Political Environment and Global Business PDF

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4-1 Political Environment and Global BusinessPolitical System - is the means by which people in a society make the rules that control and influence their lives. Political systems are the formal and informal political processes by which decisions are made concerning the use, production and distributi...

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4-1 Political Environment and Global Business

Political System- is the means by which people in a society make the rules that control and influence their lives. Political systems are the formal and informal political processes by which decisions are made concerning the use, production and distribution of resources in any given society

Types of Political Systems

DEMOCRACY The word democracy comes from the Greek words "demos", meaning people, and "kratos" meaning power; so democracy can be thought of as "power of the people": a way of governing which depends on the will of the people. In a democracy, all citizens have the opportunity to take part in making the rules that govern them. A democracy emphasizes the importance of the individual’s needs and interests. In this political system, people have equal rights, including the right to vote for political leaders. They also have many freedoms, including freedom of speech and freedom of religion.

The idea of democracy derives its moral strength – and popular appeal – from two key principles: 1. Individual autonomy: The idea that no-one should be subject to rules which have been imposed by others. People should be able to control their own lives (within reason). 2. Equality: The idea that everyone should have the same opportunity to influence the decisions that affect people in society.

TOTALITARIANISM

In a totalitarian system, most people are excluded from making the rules by which they live. In this system, political control is held by one person, a small group of people, or one political party. In the broadest sense, totalitarianism is characterized by strong central rule that attempts to control and direct all aspects of individual life through coercion and repression.

Examples of totalitarian systems include monarchy and dictatorship. In pure monarchy, the right to absolute rule for life is based on heredity. In military dictatorship, a member of the armed forces makes all the decisions. Although all totalitarian system are not the same, in a totalitarian system, people’s rights and freedoms are restricted. People may not be allowed to express their opinions, to travel freely outside the country, or to practice the religion they choose.

MIXED SYSTEMS

In reality, there is no pure form of either a democracy or a totalitarian system. Most political systems are considered mixed. That means they have characteristics of both systems and fall somewhere in between.

POLITICAL RELATIONS WITH HOST AND HOME COUNTRIES

International business activities can be affected by the political environments in which companies operate. Companies often will have different perceptions of their responsibilities to host and home countries.

Global Companies Operating in Host Countries

A host country is the country in which multinational enterprise is a guest. Multinational enterprises fulfill a number of positive roles in host countries while operating within the existing economic, social, and legal environment. Host country a country where a company that is based in another country has business activities.

A multinational enterprise stimulate economic activity. They provide employment for citizens of the host country. Often they introduce more advanced technologies that help the economic development of the host countries.

Host countries expect multinational enterprise to comply with societal expectations and standards. Social responsibility is the key to the success or failure pf a multinational enterprise. A social responsibility is the process whereby people function as goof citizens and are sensitive to their surroundings. A Global Company’s Relationship with its Home Country

In addition to being a good guest while conducting business around the globe, a multinational enterprise has responsibilities in its home country. A home country is the country where a multinational enterprise is headquartered. A multinational enterprise is expected to comply with the home country’s social, economic, and legal mandates.

Improper actions could jeopardize the ongoing operations of the business. Fines, sanctions, and other legal actions are possible. In the most serious cases, the multinational enterprise could be restricted from engaging in business in the home country.

4.2 How government discourage global business

Laws that protect workers and consumers

Why do government regulate businesses? 

public safety and welfare

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protection of industry

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revenue generation

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Avoid Child Labor

Trade Barriers are government actions or policies that make it difficult to trade across borders. It also refers to the obstacles that are put in place by governments to limit free trade between national economies. Trade barriers are thus essentially interventions in markets that happen to operate internationally.

Protectionism is a policy of protecting domestic industries against foreign competition by means of tariffs, subsidies, import quotas, or other restrictions or handicaps placed on the imports of foreign competitors. It is a government policies that restrict international trade to help domestic industries. Protectionist policies are usually implemented with the goal to improve economic activity within a domestic economy but can also be implemented for safety or quality concerns.

A list of some modern-day protectionist measures, including tariffs, domestic subsidies to exporters, and non-tariff barriers which restrict imports.

Types of Protectionism 1. Tariffs –a tax on imports. 2. Quotas –a physical limit on the quantity of imports

3. Embargoes –a total ban on a good, this may be done to stop dangerous substances 4. Subsidies – If a government subsidises domestic production this gives them an unfair advantage over competitors. 5. Administrative barriers – Making it more difficult to trade, e.g. imposing minimum environmental standards. 6. Competitive devaluation – manipulating currency to make exports cheaper.

Boycott A boycott is an act of nonviolent, voluntary and intentional abstention from using, buying, or dealing with a person, organization, or country as an expression of protest, usually for moral, social, political, or environmental reasons. The purpose of a boycott is to inflict some economic loss on the target, or to indicate a moral outrage, to try to compel the target to alter an objectionable behavior. Licensing requirements Import licensing can be defined as administrative procedures requiring the submission of an application or other documentation (other than those required for customs purposes) to the relevant administrative body as a prior condition for importation of goods. Import licensing provides protection from legal disputes and financial losses for businesses engaged in international trade. An import license is a permit to import an indicated quantity of certain goods over a specified period of time (typically one year).

Political Risks in International Business

Political Risks in International Business – the possibility of government actions or political policies that could adversely affect foreign companies. Major Political Risks – can temporarily or permanently disrupt global business activities. *Trade Sanctions *Expropriation *Economic Nationalism *Civil Unrest or War

Trade Sanctions – trade restrictions that are imposed by the government against another country to protest that country’s behavior. -

Trade sanctions range from tariffs to boycotts.

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A country can impose a Trade Embargo against another country and stop all import-export trade with that country.

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Trade Embargo refers to banning exports or imports to or from one or more countries.

Expropriation – A government takes control and ownership of foreign-owned assets and companies. Economic nationalism – refers to the trend of some countries to restrict foreign ownership of companies and to establish laws that protect against foreign imports. -

Form of protectionism. (encouraging people to “buy domestic” products.

Civil Unrest or War – interrupts production, sales and other business activities. -

Transportation of goods and people may be hindered because of a curfew, gunfire, or rioting.

International taxes International taxes – collected revenues by the government to pay for welfare programs, to build roads and bridges, to provide health care insurance to support military forces among many other things. Types of Taxes Customs Duty (import tax) – tax assessed on imported products. Sales Tax – tax on the sale of products. -

Also considered as regressive taxes because the same rate of tax is charged to all customers regardless of their income level.

Excise Tax – tax levied on the sale or consumption of specific products such as alcoholic beverages, tobacco, telephone service, airline tickets, gasoline and motorcycle vehicles. Payroll-Related Tax – fall into 2 categories Taxes withheld from employee pay - the employer makes a matching payment. Income taxes are withheld from employees’ pay. Taxes paid by the employer based on employee pay – includes unemployment taxes and worker’s compensation taxes. Social Security and Medicare fall into both categories. Value-Added Tax (VAT) – tax assessed on the increase in value of goods from each stage of production to final consumption. Similar to a national sales tax. Income taxes – tax on the amount of income a person or corporation earns, minus allowable deduction and credits. -

Also called progressive tax because the percentage a person pays increases the more income a person makes.

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It is based on the “ability to pay”

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Corporation pay income tax based on corporate annual income minus allowable business deductions and tax credits.

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A corporate income tax is viewed as an indirect business tax on consumers.

4.3: How Government Encourages Global Business

GOALS *Explain government actions that can encourage global business activities. *Discuss U.S government agencies that can help reduce international risk. *Describe how tax incentives encourage global business. Encouraging International Business -Specific actions by governments encourage and promote international business. Governments around the world encourage domestic industries to export by providing export counseling and training, export insurance, and export subsidies and tax credits. Governments view exporting as an effective way to create jobs and expand economic prosperity. Governments encourage business through a number of techniques. Establishing free-trade zones- A free-trade zone is a designated area, usually around a seaport or airport, where products can be imported duty-free and then stored, assembled, and used in manufacturing. Only when the product leaves the zone does the importer pay duty. Granting most-favored Nation Status- Allows a country to export into the granting country under the most favorable trade conditions that the importing country offers to any of its trading partners. Products from countries with MFN status are subject to the lowest duty rate. In some cases the lowest rate is zero. *Providing export insurance to exporters to guarantee against commercial and political risks *Providing free or subsidized export marketing assistance to exporters to help research foreign markets and promote their products in other countries *Providing tax incentives for foreign companies to invest and to locate manufacturing plants in their countries

Establishing free-trade agreements- A growing trend throughout the world is for countries to establish free-trade agreements with each other. Under a free-trade agreement, member countries agree to eliminate duties and trade barriers on products traded among members. Common markets- In a common market, members eliminate duties and other trade barriers, allow companies to invest freely in each member’s country, and allow workers to move freely across borders. *Reducing or eliminating trade barriers such as tariffs and quotas

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