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Chapter2and3EconomicPoliticalEnvironment-Fall2019.pptxChapter 2 – Economic & Chapter 3 - Political Environment
Management 405, Fall 2019
Economic development
Typical Stages of Economic Development
EXCEPTIONS TO EVERYTHING!
Critical mass in agricultural production
Development of manufacturing production
base
Dominance of service industries
Comparison of Economies
| Low Income - Developing countries | Middle Income - Emerging Economies | High Income -Advanced Economies | |
| Economic | Limited industrialization, high birth rates, low life expectancy – “Bottom of the Pyramid” | Rapidly Urbanizing, industrialization export and trade oriented, low to medium wage, pockets of prosperity, rapidly growing consumption | Services oriented, large economy, but generally slow consistent growth, high wage and capital intensive, stable consumption |
| Demographics | Young, high birth rates, low life expectancy | Young, high literacy, advancing educational institutions | Older, low replacement rate, strong educational institutions |
| Political | political instability, high corruption indicies | Mixed | Stable and generally transparent |
| Institutional | General Lack of institutions | Institutional Voids -Product, Financial, information, political | Stronger institutions |
| Business Industry | Extractive industries dominate, rely heavily on foreign aid and payments | Flagship and Conglomerate firms dominate landscape. Generally two types of economics- 1) resource dependent, 2) labor rich | Diverse economies, strong capital markets, market focused firms |
Another look at categorizing economies
Purchasing Power Parity – true measure of consumer lifestyle – accounts for local prices
County vs. Metropolitan Areas (GDP)
| Country | Country GDP USD | GDP - PPP | Cities- USD : PPP |
| China | 6,091 | $10,960 | Shanghai ($48,721: $76,000) Xinyang ($3,455: $5,400) |
| U.S. | $54,971 | $54,971 | Washington DC $131,000 Mississippi $25,024; |
| Thailand | $5,480 | $13,824 | Bangkok $14,000; Lopburi $2,800 |
| Russia | $14,097 | $23,589 | Tyumen $57,000; Chechnya $3,000 |
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Competitiveness
Historical view
Land, labor, capital, resources
Contemporary View
Land, labor, capital, resources + organization & interconnectivity
i.e. Industry clusters and Hubs
(Silicon Valley, Wall Street, Hong Kong Logistics, Fraport)
Competitiveness Report
Political/Legal Environment
Legal System
Institutions
Governance
Transparency
Political Systems
Collectivism vs. Individualism
State Owned Enterprises
Market Economy
Command Economy
Types of Economic Systems
4-9
Types of Economic Systems
9
This Figure shows the different types of economic systems.
Political Motivations of Host Countries
Self-preservation
Security
Prosperity
Prestige
Ideology
Cultural identity
10
Differing Legal Systems
Common law country
Disputes are decided by reliance on the authority of past judicial decisions
Civil law country
Legal system reflects the structural concepts and principles of the Roman Empire
5-11
Islamic Law
Sharia – comprehensive code governing Muslim conduct in all areas of life, including business (source: Koran, Hadith, Prophet Mohammed teachings)
11
Asian countries are split. India, Pakistan, Malaysia, Singapore, and Hong Kong are common-law countries.
Japan, Korea, Thailand, Indochina, Taiwan, Indonesia, and China are civil-law jurisdictions. Scandinavian countries use parts of both systems. The majority of countries today have civil-law systems.
In post-communist Eastern and Central Europe, consultants from both civil and common law countries are trying to influence the process. Central Europe relies on the German civil law system while Russia looks to the U.S. system. Germans think that U.S. law is too complicated and the U.S. response is that the German system is outdated.
Taxes
5-12
Government taxation policies
High taxation can lead to black market growth and cross-border shopping
Corporate taxation
Companies attempt to limit tax liability by shifting location of income
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Governments rely on tax revenues to generate funds necessary for social services, the military, and other expenditures. Unfortunately, government taxation policies on the sale of goods and services frequently motivate companies and individuals to profit by not paying taxes. In China, for example, even though import duties have dropped since it joined the WTO, many imports are subject to double-digit duties plus a 17 percent value-added tax. As a result, significant quantities of oil, cigarettes, photographic film, personal computers, and other products are smuggled into China. It is estimated that 90 percent of cigarettes are smuggled into China. Companies can still profit. For Philip Morris, this means annual sales of $100 million to Hong Kong distributors! Cross-border shopping can be spurred on by high excise and VAT taxes. It is estimated that British citizens who travel to France by car return home with 80 bottles of wine.
Corporate taxation is another issue. The high level of political risk currently evident in Russia can be attributed in part to excessively high taxes on business operations. High taxes encourage many enterprises to engage in cash or barter transactions that are off the books and sheltered from the eyes of tax authorities. This, in turn, has created a liquidity squeeze that prevents companies from paying wages to employees. Unpaid, disgruntled employees can contribute to political instability. Putin’s government is pursuing a tough new tax policy in order to shrink Russia’s deficit and qualify for IMF loans.
Earnings stripping refers to the practice of foreign companies making loans to U.S. affiliates rather than using direct investment to finance U.S. activities. The U.S. subsidiary can deduct interest on these loans and reduce its tax burden. It is estimated that tax minimization costs the U.S. government $3 billion a year.
Political Risk
5-13
Some examples of political risk include
War
Social unrest
Politically motivated violence
Transparency
Social conditions (population density and wealth distribution)
Corruption (www.transparency.de) nepotism
Crime
Labor costs
Tax discrimination
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Government Involvement in Trade
Facilitator – promote trade (Trade Agreements, economic integration, trading platform, etc.)
Regulatory Compliance – seeks compliance to local laws and customs
Capital controls and taxation
Public safety
Promotion of FDI and Exports
Promotional Activities www.trade.gov; www.business.ca.gov; www.citd.org
Financial Activities www.exim.gov; www.sba.gov/oit
Export facilitating Activities http://www.buyusa.gov/home/californiareception.html
Foreign Direct Investment Activities http://www.mida.gov.my/en_v2/
Risk Mitigation Activities
Single Country Perspective
Role of Government
Trade Agreements
Bilateral – A bilateral trade agreement usually includes a broad range of provisions regulating the conditions of trade between two (2) countries. These include reductions in customs duties rates, commercial and fiscal regulations, transit arrangements for merchandise, customs valuation bases, administrative formalities, quotas, and various legal provisions....
Multilateral – involves multiple countries whereby trade barriers are reduced or eliminated, and thus increasing the economic integration – essentially same concept as bilateral but negotiations are complicated by the issues and agendas of each party.
AID & Commercial Diplomacy
Foreign Assistance
Military – strengthening of security, training, defense
Economic – USAID – micro enterprises, economic development (clean water, ed, healthcare); help support affected groups (women, minorities, human trafficking, etc.)
Activities undertaken by public and private actors with diplomatic status to support business promotion between a home and host country.
State Department sponsored events that mix business with diplomacy
Non-Governmental Organizations
Non-profit entities – combination of public and private funds (sometimes supported through federal grants – but non-official status) that have particular issues to address in the global marketplace
Churches
Business groups and associations
Environmental groups
Humanitarian groups
Global Trading System
Global Platform
Standards and Trading Rules
Communications protocols
Transportation systems
Financial transactions
World Trade Organization
Negotiating platform for
Economic Integration
| Benefit or characteristic | Type |
| Free movement of goods between borders without taxes | Free trade area - NAFTA , ASEAN |
| Common external tariffs | Customs union – Benelux |
| Free flow of capital and labor | Common market – EU, CARICOM |
| Harmonization of economic policy | Economic union – EU; CEPA |
| Political integration | Political union – Italy in 1870, Russia & Soviet Block, HKG & China (one country – two systems) |
Regulatory Environment
5-24
Export Controls (Export Administration Regulations - EAR, International Trade in Arms Regulations - ITAR)
Ownership Controls – restricted industries
Import Regulations (covered later in class)
Regulatory Compliance
Food & food supply
Consumer/Product Safety
National/ Economic Interest
Environmental
24
Multi-lateral Development Agencies
World Bank
International Monetary Fund
Asian Development Bank
Inter-American Development Bank
African Development Bank
