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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,

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


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;

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
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

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

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 Countrys 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 Countrys

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
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 Countrys 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
Countrys Level
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
Countrys Level

Of Economic Development?

The United Nations used Sens ideas to develop

the Human Development Index (HDI) which is

based on

life expectancy at birth

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

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

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

 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

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):

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
 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

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

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 Markets

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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