Lecture 2.

5
BUSI 1695 International Business
Environment
The State and the
Political environment
 LEARNING OUTCOMES

01 02 03 04
Understand Recognize Appreciate Discuss the
the how the economic European
different state and Union and
economic intervenes political Brexit
systems in the integration
economy
2
  Comprises of:
• The executive
• Parliament or a similar body
• Civil service

WHAT IS THE •
•
Judiciary / A legal system
Police and armed forces

STATE?  Has monopoly over:

• Taxation
• Money supply
• Legitimate use of intervention

 Variations of policies depending on

BASED ON NEEDLE, 2019 political ideologies 3
WHAT ARE THE CORE RESPONSIBILITIES OF THE
STATE?

According to the World Bank 1997:

• Establish a legal framework
• Develop economic policies
• Build basic infrastructure and offer fundamental services
• Protect the vulnerable
• Protect the environment

^^^ affects all businesses at macro/micro level

 influences businesses to adapt to the workings of the state
4

BASED ON NEEDLE, 2019

 A changing political economy
• Democracy vs
Autocracy

• As global GDP
increases so
does
democracy

• Globalization
increases the
number of
democracies?
Types of Economic
Systems

6
TYPES OF ECONOMIES

A. Free Market economies

In capitalist or free market economies, individuals and businesses

interact in free markets.
The allocation of resources is determined through a system of
prices.
There are three basic models:
I. The Anglo-Saxon model.
II. The Social Market model.
III. The Asian model.
B. State controlled economies
7
C. Transition economies
BASED ON NEEDLE, 2019
 ANGLO-SAXON CAPITALISM
(AKA LIBERAL MARKET ECONOMY)
• Competitive markets, little state intervention – prices
based on S&D  markets regulate the economy
• Long periods of economic growth
• Freedom of choice
• Importance of private property
• Shareholders the most important stakeholders
• Managers rewarded for maintaining profits and share
price
• Importance of individualism  individuals gets very rich!
• Trade unions tolerated and restricted by law
• In a recession  cost cuts to maintain profits

8
Q. Most prevalent in what country?
SOCIAL MARKET CAPITALISM
(AKA THE GERMAN MODEL OR COORDINATED
MARKET ECONOMY)

• Competitive free-market regulated by the state

• Mix of private and state ownership
• Well-funded, comprehensive social welfare system
• Markets and firms regulated by law and state bureaucracy
• Many stakeholders recognized including employees
• Co-ordinated wage bargaining
• Importance of responsibility to society (collectivism)
• Trade unions are heavily involved in redundancy decisions
(job protection)

• Model prevalent in Germany, France, and in Scandinavia,

but variation in application 9
ASIAN CAPITALISM
(AKA THE JAPANESE MODEL, ALLIANCE OR COMMUNITY CAPITALISM

• Belief in free market with state intervention where

necessary – strong
• State is bureaucratic but assists business
• Large corporations collaborating with the state –
relationship/ trust building
• Firm and associates viewed as a family – MNEs are
typically family run business (not necessarily
corruption)
• Strong corporate cultures – loyalty
• Weak social welfare  individual + family
responsibility
• Weak trade unions
10
 •Also known as command economies (what USSR/China was!)
• State control of the supply and demand of services.
• State sets targets and allocation of resources.

State • Central control of prices, wages and employment levels.

controlle
• Principles were built on socialism.
• Jobs for life, no incentive, everything subsidized, inefficiencies over production

d/ • No competition!

Centrally
planned
economi
es
  The process of change from state control to a
market economy involving processes of:
- Liberalization (removal of state control) of
markets, wages and prices
- Stabilization - control wage and price inflation
- Internationalization - opening the economy to
international trade and encouraging inward
foreign investment.
TRANSITIONA - Privatization - The selling off state-owned
businesses
L ECONOMIES
 Two transition strategies:
• A shock change, where the former economic
systems, institutions and processes are
dismantled over a short period of time
(USSR).
• Gradualism, where there is more gradual
change over a period of years (China).
BASED ON NEEDLE, 2019 12
 LEARNING OUTCOMES

01 02 03 04
Understand Recognize Appreciate Discuss the
the how the economic European
different state and Union and
economic intervenes political Brexit
systems in the integration
economy
13
Summary:
State Intervention

14
 SUMMARY: HOW DOES THE STATE INTERVENE
IN DIFFERENT SYSTEMS?

Centrally planned Social market systems

(state controlled  1. Key role for state in
economies)  Anglo Saxon market
social welfare provision
1. State sets the mandate systems
 2. Laws limit mergers
 1. Free market with
2. Ownership of business and takeovers
minimum intervention
3 Control of targets and  3. Attempt at reaching
 2. Laws and regulations financing for firms
resources consensus involving state,
affecting business  3. State
4. Control of supply and business and labour
 3. Tension between business
demand  4. Promote employee
business and state over
support for
involvement/rights
extent of intervention  2. Government
the economy
 1. State directs
BASED ON NEEDLE, 2019 15
Asian systems
ISSUES RELATING TO MODELS OF THE FREE MARKET
• Favoured free market models have appeared at
different times – USA, UK, Japan
• Do some models lead to better economic performance
than others? Is it time specific?
• Are models linked to cultural differences? Is it unique
to context?
• Not all firms in a country conform to national models 
Assessed at National level and organizational level
• Is there one best way? Is there a choice?

 Q. These are important questions for transitional

economies and developing economies. 16

BASED ON NEEDLE, 2019

 • Impact is difficult to assess (takes
years to see true impact e.g. Brexit)
• Government policies continuously
DIFFICULTIES change (democracy  new leaders
undo work from previous leaders)
WITH STATE
INTERVENTIO • Opposition by businesses towards
unwanted intervention (MNEs will
N leave)
• Resistance by large, powerful
multinationals (FB, Amazon, Google)

BASED ON NEEDLE, 2019 17

TYPES OF STATE INTERVENTION IN BUSINESS

• Collective provision of public goods e.g. schools, hospitals,

infrastructure
• As an employer ensures minimum wage esp. public sector employment
 doctors, nurses, teachers
• As an economic stabiliser and stimulant  tax and interest rates
• Market protection  tariffs, quotas, safeguards
• Taxation of business profits
• Macroeconomic policy – long term strategic vision of economy/ planning
• Domestic protectionism for national champions – generally outlawed
under free trade, EU and WTO laws
• Ensures healthy growth of the economy!
18

BASED ON NEEDLE, 2019

 LEARNING OUTCOMES

01 02 03 04
Understand Recognize Appreciate Discuss the
the how the economic European
different state and Union and
economic intervenes political Brexit
systems in the integration
economy
19
Types of economic
and political integration

20
21
 The EU
The EU 28 are: Belgium,
Luxembourg, Netherlands, France,
Germany, Italy, Britain, Denmark,
Ireland, Greece, Spain, Portugal,
Austria, Finland, Sweden, Czech
Republic, Slovakia, Estonia, Latvia,
Lithuania, Cyprus, Malta, Poland,
Hungary, Slovenia, Bulgaria,
Romania; and Croatia.
Member States of the
European Union

22
Candidate countries and
potential candidates
 How rich is the EU compared to the rest
of the world?
Size of economy Wealth per person:
GDP in trillions of Euro (2013) GDP per person (2013)

23
 EUROPEAN UNION
 4 Freedoms of movement:
goods, services, people, capital

 Achievements of the single market:

 Reductions in the price goods and
services,
e.g. airfares and mobile phone calls
 Greater choice for consumers
 Creations of millions of new jobs
 Coordinated policies of individual
governments and central banks

 Formation of the one single large

economy with same collective vision
24
 Learning outcomes

01 02 03 04
Understand Recognize how Appreciate Discuss the
the different the state economic and European
economic intervenes in political Union and
systems the economy integration Brexit

25
What is BREXIT?
Brexit is an abbreviation for "British exit," which refers to the June
23, 2016, referendum whereby British citizens voted to exit the
European Union

The UK is the first and so far only sovereign country to have left the EU, after
47 years of having been a member state.

Why is Britain leaving the European Union?

A referendum was held on Thursday 23 June, to decide whether the
UK should leave or remain in the European Union. Leave won by 52%
to 48%. The referendum turnout was 71.8%, with more than 30
million people voting (Guardian.com)
**In other words David Cameron promised a referendum to win votes
for the Tories (it backfired!)**
26
Pros and cons of Brexit
https://www.youtube.com/watch?v=UV70FIC6Xy0
 The UK top
trading partners

28
Life after Brexit
• Legislative impact? Deal was reached, UK officially
withdrew from the UK at 23:00 on 31st January
• Global competitiveness? e.g. EU consumers now have
to pay import and customs tax from goods/service from
UK
• The future of MNEs services? Will they relocate?
• Barriers to trade? UK has to renegotiate and pursue its
own trade deals  signed trade deals and agreements in
principle with 68 countries and one with the EU.
• Impact on the labour market? e.g. no lorry drivers,
VISAs (right to remain)
• Impact of uncertainty?

29
Readings
Chapter 3 - Needle

Chapter 2 - Palmer and Hartley

Recommended reading:
Capitalism and democracy — the odd couple, Financial Times, 19.
September 2017
https://www.ft.com/brexit

Next week’s tutorial 2.5:

Case study on Brexit
30