Chapter 1
ASSESSING THE ENVIRONMENT
POLITICAL, ECONOMIC, LEGAL, TECHNOLOGICAL
LECTURE OUTLINE
General Outline
Technology
Management in Action: Global Cybertheft of Corporate Secrets an Increasing Risk
Regional Trading Blocs
The European Union
Asia
Managing Political Risk
Managing Terrorism Risk
Economic Risk
The Legal Environment
Contract Law
Discussion Questions
Application Exercises
Experiential Exercise
Case Study: Apple’s iPhones—Not “Made in America”
Chapter Learning Objectives
1-2. To develop an appreciation for the ways in which political, economic, legal, and
technological factors and changes impact the opportunities that companies face
Opening Profile: Assessing Risks in Russia (see slide 1-3)
This opening section briefly describes the top risks involved in assessing risk in Russia to
include sanctions-based retaliatory measures and a decline in business activity. The section
describes other issues such as the threat of backlash in Russia against Western products, and the
continued standoff between Russia and Ukraine; global outcry after Malaysia Airlines Flight 17
shot down. Globalization has compounded the types and levels of business risks. Managers face
the challenges of: politics, cultural differences, global competition, terrorism, sustainability, and
social obligations (see slide 1-4)
I. Chapter Learning Goals (see slide 1-5)
A. What is International Management?
1. What is Globalization?
2. Global Trends (see slide 1-8)
a. The changing balance of growth toward emerging markets compared with
developed ones, along with the growing number of middle-class consumers in
those areas.
3
3. 2014-2015 Foreign Direct Investment Confidence Index Top 25 Targets for FDI (see
slide 1-9)
It is clear that globalization—in the broader sense—has led to the narrowing
of differences in regional output growth rates, driven largely by increases led by
4. Chapter Learning Goals & Challenges to Globalism (see slides 1-10 & 1-11)
The backlash against globalization comes from those who feel that it benefits
advanced industrial nations at the expense of many other countries and the people
within them who are not sharing in those benefits. Joseph Stiglitz, a Nobel Laureate,
5. Effects of Institutions on Global Trade
4
a. Two major groups of institutions play differing roles in globalization: World
Trade Organization and International Labor Organization are examples of
6. Effects of Globalization on Corporations
a. Global companies are becoming less tied (see slide 1-12) to specific locations and
7. Small and Medium-Sized Enterprises (SMEs)
Small companies also affect and, are affected by globalism. They play a vital role
in contributing to their national economies through new job creation and
employment, development of new products and services, and international
Discussion Question: Evaluate the statement by Thomas Friedman that the world is flat.
What does he mean by this statement?
Teaching Resource: For the latest statistics, have your students visit one of the following
Web sites:
B. The Globalization of Human Capital (see slide 1-13)
1. Major changes are occurring in the world labor force, including the following:
a. Increased movement across borders for all types of workers
b. Increased offshoring of jobs to lower wage countries
c. Increased offshoring of white-collar jobs
C. The Globalization of Information Technology (see slide 1-14)
5
1. Of all the technological development propelling international business today, the one that
Teaching Tip: The Financial Times has a regular monthly special section on information
technology. See also Forbes online: http://www.forbes.com/technology/
Management in Action: Global Cybertheft of Corporate Secrets (see slide 1-15)
Added to the risks that businesses have encountered in the global environment is
cybertheft, which has become common, hard to detect, and difficult to combat. In May
2014, the U.S. Department of Justice (DOJ) charged five Chinese military personnel of
Further allegations were formalized against hackers located in Russia. Although
company executives have been aware of such hacking for some time, they are now willing
to publicize that information to expose the economic cyber espionage in an attempt to
control future damage to their companies. Although then Attorney General Eric Holder
acknowledged that those accused would unlikely be brought to trial because there is no
extradition treaty with China, he made it clear that there are costs to pay for stealing trade
secrets and harming the interests of U.S. companies.
B. Regional Trading Blocs (see slide 1-16)
Much of today’s world trade takes place within three regional free-trade blocs (Western
Europe, Asia, and the Americas). These trade blocs are continually expanding their
borders to include neighboring countries, either directly or with separate agreements.
1. The European Union “EU”
a. EU (see slide 1-17) comprises a 28-nation, unified, borderless market of
approximately 500 million people, as shown in Map 1.2. Countries around the
b. “Germany’s prosperity is inextricably linked with the success and survival of the
single currency, with more than 38 percent of German exports going to its
eurozone partners, and almost 58 percent to the 28 members of the European
6
c. The EU represents the following challenges to global managers
1. How to deal with the possibility of a market closed to outsiders (“fortress
Europe”), a market giving preferences to insiders
2. How to deal effectively with multiple sets of national cultures, traditions, and
customs within the Eurozone
3. Asia (see slide 1-18)
a. Japan and the Four Tigers of Hong Kong , Singapore, South Korea, and
Taiwan,—each of which has abundant natural resources and labor—provide most
of the capital and expertise for Asia’s developing countries. ASEAN is
negotiating a free trade agreement and moving towards a common market.
4. The Americas (see slide 1-19)
a. The NAFTA free-trade agreement between the United States, Canada, and
Mexico has created a trading block—“one America”—with 421 million
consumers, making the Northern Hemisphere the largest market in the world.
From Mexico’s perspective, the country’s exports have exploded under NAFTA;
U.S-Mexico bilateral trade increased from $88 billion in 1993, the year prior to
the implementation of NAFTA, to $383 billion (estimated) in 2010, an increase of
335 percent. However, Mexico’s dependence on the United States for its
7
b. The U.S.-Central America Free Trade Agreement (DR-CAFTA) has passed
Congress and includes five countries in Central America and the Dominican
Republic. The agreement is seen as a stepping stone to the Free Trade Area of the
Americas (FTAA) to include 34 countries in the Americas. Cuba is excluded from
the proposed agreement.
5. Other Regions in the World (see slide 1-20)
a. Sweeping political, economic, and social changes around the globe represent new
b. The Russian Federation—Foreign investment in Russia boded well for the economy
until the situation with Ukraine, caused a considerable downturn in confidence. The
Teaching Tip: Challenge your students to think about the “threat” associated with “free
trade.” Ross Perot once suggested that NAFTA would create a giant sucking sound, drawing
jobs away from the United States. A discussion question to raise those issues might be, “If
NAFTA was sucking away important U.S. jobs, why was unemployment in the United
States at record-low levels after NAFTA came into effect?”
Another question: “If there is a giant sucking sound from Mexico to China as off-shored
jobs have gone to China because of its low wages, what should Mexico do to battle
unemployment?”
Teaching Tip: Ask your students, “Can a country be successful if it has economic freedom but
not political freedom?”
8
Comparative Management in Focus: China Loses Its Allure (see slide 1-21)
1. The Allure of doing business in China
a. Until 2010, China grew at 10 percent for 30 years, declining to 7.3 percent in
2014.
b. Growth of 7 percent for 2015 was called “a new normal” by Premier Li Keqiang.
2. Comparative Management in Focus: China Losing Its Allure (see slide 1-22):
a. China’s legal and regulatory system is arbitrary.
3. Management Focus: Tips for doing business in China (see slide 1-23)
a. Connections are important.
b. Negotiations will be different from the U.S. and difficult.
c. Communication must be clear, honest, and fully prepared for.
d. Culture matters!
F. Chapter Learning Goals (see slide 1-24)
1. The rules of the game for global managers are set by each country and its political and
The Global Manager’s Role (see 1-25) The Contingency Role of the Global Manager Within
the larger context of global trends and competition, the rules of the game for the global manager
are set by each country: its political and economic agenda, its technological status and level of
II. The Political and Economic Environment (see slide 1-26)
A. Proactive globally-oriented firms maintain an up-to-date profile of the political and economic
environment of the countries in which they maintain operations.
The top ten risks overall were as follows:
1. Economic slowdown
2. Regulatory/legislative changes
3. Increasing competition
4. Damage to reputation/brand
B. Political Risk (see slide 1-27)
1. Political risks are any governmental actions or politically motivated events that
adversely affect the long-run profitability or value of firms doing business. Clearly, as
2. Nationalization refers to the forced sale of the MNCs assets to local buyers, with some
compensation to the firm.
3. Expropriation occurs when the local government seizes the foreign-owned assets of the
MNC providing inadequate compensation, if any at all.
4. Macropolitical risk events are those that affect all foreign firms doing business in a
country or region; e.g., terrorism, the use or threat of use of anxiety inducing violence for
10
5. The Political Risk Cont. : (see slide 1-28)
a. Expropriation without prompt and adequate compensation
b. Forced sale of equity to host country nationals, usually at or below depreciated book
C. Political Risk Assessment
1. International companies must conduct some form of political risk assessment in order to
manage their exposure to risk and to minimize financial losses.
2. Risk assessment by multinational corporations usually takes two forms: the use of experts
or consultants and the development of internal staff and in-house capabilities. Both
means may be used. The focus must be on monitoring political issues before they become
headlines. The ability to minimize negative effects on the firm or to be the first to take
advantage of opportunities is greatly reduced once developments have been reported in
the news.
3. For autonomous international subsidiaries, most of the impact from political risks will be
at the level of ownership and control of the firm. For global firms, the primary risks are
likely to be from restrictions (on such things as imports, exports, and currency) with the
impact of the local level of the firm’s transfers of money, products, or component parts.
D. Managing Political Risk (see slide 1-29)
1. After assessing the potential political risk of investing or maintaining current operations
in a country, managers face perplexing decisions on managing political risk. On one
level, they can decide to suspend their firm’s dealings with a certain country at a given
2. Below are Taoka and Beeman suggested these means of adaptation:
a. Equity sharing includes the initiation of joint ventures with nationals to reduce
3. In addition to avoidance and adaptation, two other means of risk reduction available to
managers are dependency and hedging.
a. Dependency—keeping the subsidiary and host nation dependent on the parent
corporation. It can be maintained with four methods:
1. Input control—parent controls the key inputs.
E. Managing Terrorism Risk (see slide 1-30)
1. No longer is the risk of terrorism for global businesses focused only on certain areas such
as South America or the Middle East. That risk now has to be considered in countries
such as the United States, which had previously been regarded as safe. Eighty countries
lost citizens in the World Trade Center attack on September 11, 2001. Many companies
Teaching Tip: A number of firms offer political risk consulting services. You could have your
students search the Web for some of these firms and report back the methodology that they
employ.
F. Economic Risk (see slide 1-31)
1. A country’s level of economic development generally determines its economic stability
and therefore its relative risk to a foreign firm. Recently, the level of economic risk in
12
2. A country’s ability or intention to meet its financial obligations determines its economic
risk. The economic risk incurred by a foreign corporation usually falls into one of two
3. The risk of exchange-rate volatility results in currency translation exposure to the firm
when the balance sheet of the entire corporation is consolidated and may cause a negative
cash flow from the foreign subsidiary.
Teaching Tip: Ask students to choose a country and use the Website www.reuters.com (click investing,
and then currencies) to find out how much of that country’s currency they would receive if exchanging
$20. Then ask them to find out the cost of some basic items such as the cost of a combo meal at
McDonald’s, a movie ticket, and a Coca-Cola. How far does the money go there?
5. The four primary methods (see slide 1-33) of analyzing economic risk: quantitative,
qualitative, combination of both, and the checklist approach.
III. Chapter Learning Goals & The Legal Environment (see slides 1-34 & 1-35)
A. The prudent international manager consults both local and headquarters’ legal services in
order to comply with host country regulations and to maintain cooperative long-term
relationships in the local area.
B. Although the regulatory environment for the international manager consists of the many local
laws and the court systems in those countries in which he or she operates, certain other legal
issues are covered by international law. International law is the law that governs relationships
between sovereign nations. The United Nations Convention on Contracts for the International
Sale of Goods (CISG) applies to contracts for the sale of goods between countries that have
adopted the convention.
Teaching Resource: CNN financial networks world financial markets—of particular interest