FOR MORE CLASSES VISIT tutorialoutletdotcom All images in this presentation are used for educational purposes. Fair dealing. MGT376 International Business Lecture 2: Political Economy & Risk Dr. Sergej Ljubownikow e-mail: s.ljubownikow@sheffield.ac.uk

1. MGT 376 International Business All images in this presentation
FOR MORE CLASSES VISIT
tutorialoutletdotcom
All images in this presentation are used for educational purposes. Fair
dealing. MGT376
International Business
Lecture 2:
Political Economy & Risk
Dr. Sergej Ljubownikow
e-mail: s.ljubownikow@sheffield.ac.uk
Office: SUMS D037b
Office Hours: check MOLE All images in this presentation are used for
educational purposes. Fair dealing. Learning Objectives
• After this session you should:
– Be able to analyze differences between countries based on an
understanding of political, economy, and legal system
– Be able to consider the risk factors affecting international
businesses All images in this presentation are used for educational
purposes. Fair dealing. What Is A Political Economy?
• Political economy of a nation - how the political,

2. economic, and legal systems of a country are
interdependent
– they interact and influence each other
– they affect the level of economic well-being in the
nation All images in this presentation are used for educational purposes.
Fair dealing. Politics & Economics
• Politics
–
–
–
–
– High politics
Distinct
Highly important
State-centric
International relations =
international politics
– Governance,
organisation,
society/polis • Economics

3. –
–
–
– Secondary
Distinct
Limited importance
Remit of non-state
actors
– Not central to
international relations
– Production, exchange,
consumption All images in this presentation are used for educational
purposes. Fair dealing. Political Economy
• Alternative Approach
– Politics & economics are intertwined
– They influence & relate to each other
– Contemporary issues & processes have political &
economic characteristics, causes & impacts
– State & non-state actors have political & economic
functions; make political & economic decisions;

4. respond to political & economic processes. All images in this
presentation are used for educational purposes. Fair dealing. What Is A
Political System?
• Political system - the system of government in a
nation
• Assessed according to
– the degree to which the country emphasizes
collectivism as opposed to individualism
– the degree to which the country is democratic or
totalitarian All images in this presentation are used for educational
purposes. Fair dealing. What Is The Link Between Political
Ideology and Economic Systems?
• Political ideology and economic systems are
connected
– countries that stress individual goals are likely to have
market based economies
– in countries where state-ownership is common,
collective goals are dominant All images in this presentation are used for
educational purposes. Fair dealing. What Is An Economic System?
There are three types of economic systems
1. Market economies
2. Command economies

5. 3. Mixed economies All images in this presentation are used for
educational purposes. Fair dealing. Economic and Political Freedom All
images in this presentation are used for educational purposes. Fair
dealing. What Is A Legal System?
• Legal system - the rules that regulate behavior along
with the processes by which the laws are enforced
and through which redress for grievances is
obtained
– the system in a country is influenced by the prevailing
political system • Legal systems are important for business because
they
– define how business transactions are executed
– identify the rights and obligations of parties involved in
business transactions All images in this presentation are used for
educational purposes. Fair dealing. What types of Legal System exist?
• For the next two minutes discuss with your
neighbour. All images in this presentation are used for educational
purposes. Fair dealing. What Are The
Different Legal Systems? There are three types of legal systems
1. Common law - based on tradition, precedent, and
custom
2. Civic law - based on detailed set of laws

6. organized into codes
3. Theocratic law - law is based on religious
teachings All images in this presentation are used for educational
purposes. Fair dealing. Legal Systems All images in this presentation are
used for educational purposes. Fair dealing. How Are Contracts
Enforced In
Different Legal Systems?
• Contract - document that specifies the conditions
under which an exchange is to occur and details
the rights and obligations of the parties involved
• Contract law is the body of law that governs
contract enforcement – under a common law system, contracts tend to be
very
detailed with all contingencies spelled out
– under a civil law system, contracts tend to be much
shorter and less specific because many issues are
already covered in the civil code All images in this presentation are used
for educational purposes. Fair dealing. Legal Systems All images in this
presentation are used for educational purposes. Fair dealing. How Are
Property Rights
And Corruption Related?
• Property rights can be violated through
1. Private action – theft, piracy, blackmail

7. 2. Public action - legally - ex. excessive taxation or
illegally - ex. bribes or blackmailing
• high levels of corruption reduce foreign direct investment,
the level of international trade, and the economic growth
rate in a country • https://www.youtube.com/watch?v=iNf2tv_aXN
Q All images in this presentation are used for educational purposes. Fair
dealing. 2015 Corruption Perceptions Index Source:
Transparency
International (2015) All images in this presentation are used for
educational purposes. Fair dealing. What Determines A Country’s Level
Of
Economic Development?
• In the next two minutes discuss in pairs:
– What data do firms need to assess a countries economic
development? All images in this presentation are used for educational
purposes. Fair dealing. What Determines A Country’s
Level Of Economic Development? Gross national income (GNI) per
person
measures the total annual income received by
residents of a nation Japan, Sweden, Switzerland, and the U.S. have high
GNI China and India have low GNI GNI can be misleading because it
does not

8. consider differences in the cost of living need to adjust GNI figures
using purchasing power
parity (PPP) How Do Countries
Compare On GNI?
Economic Data for Select Countries All images in this presentation are
used for educational purposes. Fair dealing. All images in this
presentation are used for educational purposes. Fair dealing. Differences
in Economic Development: Purchasing
Power Parity All images in this presentation are used for educational
purposes. Fair dealing. What Determines A Country’s Level
Of Economic Development?
•
• Official figures can also be misleading because
they do not account for black economy
transactions
In addition, GNI and PPP data are static and do
not consider economic growth rates
– So, while China and India are currently categorized
as being poor they are growing more rapidly than
many developed nations and are expected to become
among the largest economies in the world All images in this presentation
are used for educational purposes. Fair dealing. What Determines A
Country’s Level

9. Of Economic Development?
• Nobel-prize winner Amartya Sen argues
economic development should be seen as a
process of expanding the real freedoms that
people experience
–
– • the removal of major impediments to freedom like
poverty, tyranny, and neglect of public facilities
the presence of basic health care and basic education Amartya Sen also
claims that economic progress
requires the democratization of political
communities to give citizens a voice All images in this presentation are
used for educational purposes. Fair dealing. What Determines A
Country’s Level
Of Economic Development?
• The United Nations used Sen’s ideas to develop
the Human Development Index (HDI) which is
based on
–
–
– life expectancy at birth

10. educational attainment
whether average incomes are sufficient to meet the
basic needs of life in a country All images in this presentation are used
for educational purposes. Fair dealing. How Is The Political Economy
Changing? Since the late 1980s, two trends have emerged
1. Democratic revolution (late 1980s and early
1990s) democratically elected governments replaced
totalitarian regimes more committed to free market capitalism 2. A move
away from centrally planned and
mixed economies more countries have shifted toward the marketbased
model All images in this presentation are used for educational purposes.
Fair dealing. How Is The Political Economy
Changing?
• Trend 1: Democracy has spread over the last two
decades
– many totalitarian regimes failed to deliver economic
progress to the vast bulk of their populations
– new information and communication technologies
have broken down the ability of the state to control
access to uncensored information
– economic advances of the last 25 years have led to
increasingly prosperous middle and working classes

11. who have pushed for democratic reforms How Free Are
Countries Politically?
Freedom in the World in 2015 All images in this presentation are used
for educational purposes. Fair dealing. All images in this presentation
are used for educational purposes. Fair dealing. How Is The Political
Economy
Changing?
• • Author Francis Fukuyama argues that the new
world order will be characterized by democratic
regimes and free market capitalism
But, political scientist Samuel Huntington
argues that while many societies are
modernizing they are not becoming more
Western – predicts a world split into different civilizations
• these civilizations will be in conflict with each other All images in this
presentation are used for educational purposes. Fair dealing. How Is The
Political Economy
Changing?
• Trend 2: The spread of market-based systems
– • more countries have moved away from centrally
planned and mixed economies toward the marketbased model Command
and mixed economies failed to
deliver the sustained economic growth achieved

12. in market-based countries How Free Are Countries
Economically?
Distribution of Economic Freedom, 2015 All images in this presentation
are used for educational purposes. Fair dealing. All images in this
presentation are used for educational purposes. Fair dealing. What Is
The Nature Of
Economic Transformation?
• The shift toward a market-based system involves
– deregulation – removing legal restrictions to the free
play of markets, the establishment of private
enterprises, and the manner in which private enterprises
operate
– privatization - transfers the ownership of state property
into the hands of private investors
– the creation of a legal system to safeguard property
rights All images in this presentation are used for educational purposes.
Fair dealing. What Are The Implications Of Political
Economy Differences For Managers?
• The costs of doing business in a country are a
function of its
– political system
• is it necessary to pay bribes to get market access? – economic level

13. • are the necessary supporting business and infrastructure in
place? – legal system
• it can be more costly to do business in countries with
dramatically different product, workplace, and pollution
standards, or where there is poor legal protection for property
rights All images in this presentation are used for educational purposes.
Fair dealing. What Are The Implications Of Political
Economy Differences For Managers?
• Ownership Risk, representing potential threats to
ownership from nationalization or seizure.
• Operational Risk, representing threats governments impose
for “changing the rules of the game.”
• Transfer Risk, represent impediments to the transfer of
production factors, products or capital. All images in this presentation
are used for educational purposes. Fair dealing. Country Risk/Political
Risk All images in this presentation are used for educational purposes.
Fair dealing. Country Risk/Political Risk
• Sources of Country Risk
•
•
•
•

14. •
• Political System
government
political parties
legislative bodies
lobbying groups
trade unions
other political institutions Legal System
Laws, regulations, and
rules that aim to:
• ensure order in
commercial activities
• resolve disputes
• protect intellectual
property
• tax economic output All images in this presentation are used for
educational purposes. Fair dealing. Country Risk/Political Risk
• Risk arising from legal System (Host country):
•
•

15. •
•
•
•
•
• Foreign investment laws
Controls on operating forms and practices
Marketing and distribution laws
Laws regarding income repatriation
Environmental laws
Contract laws
Inadequate or underdeveloped legal systems
Internet and e-commerce regulations All images in this presentation are
used for educational purposes. Fair dealing. Country Risk/Political Risk
• Risk arising from legal System (Home country):
– Extraterritoriality rules: the application of home-country laws to
other countries.
• The Foreign Corrupt Practices Act (FCPA)
• European Union pursued Microsoft for monopolistic practices
– Anti-boycott regulations

16. – Accounting and reporting laws
– Transparency in financial reporting All images in this presentation are
used for educational purposes. Fair dealing. How to Assess Political
Risk?
• The various ways to measure political risk can be classified into five
categories
• Qualitative approaches
• Aggregates of expert opinions
• Scenario approaches
• Decisiontree models
• Quantitative techniques that result in political risk indices (i.e.
Economist Intelligence Unit (EIU), Business Environment Risk Index
(BERI)) All images in this presentation are used for educational
purposes. Fair dealing. The Economist Intelligence Unit (EIU) Model
• Country risk model containing political, social, and
economic/financial variables with a total rating value of 100
points.
• The variables represented “political risk” defined in terms of
outcome losses covered by political risk insurance.
• A score of zero meant no risk, the max score meant max
(prohibitive) risk.
• Variables (weight): bad neighbors (3), authoritarianism (7),
staleness (5), illegitimacy (9), generals in power (6), war/armed

17. insurrection (20), urbanization pace (3), fundamentalism (4),
corruption (6), ethnic tension (4). All images in this presentation are
used for educational purposes. Fair dealing. Factors of the Composite
EIU Risk Rating
• Political risk (22% of the composite)
•
• Political stability (war, social unrest, orderly political transfer,
politically motivated violence; and international disputes)
Political effectiveness (change in government orientation; institutional
effectiveness; bureaucracy; transparency/fairness; corruption; and
crime). • Economic policy risk (28%)
• Determined with 27 variables in five categories: monetary policy;
fiscal policy; exchange rate policy; trade policy; and regulatory
environment. • Economic structure risk (27%)
• Incorporates global environment, growth, current account, debt, and
financial structure groupings with 28 variables. • Liquidity risk (23%)
•
Covers 10 variables of currency conditions All images in this
presentation are used for educational purposes. Fair dealing. Managing
Country Risk
● Proactive environmental scanning: Management should
develop a comprehensive understanding of the political and

18. legal environment in target countries. Scanning – ongoing
assessment of potential risks and threats to the firm, via
intelligence sources such as: Employees working in the host country
Embassy and trade association officials Consulting firms, such as
Business Entrepreneurial Risk
Intelligence (http://www.beri.com) ● Minimize exposure to country
risks All images in this presentation are used for educational purposes.
Fair dealing. Why is an understanding of risk important for
managers?
• During the next 2 minutes discuss with your
neighbours All images in this presentation are used for educational
purposes. Fair dealing. How Can Managers Determine A Market’s
Overall Attractiveness?
Country Attractiveness All images in this presentation are used for
educational purposes. Fair dealing. Learning Objectives
• Now you should:
– Be able to analyze differences between countries based on an
understanding of political, economy, and legal system
– Be able to consider the risk factors affecting international
Businesses
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