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Economic Systems Countries economic system deals with three issues:

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1 Economic Systems Countries economic system deals with three issues:
What goods and services should be produced? How should the goods and services be produced? For whom should these goods and services be produced?

2 Systems are categorized by the ownership of resources and the governments involvement

3 Types of Economic Systems
Command/Centrally Planned Market Mixed

4 Command/Centrally Planned Economies
All activities of the economy are planned by the government This includes what is produced, the quantity of goods produced, and the prices at which they are sold. This is often called a communist economic system. Cuba and North Korea are examples

5 Over past 20 years these have declined
Failed to create economic value Failed to provide incentives Failed to achieve growth Failed to satisfy consumer needs Vending Machine Fashion Butcher Shop in Warsaw 1989 Queue in Wroclaw, Poland

6 Market Economy In a market economy, decisions are made by consumers and companies about what, how, and for who items are produced Property is privately owned This is also known as a capitalist system An example of a market economy is the United States U.S. is not a pure market ecnomy

7 Mixed Economy In a mixed economy, some parts of the economy are privately owned and some are owned by the government Typically the government steps in for companies who are considered vital to the country or necessary for the public good (ex: health care, transportation)

8 This is often referred to as a socialist system
Examples of mixed economies include France, Italy and Sweden

9 Relationship to Political Systems
Totalitarian political systems tend to have a communist/command economy Democratic political systems tend to have a capitalist/market economy

10 Privatization The trend today is toward market economies
The process of transferring government owned and operated entities to private individuals is called “privatization”

11 Peru’s Privatization Peru wanted to involve its citizens, particularly low-income people In November 1994, the government launched a program designed to involve citizens in auctions of shares of formerly state-owned enterprises. With almost 50 percent of the population below the poverty line, 3,000 people bought out all the telephone company shares available in the fist auction in less than three hours.

12 In the second auction, 6,600 investors -- many of them lower-income -- bought out all available shares in 45 minutes. By ,500 people had participated in the three auctions held to date. The government aimed to involve half a million by 2000.

13 Results Highest real economic growth rate in the world in 1995.
Poverty rate had dropped from 53.6 percent to 45.8 percent by 1995 Major tax and trade reforms have been enacted and the privatization program has sold off 51 state-owned enterprises, garnering $3.6 billion.

14 Economic Risk Likelihood that events, including economic mismanagement, will cause drastic changes in country's business environment that adversely affect the profit and other goals of a business enterprise

15 Types of Economic Risks
Exchange controls Tax impositions Minimum wage changes Inflation Loan default

16 3 bases for the majority of legal systems around the world
Common law Code/civil law Theocratic law Book mentions Statutory law also Website mentions customary law and mixed

17 Common law Bases itself on tradition, past practices and legal precedents set by courts through interpretation of the statutes, legal legislation and past rulings

18 Code/Civil Law Code law is based on an all-inclusive system of written rules. There are three parts of rules: commercial, civil and criminal

19 Theocratic Law This system is based religious beliefs
Ex: Islamic law is based on an interpretation of the Koran An example of how Islamic Law differs from American law is that Islamic law prohibit the charging of interest

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22 Legal Disputes There are three types of legal disputes:
Between governments Between a government and a company Between two companies First type can be handled by the World Court

23 International Court of Justice
Judicial branch of the United Nations Located at the Peace Palace Hears disputes between governments and gives advisory opinions about issues to international agencies Docket for cases

24 International Dispute between companies
Jurisdiction determined in three ways: Is there a jurisdictional clause? Where was the contract entered into? Where were the provisions of the contract performed? Others must be handled by one country’s laws

25 Jurisdictional Clause
Statement in business that specifies whose legal system or laws will apply to a dispute. “That the parties in question hereby agree that the agreement is made in Colorado, USA, and that any questions regarding this agreement shall be governed by the law of that state, Colorado, USA.”

26 Dealing with Disputes Conciliation/Mediation Arbitration Litigation

27 Conciliation Ask a non-biased third party to step in and recommend what should be done. It is nonbinding, and can be either formal or informal. Recommended for disputes involving the Chinese because it is less threatening than arbitration.

28 Arbitration Preferred manner of dealing with disputes internationally
Both parties select a third person to make a decision that will be honored by all Formal arbitration groups exist such as the American Arbitration Association, or International Chamber of Commerce

29 Arbitration clauses should be written into business contracts to make sure that both parties agree to follow the decision made by arbitrators. Arbitration clauses are recognized by courts and over 80 countries have signed an agreement to recognize arbitration awards. Why International Arbitration? International arbitration offers several principal advantages as a dispute resolution tool in contracts on global deals: It avoids unpredictable courts, unpredictable political situations, and unpredictable countries. Your dispute could readily wind up as a political or diplomatic football, or in judicial limbo as you argue jurisdiction. You may also do business in countries where legal protections for business are minimal. A variety of international organizations offer flexible arbitration procedures. Dispute resolution organizations such as the International Chamber of Commerce, International Center for Dispute Resolution, London Court of International Arbitration, and others facilitate arbitrations and provide rules to govern the process. You control the process by selecting the forum, facilitator, law, language, and number of arbitrators. The parties to the contract can negotiate a protocol for dispute resolution that is fast, convenient, cost-effective, and often less combative than traditional litigation. It’s harder for other parties to avoid the reach of the law. You don’t need to worry, for example, about obtaining personal jurisdiction over non-U.S. defendants, or about whether the company with which you are contracting is protected under the Foreign Sovereign Immunities Act. Most important, arbitral judgments are much easier to enforce internationally than overseas court judgments. If the party against whom the arbitral award is made has assets in one of the 126 countries which are signatories to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (commonly known as the New York Convention), then the award in most circumstances will be treated as if it had been sought and received in a domestic arbitration in the country where you are trying to enforce it. Is arbitration a panacea? Not necessarily. The process does have limitations: there is no practical right of appeal; discovery, documents, and motion practice are often severely restricted; and arbitrators aren’t necessarily bound by case law, or may issue “split the baby” decisions that give neither party a complete victory.

30 Litigation Least preferred method of dealing with international disputes. Excessive costs, time delays and may create a poor image for all parties involved. Fair juries and collecting awards can also be an issue.

31 Chinese recommended settlement process
Informal negotiation Conciliation Arbitration Litigation

32 Intellectual Property
Intellectual property refers to works of the mind such as ideas, art, music. It can also be products such as a chemical formula or computer software. This is becoming one of the hottest issues in international business.

33 Types of intellectual property
Patent – exclusive rights to a new product or process for an inventor Trademark – words or symbols that are registered by a company Copyright – legal rights to a work by authors, composers, playwrights, artists or publishers Patent (20 yrs)– exclusive rights to a new product or process for an inventor Trademark (indefinite if distinctive)– words or symbols that are registered by a company Copyright – legal rights to a work by authors, composers, playwrights, artists or publishers * creator’s lifetime plus 50 years if sone after 1978 * 75 years from date of publication or 100 years after creation, whichever comes first

34 Examples of famous protected works and their worth in millions
Coca-Cola $68,734 IBM $60,211 Microsoft $56,647 GE $47,777 Nokia $34,864 McDonald's $32,275

35 Brand values courtesy of Interbrand See the full report at

36 Protection Paris Convention of the Protection of Industrial Property, Madrid Agreement, and others have tried to make protection easier for international registration The main international trademark treaty is the Paris Convention. The Paris Convention is essentially an agreement between member nations (of which there are over 110) to allow foreign nationals of member countries the same treatment in each of the member countries as that country makes available to its own citizens. Under the Paris Convention, six months after a trademark application is filed in the US, the applicant can file an application in one of the foreign member nations and receive the filing date of the US application. If an application is filed more than six months after the US filing date then the claim to priority is lost.

37 Problems in Intellectual Property
In the U.S., ownership is established by prior use due to our common law system Many code-law countries use a registration system, where the first company to register is the one who has rights

38 Piracy and counterfeit items are also a large problem

39 In a survey conducted by the IACC, Fortune 500 companies reported that they spend an average of between $2 - $4 million per year to combat counterfeiting. Some reported spending up to $10 million. IACC – International Anti-Counterfeiting Coalition

40 The computer software industry as a whole is losing between $12 - $16 billion per year because of rampant piracy and counterfeiting. This amounts to more than 40 percent of all software industry revenues. In some countries, more than 90 percent of computer software are illegitimate copies.

41 Illegal videotaped copies of newly released films are often available for sale on the street even before the movies appear on the big screen. A recent film which cost a studio in excess of $100 million to produce, could be purchased on the street for a mere $10.00 before it was released in theatres.

42 You Tube Trademark counterfeiting robs the U.S. of $287 billion annually. It is a highly profitable tax-free cash business and it's lining the pockets of the same criminals involved in murder, drug trafficking, gun running and extortion. City of New York Office of Comptroller November 2004 Report on Counterfeiting in NYC

43 What's more, incidents of dangerous fake products turning up in the U
What's more, incidents of dangerous fake products turning up in the U.S. have spiked since the mid-1990s. Authorities found counterfeit baby formula at retail stores in 16 states, bacteria in fake shampoo and the FAA estimates that 520,000 counterfeit aircraft parts are installed on airplanes each year.

44 Marketing Laws Countries have different laws relating to promotion, product development, pricing, labeling and distribution Examples: In Germany, comparisons made between products must be proven In Canada, claims can not be misleading

45 Companies must check each country’s laws
Germany’s green dot program affects product packaging because all packaging must be accepted back by the manufacturer, distributor or retailer. Companies must check each country’s laws

46 Contract Law Issues Contract law varies widely between countries
Civil law countries tend to be much shorter and less specific Common law countries tend to be much more detailed

47 Product Safety and Liability
Safety standards vary greatly Liability laws also change by country as to how much a company can be held responsible for product problems

48 American laws which follow businesspeople
Foreign Corrupt Practices Act National Security Laws i.e. Patriot Act Antitrust Laws

49 Foreign Corrupt Practices Act
Applies to any individual, firm or representative of an organization FCPA prohibits paying, offering, or promising to pay anything of value to any foreign official, political party or candidate for political office In order to assist firm in obtaining or retaining business

50 FCPA enforcement actions filed by DOJ and the SEC
Over 100 firms are currently being investigated Top Five Trends in FCPA Enforcement The past year in FCPA enforcement activity bore out many of the key enforcement themes that we have observed in recent years.  Although there are many important trends that can be drawn from last year's prosecutions, we have identified below the top five that we believe best highlight the myriad risks facing companies and their employees doing business internationally.  These significant trends are: 1.  Escalating corporate financial penalties; 2.   Increasing focus on individual prosecutions; 3.   Internationalization of foreign anti-corruption enforcement; 4.   DOJ's coupling of FCPA prosecutions with other charges; and 5.   Continuing upswing in FCPA litigation. In Jan – 22 executives indicted large number of pending cases, along with several significant enforcement initiatives, indicate that FCPA enforcement will continue to be busy for the foreseeable future. During the first quarter of 2010, four companies announced reserves of over $100 million each, some significantly higher, in anticipation of upcoming FCPA settlements. Based on other reserve announcements, other, smaller settlements also appear on the horizon. Source: Gibson Dunn at 10/14/2009

51 Antitrust Regulations
Microsoft antitrust issues 1999 U.S. Justice Dept charge that they are monopoly over Windows operating system (self policing) 1999 European Union charged unfair practices for using Windows to control media players ($1.6 billion fine)

52 2004 Japan's Fair Trade Commission issued cease-and-desist order for anti-competitive behavior.
2009 European Union charges anti-competitive practices

53 Legal Risk Likelihood that trading partner will opportunistically break a contract or expropriate intellectual property rights

54 Political, Legal and Econ Impacts
Systems in place impact economic development Gross National Income per head of population (GNI) Nation Master GNI chart

55 Broader concept is Human Development Index (HDI)
Life expectancy, educational attainment, average income adequate to meet basic needs chart

56 Major Themes from text Innovation and entrepreneurship are engines of long-run economic growth Market economies have greater incentives for innovation and entrepreneurship Strong legal protection of property rights is conducive to economic growth

57 Democratic governments seem more conducive to long-term economic growth than dictatorships
Trends has been toward democracy and toward market economy


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