The document discusses the political, economic, legal, and technological environments faced by global managers. It describes how international business has grown due to factors like improved transportation and communication technologies, lowered trade barriers, and increased global competition. Key political risks include expropriation and nationalization while economic risks relate to currency devaluations and policy changes. Legal systems differ globally and laws impact business activities and cross-border transactions. Technological changes like the internet are both driving and being driven by globalization. Global managers must understand these environmental factors in countries where they operate.

1. Assessing the Environment – Political,
Economic, Legal, Technological
Chapter 1

2. The Field of International Business
International Business refers
to profit-related activities
conducted across national
boundaries.

3. Why Companies Engage in
International Business
–Expand sales
–Acquire resources
–Diversify sources of sales and
supplies
–Minimize competitive risk

4. Reasons for Recent International
Business Growth
 Expansion of technology
• Business is becoming more global because
–Transportation is quicker
–Communications enable control from
afar
–Transportation and communications
costs are more conducive for
international operations

5. Reasons for Recent International
Business Growth
 Liberalization of cross-border
movements
• Lower governmental barriers to the
movement of goods, services, and
resources enable companies to take better
advantage of international opportunities

6. Reasons for Recent International
Business Growth
• Development of supporting
institutional arrangements
• Institutional arrangements
–Are made by business and government
–Ease flow of goods
–Reduce risk

7. Reasons for Recent International
Business Growth
• Increase in global competition
• More companies operate internationally
because
–New products quickly become global
–Companies can produce in different
countries
–Domestic companies’ competitors,
suppliers, and customers become
international

8. The Usual Pattern of Internationalization

9. What is Global Management?
Global management is the process of
developing strategies, designing and
operating systems, and working with
people around the world to ensure
sustained competitive advantage.

10. OrganizingPlanning
LeadingControlling
The Process of International
Management

11. H o m e
M a r k e t
O r ie n te d
E th n o c e n tr ic
M a n a g e m e n t
In d iv id u a l
F o r e ig n
M a r k e ts
P o ly c e n tr ic
M a n a g e m e n t
In te g r a te d
W o r ld w id e
M a r k e tin g
G e o c e n tr ic
M a n a g e m e n t
M a n a g e r ia l A t t it u d e s

12. An Open Systems Model: The Global
Manager’s Role and the International Environment

13. Regional Trading Blocs
 The Triad: Much of today’s world trade takes place
within three regional free-trade blocs:
 Western Europe
A unified market of over 400 million people in 27 nations
 North America
North American Free Trade Agreement (NAFTA)
Central American Free Trade Agreement (DR-CAFTA)
Free Trade Area of the Americas (FTAA)
 Asia
Japan; The Four Tigers; China; India; South Asia

14. The European Union (EU)
 The Euro is now a legally tradable currency.
 The EU is the most integrated common market in
the world with over 400 million consumers.
 The creation of EU has not eliminated national
pride. Most people in W. Europe still think of
themselves first as British, French, Danish or
Italian, and are wary of giving up too much power
to centralized institutions, or of giving up their
national culture.

15. Global Managers and the E.U.
 Global managers face two major tasks with
respect to the E.U.
– How firms outside of Europe can deal with a market
giving preference to insiders
– How to deal effectively with multiple sets of national
cultures, traditions, and customs within Europe.

16. North America
 The North American Free Trade Agreement
(NAFTA) between the United States, Canada and
Mexico has created a single market of 421 million
consumers.
 The “One America” trading bloc has the potential
for expansion in South America as trade
liberalization among the Latin American
countries progresses.

17. North America (contd.)
 Maquiladoras are U.S. manufacturing facilities
that have operated just south of the Mexican-
American border since the 1960s under special
tax concessions.
 Joint ventures between Mexican and American
companies are common. Examples include the
one between Wal-Mart and Cifra, which in 2001
was Mexico’s biggest chain.

18. Asia
 Japan and the Four Tigers – Singapore, Hong Kong,
Taiwan, and South Korea – provide most of the capital
and expertise for Asia’s developing countries. Japan is
the world’s second largest economy.
 China has the fastest growth rate in the world, offers a
large population of low-wage workers and a large
consumer market. China is known as the world’s factory.
 India is the fastest growing free-market democracy, and it
is known as the world’s services supplier. It is the
world’s leader in outsourced back-office and high-tech
services.

19. What is Political Risk?
 Political risks are any governmental action
or politically motivated event that could
adversely affect the long-run profitability or
value of a firm.
 Example:
Venezuela recently forced oil companies to accept
a minority stake in fields they owned and to pay
more in taxes and royalties

20. Terrorism Risk
 Terrorism is “the use, or threat of use, of anxiety-
inducing … violence for ideological or political
purposes” (Micklous).
 The increasing incidence of terrorism around the
world concerns MNCs.

21. Typical Political Risk Events
 Expropriation of corporate assets without prompt
and adequate compensation (Confiscation: no
compensation is provided).
 Forced sale of equity to host-country nationals,
usually at or below depreciated book value
(Nationalization).
 Discriminatory treatment against foreign firms in
the application of regulations or laws.
 Barriers to repatriation of funds (profits or
equity).

22. Typical Political Risk Events (Contd.)
 Loss of technology or other intellectual property
(such as patents, trademarks, or trade names).
 Interference in managerial decision making.
 Dishonesty by government officials, including
canceling or altering contractual agreements,
extortion demands, and so forth.

23. Political Risk Assessment
 Helps companies manage exposure to
risk and minimize financial loss
 Two forms:
– Consultation with experts
– Development of internal staff capabilities

24. Techniques for Managing Political Risk
Computer Modeling
Example: American Can’s Primary Risk
Investment Screening Matrix (PRISM)
Ranking systems
Early warning systems

25. Managing Political Risk
(Taoka and Beeman’s suggestions)
 Adaptation
Equity sharing
Participative management
Localization of the operation
Development assistance

26. Managing Political Risk
Dependency
Input Control
Market Control
Position Control
Staged Contribution Strategies

27. Managing Political Risk
Hedging
Political Risk Insurance
Local Debt Financing
Avoidance/Withdrawal

28. Economic Risk
Is closely related to political risk
Is determined by a country’s ability or
intention to meet its financial
obligations

29. Economic Risk in LDCs
 LDCs tend to pose more risk than
developed countries
 For example, expectations that
Argentina’s economy would shrink by
15% in 2002 negatively affected foreign
firms doing business there

30. Types of Economic Risk
The economic risk incurred by a foreign
corporation usually falls into one of two main
categories: its subsidiary (or other investment)
in a specific country may become unprofitable
 if the government abruptly changes its
domestic monetary or fiscal policies or
 if the government decides to modify its
foreign-investment policies.
 Example: Devaluation of Peso in 1990s

31. Approaches to Assessing Economic Risk
 Quantitative
 Qualitative
 Checklist
 A combination of these methods

32. The Legal Environment
 Consists of the local laws and legal systems of
those countries in which an international
company operates and of international law,
which governs relationships between
sovereign countries
 A host country’s legal system may be derived
from common law, civil law, or Islamic law,
and is a reflection of the country’s culture,
religion, and traditions.

33. Legal Systems
 A common law system is based on tradition, precedent,
custom and usage, and interpretation by courts. It uses
past court decisions as precedents. It is used in the US
and 26 other countries of English origin or influence.
 A civil law system is based on a very detailed and
comprehensive set of laws organized into code. It is used
in about 70 countries, including Japan and many in
Europe.
 A theocratic law system is based on religious beliefs and
combines common, civil, and indigenous laws to varying
degrees. It is used in Islamic countries, such as Saudi
Arabia.

34. Impact of Laws on Business
National laws affect all local business
activities
National laws affect cross-border
activities
International treaties and
conventions govern cross-border
transactions

35. Key Legal Issues
in International Business
Trade and investment regulation
Intellectual property protection
Financial flows regulation
Taxation
Reporting requirements
Ownership regulation

36. Key Legal Issues in
International Business
Contractual relationships
International treaties
Dispute resolution

37. The Technological Environment
 Technoglobalism is the phenomenon in which
rapid developments in information and
communication technologies are propelling
globalization and vice-versa.
 An MNC’s major concern is the appropriability
of technology – that is, the ability of the
innovating firm to profit from its own technology
by protecting it from competitors.

38. Global E-Business
 E-business is “the integration of systems,
processes, organizations, value chains and entire
markets using Internet-based and related
technologies and concepts.”
 E-commerce refers directly to the marketing and
sales process
 The Internet and e-business provide a number of
uses and advantages in global business.

39. The Environment of the Global Manager
 Political Environment
• Form of government
• Political stability
• Foreign policy
• State companies
• Role of military
• Level of terrorism
• Restrictions on
imports/exports
 Economic Environment
• Economic system
• Stage of development
• Economic stability
• GNP
• Int’l financial standing
• Monetary/fiscal
policies
• Foreign investment

40. The Environment of the Global Manager
(contd.)
 Regulatory Environment
• Legal system
• Prevailing int’l laws
• Protectionist laws
• Tax laws
• Role of contracts
• Protection for
proprietary property
 Technological Environment
• Level of technology
• Availability of local
technical skills
• Technical requirements of
country
• Appropriability
• Transfer of technology
• Infrastructure
• Environmental protection