International Business:(Political and Legal System;Actors in Political and Legal System; Political Risks;Government Interventions)
What is environment?
Environment is the
surroundings or conditions in which a person, animal, or plant lives or
operates.
What is business?
An organisation or economic system
where goods and services are exchanged for one another or for money (currency,
gold etc.)
What is business environment?
Business environment consists of all
components (Internal and external factors) of the surrounding of a business
organisation, which effect or influence its operations and determine the
effectiveness.
What is international business/ global business?
Exchange of goods and services among
individuals and business firms from different countries.
The international business or global
business or world business includes trade as well as investment. Trade covers
exports and imports of goods, services and intellectual properties (ideas).Investment
includes inflows and outflows of FDI as well as portfolio investment.
What is globalisation?
The Worldwide movement toward
economic, financial, trade, and communications integration.
Globalisation a multi-dimensional
process (economic, technological, socio-cultural, political & institutional
and ecological process) where the study focus on economics.
Globalisation implies the opening of local and
nationalistic perspectives to a broader outlook of an interconnected and
interdependent world with free transfer of capital, goods, and services across
national frontiers.
What is international business environment or global
business environment?
Global
business environment
International
Business Environment is multidimensional including the
political risks, cultural differences, exchange risks, legal & taxation
issues. Therefore (IB) International
Business Environment comprises the political, economic, regulatory, tax, social
& cultural, legal, & technological environments.
The main cultural and social factors
that affect international business are language, education, religion, values,
customs, and social relationships.
These relationships include interactions
among families, labour unions,
and other organisations.
A
business firm has the three level of business environment:
·
Operating
·
Industry
·
And remote environments
The combination of internal and external factors
that influence a company's
operating situation: they include competitors, creditors,
customers, labours, trade union and suppliers.
It consists of the industry specific factors
identified by the Porter’s 5-forces Model: Supplier ability, Demand condition
or buyer power, entry barriers, availability of substitute and competitive
rivalry for firms providing same products.
Remote
Environment (General Environment)
General environment consisting of that
factors which are beyond control or uncontrollable. Uncontrollable factors put
in an acronym of PEST-NG that stands for:
Economical and Financial Environment
Factors
Socio- Cultural (and human)
Environment Factors
Technological Environment Factors
Natural Environment Factors
Global Environment Factors
Political
Economic
Socio-cultural
Technological
Legal
Ecological/ Ethical (& Natural)
Global Factors
International business owners and
managers pay close focus to the political and legal environment to determine
how government actions will affect their company.
The political environment of the country is very important for an international
firm as it moves from exports to foreign direct investment (FDI) as the mode of
international market entry. Different firms use political pressure tactics to
have free exportability of the products in their home country regulations,
hassle-free procedures, and legislative requirements and export incentives.
High uncertainty of
political and legal aspects many international firms (MNC) make use of
specialist consultants and analysts to identify and assess political factors.
International
managers need to understand the significance of political decision-making in
the host country that may severely influence its overseas operations.
A political system is a system of
politics and governments. A country’s political system influences how business
is conducted domestically and internationally.
For the study of the political system,
a business firm should analyse the constitution, major political parties, form
or structure of government, the mechanism designed to guide a delegation of
power from one leader to the next. A firm should also study how politicians
finance their campaigns.
Nature or Assumptions
A political system is a complete set
of institutions, interest groups (such as political parties, trade unions, and
lobby groups), the relationships between those institutions and the political
norms and rules that govern their functions (constitution, election law).
A political system is composed of the
members of a social organisation (group) who are in power.
A political system is a system that
necessarily has two properties: a set of interdependent components and
boundaries toward the environment with which it interacts.
A political system is a concept in
which theoretically regarded as a way of the government makes a policy and also
to make them more organised in their administration.
A political system is one that ensures
the maintaining of order and rationality in the society and at the same time
makes it possible for some other institutions to also have their grievances and
complaints put across in the course of social existence.
Political system consists
Political system is consists of
different elements. These elements are implemented and modified according to
the influence from the elements that include:
Executive
That consists councils of ministers
and government bureaucracy or authority.
Legislature
That consists parliament with upper
and lower houses
Judiciary
That consists courts and other
judicial and quasi-judicial authorities/institutions) In Nepal Apex Court of
Supreme Court, Appellate Court, Special Court, and Districts Courts. There can
be tribunals on settling bank loans, corruption and human right issues.
Political
parties and Civil Society
People (Political parties, civil
society) and media is symbolically described as the fourth estate.
Based on the different political ideologies, there are
different political system which may be discussed in two categories:
Collectivism, Individualism and Socialism
Individualism refer to the political system where
individualism is the idea that the individual’s life belongs to him and that he
has an inalienable right to live it as he sees fit, to act on his own judgement,
to keep and use the product of his effort, and to pursue the values of his
choosing. It’s the idea that the individual is sovereign, an end in himself,
and the fundamental unit of moral concern. This is the ideal that the American
Founders set forth and sought to establish when they drafted the Declaration
and the Constitution and created a country in which the individual’s rights to
life, liberty, property, and the pursuit of happiness were to be recognised and
protected.
In a purely socialist system, all
legal production and distribution decisions
are made by the government, and individuals rely on the state for everything
from food to healthcare. The government determines the output and pricing
levels of these goods and services.
Democracy and
Totalitarianism
Question: What is
the difference between a democracy and totalitarianism?
Democracy is a political system in which government is by the
people, exercised either directly or through elected representatives.
Characteristics
of Modern Democracy
1.
Majority
Rule– the system of government is based on parliamentary majorities
2.
Representative
Elections-the people are allowed to elect representatives to speak for
their views and interests.
3.
Multi-party
system-voters have the opportunity to choose from a variety of political
parties, representing a wide range of political opinion.
4.
Freedom of
speech-no restriction is placed on the right to opinions and express
then openly.
5.
Freedom of
association-no restriction is placed on people organising political parties
to take part in democratic life.
6.
Freedom of
Assembly-no restriction is placed on the right to hold meetings or
organise demonstrations provided those do not violate the rights of
others.
7.
Respect
the individual rights-the state protects individuals whose rights
are threatened by the actions of others.
8.
Respect
for Minority rights-minorities should not have their basic rights
violated by the majority.
9.
Respect
for the Law-citizens who are given democratic rights should obey
the laws that provide these rights.
10.
Respect
for Democratic Procedures-individuals or groups who have grievances
against the system should operate within it, seeking to change the law through
legal means.
11.
Channels
of Influence-individuals and groups have channels of access to decision makers
at every level.
Good Governance is an approach to government that is
committed to creating a system founded in justice and peace that protects
individual’s human rights and civil liberties.
Totalitarianism is a form of government in which one person or
political party exercises absolute control over all spheres of human life, and
opposing political parties are prohibited.
There are four
major forms of totalitarianism today:
Communist Totalitarianism: advocates achieving socialism through totalitarian dictatorship
Theocratic Totalitarianism: political power is monopolised by a party, group, or
individual that governs according to religious principles
Tribal Totalitarianism: a political party that represents the interests of a particular tribe
monopolises power
Right Wing Totalitarianism: individual economic freedom is allowed but individual political freedom
is restricted in the belief that it could lead to communism.
Difference between Democratic and totalitarianism
Actors
in political and Legal System
As an international business trader or
investor we should consider about the government of the country where we are
pre paring for trade or investment because of following intervention by government
may affect our business activities:-
- The government, or the public sector, is the most important actor, operating at national, state, and local levels. Governments have the power to enact and enforce laws.
- Government intervention alters the competitive landscape, by hindering or helping the ability of firms to compete internationally.
- Government organisation are in influential position for how an international firms enter host countries and how they conduct business there. Governments regulate international business activity through institutions, agencies, and public officials.
- Governments intervene in trade and investment to achieve political, social, or economic objectives.
- Governments impose trade and investment barriers that benefit interest groups, such as domestic firms, industries, and labour unions.
- Government intervention is an important dimension of country risk.
Customs — the
checkpoint at national ports of entry where officials
Non-tariff
trade barrier – government policy, regulation, or procedure that trade aid and
loans, subsidies.
Regional Trading/Economic
Blocs
Regional trade organizations, such as the SAARC,BIMSTEC (Bay of Bengal Initiative for Multi-Sectorial
Technical and Economic Cooperation (BIMSTEC)
is an international organisation to foster socio-economic cooperation among
Bangladesh, India, Myanmar, Sri Lanka, Thailand, Bhutan and Nepal.
European Union (EU), the North American Free Trade Agreement (NAFTA), and the Association of Southeast
Asian Nations (ASEAN), aim to advance the economic and political
interests of their members. The EU organization is especially well developed,
with its own executive, legislative, and bureaucratic bodies.
Supranational organisation or worldwide
influential international organisation
Supranational agencies such as the World Trade
Organization (WTO), United Nations (UN), and the World Bank have a strong influence on international business activities. Such
organizations help facilitate free and fair trade by providing administrative guidance, governing frameworks, and, occasionally,
financial support.
The focus of most supranational organizations is to ease trade
among different countries, the entity may also have political implications or
requirements.
According to WTO Official, the World Trade Organization (WTO) is the only international organization dealing with the
global rules of trade. Its main
function is to ensure that trade flows as smoothly, predictably and
freely as possible.
Example: - Different infrastructure, health and education programs are running
in Nepal with assistance of WTO and World Bank. That’s why these organisation
can influence Nepali political system as a major actor.
Basically these
types of influential organisations are engaged in different activities related
to food production, such as agriculture and fisheries, and those concerning the
environment or energy production.
Supranational organizations may also be involved
in education and forms of foreign aid or assistance to
countries. Certain organizations are involved in areas with significant
political impact on the member nations, including arms, the acceptable
treatment of prisoners of war, nuclear power, and other nuclear-development
capabilities.
Special Interest Group
Special interest group consists such as the Labour unions,
trade unions, different NGO’s, INGO’s and environmental groups etc.
Example: Greenpeace an environmental group that opposed the
plan of Sempra Energy (California based MNC), to build a natural gas terminal
and pipeline in Mexico. Environmental
groups believe that Sempra’s pipeline facility will pollute the ocean and wipe out
lobster and tuna stock. Environmental activists disrupted Sempra’s construction
process.
Similarly in another case Greenpeace also has been successful
in pressurizing home appliance producers from China to Germany to manufacture
environmentally friendly refrigerators. That’s why a business person should
have consider about various interest groups what they are following and how our
business can affect by them.
Domestic Competitors
Usually local competing firms oppose foreign company and
force (lobby) government for take restrictive actions for open trade.
Constitutional Bodies
Executive
That consists councils of ministers
and government bureaucracy or authority.
Legislature
That consists parliament with upper
and lower houses
Judiciary
That consists courts and other
judicial and quasi-judicial authorities/institutions) In Nepal Apex Court of
Supreme Court, Appellate Court, Special Court, and Districts Courts. There can
be tribunals on settling bank loans, corruption and human right issues.
Political Parties
The political parties
can affect business organizations in many ways. It could add a risk
factor and lead to a major loss. We should understand
that the political philosophy of that political parties which have the power to
change results. It can also affect government policies at local to federal
level. Companies should be ready to deal with the local and international
outcomes of politics.
Constitution and state structure
Any system or laws that contradicts
with the constitution gets automatically void. It is essential for any
international business firm to analyse the constitution of any country where
they intend to operate. Understanding of constitution give us long term meaning
of success over political risk.
Concept of legal Environment
Legal environment
plays a very important role in determining the success of any businesses around
the globe. The government taxes that are being imposed among other regulatory
measures help to promote economic growth and to protect consumers from exploitation
and other illegal factors.
Legal environments
consists of those factor which affect our business operation in any regulatory
framework. (Example Tax, Fine etc.)
In the legal environment of a business, we analyse
the key areas, particularly where law changes and how legal aspects affect
businesses. All these legal factors are contained in the legal environment of a
business.
Being as a manager of MNC we should consider three
bodies of law:
International
Law
International law is the set of rules,
agreements and treaties that
are binding between countries. When sovereign states enter into agreements that
are binding and enforceable, it’s called international law. Countries come
together to make binding rules that they believe benefit their citizens.
International laws promote peace, justice, common interests and trade.
Host Country Law
Set of rules, regulation belongs to that country
where an international firm intended to go for business.
Home Country Law
Set of rules, regulation belongs to that country
where an international firm originated.
Legal system
Legal system refers
to a procedure or process for interpreting and enforcing the law. It elaborates
the rights and responsibilities in a variety of ways. Jury
system is a legal system for determining the facts at issue in a law suit. Tax
system is a legal system for assessing and collecting taxes. Electoral system
is a legal system for making democratic choices.
The legal system of a country refers to the rules, or
laws, that regulate behavior, along with the processes by which the laws of a
country are enforced and through which redress for grievances is obtained
A country’s legal system is important
because
- Regulates business practice
- Defines the manner in which business transactions are to be executed
- Sets down the rights and obligations of those involved in business transactions
There are basically three major legal systems.
Civil Law (Code Law
System)
Common Law System
Social and Religious
Law (Theocratic Law) System.
Civil Law System
It is also called
code law. Civil law system is a legal system that outlines private rights and
remedies and solves disputes between individuals in areas such as contracts and
property. Civil law is also known as civilian law or Roman law. The civil law
system originated in Rome. Doctrines compiled by legal scholars under a code
serve as the primary source of law.
The civil law system uses precisely structured
codes on a written constitution. Codification is a common characteristic of
civil law, as every state requires a law that can apply to its jurisdiction.
There are codes covering corporate laws and tax laws as well as constitutional
and civil codes.
In civil law, there is a clear separation of
powers. The judiciary is highly independent from the legislative and executive
arms of government. The judiciary court can make independent judgements without
the fear of influence by the other arms of government. In policy making, the
courts have equal but separate powers.
The common law is the body
of law formed through judgments from the higher courts rather than
through statutes or written legislation. The guiding principle of
common law systems is that similar cases should receive similar treatment under
the law. Common law principles are established and developed through
written opinions of judges given at
the end of a trial or
an appeal. These opinions
set precedents, legal rules that are
then applied in future similar
cases. The doctrine of judicial precedent, the
principle under which the lower courts must follow the decisions of the higher
courts
Social and Religious Law (Theocratic Law) System.
This system is based
on religious teachings, as they are enshrined in the religious scriptures.
Islamic law, Shari at, is the most widely practised religious legal system in
today’s world. It is based on morality rather than commercial requirement of
human behaviour in all aspects of a person’s self and social life. Islamic law
is based on the Holy book of Islam, the Quran and on interpretation of the
practices and sayings of Prophet Mohammad.
Government
As an
international business trader or investor we should consider about the
government of the country where we are preparing for trade or investment
because of following intervention by government may affect our business
activities:-
The government, or the public sector, is the most
important actor, operating at national, state, and local levels. Governments have the power
to enact and enforce laws.
Government
intervention alters the competitive landscape, by hindering or helping the
ability of firms to compete internationally.
Government organisation are in influential position for how
an international firms enter host countries and how they conduct business
there. Governments regulate international business activity through
institutions, agencies, and public
officials.
Governments
intervene in trade and investment to achieve political, social, or economic
objectives.
Governments
impose trade and investment barriers that benefit interest groups, such as
domestic firms, industries, and labour unions.
Government
intervention is an important dimension of country risk.
Protectionism
— national economic policies that
restrict free trade. Usually intended to raise revenue or protect domestic
industries from foreign competition.
Customs — the checkpoint at national ports of entry where officials
inspect imported goods and levy tariffs.
Non-tariff
trade barrier – government policy, regulation, or
procedure that trade aid and loans, subsidies.
Supranational
organisation or worldwide influential international organisation
Supranational agencies such as the World Trade
Organization (WTO), United Nations (UN), and the World Bank have a strong influence on international business activities. Such
organizations help facilitate free and fair trade by providing administrative guidance, governing frameworks, and, occasionally,
financial support.
The focus of most supranational organizations is to ease trade
among different countries, the entity may also have political implications or
requirements.
According to WTO Official, the World Trade Organization (WTO) is the only international organization dealing with the
global rules of trade. Its main
function is to ensure that trade flows as smoothly, predictably and
freely as possible.
Example: - Different infrastructure,
health and education programs are running in Nepal with assistance of WTO and
World Bank. That’s why these organisation can influence Nepali political system
as a major actor.
Basically these
types of influential organisations are engaged in different activities related
to food production, such as agriculture and fisheries, and those concerning the
environment or energy production.
Supranational organizations may also be involved in education and forms
of foreign ad or assistance to
countries.
Regional Economic Blocs
Regional trade organizations, such as the SARC,BIMSTEC (Bay of Bengal Initiative for Multi-Sectorial
Technical and Economic Cooperation (BIMSTEC)
is an international organisation to foster socio-economic cooperation among
Bangladesh, India, Myanmar, Sri Lanka, Thailand, Bhutan and Nepal.
European Union (EU), the North American Free Trade Agreement (NAFTA), and the Association of Southeast
Asian Nations (ASEAN), aim to advance the economic and political
interests of their members. The EU organization is especially well developed,
with its own executive, legislative, and bureaucratic bodies.
Special Interest Group
Special interest group consists such as the Labour unions,
trade unions, different NGOs, INGO’s and environmental groups etc.
Example: Greenpeace an environmental group that opposed the plan of
Sempra Energy (California based MNC), to build a natural gas terminal and
pipeline in Mexico. Environmental groups
believe that Sempra’s pipeline facility will pollute the ocean and wipe out
lobster and tuna stock. Environmental activists disrupted Sempra’s construction
process.
Similarly in another case Greenpeace also has been successful
in pressurising home appliance producers from China to Germany to manufacture
environmentally friendly refrigerators. That’s why a business person should
have consider about various interest groups what they are following and how our
business can affect by them.
Domestic Competitors
Usually local competing firms oppose foreign company and
force (lobby) government for take restrictive actions for open trade.
Constitutional Bodies
Executive
That
consists councils of ministers and government bureaucracy or authority.
Legislature
That
consists parliament with upper and lower houses
Judiciary
That
consists courts and other judicial and quasi-judicial authorities/institutions)
In Nepal Apex Court of Supreme Court, Appellate Court, Special Court, and
Districts Courts. There can be tribunals on settling bank loans, corruption and
human right issues.
Political
Parties
The political parties can affect business organisations in many ways. It
could add
a risk factor and lead to a major loss. We should
understand that the political philosophy of that political parties which have
the power to change results. It can also affect government policies at local to
federal level. Companies should be ready to deal with the local and
international outcomes of politics.
Constitution
and state structure
Any system
or laws that contradicts with the constitution gets automatically void. It is
essential for any international business firm to analyse the constitution of
any country where they intend to operate. Understanding of constitution give us
long term meaning of success over political risk.
Political Risk
Political Risk has been defined as the likelihood that
political forces will cause drastic changes in a country’s business environment
that adversely affect the profit and other goals of a business enterprise. Social unrest typically finds
expression in strikes, demonstrations, terrorism, and violent conflict.
Such unrest is more likely to be found in countries that contain more than one
ethnic nationality, in
countries where competing ideologies are battling for political control, in
countries where economic mismanagement has created high inflation and falling
living standards, or in countries that straddle the “fault lines” between
civilizations.
Political risk in terms of
business, is a type of risk that faced by investors, corporations, and governments that political
decisions, events, or conditions will significantly affect the profitability of
a business sector negatively.
General Political Risk
Government Intervention In the Economy and Firms
Types of General Political Risk
Operational Restrictions
In 1970-71,
Chile government had restricted bringing new foreigners into the management of
copper industries operating there. These international companies were asked to
take local Chileans into the company management. Those firms who objected or
ignored to do so, those firms were forced to leave from Chile.
Sanction and Embargoes
Embargo
Embargo means a trade restriction that makes it
illegal for citizens or companies of one country to trade with those of another
country.
An embargo is a
government-imposed prohibition of the exchange of goods or services with a
specific county or countries.
In foreign policy,
embargoes are typically intended to force the embargoed country to change a
particular social or political policy.
The effectiveness
of embargoes is an ongoing foreign policy debate, but historically, most
embargoes fail to achieve their initial goal.
For Example
One of the most
widely known embargoes in history is the embargo of the United States against
Cuba. Following President Eisenhower’s decision to cancel the import of sugar
from Cuba to the United States and stop the export of crude oil to Cuba, Fidel
Castro’s government proceeded to the nationalisation of American-owned oil
refineries. On October 19, 1960, the United States responded with a commercial
and economic embargo on Cuba, restricting it from importing U.S. goods except
for food and medicine. Two years later, the embargo was extended to all imports
from the United States.
An embargo is a
government-imposed prohibition of the exchange of goods or services with a
specific county or countries.
In foreign policy,
embargoes are typically intended to force the embargoed country to change a particular
social or political policy.
The effectiveness
of embargoes is an ongoing foreign policy debate, but historically, most
embargoes fail to achieve their initial goal.
Sanctions
Sanctions refer to measures taken by one or more nations against another
country to halt trade with the target country. Sanctions may be imposed
on exports or imports of specific products, financial assistance, and specific methods of
transportation. When a government imposes a sanction, businesses that violate
the sanction are subject to legal penalties.
Both sanctions and embargoes mean the prohibition or restriction of an
activity. Particularly, an embargo is commonly used when the restriction is a
trade-related. Sanctions, on the other hand, are used for all other disciples
of prohibitions.
Who can impose sanctions and embargoes?
Sanctions can be imposed by the
UN Security Council, the European Union. Usually, sanctions are instituted by
the Security Council and later adopted by its member states in the form of
legislation and regulations. Individual states can also impose their own
sanctions and embargoes.
Terrorism
The most
immediate and measurable impact of terrorism is physical destruction.
Terrorists destroy existing plants, machines, transportation systems, workers,
and other economic resources. On smaller scales, acts of terrorism may blow up
cafes, churches, or roads. Large-scale attacks, most infamously the World Trade
Centre bombings on Sept. 11, 2001, can destroy billions of rupees worth of
property and senselessly kill thousands of productive workers.
War And Arm Conflict
War is always negative for the economy, and physical destruction is a
large reason. Productive resources that might have generated valuable goods and
services are destroyed, while other resources are almost invariably diverted
from other productive uses to bolster the military and defence. None of this
creates wealth or adds to the standard of living, even though military spending
is often erroneously cited as a stimulant; this is the "broken window fallacy" sometimes mentioned by
economists.
Domestication and Expropriation (Government Takeover)
Domestication
Domestication offers to governments a subtle control over the
foreign firm’s trade & investments. There is a partial ownership transfer
and companies are urged to prioritise local production and to retain a large
share of the profit within the country. Domestication can negatively impact the
international firm’s activities, as well as that of the entire firm. For example, if foreign companies are
forced to hire nationals as managers, poor cooperation and communication can
result. If domestication was imposed within a short time span, poorly
trained and inexperienced local managers would head the firm operations with
possible loss of profits.
Expropriation
Expropriation is
the controlling (capturing) of
foreign assets by a government with payment of compensation to the owners.
In other terms, it is involuntary transfer of property, with compensation, from
a privately owned firm to a host country government. Expropriation may generate
some funds for the owners. However, procedures to get paid from the government
are sometimes protracted and the final amount remains low. Furthermore, if no compensation is paid, conflicts
may erupt between the host country and the country of the expropriated firm.
For instance, the relations between U.S. and Cuba acknowledge such situation,
since Cuba does not offer compensation to U.S. firms that have their assets
sized. Also, expropriation can refrain other companies
from investing in the concerned country.
Confiscation
Confiscation is the seizing of a company's assets without payment. Expropriation
occurs when the government seizes an investment but some reimbursement for the
assets is made. Domestication occurs when the host country gradually causes the
transfer of foreign investments to national control and ownership through a
series of government decrees by mandating local ownership and greater national
involvement in a company's management. The ultimate goal of domestication is to
force foreign investors to share more of the ownership, management, and profits
with nationals’ than was the case before domestication.
Other Government Actions- Political Related Risks are
less dangerous but more common such as boycott, sabotage.
When facing shortage of foreign currency, government, sometimes, attempts
to control
the movement of capital in and out of the country.
Often, exchange controls are
levied selectively against certain products or companies. Exchange controls
limit importation of goods so that firms might be confronted with difficulties
in their regular transactions. Severe restrictions on import can
be a motive for foreign corporate to shut down. Governments may also raise the tax rate applied to foreign
investors in order to control them and their capital. Government may implement
a price control system. Such
control uses to derive from a sensitive political situation. For example,
social pressure may result in a kind of price standardisation for particular
sectors like food, transportation, fuel, and healthcare.
Macro
Political risks like arms conflicts, insurrection may affect all firms in the
country equally. For that reason they are called macro
political risks.
Micro
political risks unlike,
nationalisation, strikes, expropriation may affect only a handful and specific
firm, and they are named micro political risks.
Negative impact/effects of political risks on firm
are summarized in the following table.
Government Intervention In the Economic Activities and Firms
Government intervention is any action carried out by the government or
public/government entity that affects the market economy with the direct
objective of having an impact in the economy.
Governmental intervention is the intentional interference of a
government in a country’s economic system through regulatory actions.
It refers to a situation when a government is actively
affecting business activities of individuals or organizations.
§
Governments intervene in trade and investment
to achieve political, social, or economic objectives.
§
Governments impose trade and investment
barriers that benefit interest groups, such as domestic firms, industries, and labour
unions.
§
Government intervention alters the competitive
landscape, by hindering or helping the ability of firms to compete internationally.
§ Government
intervention is an important dimension of country risk.
Different
Mechanism or intervention by Government
Protectionism —
economic policies that restrict free trade
Government intervention often results
from protectionism. Usually intended to raise revenue or protect domestic industries
from foreign competition. Protectionism refers to national economic policies designed to restrict
free trade and protect domestic industries from foreign competition. Governments may restrain
(prevent) foreign investment in order to protect domestic business interests.
Protectionism often leads to such
specific types of intervention as tariffs, non tariff barriers such as quotas,
and arbitrary administrative rules designed to discourage imports.
Customs — the checkpoint at national ports
Checkpoints at the ports of entry in
each country where government officials inspect imported products and levy
tariffs. Some time they stop imported products. Recent example of vegetable
trading between India and Nepal.
Tariff
A tax imposed on imported products,
effectively increasing the cost of acquisition for the customer. Tariff – a tax on imports (e.g.,
citrus, textiles) specific duty, compound duty.
Non tariff trade barrier
A non tariff trade barrier is a government policy, regulation, or
procedure that impedes (prevent) trade through means other than explicit
tariffs.
Quota—
A quantitative restriction placed on
imports of a specific product over a specified period of time. Government
intervention may also target FDI flows through investment barriers that restrict the operations of
foreign firms.
Why does a government intervene in trade and investment
activities? Rationale for Government
Intervention/ Government Intervention and Investment
Defensive Rationale
Four major
defensive motives are particularly relevant: protection of the nation’s
economy, protection of an infant industry, national security, and national
culture and identity. Let’s address each of these motives in turn.
- Protection of the national economy
- Protection of an infant industry
- National security
- Saving national culture and identity
Offensive Rational
Offensive
rationale for government intervention fall into two categories:
- Employment Opportunities
- National Strategic Priorities
Cultural Environment and its Impact on International Business
According to Terpstran (1987)
"Integrated sum of learned behavioural traits revealed and shared by members of society"
Diseases such as corona, and other problems like terrorism, ethnic violence, gender inequality, poverty have made societies uncertain about their future. International trade deals not only cross borders, they also cross cultures.
Trading on a global basis requires a good understanding of different cultures. The method that works in our country may not work properly in another country, and it can also be understood as an insult!
As an international business professional, raising awareness of cultural issues within our organization is important to ensure effectiveness and acceptance.
Business culture refers to the beliefs, norms, and behaviours that determine how a company's employees and management conduct business activities inside and outside the organization. It also includes how they are affected by it.
The major elements of culture for the business world are: language, religion, values, customs, and history and each of them is equally important.
The basic elements of cultures are:
The values and attitudes (मान र दृष्टिकोण)
The manners and customs (शिष्टाचार र चलनहरू)
The law and politic (कानून और राजनीति)
The technology and material culture (प्रविधि र भौतिक संस्कृति{भौतिकवाद})
The aesthetic (aesthetic art, heritage, rituals, language, resources) {सौंदर्यबोध-सौन्दर्य (सौन्दर्य कला, विरासत, अनुष्ठान, भाषा, स्रोतहरू)}
Regional Economic Integration - Types, leading Economic Blocs
क्षेत्रीय आर्थिक एकीकरण
Economic integration is an agreement between different nations that includes the reduction or elimination of trade barriers (tariffs or non-tariff) and the coordination of monetary and fiscal policies.
Regional economic integration occurs when countries come to the formation of free trade arrangements or customs unions, giving members preferential trade access to each other's markets.
Regional economic integration has enabled countries to focus on issues that are important for their development as well as to encourage trade relations between neighbouring countries.
Reasons for Regional Economic Integration
Geographic Proximity (भौगोलिक निकटता)
Similar Consumer's Taste, Needs and Preferences
Easy Distribution Channels (सजिलो वितरण च्यानलहरू)
Common History and Interests
Common Economic Opportunities
Common Economic Problems and Challenges
Types (Stages - Phases) of Regional Economic Integration
- PTA - Preferential Trading Area :(Reduces only tariffs rates for member nation{SAPTA- South Asian Preferential Trading Agreements})
- FTA - Free trade Area :(Eliminating all tariffs and non-tariff barriers {SAFTA - South Asia Free Trade Area, NAFTA - North American Free Trade Area, BIMSTEC-FTA}
- Custom Union :(Common tariff and non-tariff barriers on imports from non member countries)
- Economic Union ::(Greater economic harmonisation, Single currency like Euro for European Union (EU),Uniform Monetary System, Union of regulation authorities)
- Political-Economic Union: Single Economic Political Identity- UAE (United Arab Emirates, and EU to emerge as the one soon)
SAPTA - South Asian Preferential Agreements
SAFTA - South Asian Free Trade Area
BIMSTEC - Bay of Bengal Initiative for Multi-sectoral Technical and Economic Cooperation
ASEAN - Association of South East Asian Nations
EU - European Union
NAFTA - North American Free Trade Area
1. South Asian Preferential Agreements - SAPTA
The SAARC Preferential Trading Arrangement (SAPTA) reflected the desire
of the Member States to promote and sustain mutual trade and economic
cooperation within the SAARC region through the exchange of tariff
concessions.
The idea of liberalizing trade among SAARC countries was first mooted by
Sri Lanka at the sixth Summit of the South Asian Association for
Regional Co-operation (SAARC) held in Colombo in December 1991.
Four rounds of negotiations were held under SAPTA. SAPTA was envisaged primarily as the first step towards the transition to a South Asian Free Trade Area (SAFTA) leading subsequently towards a Customs Union. Accordingly SAPTA was superseded with the implementation of SAFTA. Product coverage was limited under SAPTA and usage of tariff preferences under the SAPTA has been gradually decreasing.
SAPTA - at a glance
| Date of signing of the agreement | Date of coming into effect | Members | Negotiation approach | Products coverage |
| 11th April 1993 | 07th December 1995 | Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka | Positive List | Over 6,500 |
South Asian Free Trade Area - SAFTA
Accordingly SAPTA was superseded with the implementation of SAFTA.
What is SAFTA?
The South Asian Free Trade Area (SAFTA) is the free trade arrangement of the South Asian Association for Regional Cooperation (SAARC). The agreement came into force in 2006, succeeding in the 1993 SAARC Preferential Trading Arrangement (SAPTA). These include Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka, Afghanistan.
What is the ultimate goal of SAFTA?
SAFTA replaced the earlier South Asia Preferential Trade Agreement (SAPTA), which was limited in scope. The ultimate objective of SAFTA is to create a full South Asia Economic Union on the lines of the European Union.
Purpose of agreement
The SAFTA in its preamble recognizes the need for specialized treatment for LDCs(landlocked country).
Emerging Foreign Markets
Some emerging market economies are India, Mexico, Russia, China, Indonesia and Brazil.
An emerging market economy is an economy geared towards becoming a developed economy.
Generally, emerging market economies can provide greater returns to investors due to rapid growth, which is why it attracts large amounts of foreign investment.
Emerging market economies are categorized in different ways by different observers or rating agencies.
Income standards, growth rates, financial systems, customer needs, and demand, living standards, are some of the parameters for emerging markets.
The International Monetary Fund (IMF) classifies more than 20 countries as emerging markets. Brazil, Russia, India, China, and South Africa are the fastest emerging markets.
The Changing Demographics of the Global Economy
Until the 1960s, the US dominated in world economic production and trade. By the mid-1990s, America's share of world production had fallen drastically, As European and Southeast Asian economies were producing half of the world's total output.
