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MGT520 - International Business - Lecture Handout 27

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THE POLITICAL ECONOMY OF INTERNATIONAL TRADE

Economic Rationales for Government Intervention:

Unemployment:

There is probably no more effective pressure group than the unemployed, because no other group has the time and incentive to picket or write letters in volume to government representatives. By limiting imported goods, consumers are forced to consume more goods produced domestically. This helps boost domestic employment. However, placing restrictions on imports normally results in retaliatory tariffs by other countries. In such instances, domestic jobs related to exports may be lost. Even if import restrictions do increase domestic employment, there will still be costs to some people in the domestic society in the form of higher prices or higher taxes.

Infant Industry Argument:

The infant industry argument holds that a government should guarantee an emerging industry a large share of the domestic market until it becomes efficient enough to compete against imports. However, governments have a hard time identifying which industries merit protection. Furthermore, protection for any particular industry means higher costs for local consumers, which can reduce the profitability of other domestic industries.

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MGT520 - International Business - Lecture Handout 25

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THE POLITICAL ECONOMY OF INTERNATIONAL TRADE

THE POLITICAL ENVIRONMENT:

The political environment can have a dramatic impact on the operations of a firm. U.S. managers may be accustomed to a stable political system and a relatively homogenous population. This is often not true in other countries. A political system integrates the parts of a society into a viable, functioning unit. Sometimes that is a very difficult task. A country’s political system influences how business is conducted domestically and internationally.

THE IMPACT OF THE POLITICAL SYSTEM ON MANAGEMENT DECISIONS:

Political Risk:

Political risk occurs when there is a possibility that the political climate in a foreign country will change in such a way that the operations of international companies in that country will deteriorate.

  • Types and causes of political risk: Types of political risk include government takeovers of property, operating restrictions, and agitation that damages the company’s performance. Such problems can be caused by changing opinions of political leadership, civil disorder, and changes in external relations (such as animosity between the home and host country governments.
  • Macro and micro political risks: If political actions are aimed only at specific foreign investments (e.g., a single foreign company), they are considered micro political risks. If they are aimed at a broad spectrum of foreign investors (e.g., when all foreign-owned private property was taken over by Cuba), they are considered macro political risks.

  • Read more: MGT520 - International Business - Lecture Handout 25