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Market economy
■ Market economies- decisions regarding production levels, consumption, investment,
and savings resulting from the interaction of supply and demand (market forces).
■ Economic decisions are left to individuals and firms.
Mixed economy
■ Mixed economy- exhibits market and command economy features, thus combining
state intervention and market mechanisms.
■ Most industries are under private ownership, and entrepreneurs freely establish, own,
and operate corporations- but the government also controls certain functions, such as
pension programs, labor regulation, minimum wage levels, and environmental
regulation.
6-11. What are the specific characteristics of democracy? How do these
characteristics facilitate international business?
Democracy
■ Democracy- become the prevailing political system in much of the world’s advanced
economies.
■ Two key features:
■ Private property rights: The ability to own property and assets and to increase one’s
6-12. Describe the major types of legal systems. Which systems are most
widely encountered?
Visit MyManagementLab for suggested answers.
6-13. Who are the major actors in political and legal systems? Which participant
do you believe is most influential in international business?
■ Actors include government, which exists at the national, state, and municipal levels.
■ The World Trade Organization and the United Nations are typical of international
organizations that influence international business.
■ Regional organizations such as the European Union promote region-based trade.
6-14. Describe proactive actions that firms can take to minimize country risk.
Managing country risk:
■ Successful management requires developing an understanding of the political and
legal context abroad.
● APPLY YOUR UNDERSTANDING
6-15. Country risk refers to the ways governments restrict, or fail to restrict,
business activities. The nature of such restrictions varies around the world. In
each country, national economic success substantially depends on the quality of
laws and regulations. Government must strike the right balance – too little
regulation promotes uncertainty; too much causes hardship. Country risk is
revealed in various ways:
▪ Foreign investment laws
▪ Controls on operating forms and practices
▪ Environmental laws
▪ Contract laws
▪ E-commerce laws
▪ Underdeveloped legal systems
▪ Accounting and reporting laws
Conduct research online and give specific examples of each type of country risk.
Describe how each might help or hinder company activities.
■ Foreign Investment Laws
● These laws might hinder company activities because it imposes restrictions
such as ownership of businesses, forcing foreign companies to partner with a
local firm, and paying high taxes.
● Recently, Myanmar relaxed its foreign investment laws to attract foreign
● The new law allows foreign firms to lease land from the government for up to
50 years, and can be extended twice, good for 10 years with each extension.
■ Controls On Operating Forms and Practices
● In Indonesia, a public company must have three components consisting of
general meeting of shareholders, board of directors, and board of supervisors.
● This presents issues for foreign shareholders because they are not Indonesian
nationals.
oFor example, when an American company chooses to form a
oThis may cause the firm to not be as profitable as planned, and it
■ Environmental Laws
● Recently, China has posed stronger environmental laws on foreign firms; if the
firms do not stay ahead of the law, they may expose themselves to risks
involving their reputation and profits.
oIf a foreign firm needs to do any type of construction work, it must be
● Environmental laws may both hinder and help company activities.
oHinders: Firms must be aware and follow the environmental laws, or
■ Contract Laws
● In many countries where foreign companies do not receive the best legal
protection, the foreign company would be at risk when breaking a contract.
■ E-Commerce Laws
● Weak e-commerce laws and regulations may hinder a foreign company’s
activities.
■ Underdeveloped Legal Systems
● Countries with underdeveloped legal systems may also have weak intellectual
property rights protection.
● Weak intellectual property rights protection hinders company activities.
■ Accounting and Reporting Laws
● The differences in accounting and reporting laws around the world could
potentially hinder and/or help company activities.
oIn South Korea, research and development costs are capitalized instead of
expensed.
ADDITIONAL INFORMATION:
For business enterprises to thrive, some minimum conditions must be present,
including recognition of private property rights and limited government
intervention. To what extent may totalitarianism, socialism, and democracy
interfere with the ideal commercial environment for firms?
Totalitarianism Command economies ● Most government interference
● Least innovation
● Adverse commercial environment
Democracies cultivate the ideal commercial environment as democracy is characterized
by private property rights, individual freedom, consumer sovereignty, and limited
government.
■ Democratic governments devise laws that protect property rights. People and firms
■ Socialism occurs as communism or social democracy. Communism proved to be
ineffective for allocating resources and declined sharply with the collapse of the
Totalitarianism/Command economy (centrally planned economy)
■ The state is responsible for making all decisions:
◘ What goods and services the country produces
■The state owns all wealth, land, and capital, and allocates resources based on which
■ Command economies were common in the twentieth century; they proved so
■ Central planning is less efficient than market forces in synchronizing supply and
demand.
Examples- China, India, Russia, and certain countries in Central Asia, Eastern Europe,
and the Middle East.
Democracy/Capitalism/Market economy
■ Market economies- decisions regarding production levels, consumption, investment,
and savings resulting from the interaction of supply and demand (market forces).
Socialism/Mixed economy
■ Most industries are under private ownership, and entrepreneurs freely establish, own,
■ The state usually funds public education, health care, and other vital services and
■ Examples- France, Germany, Japan, Norway, Singapore, and Sweden,
■ The last century saw a substantial increase in the number of mixed economies and a
■ Governments in Europe, Japan, and North America imposed regulations for
6-16. Suppose you get a job at Aoki Corporation, a firm that manufactures glass
for industrial and consumer markets. Aoki is a large firm, but has little
international experience. Senior managers are considering a plan to move Aoki’s
manufacturing to China, Mexico, or Eastern Europe, and to begin selling its glass
in Latin America and Europe. However, they know little about the country risks
that Aoki may encounter. Describe how each of the following factors might
contribute to country risk as Aoki ventures abroad: foreign investment laws,
controls on operating forms and practices, and laws regarding repatriation of
income, environment, and contracts?
(LO 6.5; LO 6.6; LO 6.7; AACSB: Analytical Thinking)
Foreign investment laws
■ These laws affect the type of entry strategy firms choose, as well as their operations
and performance.
■ Foreign investment laws may restrict FDI.
■ Examples-
◘ Japan- daitenhoo (large-scale retail store law) restricted foreigners from
opening warehouse-style stores such as Wal-Mart or Toys“R”Us.
◘ Malaysia- firms that want to invest in local businesses must obtain permission
Controls on operating forms and practices
■ Governments impose laws and regulations on how firms should conduct production,
marketing, and distribution activities within their borders.
■ Example- China- huge telecommunications market, government requires foreign
investors to seek joint ventures with local firms; local operations cannot be wholly
owned by foreigners- this is to ensure that China maintains control of its
telecommunications industry and obtains inward transfer of technology, knowledge, and
capital.
Laws regarding income repatriation
■ MNEs earn profits in various countries and typically seek ways to transfer these funds
Environmental laws
■ Governments enact laws to preserve natural resources, combat pollution and the
abuse of air, earth, and water resources, and ensure health and safety.
■ Examples-
(4) FDI, especially where this is done in collaboration with a foreign entity, in
order to create and operate a foreign subsidiary; and
(5) Joint ventures and other types of cross-border collaborations.
■ Some convergence-1980- the United Nations instituted the Convention on Contracts
for the International Sale of Goods (CISG), a uniform text of law for international sales
contracts.
6-17. Ethical Dilemma:
The United States imposed a trade and investment embargo on Iran. U.S. citizens
were barred from doing business with Iran. Proponents argued the embargo was
justified because Iran has supported terrorism, is developing nuclear weapons,
and is a disruptive force in the Middle East. However, critics condemned the trade
sanctions for several reasons. First, they argued the sanctions represented a
double standard because the United States supports other countries that have
engaged in terrorism and other bad behaviors. Second, the best way to nurture
healthy dissent and civil society in Iran may be to engage the country rather than
restrict economic relationships. Third, the sanctions harmed the Iranian people,
who were deprived of the benefits of trade with the United States. Fourth, the
sanctions were largely ineffective because other countries supply Iran with
products it needs. Finally, the sanctions harmed U.S. companies, especially oil
and gas firms, which were prevented from doing business with Iran. What is your
view? Using the Ethical Framework in Chapter 4, analyze the arguments for and
against trade with Iran. Can the United States, acting alone, compel desired
changes in Iran by imposing sanctions? Justify your answer
■ Framework for making ethical decisions consists of five steps:
1. Identify the problem
2. Examine the facts
3. Create alternatives
Evaluate each proposed action to assess its consistency with accepted
ethical standards, using the approaches described earlier:
4. Implement course of action
5. Evaluate results
A FRAMEWORK FOR MAKING ETHICAL DECISIONS [Chapter 4]
1. Identify the problem
The United States imposed a trade and investment embargo on Iran. U.S. citizens were
2. Examine the facts
Critics:
◘ First, they argue the sanctions represent a “double standard,” as the United
States supports other countries that have engaged in terrorism and other bad
behaviors.
3. Create alternatives
■ The United States imposed trade and investment embargo on Iran has certain
negative effects on the Iranian people. Supporters of the embargo argue that it is
justified because Iran harbors terrorists and is developing nuclear weapons. However,
most Iranians are law-abiding, good citizens who only wish to live out their lives in
■ The fact that Iran has been known to harbor terrorists who have attacked the United
■ If the trade embargo were lifted, this would alleviate the burden on U.S. oil and gas
■ The U.S. government may have had its own citizen's best interests at heart with the
imposition of the embargo and the not the interests of Iran- and some would argue, why
should Iran’s interests supersede those of America? The removal of this embargo would
Utilitarian – which action results in the greatest good and least harm?
Rights – which action respects the rights of everyone involved?
Fairness – which action treats people most fairly?
Common Good – which action contributes most to the overall quality of life of
the people affected?
Virtue – which action embodies the character strengths that you value?
4. Implement course of action
Implement your decision.
5. Evaluate results
Which underscores the most important message that the U.S. wants to send to the
world? Terrorism is rampant in the Middle East. Can the U.S. feasibly levy an embargo
against every country that harbors terrorists? Which alternative fosters future
partnerships, peace and harmony? Most decisions have both positive and negative
outcomes. What is paramount in this situation- economic, political, or societal agenda?
In the end, we may have to accept this less than perfect decision, as some would argue
that it is more important to stand for something than to jeopardize our principles.
● GlobalEDGE™ INTERNET EXERCISES http://globaledge.msu.edu
6-18. Supranational organizations such as the World Bank (www.worldbank.org)
and the World Trade Organization (www.wto.org) oversee much of the legal
framework within which the world trading system operates. Political frameworks
for industries or country groupings are influenced by organizations such as the
Organization of Petroleum Exporting Countries (www.opec.org) and the
Organisation for Economic Co-operation and Development (www.oecd.org).
Using globalEDGE™ and the online portals cited here, address the following
question: What is the goal of each organization, and how does it go about
achieving its goal? By viewing the news and press releases at each Web site,
summarize the latest initiatives of each organization.
World Bank
The main goal of the World Bank (based in Washington DC) is global poverty reduction
and the improvement of living standards in poor countries throughout the world. The
Bank’s two major units are the International Bank of Reconstruction and Development
(IBRD) and the International Development Bank (IDB). The IBRD’s role is to reduce
World Trade Organization
161 members as of 26 April 2015
The primary goal of the World Trade Organization (WTO), based in Geneva,
Switzerland, is to facilitate the free, fair, and smooth flow of international trade among
system among countries, the WTO’s strategy for achieving its goal is multifaceted. For
example, it administers trade agreements, acts as a forum for trade negotiations, settles
trade disputes, reviews national trade policies, assists developing countries in trade
policy issues via technical assistance and training programs, and cooperates with other
international organizations that influence international business.
