1. Global Business Management (MGT380) Lecture #5: Politics and Law

2. Learning Objectives  To understand the importance of the political and legal environments in both the home and host countries for GB.  To learn how governments affect business through legislation and regulations.  To see how the political actions of countries expose firms to international risks.

3. Summary of the lecture  Rationale of trade policies  The domestic policy actions of most governments aim to increase the standard of living of citizens and to improve the quality of life, and to achieve full employment.  These policies goals and international trade relates indirectly.  Each country develops its own domestic policy, which varies, may cause conflict. E.g., Cattle, Cars  ITO, GAAT (Most Favored Nation clause), WTO

4.  Three major changes have occurred over time in the global policy environment:  a reduction of domestic policy influence;  a weakening of traditional international institutions Focus was shifted towards non-tariff barriers which are more complex Right to establishment within countries without personal presence Disputes in areas like agriculture or intellectual property rights protection continue to rise. Inclusion of ‘social causes’ such as labour laws, competition, emigration  Sharpening of the conflict between industrialized and developing nations.

5.  Trade restrictive measures:  Tariffs are taxes on the value of imported goods  Quotas are restrictions on the no of foreign products that can be imported  Non-tariff barriers include testing, certification, simply bureaucratic hurdles which result in restricting imports.  Anti-dumping law, Nontariff barriers (preference to domestic bidders, incompatibility of international standards) and tightening market access  Effects: high cost, shift of product/mode, efficiency loss

6. Mini-case study: Shrimps, Turtle and the WTO  There are seven species of sea turtle in the world, six of them are on the list of engendered species in the US. A major cause of the decline of sea turtle has been poor fishing practices, particularly in shrimp boats. It is estimated that almost 150,000 sea turtles/year are trapped in the nets of sea boats. To limit this, in 1989, US congress passed a law which required shrimp boats to the equipped with a turtle excluder. The law also banned the importation of shrimp from countries that fail to mandate the use of turtle excluders. In 1996, US placed an embargo on importation from India, Pakistan and Malaysia. In response, these countries filed a complaint in WTO against it, Thailand also joined them on principle grounds.  US claimed that WTO rules include provisions for taking restrictive measures if they are related to the conservation of exhaustible resources. Its US obligation and therefore US took reasonable measures.  The four countries argue that US violating WTO rules by applying domestic legislation outside its boundaries and applying it in a discriminatory manner. It is unfair restraint on trade.

7.  WTO ruled that US was wrong to prohibit shrimp imports from countries that failed to protect sea turtle. WTO state that while environmental protection is important but the primary aim of international agreements on trade is promotion of economic development through unfettered free trade. US would not be allowed to force other nations to adopt policies to protect an engendered species. Questions:  Do you think it is correct for the WTO to decouple trade policy from environmental policy. Why?(It is one of the challenges WTO is facing, It is good to disentangle trade and social cause policies)  Do you think other countries are correct to accuse the US of hypocrisy on the environmental issue? (Yes, for instance, KOYOTO treaty)

8. A Look at Three Segments  The Home-Country Perspective  Host Country Political and Legal Environment  International Relations and Laws

9. The Home Country Perspective  Many laws and regulations may not specifically address GB issues, yet they have impact of GB.  Countries make legal and regulatory measures for BG which have +/- impact  Major areas of governmental activity that are of concern to the international business manager:  Embargoes and Sanctions  Export Controls  Regulation of International Business Behavior

10.  Sanctions and Embargoes: Refers to Gov actions that distorts free flows of trade in goods/services for political purpose rather than economic purpose.  Origin started in 1284, the Hansa, German association of merchants believed that one of their ship is attached and looted by Norwegians.  It is a principle tool of the foreign policy in hope that foreign country would change the policy.  Later, multilateral use of economic sanctions was introduced

11.  UN faced two problems in it:  How to explain ‘peace’ and ‘breach of peace’  Mutual consensus across the countries  Sanctions means significant loss of business to firms. it is around $20 billion in lost exports to US.

12.  Export Controls: Most countries have export control system designed to deny or at least delay the acquisition of strategically important goods rivals.  The legal basis varies across countries. For instance, in Germany arm export comes under war-weapons and comes under War Weapon Control law, normal items are controlled by German Export list, Dual use items are controlled by Joint list of EU.

13.  Determinants of Export control: National security, foreign policy, nuclear non-proliferation  Steps:  Should a given product be exported?  To a given country?  For use by a given firm?  Environment for export control has been changed over the years. Major changes are as follows:

14.  Collapse of Soviet Union and Eastern Block  Focus is shifted to third world countries  Loosing bond between allied nations  Availability of technology from other resources  Speed of change and rapid dissemination of information and innovation around the world. The issue of equipment size

15.  Export control problems and conflicts:  (i) continuing debate about what constitutes military-use products, civil use and dual use products. E.g., harmless screws.  (ii) transfer of knowledge is uncontrollable  (iii) nations have their desires to safeguard their national interests

16.  Regulating International behaviour: r egulations on firms varies substantially among nations.  Nations may employ boycotts to govern business activities. Firms are forced to either loose the business or pay fines.  Antitrust Laws are a regulatory activity.  General standard of behaviour and ethics. E.g. Rain forest, China cheap labor, Mexico’s low safety standards

17.  Bribery is an another area. Firms operating abroad are affected by laws against bribery and corruption.  International businesses may bribe to counterbalance poor product quality, to create a market for goods, or to stay competitive with other firms that bribe.

18. Host Country  Political Action and Risk: Varies widely from country to country  Confiscation The government takeover of a firm without compensation to the owners.  Expropriation A form of government takeover in which the firm’s owners are compensated.  Domestication The government demands transfer of ownership and management responsibility.  Intellectual property right Risk of loosing their core competitive edge.

19.  Economic Risk  Less dangerous, but more common  Exchange controls may be imposed  Tax policies may be used to control corporations and their capital  Price controls may employed to control prices of imported products or services. E.g. products in food and health care

20.  Political risks:  Ownership Risk Exposes property and life  Operating Risk Interference with the ongoing operations of a firm  Transfer Risk Limitations on the outflow of funds

21. Managing the Risk  Demonstration of concern with host country’s society can be effective.  Hiring of local people  Close monitoring of situation  Firms can take out insurance to cover losses due to political and economic risk.

22. Legal Differences and Restraints  Countries differ in their laws as as well as in their use of the law. There are two major legal systems worldwide:  Common Law: Based on tradition and dependent upon precedent and custom. Pakistan, India, US, Canada  Code Law: Based on a comprehensive set of written statutes. EU, China

23. International Relations and Laws  International Politics: The effect of politics on international business is determined by both the bilateral political relations between home and host countries and by multilateral agreements governing the relations among groups of countries.  International Law: Plays an important role in the conduct of international business. Treaties and agreements have a strong influence on international business operations.

24. International Law  The World Trade Organization defines internationally acceptable economic practices for its member nations.  The Patent Cooperation Treaty (PCT) provides procedures for filing patent applications.  The United Nations has developed codes and guidelines that affect international business.

25.  Arbitration: Procedures are quicker and often spelled out in the original contract  Litigation: Often involves extensive delays and is very costly

26. Summary of the lecture  The Home-Country Perspective, Host Country Political and Legal Environment, International Relations and Laws  Major areas of governmental activity that are of concern to the international business manager:  Embargoes and Sanctions  Export Controls  Regulation of International Business Behavior

27.  Sanctions and Embargoes: Refers to Gov actions that distorts free flows of trade in goods/services for political purpose rather than economic purpose.  Export Controls: Most countries have export control system designed to deny or at least delay the acquisition of strategically important goods rivals.  Steps: Should a given product be exported? To a given country? For use by a given firm?

28. Collapse of Soviet Union and Eastern Block Focus is shifted to third world countries Loosing bond between allied nations Availability of technology from other resources Speed of change and rapid dissemination of information and innovation around the world. The issue of equipment size Regulating International behaviour through boycotts, anti-trust laws, bribery, general acceptable standards and ethics

29.  Political Action and Risk:  Confiscation: The government takeover of a firm without compensation to the owners.  Expropriation: A form of government takeover in which the firm’s owners are compensated.  Domestication: The government demands transfer of ownership and management responsibility.  Intellectual property right: Risk of loosing their core competitive edge.  Economic risk: currency control, taxes, prices control  Political risk: ownership, operating and transfer risks  Managing risk, & legal systems(code and common)