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Chapter Six

Political and Trade


Forces

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Ideological Forces

 Government Ownership of business


 Government own all the major factors of
production
 Labor unions are government-controlled
 Some field is unfair competition

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Dis 1: What do you think
Ideological force in your nation
1. What is kind of an ideological force
in your nation?
2. What do you think the advantage of
the above type?
3. What is best type for your nation
now? Explain pls?

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Why Firms are Nationalized

 The government suspects that the firms are concealing


(hide) profits
 To increase the firm’s profitability
 For ideological reasons - countries have national,
government run utility companies, control strategic
industries (petroleum in Mexico), etc.
 To preserve jobs by supporting failing industries that
are important to the economy
 As a consequence of previous government’s support to
protect the public investment

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Unfair Competition?

 Privately owned companies complain that


government owned companies
 Can cut prices because maximizing profit is
not their main purpose
 Get cheaper financing
 Get government contracts
 Get export assistance
 Can hold down wages with government
assistance

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Dis 2: think about unfair
competition in Vietnam
1. Pls show the name of some industry
or firm is owned by government?
2. To list something is considered
unfair?
3. Pls vote for private or state owned
companies? What is the best now?

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Privatization

 In EU: Britain worried and took a


changing privatization movement
 In Chi Le: Government sold his
stakes and got money back
 In Vietnam done and continuing
privatization movement
Privatization anywhere…

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Government Protection

 Terrorism
 Unlawful acts of violence committed for a wide
variety of reasons,
 Economic gain: ransom (take money in exchange
something)
 To overthrow (let down) a government
 To gain release of imprisoned colleagues
 To exact revenge (beat for beat) for real or
imagined wrongs
 To punish nonbelievers of the terrorists' religion

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Government Protection

 World wide terrorist groups: a new trend


 Government-sponsored terrorism: act of war
 Countries finance, sponsor, and train
terrorists and/or provide sanctuaries
(church/pagoda) for them

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Government Protection
 Kidnapping for Ransom
 Victims held for large ransoms
 Columbia and Peru are dangerous places
for American executives
 U.S. executives practice “commando
management” to avoid kidnap risk
 Arrive secretly, meet for a few days and
fly off before kidnappers learn of their
presence
 Such behavior is suggested when operating in
countries that are on the U.S. State
Department’s warning list LO3
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Countermeasures by Industry

 KRE (kidnap, ransom, and extortion – ask money for


exchange secret or something)
 Insurance to cover ransom payments, antiterrorist
schools
 Cassidy and Davis
 The world’s largest kidnapping and extortion
underwriting firm is located in London
 Antiterrorist Schools

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Government Stability

 Stable Government
 Maintains itself in power and whose fiscal,
monetary and political policies are
predictable and not subject to sudden,
radical changes
 Unstable Government
 Cannot maintain itself in power or makes
sudden, unpredictable, or radical policy
changes

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Traditional Hostilities

 Traditional hostilities (deeply hate) refer to


long-standing enmities between tribes, races,
religions, ideologies, or countries
 Arab countries -Israel
 Hutus and Tutsis in Burundi and Rwanda
 Tamils and Sinhalese in Sri Lanka

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Country Risk Assessment

 A country risk assessment (CRA) is an evaluation by


the firm that assesses a country’s economic
situation, policies and politics to determine how
much risk exists of losing an asset or not being paid

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Country Risk Assessment

 Types of Country Risks


 Political: wars, revolutions, coups (dare
to make politic problem)
 Economic
 Financial: BOP deficits
 Labor: low productivity, militant (fighting)
unions
 Legal: underdeveloped laws concerning
business
 Terrorism

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Information Content for CRA

 Information needed to conduct CRA


 Nature of business - the needs of the
company
 Length of time required by economic
activity being considered
 Utility of risk analyses of social,
political, and economic factors
decreases precipitously over longer
time spans

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Dis 2: CRA in Laos and India

1. Pls think the CRA in Laos? Give a


list of risks as you known?
2. Pls think the CRA in India? Give a
list of risks as you known?

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Arguments for trade
restrictions
 National defense
 Sanctions to punish offending nations
 Protect Infant (or dying) industry
 Protect domestic jobs
 Scientific tariff or fair competition
 Retaliation

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Dumping

 Dumping is within the domain of the WTO


 The WTO defines dumping as selling a product abroad
for less than
 the average cost of production at home
 home market price
 the price to third countries

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Dumping

 Dumping is used by a manufacturer


 to sell excess production without disrupting (cut
down) prices in the home market
 as a response to cyclical (reprocipal) or seasonal
factors
 as a way to raise market share
 Predatory (killing) dumping occurs when the
manufacturer lowers the export price to force the
importing nation’s domestic producers out of
business
 The manufacturer expects to raise prices once
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New Types of Dumping

 Social dumping occurs when firms in


developing nations capitalize on low wages
and poor working conditions
 no worker benefits
 undermines social support systems
 Environmental dumping refers to lax
environmental standards that lower costs

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New Types of Dumping

 Financial services dumping refers to low


requirements for bank capital-asset ratios
 Cultural dumping occurs when cultural barriers aid
local firms
 Tax dumping refers to special tax rates or related
breaks

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Subsidies and
Countervailing Duties

 Subsidies are economic actions by a


government to support exports or hinder
imports
 Countervailing duties are additional import
taxes levied by the importing nation’s
government on imports that have benefited
from export subsidies offered by the exporting
nation’s government

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Dis 2: chinese lighter case
A lot of chinese goods sold in USA is lower than
that of home nation. The Chinese goods bear a
high tax rate of anti-dumping when imported into
USA. For lighter, Chinese government did not
collect tax and refund as usual. He would
urguered that it was no provident in government
support for low price. He was winner in this
game.
1. What do you think the evident for government
support in refund tax?
2. how do you do if you urgues with him?
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Tariff Barriers

 Tariffs or import duties are taxes levied on


imported goods to reduce their competitiveness
 Ad valorem duties are assessed as a
percentage of invoice value
 Specific duties are assessed as a fixed sum
per unit
 Compound duties are a combination of ad
valorem and specific duties
 A variable levy may guarantee the market price
of the import is equal to that of the domestic
product

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Non-Tariff Barriers

 Forms of discrimination against imports other than


import duties such as
 Specifications
 Customs procedures
 Quotas are numerical limits on specific classes of
imports
 Absolute: once number is reached imports stop
 Global: no regard to source
 Allocated or discriminating: assigned to specific
countries

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Non-Tariff Barriers

 Voluntary export restraints (VERs) are


export quotas imposed by the exporting
country
 Orderly marketing arrangements are VERs
based on formal agreements between
exporting and importing countries

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Chapter Seven

Intellectual Property and


Other Legal Forces

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
International Legal Forces

 Rule of law allows foreign businesses to


know interests will be protected
 Public International Law
 Legal relations between governments
 Private International Law
 Laws governing transactions of
individuals and companies that cross
international borders

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Sources of International Law

 The most important source of law is found in


bilateral and multilateral treaties between nations
 Treaties are agreements among countries, which
may be bilateral (between two countries) or
multilateral (involving more than two countries);
also called conventions, covenants, compacts, or
protocols
 United Nation’s International Court of Justice
creates law when it decides disputes

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Extraterritoriality

 Extraterritoriality (exemption of local authority


for somebodies) refers to a country’s attempt to
apply its laws to foreigners or nonresidents and
to acts and activities that take place outside its
borders
 Not done through force, but by traditional
legal means

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International Dispute Settlement
 Litigation (dispute) in the United States
 Well-developed court systems that facilitate
litigation
 One reason many people outside the
U.S. dislike litigation in the U.S. is the
process of discovery
 Unlike most other countries, the U.S.
has two major court systems
 The federal court system and the
state court systems

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Performance of Contracts

 United Nations solution


 Many countries, including the U.S., have ratified
the UN Convention on Contracts for
International Sales of Goods (CISG)
 CISG established uniform legal rules to govern
international sales contracts and the rights and
obligations of the buyer and seller
 CISG is automatically applied to all contracts

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Dis 1: Viena Convention 1980

1. Do you know the Viena Convention


1980?
2. How many do nations ratify this
convention?
3. Why does USA not apply after
signing this convention?

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Performance of Contracts

 Private solution: arbitration


 Instead of going to court in any country,
companies may opt for arbitration
 A process, agreed to by parties to a dispute in
lieu of going to court, by which a neutral
person or body makes a binding decision
 Generally faster
 More informal
 Confidential
 Less expensive

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Intellectual Property

 Intellectual property includes


 Patents
 Trademarks
 Trade names
 Copyrights
 Trade secrets
 All result from the exercise of someone’s intellect

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Intellectual Property

 Patents - protection
 International Convention for the Protection of
Industrial Property
 European Patent Organization (EPO)
 The World Intellectual Property Organization
(WIPO)

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Intellectual Property

 Trademarks
 Protection varies by country, 10 to 20 years
 Madrid Agreement of 1891
 General American Convention for
Trademark and Commercial Protection
 Bilateral basis in friendship, commerce, and
navigation treaties

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Intellectual Property

 Trade names
 Protected in countries that adhere to the Convention
for the Protection of Industrial Property
 Copyrights
 Protection provided under the Berne Convention of
1886 which is adhered to by 77 countries
 Universal Copyright Convention of 1954 adopted by
92 countries

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Common Law or Civil Law?

 Common Law
 Jurisdiction has more power to expand rules to
fit particular cases
 Civil Law
 Jurisdiction is bound by the words in the code
 Much more predictable
Religion Law

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Law or custom

 Incoterms
 E: exwork
 F: FOB, FAS,
FCA
 C: CFA, CIF,
CIP, CPT
 D: DAT,DAP,
DDP

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Legal System Differences
between Europe and United States

 Europe
 Legislation is rarely amended and
regulations are rarely revised
 Courts are not as often asked to give their
interpretations. If they are, the decisions
are rarely appealed
 United States
 Laws and regulations are constantly being
amended or revised by legislatures and the
agencies
Islam contries
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Standardizing Laws

 Many attempts have been made to standardize laws


among various countries
 International business flows are facilitated with a
uniform set of rules
 Attempts include
 Tax conventions and treaties
 Antitrust cooperation
 International Center for Settlement of Investment
Disputes
 UN Convention on International Sale of Goods
 International Organization for Standardization (ISO)
 International Electrotechnical Commission (IEC)

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Taxation

 Non-revenue tax purposes


 To redistribute income
 Discourage consumption of products such as
tobacco and alcohol
 Encourage purchase of domestic rather than
imported products

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Tax Laws and Regulations

 Complexity of national tax systems differs


 Many consider tax laws and regulations of the U.S.
the most complex
 Compliance with tax laws and their enforcement varies
 Germany and U.S. are strict
 Italy and Spain are relatively lax
 Other differences include
 Tax incentives, exemptions, costs, depreciation
allowances, foreign tax credits, timing, and double
corporate taxation
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Dis 2: Tax system in Vietnam

1. What do you think the issues of tax


system in Vietnam?
2. Pls list the tax laws in Vietnam if you
undertake business?
3. What are about the tax rate of VAT
and corporate income tax in
Vietnam?

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Antitrust Laws

 Antitrust laws
 Laws to prevent price fixing, market sharing, and
business monopolies
 Competition policy
 The European Union equivalent of antitrust laws
 The U.S. and the EU have attempted to enforce their
antitrust laws extraterritorially
 Japan’s Fair Trade Commission
 The “toothless tiger”
 Japanese companies are incorporating antitrust
thinking into their strategy LO6
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Tariffs, Quotas,
and Other Trade Obstacles
 Purposes of tariffs
 To raise revenue for government
 To protect domestic producers
 Quotas limit the number or amount of imports
 For protection
 Other trade obstacles include
 Health requirements
 Packaging requirements
 Language requirements
 Weak patent or trademark protection
 Quarantine periods
 Voluntary Restraint Agreements

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Worldwide Examples of Tarrifs

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Torts

 Torts are injuries inflicted on other people, either


intentionally or negligently
 Product Liability
 Standard that holds a company and its officers
and directors liable and possibly subject to fines
or imprisonment when their product causes death,
injury, or damage
 Strict Liability
 Standard that holds the designer or manufacturer
liable for damages caused by a product without
the need for a plaintiff to prove negligence in the
product’s design or manufacture
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U.S. Laws That Affect U.S. Firms’
International Business

 Foreign Corrupt Practices Act (FCPA)


 U.S. law prohibits making payments to
foreign government officials for special
treatment
 Congress passed FCPA outlawing bribery,
but not “grease” payments

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Accounting Law

 Sarbanes-Oxley Act (SOX)


 Brings major changes to the regulation of corporate
governance and financial practice
 New reporting requirements
 Officer and director responsibilities
 Auditor independence
 Applies to any company, domestic or foreign, that
has securities registered or is required to file reports
under the Securities Exchange Act of 1934

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Dis 3: Accounting in Viet Nam

1. Pls explain why does the


vietnamese firm make two
accounting books (one for tax
declaration, one for administration)?
2. What do you think about the
business laws in Vietnam? How do
you do for strictly law application in
Vietnam?

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Chapter Eight

Understanding the
International Monetary
System and Financial Forces

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
IMF’s Current Exchange
Rate Arrangements

 Exchange arrangements with no separate legal


tender
 Currency board arrangements
 Other conventional fixed peg arrangements
 Pegged exchange rates within horizontal bands

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IMF’s Current Exchange
Rate Arrangements

 Crawling pegs
 Exchange rates within crawling bands
 Managed float with no preannounced path for the
exchange rate
 Independently floating exchange rates

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Summary of
Currency Arrangements

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Bank of International Settlements

 The Bank of International Settlements is based in


Basel, Switzerland
 an international organization of central banks: the
banker for central banks
 foster’s “cooperation among central banks and other
agencies in pursuit of monetary and financial
stability”

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Euro to U.S. Dollar
Exchange Rate

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Foreign Exchange Quotations
 Exchange Rates
 Foreign currency X’s per U.S.$ rate can be
computed from the reciprocal of the U.S. $
equivalent rate of currency X (and vice versa)

1/(U.S. $ equivalent rate of currency X) =


(Currency X per U.S. $ rate)

1/(Currency X per U.S. $ rate) = (U.S. $ equivalent rate


of currency X)

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Exchange Rate Forecasting

 Efficient market approach


 Assumption that current market prices fully reflect
all available relevant information
 Random walk hypothesis
 Assumption that the unpredictability of factors
suggests that the best predictor of tomorrow’s
prices is today’s prices

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Exchange Rate Forecasting

 Fundamental approach
 Exchange rate prediction based on econometric
models that attempt to capture the variables and
their correct relationships
 Technical analysis
 An approach that analyzes data for trends and then
projects these trends forward

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Currency Exchange Controls

 Currency exchange controls are


 government controls that limit the legal uses of a
currency in international transactions
 the value of the currency is arbitrarily fixed at a rate
higher than its market value
 If you see “official rate” next to a currency rate
quotation, that country has currency exchange
controls in place

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Currency Exchange Controls

 A black market typically surfaces as a result of


currency exchange controls
 However, this type of currency exchange
transaction is illegal
 The black market is rarely able to accommodate
transactions of the size involved in international
business

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Balance of Payments

 The state of a nation’s balance of payments (BOP)


reveals the state of that country’s economy
 If the BOP is slipping into deficit the government is
probably considering one or more market or
nonmarket measures to correct or suppress that
deficit
 Currency devaluation or restrictive monetary or
fiscal policies to induce deflation are likely
 Currency or trade controls may be near

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A Nation’s Balance of Payments

 Current account: records exports and imports in


goods and services
 Goods or merchandise account
 Services account
 Unilateral transfers
 Capital account: records the net changes in
international financial assets and liabilities
 Direct investments
 Portfolio Investments
 Short-term capital flows

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Balance of Payments
Current Account

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A Nation’s Balance of Payment

 Official Reserves account: records the assets held by


the government
 Gold, foreign currencies
 Accounts in foreign banks: A balance of the
country’s foreign currency

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