MBA/MBAA

Term VI
International Business

Sessions – 3

Prof. Abu Rehan Abbasi 1

Range of Economic Systems

2
Centrally Planned Economy

Origin Decline
• Rooted in Collectivism • Failure to create
• Popularized by Karl economic value
Marx in the nineteenth • Failure to provide
century incentives
• Implemented in the • Failure to achieve rapid
twentieth century by growth
means of violent • Failure to satisfy
upheaval consumer needs

3
Mixed Economy

Goals Decline
• Low unemployment and • Lack of accountability,
poverty rising costs, and slow
• Steady economic economic growth
growth
• Equitable distribution of
wealth • Move toward market-
based systems
• Move toward
privatization (most recent
e.g.,?)

4
Market Economy

Origin and Essence Features

• Private ownership • Free choice
• Interplay of two forces: • Alternative purchase
supply and demand options

• Emphasis on • Free enterprise

individualism • Firms choose products
and markets
• Laissez-faire economics • Price flexibility
• Economic freedom • Prices follow supply and
demand

5
Market Economy

Government’s Role
Enforce antitrust laws
Preserve property rights
Provide fiscal and monetary stability
Preserve political stability

6
Economic Development
National Production

Popular Indicators
of Economic
Development

Gross Domestic Gross National

Product (GDP) Product (GNP)

7
Gross Domestic Product

Gross Domestic
Product (GDP)-
the value of
finished goods
and services
produced within a
country’s borders

8
 GDP of the US, by type

Net exports Personal Consumption Business Investment Government Spending

Unpacking GDP leads
us to a better Government
Net exports
5%
understanding of Spending
16%
opportunities for
international Business
Investment
companies 16%

Personal
Breaking GDP down Consumption
63%
into sectorial
categories also helps
identify trends in
their particular
markets 9
Gross National Product (GNP)

• A second way to measure economic development takes

into account the international income of a country

• Gross National Product- the total value of final goods and

services provided by a country; it equals the gross
domestic product plus the net payment outflows of a
country

• Unlike GDP it counts the output that domestic companies

make abroad

GNP = GDP + NR – NP
NR= net receipts, net income from foreign assets owned by nationals
NP = net payment outflows to foreign owners
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Economic Development

Developed Country

Newly Industrialized Country

Emerging Markets

Developing Country

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 Uncounted Transactions

Question of Growth
GDP and GNP
Drawbacks
Problem of Averages

Pitfalls of Comparison

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 Uncounted transactions

13
Source: https://wol.iza.org/articles/shadow-economy-in-industrial-countries/long
o We do not get to know what the future holds –
what is the expected growth likely to be?

o Number helpful in estimating the national

quality of life but a very detailed picture of
development is absent.

• e.g., Urban areas are more developed than

rural and have higher per capita income.

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Avoid pitfalls of comparison by factoring

Purchasing • Value of goods and services that can

be purchased with one unit of a
Power country’s currency

Purchasing • Relative ability of two countries’

Power Parity currencies to buy the same “basket”
of goods in those two countries
(PPP)

15
Purchasing Power Parity

• If we convert Swiss francs to dollars at official

exchange rates, we estimate Switzerland’s GDP
per capita at $47,900.

• This is higher than the official GDP per capita of

the United States ($39,700)

• But adjusting Switzerland’s GDP per capita for

PPP gives us a revised figure of $34,700, which
is lower than the U.S. GDP figure of $39,700.
16
Economic Development
Human Development

United Nations’ Human

Development Index
(HDI)

Long and Decent Standard

Education
Healthy Life of Living

17
 Human Development Index (HDI)

HDI Rank Country HDI Value

GNI per Life Expectancy
Capita Rank at Birth (Years)
Very High Human Development
1 Norway 0.955 5 81.3
3 United States 0.937 9 78.7
5 Germany 0.920 15 80.6
9 Switzerland 0.913 11 82.5
11 Canada 0.911 16 81.1
20 France 0.893 24 81.7
23 Spain 0.885 31 81.6
26 United Kingdom 0.875 21 80.3

45 Argentina 0.811 52 76.1

High Human Development
55 Russia 0.788 55 69.1
61 Mexico 0.775 65 77.1
85 Brazil 0.730 77 73.8
Medium Human Development
101 China 0.699 90 73.7
112 Egypt 0.662 106 73.5
121 South Africa 0.629 79 53.4
Low Human Development
153 Nigeria 0.471 147 52.3
185 Mozambique 0.327 176 50.7

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Source: Based on data obtained from Human Development Report 2013 (New York: United Nations Development Programme, 2013), Table 1, pp.
144–146, available at www.undp.org.
 Government Economic Controls

o Recession- a period of GDP contraction that lasts for at

least two consecutive quarters

o Depression- a severe, sustained period of economic

contraction in one or more economies

o To keep economies out of recession or at least reduce the

amount of time they are in recession policymakers can use
both
• Fiscal policy- government actions intended to spark or
diminish consumption (taxation, gov. spending)
• Monetary policy- manipulations in the interest rates,
the banking rules, and the volume of currency in a
country, to spark or diminish consumption
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 Monetary Policy- Three Primary Levers

1. The discount rate- the interest rate a central bank

charges commercial banks to borrow money

2. Reserve requirement- the minimum amount of

cash reserves a commercial bank must hold

3. Open market operations- operations by a central

bank to buy or sell government bonds, corporate
bonds, or equities

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Political Systems

• Political System: Structures, processes, and activities by which a

nation governs itself

Totalitarianism Pluralism Anarchism

Both private and public

groups need to balance
each other’s power
Every aspect of Only individuals and
people’s lives must be private groups can
controlled to preserve order preserve personal liberties
Political Systems
Democracy

Democracy: Political
system in which
government leaders are
elected directly by the
wide participation of the
people or by their
representatives
Representative
Democracy: Democracy in
which citizens elect
individuals from their
groups to represent their
political views
Political Systems
Democracy (Cont.)

Freedom of Expression
Representative

Periodic Elections
Democracy

Full Civil and Property Rights

Minority Rights

Nonpolitical Bureaucracies
Doing business in Democratic countries

Property rights, free It does not always

trade should so happen
encourage
economic growth

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Political Systems
Totalitarianism
Totalitarian Governments

Imposed Authority

Lack of Constitutional Guarantees

Restricted Participation
Political Systems
Totalitarianism (Cont.)

Theocratic Communist
Totalitarianism Totalitarianism
Totalitarianism
Secular Tribal
Totalitarianism Totalitarianism

Right-Wing
Totalitarianism
Doing business in Totalitarian countries

Int. companies May need to pay

need to be less bribes/kickbacks to
concerned with gov.; refusing could
local political result in loss of
opposition business
Face criticism for
lack of compassion
(damaging publicity)

27
 Political Freedom
IB is significantly affected by the level of political freedom in a
country and has important implications for economic growth
and prosperity

Political freedom has been shown to increase or decrease the

opportunities available to IB

Systems that value individual freedom businesses can benefit

from
• Limited government interference
• Effectiveness of law
• Support for property rights
• Business-friendly regulation
• Freedom to trade
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Political Freedom

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 Implications of political freedom for IB
Determine foreign firm’s ability to
• Own and use property and resources
• Limitations to business income
• Determine the extent to which government may interfere in business processes
• Laws may be pro-business, but enforcing them may be a challenge
• Indirect consequence – free market customers likely to have more discretionary income,
longer life expectancy, more leisure time

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Legal Systems

• Legal System: Set of laws and regulations, including the

processes by which a country’s laws are enacted and
enforced and the ways in which its courts hold parties
accountable for their actions.

• A country’s political system also influences its legal system.

• Legal systems are frequently influenced by political moods

and upsurges of nationalism.
Legal Systems (Cont.)

oCommon Law
• Tradition: A country’s legal history
• Precedent: Past cases that have come before the courts
• Usage: How laws are applied in specific situations

oCivil Law
• Legal code

oTheocratic Law
• Based on religious teachings
The effect of the enforcement of Laws on
International Business

• With
The so many
effect of different legal systems and country-specific
variants in effect, it can be challenging to understand how
theinternational laws will affect specific international businesses.
enforcement of
• Global
Laws onregulations affect international business through laws
governing foreign ownership and operations of businesses.
International
Business
• It is difficult for multinational companies to establish
businesses in foreign countries, it is also challenging for them
to obtain and enforce contracts across borders.
 Global Legal
The World
Issues
Bank’s “Ease of
Doing Business
The World Bank’s “Ease of
Annual
DoingReport”
Business Annual
Report” outlines many of
the legal difficulties an
international firm starting
or operating a business
may face by ranking the
regulatory environment in
189 countries each year
Global Legal Issues

• Intellectual Property Business Software Piracy

• Property Rights
• Industrial Property
• Patents
• Trademarks
• Copyright
Global Legal Issues (Cont.)

• Product Safety and Liability

• Responsibility for damage, injury, or death (e.g., auto
sector recalls of vehicles)

• Taxation
• Income, sales, consumption, and VAT (e.g., Vodafone)

• Antitrust Regulations
• Prevent market sharing, price fixing, and unfair advantage
 Rules & ethical challenges
Illegal Versus
Unethical
Conduct
Ethics are the moral
principles of right and
wrong that guide
personal and
organizational decision
making
Philosophies of Ethics and Social
Responsibility

Philosophies

Friedman Cultural Righteous Utilitarian

View Relativist View Moralist View View
 Principles that can help improve the quality of
decisions

•Respect for human dignity

•Respect for local traditions

•Respect for the institutional context

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Proposed by Thomas Donaldson (Business Ethicist)
 Strategic responses to Ethical challenges

Strategic Strategic behavior

response
Reactive Deny responsibility, do less than required
Defensive Admit responsibility but fight it, do the least
that is required
Accommodative Accept responsibility, do all that is required

Proactive Anticipate responsibility, do more than

required

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 Political Risk

The risk that political conditions in a host country might

change, negatively affecting foreign businesses

• can result from the actions of a government and of non-

governmental organizations (e.g., environmental groups, citizens,
terrorists)

• essential for managers to both understand and assess the level of

political risk in a country before opening operations and then
continue to monitor the risk

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 Primary Categories of Political Risk

Macro Political Risk - adverse political actions that affect all

foreign investments and operations in a host country
e.g., Expropriation, imposition of currency and trade controls
Currency trade controls- government action to regulate the amount of currency and
goods that can be traded or purchased

Micro Political Risk- affect only a specific sector, firm, or

project
e.g., Corruption, prejudicial actions, contract breaches

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 Direct and Indirect Effects of Political Risk

Direct effects result

from political actions
that target or regulate a
specific entity. Indirect
effects are those
experienced by any
business that is not the
specific target of a
political action

While the hostilities are directed at

governments, not businesses, the
indirect effect for businesses are far-
ranging because of political instability
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 Managing Political Risk Methods

Managing
Political Risk

Information Political
Adaptation
Gathering Influence

45
 Recent political trends that affect MNCs

• The refugee crisis

• Brexit

• US-China trade war

• Covid global pandemic

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 Prof. Abu Rehan Abbasi 47
World Economic Forum – The Global Risk Report
 Geopolitical Risk

Geopolitical risks are defined as the potential

• political,
• economic,
• military, and
• social risks
that can emerge from a nation’s involvement in
international affairs.

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https://geopoliticalfutures.com/risk/
Reasons for greater Geopolitical risk in today’s times

• Rise of other power centers other than the U.S.

• Proliferation of economic sanctions as an instrument

of foreign policy

• Increase in South-South trade (many of these

emerging markets are highly volatile)

49
 Corporate foreign policy – due diligence

• Take direct control of image and reputation (not want to be

seen as an extension of home country government)

• Assess transnational risk

• Pay attention to regional political trends

• Assess local in-country risk

• In the process don’t neglect risks closer to home

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Corporate foreign policy – corporate diplomacy

• Develop your foreign policy stance

• Develop a transnational character

• Diversify your political relationships

• Don’t sabotage yourself (be careful, be alert)

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Principal References

Chipman, John (2016) Why your company needs a foreign

policy, Harvard Business Publishing

Morris, Shad; Oldroyd, James (2022) International Business,

Wiley

Peng, Mike W; Srivastava, Deepak K. (2019) Global Business,

Cengage

Wild, John J; Wild, Kenneth L (2017) International Business: The

Challenges of Globalization, Pearson

Prof. Abu Rehan Abbasi 52

Thank You

Prof. Abu Rehan Abbasi 53