29
C H A P T E R 4
International politics
Chapter objectives
2. Examine the primary reasons for the current privatization movement and the economic
impact that this movement is having on selected countries.
4. Discuss how MNEs are using strategic planning to benefit from current worldwide
economic integration efforts.
5. Discuss the impact of nongovernmental organizations (NGOs) on international business.
Chapter summary
1. Political ideologies and economic systems are interwoven. Democracies tend to have
market-driven economies; totalitarian governments tend to have centrally determined
2. Another current economic development is the trend towards privatization. Many countries
3. Economic integration is the establishment of transnational rules and regulations that permit
economic trade and cooperation among countries. Effective integration brings about trade
4. Nongovernmental organizations (NGOs) are an important new actor on the stage of
30
5. Multinational enterprises (MNEs) use a variety of strategies to benefit from integration
efforts. One is strategic alliances and acquisitions by which they are able to surmount the
economic wall and gain an inside position in the economic alliance or free trade area. The
other strategy is through the localization of operations by focusing on products, profits,
production and management. The MNEs typically use both of these strategic approaches.
Chapter outline
Introduction
Political ideologies and economics
Political systems
Economic systems
Economic integration
Trade creation and trade diversion
Levels of economic integration
Economic integration: an overall perspective
Ethics, environment, MNEs and the civil society
The European Union (EU)
Other examples of economic integration
Economic integration and strategic management
Strategic alliances and acquisitions
Localization of business operations
Lecture outline
A. Introduction
1. There have been numerous political changes in recent years, with several countries
2. An ideology is a set of integrated beliefs, theories and doctrines that help direct the
3. In the extreme, there are two types of political systems: democracy and totalitarianism.
Democracy is a system of government in which the people, either directly or through
Rugman and Collinson, International Business, 6th edition, Instructor’s Manual
their elected officials, decide what is to be done. Totalitarianism is a system of
government in which one individual or political party maintains complete control and
4. There are three basic economic systems: capitalism, socialism and mixed. However, for
purposes of analysis it is more helpful to classify these systems in terms of resource
5. Private ownership characterizes market-driven economies; public ownership characterizes
centrally determined economies.
6. There are six common, and sometimes interdependent, reasons for countries to control
business assets, a process known as nationalization. These include (a) promotion of
7. Privatization can take two forms: divestiture, in which the government sells assets; and
8. Some of the primary reasons for privatization include the following: (a) it is generally
more efficient for goods and services to be provided by private business than by
government-run companies; (b) a change in the political culture brings about a desire to
9. Many nations have privatization programs. These include countries with small gross
national products, such as Argentina, Brazil, Chile, Mexico and China. A second group
10. While many governments are privatizing assets, this does not mean that they are
distancing themselves from business firms. Both in the EU and in Japan there has been
11. The results of such cooperative efforts have not been lost on Washington, which is now
B. Economic integration
1. Economic integration is the establishment of transnational rules and regulations that
enhance economic trade and cooperation between countries. At one extreme, economic
2. Trade creation occurs when the members of an economic integration group begin
focusing their efforts on those goods and services for which they have a comparative
3. Trade diversion occurs when the members of an economic integration group decrease
their trade with nonmember countries in favor of trade with each other. One common
4. There are five levels of economic integration. A free trade area is an economic
integration arrangement in which barriers to trade (such as tariffs) among member
countries are removed. One of the best-known free trade arrangements is the European
Free Trade Association (EFTA). A customs union is a form of economic integration in
which all tariffs between member countries are eliminated and a common trade policy
5. It is not necessary for a country to pursue economic integration by starting with a free
trade area and then working up to a common market or economic union. For example,
6. Economic integration in the form of free trade typically results in a winning situation
for all group members. However, when a bloc of countries imposes a tariff on
7. An increasingly important player in the international business arena is civil society.
Civil society is a loosely organized group composed of environmentalists, antipoverty
8. In 1952, six European countries (Belgium, France, Italy, Luxembourg, the Netherlands
and West Germany) established the European Coal and Steel Community (ECSC) for
9. The main provisions of the ECs founding treaty were (a) formation of a free trade area
among the members that would be brought about by the gradual elimination of tariffs,
10. Some countries chose not to join the EC but rather to form the EFTA, whose primary
11. In 1995, the EC was renamed the EU. Over the years, the EU and its predecessors made
vigorous headway in pursuit of its objectives. For example, during the 1970s, formal
12. There are six major institutions that manage the EU: the European Council, composed
of the heads of all member states; the council of the EU, the major policy decision-
making body of the EU (decisions are conducted by the relevant ministers from each
13. The EU is a powerful economic union. Empirical studies show that the community has
34
14. Other economic alliances include the Andean Community, Mercosur, Association of
Southeast Asian Nations (ASEAN) and the Free Trade Area of the Americas (FTAA).
The Andean Community is an economic union that consists of Bolivia, Colombia,
1. One of the easiest ways of benefiting from economic integration efforts is by
2. Another common approach is the localization of business operations. Examples include
Answers to review and discussion questions
1. As political systems change, economic systems follow. What does this statement mean?
2. How does a centrally determined economy differ from a market-driven economy?
Explain.
3. What are the benefits of privatization? Why will the trend toward privatization
continue?
Some of the primary reasons for privatization include the following: (a) it is more efficient for
goods and services to be provided by private business than by government-run companies; (b) a
change in the political culture brings about a desire to sell government-held assets;
4. Why are governmentbusiness cooperative efforts beginning to increase? What
benefits do they offer?
5. What is the purpose of research consortia? What is their future likely to be? Why?
6. How does trade creation differ from trade diversion? Compare and contrast the two.
7. There are five levels of economic integration. What is meant by this statement? Be
complete in your answer.
The statement means that there are five degrees of economic integration. These include
(a) free trade areas, which are economic integration arrangements in which all barriers to trade
8. How does the EU function? Identify and describe its organization and operation.
36
9. What is the purpose of the following economic alliances: the Andean Community,
Mercosur and ASEAN?
10. Some of the primary ways that MNEs use strategic planning to benefit from economic
integration efforts is through strategic alliances and acquisitions. How do MNEs do
this?
11. How do MNEs seek to localize their business operations? Describe three steps that they
take.
Answers to real cases
How environmental regulations can be used as trade barriers
1. How can a health and safety regulation become a trade barrier? Provide examples.
2. How can different environmental circumstances make one countrys regulations
inefficient in another country?
The answer to this question can be seen in the two examples provided in the case. While it
might be efficient for beer producers in Ontario to use recyclable bottles, imports from the
3. What are some reasons why the government might not be willing to make allowances
for different countries?
Embraer versus Bombardier
1. How do factor conditions differ for Embraer and Bombardier?
2. How does the dispute reflect the difficulties in drafting the FTAA?
The FTAA will be composed of both industrialized and developing countries. In terms of
employment, Canada and the United States have low unemployment rates and high employment
costs. Free trade is likely to upset highly paid workers in industrialized countries if firms locate
3. Why are governments involved in this trade dispute?
Governments are involved in this trade dispute because they have an interest in the success of their
MNEs. Firms create domestic jobs. Their products are consumed within the nation and can be
traded for other goods from other nations. That is, they create wealth for the citizens of the
4. Why are Canada and Brazil hesitant to apply the punitive tariffs they were awarded?