Political and Economic Factors Affecting Internation al Business Chapter 9

Prior Knowledge  How does a country’s political system affect the country’s participation in international business?  What are some political and financial risks faced by Canadian companies in the international business world?  How are economic systems throughout the world becoming more interdependent and more global?

 Types of Political Systems 1. Democracy - government for and by the people 2. Totalitarian Systems - centralize power and often use the military to control the state 3. Mixed Economy - purely democratic or totalitarian political system is theoretical; most countries show characteristics of both 9.1 The Political Process: Government’s Role in International Trade

 Political Interdependence countries start to feel pressure to change their political, economic, and cultural practices 9.1 The Political Process: Government’s Role in International Trade

 Trade War - governments act aggressively in international markets and other forums to promote their own countries’ trading interests  Economic Imperialism exploitation of developing countries by more developed countries 9.1 The Political Process: Government’s Role in International Trade

9.2 Assessing Global Political Risks  POLITICAL RISK  Refers to political decisions, conditions, events or activities in a country that affect the business climate  Types of political risk 1.Ownership Risk 2.Operations Risk 3.Transfer Risk

9.2 Assessing Global Political Risks  TYPES OF POLITICAL RISK 1. Ownership Risk  Threatened by government takeover  Done by government taking back property

9.2 Assessing Global Political Risks  TYPES OF POLITICAL RISK 2. Operations Risk  Government policies create delays  i.e. new taxes, import restrictions, government regulations

9.2 Assessing Global Political Risks  TYPES OF POLITICAL RISK 3. Transfer Risk  Government policy affects currency exchange rates  Policies cause currency devaluation or economic downturn

Brainstorming Activity  In groups of three select a global event/issue and identify an industry that would be affected. - Be sure to explain the reason as to why this industry would be affect.

Identifying the Risks of International Trade  Political – War, embargo  Examples: 2006 Mexican Drug War, 2003 Iraq War, Gaza War, Military controls government, high corruption index  Economic/Financial – Non-payment, exchange rate fluctuations  Examples: Great depression, current recession, 2007 Canadian dollar at par with US dollar

Identifying the Risks of International Trade  Social – Kidnapping, terrorism, labour strike, religious  Examples: New York 9/11, July 2005 London bombings (also called the 7/7 bombings), Madrid – Spain, March Train bombing  Natural – Typhoons, earthquakes  Examples: April 6, 2009 – Abruzzo region - Italy, May 2, 2008 Cyclone Nargis tore across the Irrawaddy Delta in southern Burma, 2004 Indian Ocean tsunami

 Economic Systems – include all the factors and the rules and regulations involving production and consumption of goods/services Three most common economic systems: 1.Market Economy 2.Centrally Planned (command) Economy 3.Mixed Economy 9.3 Economic Factors Related to International Business

Market Economy  individual companies and consumers make the decisions about what, how, and whom goods and services are produced  Forces of supply and demand control market economies 9.3 Economic Factors Related to International Business

Market Economy  Law of Supply states as price of a product increases, producers will be willing to produce more of that product  Law of Demand states that as the price of a product increases, consumers will demand less of that product 9.3 Economic Factors Related to International Business

Centrally Planned (command) Economies  government regulates the amount, distribution, and price of goods and services  Society is considered before individual needs  State controls prices, wages, production quotas, and distribution of raw material  Guaranteed basic standard of living, health benefits, and education  Examples: North Korea and Cuba 9.3 Economic Factors Related to International Business

Mixed Economy  combines government involvement and private ownership of businesses  Canada is considered a mixed economy for the following reasons:  plays a major role in important industries (transportation, health care, and communications) 9.3 Economic Factors Related to International Business

 PRIVATIZATION  sell state-owned enterprises into private ownership  It can occur in all types of economies  Ex. 407 ETR

Business Cycle

Business Cycles  DEPRESSION  Economy slows and consumers buy less  Factories shut down and high unemployment  RECOVERY  Economy starts to improve  Business begin to resume production  Consumers start to spend money

Business Cycles  PROSPERITY  Economy at its best  Investment is strong  Job opportunities increase  RECESSION  Economy starts to slow  Consumers buy less  Occurs when total economic output shrinks for at least six months

World Markets  Stock exchanges discussing ability to create 24 hour stock trading around the world, this is known as GLOBAL EQUITY MARKET