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Reflection and Application Report

Reflection and Application Report (chapter 3) (due 9/20)

Purpose: The objective of this exercise is to help you internalize the knowledge you learned and apply to your career. In this process, you develop your critical thinking skills.

Note: To complete this assignment, you will need to:

1. Submit one ppt file – the Reflection and Application Report

2. Submit one word file – three quiz questions (multiple choices)

3. Respond to at least one peer classmate’s post (Reflection Report)

For detail instruction, please review the attached word file.

CHAPTER 3
Political & Legal Environment
International Marketing

Chapter 4
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Political Environment
Political Risk Defined
“Political risk in international business exists when discontinuities occur in the business environment,
when they are difficult to anticipate, and
when they result from political change.
To constitute a “risk,” these changes must have the potential for significantly affecting the profit or other goals of a particular enterprise.”

Stephan H. Robock. “Political Risk: Identification and Assessment,” Columbia Journal of World Business, July-August, 1971, 6-20.

Political Environment
Risk and Instability
POLITICAL INSTABILITY = Political change
– (change in leadership and or governmental policies over short or medium term).
– Can be manifested as frequent and/or abrupt changes in leaders, as riots, insurrections, strikes, assassinations, even elections which are held at regular intervals, as well as changes in laws or political (and foreign) policy.
POLITICAL RISK = Uncertainty about outcome of change (from firms’ perspective – financial impact that may accompany political change).
POLITICAL INSTABILITY  Political risk. Political risk may be lower in dictatorial environment than in democracy (may not be conducive to many kinds of business because of restrictions, but there is a good deal of stability and therefore, little risk associated with change).

Political Risk Assessment

Chapter 4
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Table 4-1
Notes:
The Economist Intelligence Unit (EIU) assesses four types of general political and macroeconomic risk (political risk, economic policy risk, economic structure risk and liquidity risk) independently of their association with a particular investment vehicle. They are each given a letter grade. These factors are then used to compile an overall score and rating for the country.
EIU also evaluates risk exposure associated with investing in particular types of financial instruments, namely specific investment risk. This includes risk associated with taking on foreign-exchange exposure against the dollar, foreign-currency loans to sovereigns and foreign-currency loans to banks.
Source:
Country Risk Service, April Handbook, 2002; Economist Intelligence Unit, Ltd., pages 10-13; (http://www.eiu.com).
Something else may help assess political risk. Historically, political unrest begins in the working sector (among organized workers), institutions of higher learning (colleges and universities), and other times and places where people can collect and exchange ideas and thoughts.

Category Of Risk And Description

Political risk
– The factors in this category relate to the threat of war, social unrest, disorderly transfers of power, political violence, international disputes, regime changes, institutional ineffectiveness, but also include the quality of the bureaucracy, the transparency and fairness of the political system, and levels of corruption and crime in the country in question.

Economic policy risk
– Open economies with low inflation and low fiscal deficits are rated more favorably. Among the criteria considered are monetary policy, fiscal policy, exchange-rate policy, trade and regulatory policies.

Economic structure risk
– Measures included are economic variables central to solvency. Among the subcategories of risk are growth and savings, the current account and debt structure.

Liquidity risk
– This is designed to provide an indication of the risk of potential imbalances between resources and obligations which could result in disruption of the financial markets. Among the factors considered are the direction of reserves, import cover, M2/reserves, the degree of a country’s dependence on portfolio inflows, and the size of its direct investment inflows.

Currency risk
– A score and ratings are derived to assess the risk of a devaluation against the dollar of 20percent or more in real terms over the forecast period.

Sovereign debt risk
– A score and ratings are developed to assess the risk of a build-up in arrears of principal and/or interest on foreign-currency debt which are the direct obligation of the sovereign or guaranteed by the sovereign.

Banking sector risk
– A score and ratings are used to assess the risk of a build-up in arrears of principal and/or interest on foreign-currency debt which are the obligation of the country’s private banking institutions.

The Political Environment
Host Country
Political Env.
Home Country
Political Env.

International Political Env.

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Notes:
National sovereignty – a nation’s right to govern itself without outside interference
Extraterritoriality – the (attempt) to apply a nation’s laws beyond its national borders
Political Risk – in this context, change brought about by some political discontinuity that has an impact on business.
Jurisdiction – the right to hear a dispute and make a ruling on behalf of the defendant(s) and plaintiff(s)
Intellectual Property – is that which is created in the human mind, including thoughts and ideas translated into music, drawings, paintings, renderings and the processes used in creation of products and services.
International Law – the application of law across national boundaries. Debatable whether it exists. The clearest example is perhaps the EU, which both makes law and has enforcement capabilities within the EU. The UN and other supranational bodies, although they make proclamations, announcements, etc., they have no true enforcement capabilities.

Political Environment
Some Factors Affecting Political Risk
Host country environment
Firm’s home country
International treaty participation (e.g., Friendship, Commerce, and Navigation (FCN) and Wassenaar Arrangement – multilateral export control regime)
International organization membership (e.g., IMF, WTO, and NATO)
Product or industry
Size and prominence of operations
Company behavior
Ownership and control
Distribution control

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Host country environment: political and economic stability lowers political risk.
Firm’s home country: good or bad relations with host country?
Product or Industry: sensitive or vital to host country economy?
Also, consumer products tend to be more visible than industrial goods simply because the consumer base is larger. Are the products sold in the country culturally congruent? Are the products functional or dysfunctional?
Size and prominence of operations: size relative to local competitors and other firms in general. Also, prominence in terms of location (e.g., highly visible urban location) and pretentiousness of facilities. If firm hires large portion of population, it may also be seen as a major threat in controlling economic (and political?) future of the host country.
Company behavior: good or bad corporate citizen? does the firm provide employment opportunities for the local population? What kind of job opportunities are provided (management as well as line)? Does the firm contribute to the tax base? Does the firm contribute to the economy in other ways (e.g., exports to improve balance of trade and improve hard currency earnings, sponsor of events or local causes)? Does the firm provide training for its work force? Housing? Health care? Other benefits?
Ownership and control: Does the firm own and manage the operations from the home country or are there plans for domestication (turn over some management and control to locals)? Are the raw materials and supplies imported or does the firm use local suppliers?
Distribution control: If the firm has manufacturing facilities, and if the firm controls distribution outside the country, and if this accounts for a large portion of the output, political risk is lower. The host would have little use for a plant that makes a product that cannot be sold.

Host Country Political Environment
Host country national interests:
Nationalism and patriotism refer to citizens’ feelings about their country and its interests.
Foreign firms may be perceived as a threat to their national sovereignty.
Countries want to protect their national security.
Countries concern about their national prestige.
May foster certain industries
Foreign firms may be prevented from entering those industries.
Concern of economic welfare, or employment
Host countries may use local suppliers and have local content in the products.

Host Country Political Environment
Japanese gov. subsidize agriculture ind.
In 2004, wheat was $9/per bushel at world market.
Japanese farmers received $35
$26 differences was gov. subsidies (It costs $700m per year)
To finance its production subsidies, Japanese gov. operates a tariff rate quota on wheat imports.
In-quota rate tariff = $0
Over-quota rate = $500/ton
The price of wheat in Japan is 80-120% higher than the world market price.
Why Japanese gov. still pursue this policy?
– small farmers are important constituency and the Japanese politicians want their votes
Who are the winners and who are the losers in this protectionism?

Political Arguments for Government Intervention
Further
Foreign Policy
Objectives
Protect
Industry
and Jobs.
National
Security
Retaliation
Protect
Consumers
Protect
Human
Rights

Protect
Industry
and Jobs.
Most common political argument.

Retaliation
Risky strategy. If government
fails to heed warnings and
imposes its own higher tariffs, the result is higher tariffs all
around and a corresponding
economic loss.

Protect
Consumers
Battleground for biotechnology
such as hormone-treated
beef and genetically altered crops.

Further
Foreign Policy
Objectives
Used to build relations with
another country or punish it
(so-called rogue states).
Policy is unilateral and easily defeated by other countries ignoring it.

Protect
Human
Rights
Basis for the use of “Most
Favored Nation” status to
persuade China to change its
positions on human rights.

Host Country Political Environment
Host Country Controls:
1. Entry Restrictions
Foreign firms may be prohibited from acquiring a local firm.
…instead being required to enter a joint venture.
…may be restricted as to the products it can sell.
2. Price Control
Price control from the host country government can severely limit profitability.
EX: US citizens purchase medications from Canada or Internet for lower prices.
If price controls are imposed in the US, they would have to reduce R&D budgets for new drugs.
3. Quotas and Tariffs
Which limits a firm’s ability to import equipments, components, and products.
Which forces a higher level of local procurement.

Host Country Political Environment
Host Country Controls:
4. Exchange Rate Control
Freely convertible.
Externally convertible.
Not convertible. (reasons)
Preserve foreign exchange reserves.
Service international debt.
Purchase imports.
Government afraid of capital flight.
Political decision.
Many countries have some kind of restrictions.

Host Country Political Environment
Host Country Controls:
5. Forced Asset Transfer
Confiscation – gov. seizure of assets with no remuneration.
Expropriation – seizure with some compensation, though typically less than fair market value or a firm’s valuation.
Nationalization – seizure of entire industries, such as banking and railroad, regardless of nationality.

Host Country Political Environment
How firms should respond to gov. intervention?
Many firms target emerging markets and developing economies.
These markets hold long-term potential but feature numerous trade barriers and gov. intervention in business.
What strategies would you suggest managers to cope with protectionism and other forms of intervention?

Strategies to Respond to Gov. Intervention:
Research to gain knowledge and intelligence
Choose the most appropriate entry strategies
Take advantage of Foreign Trade Zone (FTZ)
Seek favorable customs classifications for exported products
Take advantage of investment incentives and other gov. support programs.
Lobby for freer trade and investment

Tariffs on raw tuna is much cheaper than that of canned tuna.

Import cars without seats

Free-trade zone, also called foreign-trade zone
An area within which goods may be landed, handled, manufactured or reconfigured, and re-exported
without the intervention of the customs authorities.

Free Trade Zone
Duty exemption – no duties or quota charges on re-exports
Duty deferral on imports until they leave the FTZ and enter US
Quota avoidance
Can manufacture goods in an FTZ – benefit from inverted tariffs
Better inventory control

Foreign-Trade Zones (FTZ) are secure areas under U.S. Customs and Border Protection (CBP) supervision that are generally considered outside CBP territory upon activation. Located in or near CBP ports of entry, they are the United States’ version of what are known internationally as Free-Trade Zones.

Home Country Legal Environment Could Facilitate International Trade
Siberia is now the world’s largest market for Japanese used cars.

Where Do Old Toyotas Go?
Siberia, of Course
Siberia is now the world’s largest market for Japanese used cars.
Japanese car inspection cost $1000-$2000/year.
Cars > 3 years old  require for inspection/2 yrs
Cars > 10 yrs old  require for inspection/yr
Too expensive to own used cars!
 this law artificially stimulates the demand of new cars
 Stimulate international trade in used cars b/w Japan and Russia
Russian car practically falls apart after 50,000 kilometers.

Statistics of Exported Cars
In 2016, an increase of +30,000 cars helped Siberia’s automobile industry to become stable
Russia received 25,000 exported cars in 2017 but some of those were exported informally on Russian fishing boats docked near ports of Japanese
10% of used cars has annual vehicle exports in Japan
200,000 used Japanese cars exported to Siberia and 90% of those are low cost economy models such as Toyota Corollas, Hondas and Nissans

Siberia’s view on Japanese used cars
As a car becomes older, it is harder to fix the car so it would be easier to import certain models that are cheaper to fix in another place
Japanese cars do well in Russia because they value off road cars and four wheel drive cars that can handle their highways/roads
Russians seems happier to drive Japanese used cars but they disregard the warnings attached with some cars that are brought in

Government Regulations on this Trade
Russian import makers raised tariffs to 30% in imports
Also Russia raised 35% tax increase on cars that are older than seven years compared to 25% tax increase on newly imported cars back in 2016
It is important for car users to keep up to date with the rules and regulations when investing in a car that’ll help them get to necessary places
The picture on the left shows a freight transport route from Yokohama to Moscow

References
Andreyev, K. (2016, August 31). Russian Far East is still attached to Japanese cars. Retrieved March 24, 2019, from https://www.rbth.com/business/2016/08/31/russian-far-east-is-still-attached-to-japanese-cars_625665
Brooke, J. (2003, February 12). Japan’s Used Cars Find New Lives On Russian Roads. Retrieved March 28, 2019, from https://www.nytimes.com/2003/02/12/business/japan-s-used-cars-find-new-lives-on-russian-roads.html

The Political Environment
Host Country
Political Env.
Home Country
Political Env.

International Political Env.

Home Country Political Environment
A firm’s home country political env. can constrain its international as well as domestic operations.
EX: US has trade restrictions for exports to certain countries: Cuba, Iran, Iraq, Libya, North Korea, Sudan.
US export restrictions on certain products:
Products incorporating short-range wireless technologies
Beta test software
Encryption source code
EX: American human rights groups induced some US firms to leave Myanmar (Burma).
PepsiCo had to pull out of a joint venture even though it held 85% of the soft drink market share.
Reasons for these constrains:
Homeland security
Ensuring the health of the US economy
Ensuring the competitiveness of US industries

International Political Environment
US firms abroad are affected by a host nation’s attitude toward the US. (National)

For example:
UK and French firms operating in their former colonies of those countries are affected by that relationship, favorably or otherwise.
Arabs continued their call for a boycott of all American goods for policies viewed as pro-Israeli.
Coca-Cola, McDonald’s, Procter & Gamble, and KFC were among the firms that expected the boycott to negatively impact sales.

Political Env. b/w Nations Affecting Global Business
EU’s Preferential treatment to its former colonies cost consumers extra $2b/year.
Over the last two decades, Latin American countries (and America) have complained to the WTO
This trade dispute has come to an end on Nov. 8th 2012.

Managing Political Risk
Pre-Entry Planning
Perform research; assess potential risks
Avoid threatening countries
Negotiate with host government (include planned domestication)
Purchase insurance— government agencies such as OPIC, MIGA (Overseas Private Investment Corp., Multilateral Investment Guarantee Agency), as well as private providers
Adjust entry method
Use local capital

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Table 4-2

Managing Political Risk
Post-Entry Planning
Have a monitoring system
Develop corporate communications program
Develop local stakeholders (employees, suppliers, customers)
Have appropriate national executives and advisory board
Change operations over time as perceived host-country cost-benefit ratio changes.
(Examples: new products and processes, more local equity and management, new exports, local R&D)
Have contingency plans

Chapter 4
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Table 4-2 continued

Political and Legal Environment
Political Environment
Legal Environment
It determines how the laws are enforced.
It indicates the direction of new legislation.
A nation’s laws and regulations pertaining to business.
It influences the operations of a foreign firm
Those laws constitute the “rules of the game”.

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Legal environment participants: (in order of magnitude of impact, typically)
Host government.
Home government.
Multinational groups (e.g., EU) & organizations (e.g., UN).
Public (e.g., religious) & private (e.g., pacs – political action committees, sigs – special interest groups) special interest groups.
Third country governments.

Law and Global Business
Export Control:
US export control office, Bureau of Industry and Security (BIS).
US firms are prohibited to sell these products to Cuba, North Korea, Iraq, and Sudan.
Sophisticated aircraft
Biological, nuclear, or conventional weapons
Computer software
Telecommunications equipment…etc.