LEGAL AND GOVERNMENT POLITICAL FACTORS
ARIZONA STATE UNIVERSITY
OMT 440 - INTERNATIONAL BUSINESS
WEEK 5
LEARNING OBJECTIVES:
1.
Identify ideological forces that influence business
2.
The government owns the businesses they privatize
3.
Steps international travel business executives should take to protect themselves from
terrorists
4.
Evaluation of government stability and policy continuity
5.
Appreciate the importance of tariff changes and non-tariff barriers for managers
INTRODUCTION:
Understanding the politics, government and laws of a country is crucial to doing
business in that country. This is because politics, government and law are choices made by
each country. Governments and laws are determined by political decisions, and governments
issue policies and regulations that affect business. Laws directly or indirectly affect business
activities. Understanding these factors will help businesses to reduce business risks arising
from these factors.
POLITICAL FACTORS:
A Political System is the structure, processes and activities by which a country
manages itself. Political systems can be distinguished based on who has the power to govern
and how that power is used. On this basis, three systems can be distinguished political
systems, namely authoritarian, monarchy and democracy. In authoritarian systems, the people
have no power or representation in government, and the characteristic of this system is
absolute obedience to formal authority. In a monarchy, the king or queen controls the
government. There are two types of monarchical political systems: absolute monarchy, where
the king or queen has absolute power to govern the country, and constitutional monarchy,
where the powers of the king or queen are constitutionally regulated, who in general now has
practically no power in government. A democracy is a political system in which citizens
directly elect their representatives, and directly or indirectly elect their government.
A country's political system is rooted in the history and culture of its people. Therefore,
although many countries in the world claim that their political system is a democracy, in
reality, the political systems in each country are often very different.
Political Participants are those who participate in political activities in a country, and
as participants can be individuals or formal or informal groups. Who are the political
participants in different countries varies. There are countries with many political participants,
and there are countries where the majority of the population does not care about politics.
Each political participant, especially groups, has its own goals, different access to political
tools, and different levels of political power or influence. To understand the dynamics of
political factors in a country, it is important to explore who are the participants in the political
process and the political legitimacy of each of these participants.
It is commonly thought that participants in politics are political parties, and that in
Indonesia there are also individuals who seek to become elected public officials. This is
based on a very narrow definition of politics, which is those who formally organize to
achieve power through elections. The general definition of political participants is all those
who engage in political activities to express their views on the government of a country.
With this general understanding, formal political organizations, such as the House of
Representatives, the Regional House of Representatives, the Regional Representative Council
are political participants. Similarly, the bureaucracy, although not a formal organization for
politics, is a political participant that has more power than others. A formal organization that
is often debated about its status in the political system is the military. The military as well as
business people are debated, because they have excess power compared to other political
participants, so that if these two institutions participate in politics, the political process will
take place unbalanced. The military has weapons, and business people have money, which
gives them an advantage over others. In Indonesia, the military and police, the institutions
that hold the weapons, are formally banned from active politics. Public organizations of any
kind, such as associations, non-governmental organizations, and political organizations are
political participants to be reckoned with. With the process of communication accelerating
around the world, the most powerful political participant today in any country is the media. In
Indonesia, the public are enthusiastic political participants compared to those in other
countries. Almost all levels of society in Indonesia are political or at least political
"observers".
Ideology is the main source of political factors, although there are many other sources
that influence business activities in a country. These sources include aspects of nationalism,
terrorism, traditional hatred, the political economy of multinational corporations. The
ideology of a nation or state will underlie various regulations and policies of the country's
government. The impact on business activities in the country can be positive or negative
depending on the ideology itself and the extent to which the ideology underlies government
regulations and policies. Political ideology is actually inseparable from economic ideology,
so that what is known as political ideology actually includes not only how power in
governing but always also includes how the country's economic activities are carried out.
The political ideology of socialism is an ideology that argues that the state represented
by the government owns all factors of production, and there should be no private ownership.
The government determines the centralized planning of production and distribution.
Ownership of the means of production and distribution is operated for other uses than profit.
The political ideology of communism is a political ideology based on the thoughts of
Karl Marx in the form of a theory of social change that leads to an ideal classless society.
Lenin further elaborated on Karl Marx's teachings that the working class is a classless society
and the peasant class as the marginalized class must take power and subsequently hold the
power of the state. In this ideology, all factors of production are owned by the state
represented by the government. The government determines the centralized planning of
production and consumption, and is committed to the ultimate goal of a communist state.
The political ideology of capitalism is an ideology that argues that the functions of
government are limited in such a way that it only does things that cannot be done by the
private sector, such as national defense and security, public services, international relations.
All means of production and distribution are largely privately owned and can be operated for
maximum profit.
Islamic political ideology is an ideology that holds that the state should be ruled by
Islamic leaders, and the state is run in accordance with the provisions of Islam. This also
applies to the economic system, social system and political system in the lives of its citizens.
Other ideologies are the conservative concept and the liberal concept. In the USA,
conservative means an ideology that wants government activities to be minimized, and
private businesses and individuals to be maximized. Liberal means an ideology that wants
more government participation in people's lives. In other countries, the concept of
conservative means longing for the good old days, while liberal means an ideology that wants
change and freedom.
Right-Wing and Left-Wing ideologies are ideologies that characterize the
characteristics of a concept of government. In the USA, right-wing ideology means taking a
conservative position which is more extreme. Left-wing ideology means ideology that takes a
more extreme liberal position. In other countries, right-wing means power held by the
country's elite and religious groups. Left wing means rule by the people in all aspects of life.
Nationalism is the feeling of a nation of a country devoted to its own nation,
aspirations or political and economic interests as well as traditions, social and cultural. In
Indonesia, this nationalism is generally formulated comprehensively as the Trisakti principle,
namely sovereignty in politics, self-sufficiency in economics, and personality in culture. A
nation's nationalism can be a big problem for foreign companies that want to sell their
products to that country. For example, it is difficult for American and European car
companies to sell cars to the Japanese market. Products do not sell well not because of
obstacles by the Japanese government, but because the Japanese people themselves do not
want to buy foreign products, but prefer domestic products.
Terrorism is an act of violence for a variety of reasons, many of which are based on a
group's own interpretation of the meaning of a religion. Terrorism in a country is detrimental
to the lives of the people in that country as a whole, because it provides insecurity in people's
lives. Terrorism activities in a country also harm business activities in the country, both
domestic and international businesses. Security is one of the most dominant factors in various
international business activities, especially foreign investment. Indonesia and tourism from
abroad. One of the elements that hinders the entry of quality international investment into
Indonesia and the development of tourism in Indonesia is the security in Indonesia. This is
due to, among other things, the number of terrorist activities in Indonesia, and acts of
violence that are similar to acts of terrorism.
Traditional hatred is a feeling of dislike for differences that has become the culture of
a society. Such traditional hatreds include the hostility between Arabs and Israelis. The
millennia-old enmity between the two nations has evolved into religion and has become a
phenomenon in many countries. Hatred between nations has developed into hatred of
different religions. This has been exacerbated by the proliferation of sects that believe in the
need to antagonize other religions, so that in many countries, hostility between groups has
developed in the name of religion. The wrong development in culture, as well as in the
character education of a nation, has led to the development of hatred between tribes, races,
religions and groups in various countries. Indonesia is an example of a country that has long
allowed the development of hatred, either intentionally or because it is not willing to resolve
these differences, so that instead of increasing similarities, it increases differences. Hatred in
a country certainly has an impact on the security and comfort of life in that country, as well
as adversely affecting both domestic and international business activities in that country.
Multinational corporations are companies that are so economically powerful that they
are often larger than the economic power of a country. Table 6-1 below shows country GDP
data and the revenue of multinational corporations. It can be seen that there are only 26
countries in the world whose GDP exceeds the revenue of the world's largest corporation,
Wall-Mart Stores. A comparison of the power of multinational corporations and countries is
more accurately expressed in terms of the ratio of multinational corporation revenues to a
country's budget. Table 6-2 below shows data on country budgets in 2013. It can be seen that
only 10 countries have revenue budgets that exceed the revenue of Walmart-Stores as the
largest multinational corporation in the world. Table 6-3 shows the 10 countries with the
largest number of giant multinational corporations in the world.
With such great economic power, even compared to the state, the multinational
corporation indirectly has political power. History shows that in their international business
activities, many multinational corporations use their political power to gain benefits for their
business. Economic power is used to bribe government officials in countries with weak legal
and political systems. In developing countries that are rich in natural resources, in order to
achieve their business goals, multinational companies often encourage a change of power, or
cause chaos.
With many multinational companies originating from the USA, it is understandable
why the USA often intervenes in politics in developing countries that are rich in natural
resources, or in countries that are developing rapidly to become developed countries. The
ongoing conflicts in the Middle East, such as in Iran, Iraq, Afghanistan, Syria, Israel, Egypt,
and so on, can be understood by recognizing that the Middle East is the area of most of the
world's petroleum resources. Indonesia is a country that Indonesia has also experienced the
political impact of multinational corporations, including the depletion of Indonesia's natural
resources starting from 1967, which can be rationally understood as a result of the political
activities of various multinational corporations to control Indonesia's natural resources and
economy.
GOVERNMENT FACTORS:
The government of a country results from the political process in that country. While it
is debatable to what extent government should play a role, it is generally agreed that a society
cannot function properly without the institution of government. In business activities in a
country, both domestic and international business, the government of a country has an
important and vital role.
Government stability is the most important factor for business activities. A
government can be said to be stable if it can maintain its power and that fiscal, monetary and
political policies are predictable, and do not change suddenly and radically whether through
political pressure or not. However, a government that does not retain power does not
significantly affect the viability of business activities if fiscal, monetary and political policies
remain stable and are continued by the next government. For this reason, Thailand, which
experiences coups very often, resulting in a relatively quick change of government, is still
seen as a more stable government than Indonesia, which, although its government does not
change so quickly, has a more stable government. It is easy for government policies to
change radically, even within the same government.
Protection by Government is a measure of a government's ability to protect the people
within its borders, including the business activities of the people. It indicates the extent to
which the government can protect business activities from being damaged or destroyed, or
robbed by terrorist groups, extremists, and organized criminals who impose their will against
the law. As such, it is also a measure of how well the government is able to enforce its laws.
Some countries have comprehensive laws, but for some reason are unable to enforce them.
Such countries are not conducive to both domestic and international business activities.
A country's foreign economic policy plays a major role in international business
activities in and from that country. Every country in the world will have to deal with other
countries, and the management of relationships with other countries is a country's foreign
policy. Foreign policy covers three main aspects of the relationship, namely aspects of state
sovereignty, economic aspects, and cultural aspects. In politics, it is known that there are no
eternal friends, there are eternal interests. This also applies to foreign policy. Every country
will try to get the maximum benefit from their foreign policy. Healthy political economy is
when the relationship provides benefits to the parties concerned, unfortunately this is rarely
the case. A country's political economy can usually be understood from the foreign and
domestic trade policy instruments it uses, as well as the interventions made by the
government a country in international business. Commonly used trade policy instruments
include: the use of tariffs, subsidies, import and export quotas, voluntary export restraints,
local content policies, administrative procedures, and anti-dumping policies. Intervention by
the government in its political economy is based on political and economic arguments. The
political arguments used include: protecting employment and domestic industry, national
security, retaliation, consumer protection, protecting human rights, and others. The economic
arguments used include: infant industry, and strategic trade policy.
Government policy is a plan of action to achieve a goal. Government policy can be
divided into economic policy and social policy. Economic policies include fiscal policy,
monetary policy, taxation policy, industrialization policy, trade policy. Fiscal policy is a plan
on how the government will raise funds and spend them, while monetary policy concerns the
supply, demand and value of the currency in the country. Social policy is concerned with
plans of action for the welfare of society, including policies in public health, in education, in
population, and so on. All government policies will affect business and international business
activities in the country, so knowing the policies and regulations issued by the government is
very useful information for international business activities.
Government Ownership of Businesses is practiced in almost all countries of the
world, on different scales Different. There are various reasons for a government to own a
business, including: to generate revenue, to reflect the ideology of the country, to provide
employment, to control the economy, for the welfare of the people, and even just because it
already has one. Doing business in a country where the government owns many businesses in
various fields is not easy, because competing with state-owned enterprises is not easy.
Competition is unfair, because government-owned companies usually have it easy or are
facilitated in all their business activities. Cooperation with state-owned companies is also not
easy, due to different organizational management systems. However, government-owned
enterprises generally perform very poorly, due to inefficiencies, bureaucracy, and the fact that
they generally also have a social function.
Privatization is a government policy of transferring state-owned assets to the private
sector, transferring management of state activities through contracting and factoring, and
outsourcing activities formerly carried out by the state. The main reason for the wave of
privatization in the world is efficiency. It was realized that neither government ownership of
businesses nor many of the activities undertaken by the government could be efficient. The
characteristics of bureaucracy and management that do not own businesses make it difficult
to achieve effectiveness, let alone business efficiency. This has prompted many countries to
privatize their business ownership. Privatization by the state can be an opportunity or a threat
to companies doing business with the state, therefore an introduction to privatization and the
tendency of governments in this regard needs to be understood by international business
people.
Country Risk of a country expresses the risk of doing business with that country,
which is mainly due to political and government factors in that country. The risk applies to all
companies doing business in that country. Table 6-4 below provides country risk ratings for
the 10 least risky countries and some Asian countries for comparison. Indonesia is quite far
behind other ASEAN countries, especially against Singapore, Malaysia, Thailand. In the
international business risk factor, Indonesia is still better than ASEAN countries such as the
Philippines, Vietnam and Brunei.
Corruption is the behavior of government bureaucracies and other state institutions in a
country. It has been agreed to be the most instrumental factor in a country's efforts to achieve
progress and prosperity for its people, as well as in its business activities.
LEGAL FACTORS:
INTRODUCTION:
International business activities take place in a business environment. One of the
business environment factors that directly affects business activities is legal factors.
International business actors need to be familiar with the laws in the country where the
company operates, so that in carrying out their business activities in accordance with the legal
compliance required in that country. In addition, so that business people can know that the
applicable law can help them when needed. In this case, legal certainty depends on the
stability of the government and court system in the country.
In addition to the laws of the countries in which companies operate, there is also
international law, which consists of public international law, and private international law.
Public international law governs legal relations between governments. Private international
law includes laws that govern the transactions of individuals and companies that cross
national borders.
The sources of international law come from various sources. The most important are
bilateral or multilateral treaties or agreements between states. Treaties are agreements
between states also known as conventions, covenants, compacts, or protocols. The United
Nations has sponsored conferences of states to conclude treaties between them. In addition,
the United Nations-sponsored international court, the International Court of Justice also
makes international law when it decides cases between states. Another source of law is
custom, which consists of rules elaborated from past usage.
Many countries, especially the USA and some European Union countries, are trying to
make their laws applicable to other countries (extraterritoriality). This is actually contrary to
the convention of interstate relations, especially in law, because the law in a country is the
sovereign right of that country. Various ways are used by the USA and the European Union
countries to carry out extraterritoriality, both in ways that are in accordance with
international law, as well as through political and economic power, or the power of weapons.
INTERNATIONAL DISPUTE SETTLEMENT:
Disputes in international business can occur between two or more companies from
different countries, or between companies and countries, or between countries. Such disputes
can be resolved through two channels, namely litigation and arbitration. Litigation is a
settlement through a court process, while arbitration is a settlement through an arbitration
body. Litigation is usually a lengthy process, and time and costs are high. The main problem
for disputes that cross national borders is the determination of the law of the country to be
used. If the relationship agreement contains an article specifying the law of the country to be
used in the event of a dispute, the process becomes simpler.
The United Nations has sponsored the establishment of an international court, the
International Court of Justice. However, the filing of cases with this court, and compliance
with its decisions, depends on the willingness of the ratifying states to submit to the
International Court of Justice. In addition, to determine the law of the land to be used for
business disputes, the United Nations also sponsors the UN Conventions for the International
Sale of Goods (CISG) whose rules are adhered to by countries willing to ratify them.
Generally, business disputes are settled through international arbitration. The arbitration
process is a process that the disputing parties agree to resolve not through the courts, but by a
neutral body whose decision is agreed to be binding on all parties. Many international
arbitration bodies have been established, and parties to a dispute can choose which arbitration
body to use. Some of these international arbitration bodies include: International Court of
Arbitration of the International Chamber of Commerce in Paris; World Intellectual Property
Organization and Mediation Center, which specializes in intellectual property disputes; and
The International Centre for the Settlement of Investment Disputes, which specializes in
international investment disputes.
LAW TYPE:
Each country has its own laws, but the legal system applied in each country depends on
whether the country uses the Common law system or Civil Law (code law). Common law is a
law developed in England and later adopted by the former British colonies. Whereas civil law
originated in France, which was then followed by other mainland European countries, and
which was then adopted by their former colonies. Indonesia adheres to the civil law system,
because it is a former Dutch colony. Singapore, Malaysia, Australia adhere to the common
law system, because they are former British colonies.
There are two basic differences between the two systems, namely in the common law
system, the courts have the power to interpret the law, while the courts in the civil law system
only have the power to apply the written law (code law). In a common law system, the law
continues to develop according to the interpretation of each court, whereas in a civil law
system, the law is made by parliament. Another difference is that in the common law system,
the decision of who is guilty lies with the people (the common), who are represented by a
group of people called a jury. This does not exist in the civil law system.
NATIONAL LAW:
The national laws of a country that international business people need to be familiar
with include: tax laws, competition laws, international trade restriction laws, consumer
protection laws, foreign exchange laws, and so on. These laws are very important for
business activities in the country, especially international business activities.
Taxation laws in each country usually have the main purpose of generating revenue for
the state. Other objectives include: income redistribution, reducing consumption of certain
products, increasing consumption of domestic products, reducing overseas investment,
increasing domestic business progress, obtaining reciprocal benefits from international
cooperation. The approach to taxation differs from country to country in terms of tax levels,
types of taxes, complexity of tax laws and regulations, compliance and coerciveness of tax
institutions, and other differences.
To facilitate taxation in international business activities, various countries make tax
treaties or conventions. Tax treaties (tax conventions) are agreements between countries that
bind the governments of each country to share information about taxpayers and cooperate in
the application of tax laws. Tax treaties define, among other things: the definition of income,
source of income, resident, and taxable activities. Tax treaties between countries facilitate the
international flow of goods, capital, services and technology.
Antitrust Laws or competition laws regulate policies in terms of competition, typically
preventing agreements price determination by producers, market division, and business
monopoly. The presence or absence of competition law in a country and especially the
effectiveness of its implementation, determines the condition of business in that country.
Indonesia has Law No. 5/1999 on the Prohibition of Monopolistic Practices and Unfair
Business Competition that regulates how businesses should compete in the market for both
domestic and international businesses. To follow up on the law, the Business Competition
Supervisory Commission (KPPU) has been established by Presidential Decree No. 75 of
1999 on the Business Competition Supervisory Commission.
International Trade Restriction Laws exist in every country in the world. The main
purpose of such laws is to provide revenue for the government, although there are usually
many other purposes, particularly to protect domestic producers. Typical rules for trade
barriers include tariffs (the imposition of duties on exported or imported goods), quotas
(restrictions on the quantity of goods that can be exported or imported), and other methods.
Various other ways that can be applied include the obligation to meet the technical
specifications of the product as specified. Another example is as implemented by Indonesia,
where there is a rule that any goods entering Indonesia must be registered and have
instructions in Indonesian. There is also a rule that fruits and vegetables imported into
Indonesia can only go through certain ports, which are often authorized not by the central
government, but by local governments. Surabaya is one of the designated ports for fruits and
vegetables imports, but the Surabaya government prohibited Tanjung Perak from being used
as a port of destination.
The Product Liability Law is one of the laws to protect consumers more specifically.
Under this law, the company and its directors and other officers are liable and may be fined
or imprisoned if the product causes death, injury or damage. A more severe form of liability
is that the manufacturer/designer is liable for a product without the need to prove fault in the
design or production of the product. This law has been commonly applied in developed
countries, particularly the USA and Europe. Indonesia has Law No. 8/1999 on Consumer
Protection which includes rules on producer liability for the impact of their products on
consumers. However, it is too general and does not specifically address the severity of
producer liability.
The Foreign Exchange Control Regulation:
This is a law that is also commonly issued by many countries, especially in countries
that do not follow an independent free monetary system where the value of the currency is
determined solely by supply and demand. Many developing countries limit the amount of
profits that can be repatriated to the home country of companies investing in a country. There
are also exchange controls that govern the buying and selling of foreign currencies. A
common rule issued by countries is one that prohibits the physical entry or exit of currency in
excess of a specified amount. Many countries have issued mandatory declaration of foreign
currency transfers abroad, or physically carrying in or out.
ECONOMIC AND FINANCIAL MONETARY FACTORS:
LEARNING OBJECTIVES.
1.
Explain the evolution of monetary arrangements of the international monetary system
2.
Discuss the objectives of the Bank of International Settlements
3.
Explain the impact of currency fluctuations
4.
Describe currency exchange controls
5.
Summarize the effect of financial forces such as tariffs, taxes, inflation and balance of
payments on companies
6.
Explain the role of the balance of payments
MONETARY FACTORS
INTERNATIONAL MONETARY SYSTEM:
The structure in the form of institutions, agreements, regulations, and processes that
enable payments, currency exchange, and capital movements necessary for international
transactions. The international monetary system consists of: individual country currencies,
artificial currencies (SDR = Special Drawing Right), and composite currencies (euro).
The IMF's classification of International Exchange Rate Systems explains how a
country positions its currency in relation to other currencies. The international exchange rate
system in 2004 was officially classified into 8 arrangements, namely:
1.
Exchange arrangements with no separate legal tender
2.
Currency Board Arrangement
3.
Other conventional fixed-peg arrangements
4.
Peg rate within horizontal bands
5.
Crawling pegs
6.
Exchange rates within crawling bands
7.
Managed floating with no pre-announced path for the exchange rate
8.
Independent floating
Exchange arrangements with no separate legal tender are when the currency of
another country is used as the only legal currency, or the country becomes a member of a
monetary or currency union where the currency is valid in each member country. Examples:
the use of the US$ in Panama, Ecuador, El Savador and the European Union currency (euro)
which is applied by some European Union member countries and European countries that are
not members of the European Union.
Currency Board Arrangements are monetary systems based on a commitment to
exchange the domestic currency for a foreign currency determined at a fixed exchange rate,
followed by restrictions on the authority to ensure the fulfillment of its legal obligations.
Under this system, the country's government ensures that its foreign exchange reserves are
equal to its domestic currency supply. Examples of countries that use this system: Malaysia,
Hong Kong.
Other conventional fixed peg arrangements are systems where a country links its
currency officially or not to a fixed rate to a strong currency or group of currencies, where
exchange rate fluctuations are targeted at a small margin, or at most 1% of a center rate.
Example Saudi Arabia Riyal to US$.
Pegged rates within horizontal bands are systems in which the value of a currency is
kept within a margin of fluctuation around a formal or de facto fixed exchange rate, which is
wider than 1% of a central rate. Examples: Cyprus, Libya, Ukraine
Crawling pegs are a system whereby the value of a currency is adjusted periodically by
small amounts at a fixed rate announced in advance or in reaction to changes in selected
quantitative indicators. Examples: Costa Rica, Nicaragua, Bolivia, and Tunisia.
Exchange rate within crawling bands is a system that keeps the value of a currency
within a margin of fluctuation around a periodically adjusted rate at a fixed rate announced in
advance or in reaction to changes in selected quantitative indicators. Examples of countries
that use this system are: Romania, Columbia, Hungary, Sri LankaVenezuela.
Managed Floating is a system in which the monetary authority influences exchange
rate movements through active intervention in the currency market without declaring or
committing in advance to a pre-announced direction in the exchange rate. Examples of
countries that implement: Algeria, India, Singapore.
Independent floating is a system in which the exchange rate is determined by the
market, with interventions aimed at reducing the rate of change and preventing excessive
fluctuations in the exchange rate, rather than setting a specific level. Examples of countries
that implement this system: Australia, Canada, Indonesia, Japan, Korea, New Zealand,
Thailand, U.K., U.S.A.
The latest classification by the IMF (2012) is known as the de facto classification of
exchange rate arrangements because it is based on the fact of how a country implements its
monetary system. In this system, the classification is based on the degree to which the
exchange rate is determined by the market and not by government decisions. In this
classification system, there are 4 main categories, namely (1) hard peg (exchange
arrangements with no separate legal tender and currency board arrangements), (2) soft pegs
(conventional pegged arrangements, pegged exchange rates within horizontal bands,
crawling peg, stabilized arrangements, craw-like arrangements), (3). Floating (floating, free
floating), and (4). Residual cateogry (other managed). Tables 7-8 below state the number of
countries that use exchange rate systems based on these qualifications.
A country's monetary system does not only determine exchange rate arrangements.
Monetary policy must also be determined, which involves a choice of decisions: exchange
rate anchor, monetary aggregate target, inflation targeting framework, and other policies.
An exchange rate anchor is a hard currency that is used as a reference by a country in
an effort to control its exchange rate by buying or selling the currency. Commonly used hard
currencies are the US$, Euro, Composite, etc., (e.g. Singapore
$). Monetary aggregate target is the target growth rate to be achieved using monetary
instruments, e.g. M1 or M2 targets, etc. Inflation targeting framework is the publication to
the public of the target inflation rate to be achieved and the commitment of the monetary
authority to fulfill this commitment. Other policies include when a country does not specify a
specific nominal anchor, or when no information can be obtained from a country about its
monetary policy. Table 7-9 lists the number of countries for each monetary policy framework
selected.
A country's Balance of Payments (BOP) states its economic condition in relation to the
international economy. The BOP is a record of a country's transactions with other countries.
The BOP provides useful data for trade between countries. The first use is that the BOP
expresses the demand for the country's currency. The second is that the trend of the BOP
helps businessmen predict the future economic environment. Various government policies
can be taken to deal with the indicators shown. For example, if a country's BOP is in deficit,
the government will take economic measures to reduce the deficit. The government may
encourage exports with various incentives.
BOP statements are expressed as double entry accounting statements so that total assets
and liabilities will always be the same. The statement generally consists of three specific
groups, namely 1.:Current account, 2. Capital account, and 3. Official reserves account.
The current account expresses the net change in exports and imports of goods and
services. The current account is usually expressed in subaccounts: 1. Goods or merchandise
account, i.e. imports and exports of goods, 2. Service account imports and exports of
services, and 3. Unilateral transfers, i.e. records of transfers in or out of the country that are
not buying and selling transactions.
The capital account is a record of the net change in a country's international assets and
liabilities. The capital account is usually expressed in subaccounts: 1. Direct investment,
which is investment in companies or property, 2. Portfolio Short term capital flows, which
are changes in international assets and liabilities in less than 1 year.
The official reserves account is a record of assets held by the government, in the form
of gold, foreign currency, and deposits in offshore banks. The official reserves account is
expressed in subaccounts: 1. Gold imports and exports,
2. Increase or decrease in foreign currency held by the government, and 3. Increase or
decrease in liabilities to other countries' central banks.
Net statistical discrepancy is used to equalize debit and credit records due to data
incompleteness that may arise.
Each account in the BOP can be in surplus or deficit. A current account deficit implies
that imports are greater than imports, the interpretation of a surplus or deficit trade balance
needs to be based on a detailed analysis of the reasons why it is in surplus or why it is in
deficit. A deficit incurred due to imports of capital goods may be a good indication, whereas
a deficit incurred due to imports of consumer goods means the inability of domestic
production to meet the needs of the population. The same applies to the interpretation of a
capital account surplus or deficit.
ECONOMIC FACTORS
ECONOMIC ANALYSIS:
Economic factors are one of the most important external factors of the business
environment. For the effectiveness of business activities and planning its activities in the
future In the future, companies need to understand and forecast economic conditions at the
national and international levels.
To do this, a lot of data that has been published by the government of a country or from
various international organizations, such as the World Bank, IMF and others can be used. In
addition, a lot of data and analysis of a country's or international economy can be obtained or
has been analyzed by many service companies in this field. The purpose of an economic
analysis is to assess overall economic conditions and assess the impact of economic changes
on the company's business activities.
When a company is about to enter a foreign market, the economic analysis becomes
more complex, as the economic factors of three environments must be considered; domestic
environment, foreign environment, and international environment. Due to the differences in
economic factors in each country, business policies that are suitable for economic conditions
in one country will not be suitable in another country. International economic analysis needs
to be conducted to provide economic data not only on the company's market countries, but
also on countries that may be favorable prospects.
LEVEL OF ECONOMIC PROGRESS:
Each country varies in its level of economic progress. Companies doing international
business will be dealing with countries with different levels of economic progress and may
differ from the company's home country. It is important to recognize the level of economic
progress of a country, because the level of progress A country's economy will affect all
aspects of business activities with that country.
Various ways are used to classify countries based on their level of economic progress.
In general, the classification is known as: (1) developed countries, (2) developing countries.
Developed countries are countries that are both industrialized and service countries, and have
achieved high income per capita. Developed countries include: USA, Western European
countries, Japan, Australia, New Zealand, Canada, Israel. Developing countries is a
classification for countries with relatively low income per capita, and relatively low levels of
industrialization and technology use. All other countries outside developed countries are
categorized as developing countries.
This classification has been deemed inappropriate over the past few decades. Many
countries have managed to upgrade in a short period of time and are now known as newly
industrializing countries, which are fast-growing economies with medium or high incomes,
significant foreign direct investment, and substantial exports of industrial products. These
countries or regions include: South Korea, Hong Kong, Taiwan, Singapore, Brazil, Mexico,
Argentina, Malaysia, Thailand, China, Indonesia. Some countries or regions, namely South
Korea, Hong Kong, Taiwan, Singapore are often known as the 4 Asian tigers, namely
countries or regions whose industrial development far exceeds other countries, so they are
called newly industrialized economies.
Further classification developments include the term transient economies, i.e. countries
that used to have a communist or socialist economic system, and are now transitioning to a
free competition economic system. These are the countries of Eastern Europe (Hungary,
Bulgaria, Poland, etc.), and the countries of the former Soviet Union (Russia, Ukraine,
Georgia, etc.). Finally, some countries with growth potential that are expected to become
developed countries in the near future are the group of countries known as BRIC, namely
Brazil, Russia, India and China.
Various organizations also issue their own classifications, so there are classifications
from the United Nations, IMF, World Bank, and also classifications by development
economists. Rather than debating terms that are pointless, it may be better to understand that
countries in the world differ in their level of progress, as well as the speed and trend of their
economic progress. An understanding of the level, speed and trend of a country's economic
progress needs to be recognized by international business people, as this affects the business
policies that international business people need to take.
ECONOMIC DIMENSION:
To estimate the market potential in a country and also to obtain inputs for the functional
management decisions of the company, data on the magnitude and speed of change in various
dimensions of economic and socioeconomic factors are required. Some important economic
indicators include: gross domestic product, gross national income, distribution of income,
private consumption expenditures, unit labor costs, exchange rates, inflation rates, and
interest rates.
Gross National Income is a measure of the income generated by a country's residents
from domestic and international activities. Gross Domestic Product is a measure of the
income generated by both residents and non-residents of a country in the country's domestic
economic activity. Whether GNI or GDP is used as a measure of the size of a country's
economy depends on the purpose for which it is used, although GNI is generally preferred.
GNI/capita is a measure of the average income of a country's population in its domestic
and international activities. This measure is used to express the purchasing power of the
average population. Countries with high GNI/capita are more economically developed than
countries with low GNI/capita. However, the use of this measure must take into account a
number of things, including monetary values that are not sold through statistically recorded
market mechanisms, currency conversion, the size of the underground economy, and income
distribution.
To be able to compare the GNI of various countries, the currencies of each country
must be converted to a currency, which is generally the US dollar, with a certain exchange
rate. The fact shows that the use of exchange rates for GNI conversion does not reflect the
purchasing power of consumers in a country. To solve this problem, it is common to use the
method of comparing GNI with using the purchasing power parity measure. By using the
PPP measure, GNI can be more realistically compared. Table 7-1 below shows GNI/capita
data by exchange rate and by PPP of ASEAN countries and some other countries.
The underground economy is the income of a country's population that is not recorded
statistically. Typically the underground economy is larger in countries with high tax rates, or
high levels of corruption, or with high levels of illicit business activity. Estimating the size of
a country's underground economy is usually very difficult, as governments are generally not
transparent and tend not to recognize data that shows government incompetence.
Income distribution is a measure of how a country's income is distributed among its
citizens. Various methods are used to estimate The income distribution is used by the World
Bank, United Nations Development Program (UNDP), Central Intelligence Agency (CIA),
among others. Table 7-2 below gives the percentage share of income of a country's
population. The data generally shows that the distribution of income is very unequal and this
situation is almost the same in all countries in the world.
The income gap generally increases with an increase in the country's income,
especially the largest increase in income occurs in the middle class. Table 7-3 below shows
the gap expressed in terms of the UNDP's R/P 10% measure, in terms of the World Bank's
Gini measure and in terms of the CIA. R/P 10% is the ratio of the average income of the
richest 10% of the population to the average income of the richest 10%.
The poorest 10% of the population. The Gini index is a coefficient that ranges between 0 and
1, in which case 0 means perfect equality (everyone has the same income), and 1 means
perfect inequality (one person has all the country's income, and another has none).
Private consumption expenditure is the pattern of consumption, i.e. how the
population of a country spends its income, i.e. between the purchase of essential goods and
nonessential goods. Nonessential goods entrepreneurs want to know the amount of
discretionary income, which is the amount of income after deducting tax payments and
purchases of essential goods. By knowing the consumption patterns of each country,
entrepreneurs can estimate the amount of spending of the country's population for each type
of product, namely in terms of spending on food, clothing, education, health, transportation
and communication, and so on. Table 7-4 below shows the consumption patterns of the
population on a PPP basis for the specified classifications. With PPP-based measures,
differences in relative prices have been eliminated, so the data can be used to analyze how the
composition of a country's population consumption changes with different levels of progress.
It can be seen that the consumption percentage of ASEAN countries for food is almost 4
times that of Japan and the USA. Comparative analysis of consumption patterns across
countries is useful for estimating the size of the market for a particular product category in a
country.
Unit Labor Costs are total direct labor costs divided by the amount produced. A
country with low unit labor costs will be attractive for foreign direct investment companies
that require low labor production costs. In addition to unit labor costs, the rate of increase in
unit labor costs also needs to be considered, because the speed of increase varies from
country to country. A country with low unit labor costs at one time may have high unit labor
costs in the following years. Changes in a country's relative unit labor costs are influenced by
the following factors: compensation, productivity, and the exchange rate.
Foreign debt is one measure of the economic dimension that is important for
international business. Large foreign debts for developing countries pose multidimensional
problems not only to the government of the country concerned, but ultimately also to
international companies operating in the country. The government of a country that is heavily
indebted relative to its ability to pay will undertake policies that are often detrimental to
international businesses, including implementing price controls (reducing corporate profits),
cutting government spending (reducing corporate sales), implementing wage controls
(limiting consumer purchasing power), and so on. Table 7-6 below states the size of the debt
of several countries in Asia. From the data, one might conclude that Indonesia's foreign debt
is only about 1/3 of China's foreign debt. However, given that Indonesia's exports are only
1/10th of China's exports, China's ability to earn foreign exchange to repay its debt is much
greater than Indonesia. In addition, Indonesia's foreign debt is half government debt, and half
government-guaranteed debt, and is the largest stock of foreign debt of all countries in the
table.
SOCIOECONOMIC DIMENSION:
The analysis of economic factors will not be complete without taking into account the
socioeconomic dimension, which is data on the country's population in its economic
dimension. Some socio-economic dimensions include: total population, age distribution,
birthrate, population density and distribution, among others. Total population is a general
indicator of the size of a country's market potential. The size of a country's population varies
widely. China, the most populous country in the world, had a population of 1,367,030 in
September 2014 (National Bureau of Statistics of China), while Vatican City had a
population of 839 in September 2014 (http:// www.vaticanstate.va/)/ The characteristics of
population in the world show that many developed countries have a population of <10 million
people, while many developing countries have a population of >10 million people. This
suggests that total population is not an appropriate indicator to indicate a country's market
potential for most products. A more appropriate indicator should be with
with other economic indicators, such as GNI.
The Age distribution of a population provides a more precise potential market for a
product, and is also the basis for market segmentation in a country. Developing countries
generally have relatively more young people than developed countries. This is due to the fact
that the birth rate in developing countries tends to increase, whereas in developed countries it
usually decreases. Age distribution data provides an indication of the types of products that
are needed by a country. Table 7-7 provides data on the old-age population in ASEAN and
other countries.
Population Density and Population Distribution are other socioeconomic indicators
of concern to international businesses. Population density is usually measured by the number
of people per unit area (population per km2), while population distribution is a measure of
how the population is distributed within the regions of a country. Densely populated areas
tend to make product distribution and communication cheaper and easier than areas with low
population density. Another fact that needs to be recognized is the issue of urban and rural
areas. In general, there is urbanization of population from rural to urban areas, especially in
developing countries.
Other socio-economic dimensions need to be known, such as the number of working
women, divorce rates, ethnic groups, and so on. In addition, economic plans prepared by the
government stating what the economy will achieve and how it will achieve it, usually over a
5-year period, are useful data for businesses in the country. The industry dimension shows
data on The size and development of an industry in its various aspects also provides
information about the potential market and competition it may face.
FINANCIAL FACTORS
INTRODUCTION:
Financial factors are one of the uncontrollable factors faced by international
businesses. This factor is exchange rate fluctuations and the risks they pose, as well as other
external financial factors, such as exchange rate controls, tariffs, taxation, inflation, interest
rates.
EXCHANGE RATE FLUCTUATIONS:
The exchange rate of a country's currency against another country's currency is always
changing. These changes have a huge impact on international business activities. To
understand the factors that determine exchange rate fluctuations, it is necessary to understand
the role of U.S. currency, exchange rate statements, and the causes of exchange rate
fluctuations.
The US$, the currency of the USA, is the most influential currency of any country in
the world. The US$ has earned this position for historical and practical reasons that continue
to this day. The US$ has been used by many countries as a central reserve asset, as a vehicle
currency, as an intervention currency, and as a safe haven currency.
Central reserve asset means US$ is a currency held as an asset by the central bank of a
country's government. Vehicle currency means US$ is the currency that US$ is used as a
means of payment for international trade or investment. As an intervention currency because
US$ is used by a country to intervene in the foreign currency market. As a safe haven
currency, because US$ is used as a safe deposit and is believed to be universally accepted.
Exchange rate statements are expressed as spot rates, or forward rates, or cross rates.
Spot rate means the exchange rate between a country's currency and the US$ for delivery
within 2 business days. Forward rates are the exchange rate between a country's currency
and the US$ for delivery in the future, typically in 30, 60, 90 or 180 days. In forward rate
statements, the terms trading at a premium (when the forward rate is offered higher than the
spot rate), and trading at a discount (when the forward rate is offered lower than the spot
rate) are recognized. Cross rates are when the currency exchange rate is directly between the
currencies of two countries without involving the US$.
Fluctuations in currency exchange rates and the ease of exchange are determined by a
variety of factors, including the supply and demand for the currency, interest rates, inflation
rates, and future expectations. Government monetary and fiscal policies also affect exchange
rate fluctuations.
EXCHANGE RATE CONTROL
Government controls that limit the legal use of a currency in international transactions
vary from country to country, even within a country depending on the type of transaction. In
general, developed countries do not have many controls, while some developing countries do
not in order to attract foreign direct investment.
Controls are usually exercised in several ways, including: borrowing from abroad,
direct investment into the country, portfolio investment into the country, remittance of
dividends and profits, interest and principal, royalties and fees, repatriation of capital, and
through reporting and recording of remittances abroad. Controls are also exercised on foreign
currency exchange. The controls applied differ from country to country and even within the
country depending on the type of transaction.
TARIFFS OR DUTIES
Tariffs (import duties): taxes imposed on imported goods in order to increase the price
of those goods. The imposition of tariffs makes imported goods in the country more
expensive. Tariffs are taxes, and this means an increase in costs. There are 2 alternative ways
to deal with the increase in costs, namely raising prices or lowering profit margins.
TAXATION
Various taxes are applied differently in each country: income tax, value-added tax, tax
on capital gains, land and building tax, and so on. On an international level, taxes are
particularly important, as financial forces are complex due to them. Taxation can pose
financial risks, but it can also provide opportunities for businesses.
INFLATION
The increase in the price of a product over time. The causes of inflation are still debated
today, ranging from those that explain it on the basis of demand exceeding supply, to those
that explain it due to an increase in the supply of money to the economy. What is certain is
that in an inflationary economy, the prices of goods will rise.
Inflation is generally measured by the consumer price index (CPI), which is the change
in prices of a basket of consumer goods. The OECD applies a more general measure, using
gross domestic product (GDP) deflation, which takes into account the prices of intermediary
products.
Inflation will affect a company's sales and investment, because with inflation, the
relative price of goods becomes more expensive, and this will reduce the size of product
sales. As product prices become higher, the country's output becomes uncompetitive in
foreign markets, and this discourages international companies from investing in the country.
Government policies including monetary policy, as well as fiscal policy often have to
be taken to correct deficits in the balance of payments and trade. Such policies often also
cause the inflation rate to rise.
ACCOUNTING PRACTICES
Another important financial factor to consider is that accounting practices vary by
country. Companies should use accounting practices in accordance with the accounting
standards in the country where the company conducts its business activities. If the company
does business in many countries, the financial statements of each subsidiary will vary
according to the accounting standards applicable in that country. Since the financial
statements of each subsidiary must be converted, this usually leads to what is called
translation risk.
PRACTICE QUESTIONS
1.
Compare the following two methods, managed floating and independent floating on the
economic activities of a country.
2.
Why does the level of economic progress matter in international business? Provide an
analysis.
3.
What are the benefits of a company knowing its revenue distribution? Can such
information influence the company's business strategy?
4.
Do you think total population can be the only indicator of the size of a country's market
potential? Give your reasons.
5.
What is the effect of exchange rates on a country's economic activity?
6.
How do tariffs, taxes and inflation affect corporate decisions within a country?
