Country Risk
Exposure to potential loss or adverse effects on company operations and profitability caused by developments in a country's political and/or legal environments.
Political System
A set of formal institutions that constitute a government. It includes legislative bodies, political parties, lobbying groups, and trade unions. The system also defines how these groups interact with each other.
Legal System
A system for interpreting and enforcing laws. The laws, regulations, and rules establish norms for conduct. It incorporates institutions and procedures for ensuring order and resolving disputes in commercial activities, as well as protecting intellectual
Types of Legal Systems
Common Law, Civil Law, Religious Law, and Mixed
Types of Political Systems
totalitarianism (command), socialism (mixed), democracy (market)
Sources of Country Risk -- Political System
Political System
� government
� political parties
� legislative bodies
� lobbying groups
� trade unions
� other political institutions
Sources of Country Risk -- Legal System
Laws, regulations, and rules that aim to:
� ensure order in commercial activities
� resolve disputes
� protect intellectual property
� tax economic output
Rule of Law
Existence of a legal system where rules are clear, publicly disclosed, fairly enforced, and widely respected by individuals, organizations, and the government.
Common Law
The basis of law is tradition, past practices, and legal precedents set by courts via interpretation of statutes, legislation, and past rulings.
Civil Law
Based on an all-inclusive system of laws that have been "codified"�clearly written by legislative bodies.
Country Risks Caused by Political Systems
confiscation, expropriation, nationalization, creeping expropriation, embargos and sanctions, boycotts, wars, insurrection, and violence
Country Risks Caused by Legal Systems
from host country (Foreign Investment Laws, operating form and practices, marketing and distribution laws, and others) or from home country (Foreign Corrupt Practices Act)
Managing Country Risks
� Proactive environmental scanning
� Alliances with qualified local partners
� Strict adherence to ethical standards
� Protection through legal contracts
Actors in Political and Legal Systems
� The government, or the 'public sector,' operating at national and local levels.
� International organizations (World Bank, World Trade Organization, and the United Nations)
� Regional economic blocs (European Union, NAFTA)
� Special interest groups (lab
Openness is associated with
� Successful market entry
� Increased market demand
� Competition on quality, which improves overall product quality.
� Increased competition, leading to efficiencies and lower prices
Democracy and Openness
the lack of regulation and barriers to the entry of firms in foreign markets.
Protectionism
national economic policies that restrict free trade. Usually intended to raise revenue or protect domestic industries from foreign competition.
Mercantilism
A belief popular in the 16th century that national prosperity results from maximizing exports and minimizing imports.
Free Trade
The absence of restrictions to the flow of goods and services among nations.
Comparative Advantage
- how nations can achieve and sustain economic success and prosperity
- superior features of a country that provide it with unique benefits in global competition
- due to natural endowments or from deliberate national policies.
Absolute Advantage
A country should produce only those products in which it has absolute advantage or can produce using fewer resources than another country
Comparative Advantive Principle
It is beneficial for two countries to trade even if one has absolute advantage in the production of all products; what matters is not the absolute cost of production but the relative efficiency with which it can produce the produce
Factor Proportions Theory
Each country should produce and export products that intensively use relatively abundant factors of production and import goods that intensively use relatively scarce factors of production.
Introduction Stage
the inventor country enjoys a monopoly both in manufacturing and exports
Maturity Stage
the product's manufacturing becomes relatively standardized; other countries start producing and exporting the product.
Standardization Stage
manufacturing ceases in the original innovator country, which then becomes a net importer of the product. Today under globalization, for many products, the cycle occurs quickly.
How a Firm Innovates
(1) A new product or improve an existing product (2) New ways of manufacturing
(3) New ways of marketing
(4) New ways of organizing company operations.
Innovation and Productivity
key source of competitive advantage
Aggregate Productivity
key determinant of the nation's standard of living
Productivity
the value of the output produced by a unit of labor or capital
Diamond Model
� Factor conditions
� Related and supporting industries
� Demand conditions at home
� Firm strategy, structure, and rivalry
Factor Conditions
Quality and quantity of labor, natural resources, capital, technology, know-how, entrepreneurship, and other factors of production.
Related and Supporting Industries
the presence of suppliers, competitors, and complementary firms that excel within a given industry.
Demand Conditions
the strengths and sophistication of customer demand.
Firm strategy, structure, and rivalry
The nature of domestic rivalry, and conditions that determine how a nation's firms are created, organized, and managed.
Industrial Cluster
A concentration of suppliers and supporting firms from the same industry located within the same geographic area; CAN SERVE AS AN EXPORT PLATFORM
National Industrial Policy
A proactive economic development plan employed by the government to nurture or support promising industry sectors with potential for regional or global dominance
Stages in Company Internationalization
Domestic
Pre-export
Experimental
Active
Committed
Monopolistic Advantage theory
MNEs prefer FDI because it provides the firm with control over resources and capabilities in the foreign market and a degree of monopolistic power relative to foreign competitors.
Dunnings Eclectic Paradigm
1. Ownership-specific advantages - knowledge, skills, capabilities, relationships, or physical assets that the firm owns and which are the basis of its competitive advantages
2. Location-specific advantages - similar to comparative advantages, they are sp
Internationalization Theory
how the MNE chooses to acquire and retain one or more value-chain activities inside itself.
� Such 'internalization' provides the MNE with greater control over its foreign operations.
Sanctions
bans on international trade, usually undertaken by a country, or a group of countries, against another judged to have jeopardized peace and security
Embargoes
bans on exports or imports that forbid trade in specific goods with specific countries.
Litigation
when one party files a lawsuit
against another. Popular in USA.
Arbitration
a neutral third party hears both sides of
a case and decides in favor of one party or the other, based on an objective assessment of the facts
Conciliation
is a formal process of negotiation whose
objective is to resolve differences in a friendly manner. Popular in China.