1. Economic and Legal Environment Facing International Business
WEEK 3
Economic and Legal Environment Facing International Business

2. Objectives
To understand the importance of economic analysis of foreign markets
To profile trends in the evolution and diffusion of legal systems
To examine the major legal issues facing international business companies

3. Importance of Economic Environments
Economic development directly impacts citizens, managers, policymakers, and institutions.
Company managers study economic environments to estimate how trends affect their performance
A country’s economic policies are a leading indicator of government’s goals and its planned use of economic tools and market reforms.

4. Definition of Economic System
A mechanism that deals with the production, distribution, and consumption of goods and services
Types:
Market economy
Command economy
Mixed economy

5. ECONOMIC SYSTEMS Types of economic system
Market economy – individual make the majority of economic decision, few government intervention (Hong Kong, USA, Canada)
command economy – Government owned and control the economic, demand, and pricing are planned by the government
mixed economy - characterized by elements of both a market economy and a command economy 5

6. Major Elements of the Economic Environment
Gross national income (GNI): the income generated both by total domestic production as well as the international production activities of national companies
Gross domestic product (GDP): the total value of all goods and services produced within a nation’s borders over one year, no matter whether domestic or foreign-owned companies make the product.

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8. Features of an economy
Inflation – rise in price measured against standard of level purchasing power
Comparing the price of a product at two point of time, and computing the increase cost (example: price of 10 Kg rice in 2007 (RM12), in 2010 (RM25) – increase 24%, increase in income (15%)
The effect of inflation – more difficult to buy product, high cost of leaving, less value of money

9. Inflation in Zimbabwe

10. Features of an economy Unemployment Debt
Income distribution – income inequality, urban vs rural income
Poverty- little or no money, lack of standard of well-being and life
Labor costs – higher in developed countries (US/Australia labour cost $15 to $30/hour, in China only 3% of the US labour cost.

11. Features of an economy
Productivity – measures of efficiency which products are produce (amount of output created per input used). Quantity produced per person per hour
Productivity growth – economy grow higher rates without any inflation
Balance of payments
Statement of international transactions
Current account – track all activities in business
Capital account – track loans given to foreigners and loans received

12. The Economic Freedom Index
Approximates the extent to which a government intervenes in the areas of free choice, free enterprise, and market-driven prices for reasons that go beyond the basic need to protect property, liberty, citizen safety, and market efficiency
Countries with the freest economies have had the highest annual growth and a greater degree of wealth creation.

13. Dimensions of The Economic Freedom Index
Business freedom
Trade freedom
Monetary freedom
Freedom from government
Fiscal freedom
Property rights
Investment freedom
Financial freedom
Freedom from corruption
Labor freedom

14. Transition to a Market Economy
Liberalizing economic activity
Reforming business activity
Establishing legal and institutional frameworks
Success is linked to how well the government deals with:
Privatization
Deregulation
Property right protection
Fiscal and monetary reform
Antitrust legislation

15. Legal System Defined
is rules of the game on how a country’s laws are enacted and enforced
differences in the structure of law influence the attractiveness of a particular country as an investment site.
Determine the conduct of business transaction, who has the right obligations.

16. TYPES OF LEGAL SYSTEMS
Common law – Law system is based on traditional, judge-made precedent and usage (Canana, USA, N. Zealand, UK, Australia, Hong Kong)
Civil law – Law system based on the systematic codification of law and codes. Change the political official not the government (Germany, France, Mexico, Japan)
Theocratic law – law system relies on religious to define legal environment. All business transaction & social based on religious law (Shariah & Sunnah) (Middle east countries – Saudi Arabia, Iran, Libya, Itaq, Morocco) 16

17. TYPES OF LEGAL SYSTEMS
Customary law – Law system us anchored in the wisdom of dally experience or in more elegant term, local spiritual. Defined the right and responsibilities of community members in many matter. Play important roles in many indigenous or other traditional communities (Many countries in Africa)
Mixed systems – country use two or more legal system. Malaysia, Pakistan – Common law and Theocratic (Shariah) Law 17

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19. Legal Issues in International Business
Operational concerns
Legal influence 5 aspects of operation - getting start, making and enforcing contract, hiring and firing, getting out, general relationship
2. Strategic concerns
Legal influence 5 aspects of strategic – marketplace behavior, country of origin and local content, product safety and liability, Arbitration, legal jurisdiction
3. Intellectual property rights

20. Legal Issues in International Business
Starting Business
Country
(Types of law)
No. of producers
Time (day)
Australia (Common) 2
Canada (common) 1 5
China (Civil) 14 40
Japan (Civil) 8 23
UK (common) 6 13
US (Common)
Korea (Civil) 10 17
1. Operational concerns
Getting started
Registration names, tax structure
Making and enforcing contract
Common law – contract is precise & detailed
Civil Law – less specific

21. Legal Issues in International Business
Operational concerns
Hiring and firing
Singapora, NZ & US – most flexible labor regulation statues
China – the most flexible hiring, poor regulation on working conditions,
Angola, Paraguay – rigid regulation in firing
Getting out (closing business)
some countries easy & less cost (Hong Kong, Canada, Japan, Ireland)
Some countries difficult and high cost (India, Phillips, Serbia, Chat)
General relationship – richer countries regulates less and poor countries regulates more

22. Legal Issues in International Business
2. Strategic concerns
Marketplace behavior – law determine all forms of business activities including marketing. France- regulates trucks can use highway (not on Sundays) or during sales (2 times a year set by the government)
Country of origin and local content - the country that products produces. Example product label
Product safety and liability – Comply with local standards, differ due to culture differences. General standard for agriculture product – Good Manufacturing Practices, other ISO standard

23. Legal Issues in International Business
2. Strategic concerns
legal jurisdiction – different legal system may difficult in resolve business dispute.
Arbitration – resolve disputer through third parties to settle the matter. Govern by New York standard convention

24. Legal Issues in International Business
3. Intellectual property rights [IPRs]:
Ownership of creative ideas, innovative expertise or intangible assets [copyrights, patents, trademarks, etc.] that give an individual, company or countries a competitive advantages
World Trade organization and World Intellectual Property Organization (WIPO) and some countries push for better IPR
Less developed countries provide less protection for IPRs than do industrialized nations.
Countries with a more individualistic orientation view IPRs as intrinsically legitimate, but those with a more collectivist outlook extol the virtues of shared ownership.

25. Implications/Conclusions
Many countries are in a state of political transition. Presently, there is a shift away from totalitarian governments toward more democratic political ideals and freer market principles.

26. International business is affected by laws and regulations enacted both by countries and by international organizations.
Laws may be at cross-purposes; some may diminish the ability of firms to compete with foreign competitors.

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28. END of TOPIC TQ