production & marketing
-internationalization helps firms compete more effectively outside the bloc
-labor & other inputs are allocated more efficiently -->leads to lower prices
Economic Integration attracts ______ from outside the bloc
attracts INVESTMENT from outside the bloc
-preferential treatment in exports fo members
-gain free trade to members
Economic Integration acquires ________ defensive & political posture
acquires STRONGER defensive & political posture
The more _______ the the economies of the member countries, the more likely the economic bloc will succeed
SIMILAR
What does political similarity in political systems enhance?
PROSPECTS for a successful bloc
Similarity of _____ & _______ provides the basis for mutual understanding & cooporation
CULTURE & LANGUAGE
Similarity of ______ ________ facilitates easier transportation of products, labor & other factors.
GEOGRAPHIC PROXIMITY
WHAT IS THE MOST IMPORTANT FACTOR THAT CONTRIBUTES TO THE SUCCESS OF REGIONAL INTEGRATION? (test question)
ECONOMIC INTERESTS
trade_____ is generated among the countries inside the economic bloc
CREATION
-trade barriers fall within the bloc, each member country tends to favor trade within those outside
trade ______ occurs when the bloc is in place and member countries discontinue some trade with nonmember countries
DIVERSION
Aggregate Effect of regional integration
national patterns of trade are altered - more trade takes place inside the bloc and less trade takes place with countries outside the bloc.

*economic fortress - result possibly in global decline
Establishment of a _______ to manage the bloc’s affairs is required at later stages of regional integration.
CENTRAL AUTHORITY
-members must sacrifice some autonomy, such as control over own economy, loss of national sovereignty
One drawback of regional integration is the transfer of power to ________ ______.
ADVANTAGED FIRMS
-can create larger rivals
-foreign MNEs can overwhelm local firms
-economic power -->advantaged firms
Drawback - Failure of _____ or ______ _____.
SMALL OR WEAK FIRMS
Drawback - corporate ____ & ____ ____.
corporate restructuring & job loss