Country Risk (Political Risk)
is the exposure to potential loss or adverse effects on a company operations and profitability caused by developments in a country's political and or legal environment.
What are the dimensions of country risk?
1) Harmful/Unstable political system
2) Laws and regulations unfavorable to foreign firms
3) Inadequate/Underdeveloped political system
4) Bureaucracy and red tape
5) Corruption and other political blunders
6) Government intervention or protectionism
7) M
What country has the most country risk?
Venezuela, Libya, and Zimbabwe.
What countries have the least country risk?
Singapore, Japan, Canada, and the US
What two things make up international business?
Political system and legal system
What is a political system?
A set of formal institutions that constitute a government. It includes legislative bodies, political parties, lobbying groups, and trade unions.
*Includes constituents who are the people and organizations that support the political system and receive gove
What are the principle functions of a political system?
1) Provide protection from foreign threats.
2) Ensure stability based on laws.
3) Govern the allocation of valued resources among members of society.
4) Define how society members act with one another.
What is a legal system?
A system for interpreting and enforcing the laws. Laws, regulations, and rules establish the norms for conduct.
What are the principle functions of a legal system?
1) Ensure order
2) Resolve disputes in civil and commercial activities
3) Tax economic output
4) provide protections for private property including intellectual property and other company assets.
True or False: Country risk is always present.
True!
What are the 3 types of political systems?
1) Authoritarian
2) Socialism
3) Democracy
Authoritatianism
- Under authoritarianism, the state tries to regulate most aspect of public and private behavior
- Power is centralized in the government and examples include China and the Soviet Union
- Either theocratic or secular based.
- Also, usually led by a dictat
Socialism
- Socialisms fundamental principle is that capital and wealth should be vested in the state and used primarily as a means of production rather than profit.
- Based on collectivist ideology
- Collective welfare over individual welfare
- Governments should
Democracy
- Is characterized by two major features (private property rights and limited government)
- Associated with openness( lack of barriers to entry firms)
- Includes a little socialism
private property rights
Individuals can own businesses and assets and increase ones asset base by accumulating private wealth. People and firms can acquire, use, or sell property.
Limited Government
The government performs essential functions like national defense, maintaining law, and constructing infrastructure.
* However, market forces determine economic activity.
What is national governance?
National governance is the system of policies and processes by which nations are governed and the manner in which they develop laws and regulations, conduct public affairs, and manage public resources.
*Consists of political and economic freedom.
What are the 3 types of economic systems?
1. Market Economy
2. Command Economy
3. Mixed Economy
command economy
Makes the state a dominant force in the production and distribution of goods. Central planner make allocation decisions and state owns sectors of economy.
-associated with authoritarianism
market economy
the interaction of supply and demand determine market prices. Government intervention is limited
*associated with capitalism
mixed economy
exhibits the features of both a command and a market economy because it combines state intervention with market mechanisms. You can own businesses by government owns and establishes certain functions.
-Ex) US and France
True or False: Political systems tend to influence legal systems.
True
Rule of Law
Refers to a legal system in which rules are clear, publicly disclosed, fairly enforced, and widely respected by individuals, organizations, and the government.
-International business flourishes in societies where rule of law prevails.
What are the 4 types of legal systems.
1) Common law
2) Civil Law
3) Religious law
4) Mixed System Law
Common Law (Case Law)
A legal system that originated in England and then spread to US, Australia, and Canada. The basis for common law is tradition, previous cases, and legal precedents set by the nations courts through interpretations of statues, legislations, and past ruling
Civil Law (Code Law)
based on a all inclusive system of laws that has been codified; the laws are clearly written and specified.
*Includes commercial, civil and criminal.
-Legislative in origin and from western Europe
Religious Laws
Strongly influenced by religious beliefs, ethical codes, and moral values viewed as mandated by a supreme being.
-The 3 most influential religious law systems are Hindu, Jewish, and Islam
Islamic Law (Sharia Law)
based on the Quran and the teachings of the prophet Muhammed. It's adherents to differentiate between their religious and their secular lives. Spells out laws with relationships as well as politics and economics.
Mixed Legal System
Consist of two or more legal systems operating together. Also, the contrast among civl and common. law becomes blurred.
Who are the 5 participants in legal and political systems?
1) Government (public sector)
2) International Organizations
3) Regional Trade Organizations
4) Special Interest Groups
5) Competing Firms
What are the 5 types of country risk produced by political systems?
1) Government Takeover of corporate assets
2) Embargoes and sanctions
3) Boycott against firm or nation
4) Terrorism
5) War, Insurrection, and Violence
Government Takeover of Corporate Assets
Confiscation: Seizure of corporate assets without compensation.
Expropriation: Asset seizure with compensation.
Nationalization: Takeover of an entire industry, with or without compensation.
Creeping expropriation: subtle form of country risk where govern
sanction
a type of trade penalty imposed on one or more countries by one or more other countries. Typically take the form of tariffs, trade barriers, import duties, and import/ export quotas.
Embargo
an official ban on trade or other commercial activity with a particular country to isolate it and punish its government. Way more serious than a sanction.
Ex) US sanction on N Korea and Iran
Boycott
a voluntary refusal to engage in commercial dealings with a nation or company. Boycotts and public protest result in lost sales and increased cost.
ex)Boycott BP after oil spill
Terrosim
The threat or actual use of violence to attain a political gain through fear, coercion, and intimidation.
-Sometimes sponsored by national governments.
-Affects transportation and retailing industries
What are the types of country risk produced by a host country legal system?
1) Foreign Investment Laws
2) Controls on operating firms and practices
3) Marketing and distribution laws
4) Laws on income repatriation (sending money back to home country)
5) Environmental Laws
6) Contract Laws
7) Internet and E-commerce Regulation
8)
In contract law, what are the 5 main types of contract business transactions?
sale of goods, foreign distribution, licensing/franchising, FDI, and joint ventures
What are the type of country risk arising from home country legal system?
1) Extraterritorially
2) Accounting and reporting laws
3) Transparency in financial reporting
Extraterritoriality
Refers the application of home country laws to persons or conduct outside national borders. These laws are intended to prosecute individuals or firms located abroad for some type of wrongdoing.
FCPA (Foreign Corrupt Practices Act)
bans firms from offering from offering bribes to foreign parties to secure or retain business. Also accounts for foreign entities doing business in the US
*requires firms with securities in the US to meet US Accounting provisions
Transparency in financial reporting
The degree to which firms regularly reveal substantial information about their financial condition and accounting practices.
-In the US, firms must report results to stockholders and SEC every quarter. In much of the world, only once a year
The purpose of the Dodd-Frank Wall Street Reform Act was to:
increase transparency in the US financial sector.
What are the 4 ways to manage country risk?
1) Proactive environmental scanning
2) Adherence to ethical standards
3) alliance with qualified partners
4) Protection through legal contracts.
What are the 3 approaches to end international disputes?
1. Conciliation
2. Arbitration
3. Litigation
Conciliation
formal process of negotiation to resolve differences in friendly manner by using a conciliator who meets with each entity separately.
*Least adversarial
Arbitration
a neutral third party acts as judge with the power to issue a decision binding for all parties
litigation
most adversarial approach and occurs through lawsuit