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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.

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MGT520 - International Business - Lecture Handout 16

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DIFFERENCES IN CULTURE

Religious and Ethical Systems:

  1. Religion can be defined as a system of shared beliefs and rituals that are concerned with the realm of the sacred. Ethical systems refer to a set of moral principles, or values, that are used to guide and shape behavior. The ethical practices of individuals within a culture are often closely intertwined with their religion. While there are literally thousands of religions worldwide, four that have the largest following will be discussed: Christianity, Islam, Hinduism, and Buddhism. Confucianism, while not a religion, influences behavior and shapes culture in many parts of Asia. Map 3.1 shows dominant religions across the world.
  2. Christianity is the largest religion and is common throughout Europe, the Americas, and other countries settled by Europeans. Within Christianity there are three major branches: Protestant, Roman Catholic, and Eastern Orthodox. At the turn of the century Weber suggested that is was the "Protestant work ethic" that was the driving force of capitalism. This focus on hard work, wealth creation, and frugality encouraged capitalism while the Catholic promise of salvation in the next world did not foster the same kind of work ethic. The Protestant emphasis on individual religious freedom, in contrast to the hierarchical Catholic Church, was also consistent with the individualist economic and political philosophy discussed in Chapter 2.
  3. Islam has the same underlying roots of Christianity (Christ is viewed as a prophet), and suggests many of the same underlying societal mores. Islam, however, extends this to more of an allembracing way of life that governs one's being. It also prescribes many more "laws" on how people should act and live. These are laws that are entirely counter to the US "separation of church and state." In Islam people do not own property, but only act as stewards for God and thus must take care of that with which they have been entrusted. They must use property in a righteous, socially beneficial, and prudent manner; not exploit others for their own benefit; and they have
    obligations to help the disadvantaged. Thus while Islam is supportive of business, the way business is practiced is strictly prescribed. For instance, no interest may be paid on business loans. The country focus on Pakistan illustrates how banks deal with, and overcome, that restriction.
  4. Hinduism, practiced primarily on the Indian sub-continent, focuses on the importance of achieving spiritual growth and development, which may require material and physical self-denial. Since Hindus are valued by their spiritual rather than material achievements, there is not the same work ethic or focus on entrepreneurship found in some other religions. Likewise, promotion and adding new responsibilities may not be the goal of an employee, or may be infeasible due to the employee's caste.
  5. Buddhists also stress spiritual growth and the afterlife, rather than achievement while in this world. Buddhism, practiced mainly in Southeast Asia, does not support the caste system, however, so individuals do have some mobility not found in Hinduism and can work with individuals from different classes.
  6. Confucianism, practiced mainly in China, teaches the importance of attaining personal salvation through right action. Unlike religions, Confucianism is not concerned with the supernatural and has little to say about the concept of a supreme being or an afterlife. The needs for high moral and ethical conduct and loyalty to others are central in Confucianism. Three key teachings of Confucianism - loyalty, reciprocal obligations, and honesty - may all lead to a lowering of the cost of doing business in Confucian societies. The close ties between Japanese auto companies and their suppliers, called keiretsus, have been an important ingredient in the Japanese success in the
    auto industry. They have facilitated loyalty, reciprocal obligations, and honesty. In countries where these relationships are more adversarial and not bound by these same values, the costs of doing business are probably higher.

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