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Political, Social, and Envrionmental Risks

Political, Social, and Envrionmental Risks. Lecture 2 – MGT 352. Major Developments Favoring Free Trade. The emergence of the World Trade Organization (WTO).

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Political, Social, and Envrionmental Risks

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  1. Political, Social, and Envrionmental Risks Lecture 2 – MGT 352

  2. Major Developments Favoring Free Trade The emergence of the World Trade Organization (WTO) The emergence of regional trade blocs, such as the North American Free Trade Agreement (NAFTA), the expanded EU, and other regional trade agreements like MERCOSUR in South America

  3. A Hierarchy of Regional Economic Integration Initiatives Free Trade Area Elimination of Trade Barriers Customs Union +Common External Trade Positions Common Market +Labor/Capital Mobility Economic Union +Coordinated Economic and Fiscal Policy Political Union +Coordinated Political and Social Policy

  4. Major Regional Economic Agreement Initiatives • The North American Free Trade Agreement (NAFTA) • U.S.A, Canada, and Mexico • Went into effect on January 1, 1994 • Free Trade Area of the Americas • Proposal to expand NAFTA to include all countries in the Western Hemisphere, except Cuba • This region accounts for 37% of all U.S. trade, $155 billion in American investment, 800 million people, and a $13 trillion economy

  5. Major Regional Economic Agreement Initiatives • The North American Free Trade Agreement (NAFTA) • U.S.A, Canada, and Mexico • Went into effect on January 1, 1994 • Free Trade Area of the Americas • Proposal to expand NAFTA to include all countries in the Western Hemisphere, except Cuba • This region accounts for 37% of all U.S. trade, $155 billion in American investment, 800 million people, and a $13 trillion economy

  6. Major Regional Economic Agreement Initiatives (contd.) • The Association of Southeast Asian Nations (ASEAN) • The Association of Southeast Asian Nations, or ASEAN, was established on 8 August 1967 in Bangkok, Thailand, with the signing of the ASEAN Declaration (Bangkok Declaration) by the Founding Fathers of ASEAN, namely Indonesia, Malaysia, Philippines, Singapore and Thailand.

  7. Indonesia, Malaysia, Philippines, Singapore, Thailand, Brunei Darussalam, Vietnam, Laos, Myanmar, and Cambodia • Total population of 500 million, area of 4.5 million square kilometers, GDP of U.S. $737 billion, a total trade of U.S. $ 720 billion

  8. Major Regional Economic Agreement Initiatives (contd.) • Mercado Comun del Sur (MERCOSUR) • Argentina, Brazil, Paraguay, and Uruguay • Market of nearly 200 million people, area of about 12.5 million square miles, combined gross regional product in excess of $800 billion, and Latin America’s largest industrial base

  9. EUROPEAN UNION • The European Union (EU) is a union of twenty-seven independent states based on the European Communities and founded to enhance political, economic and social co-operation. Formerly known as European Community (EC) or European Economic Community (EEC). Date of foundation: 1st November, 1993.

  10. Member states (EUR: Euro currency): Austria (since 1995-01-01) (EUR) Belgium (EUR) Bulgaria (since 2007-01-01) Cyprus (Greek part) (since 2004-05-01) (EUR: 2008-01-01) Czech Republic (since 2004-05-01) Denmark Estonia (since 2004-05-01) Finland (since 1995-01-01) (EUR) France (EUR) Germany (EUR) Greece (EUR) Hungary (since 2004-05-01) Ireland (EUR) Italy (EUR) Latvia (since 2004-05-01) Lithuania (since 2004-05-01) Luxembourg (EUR) Malta (since 2004-05-01) (EUR: 2008-01-01) Netherlands (EUR) Poland (since 2004-05-01) Portugal (EUR) Romania (since 2007-01-01) Slovakia (since 2004-05-01) (EUR: 2009-01-01) Slovenia (since 2004-05-01) (EUR) Spain (EUR) Sweden (since 1995-01-01) United Kingdom of Great Britain and Northern Ireland

  11. 2003 Competitive Ranking of Countries (top twenty)

  12. (contd.)

  13. Political Uncertainties Government Policy Uncertainties War Revolution Coup d’etat Democratic changes in government Terrorists Fiscal and monetary reforms Price controls Trade restrictions Nationalization Government regulation Barriers to earnings repatriation Inadequate provision to public service Macro-Environmental Uncertainties

  14. Macroeconomic Uncertainties Social Uncertainties Inflation Changes in relative price Foreign exchange rates Interest rates Terms of trade Changing social concerns Social unrest Riots Demonstrations Small-scale terrorist movements (contd.)

  15. Political Risk Political risk is the likelihood that political forces will cause unexpected and drastic changes in a country’s environment that significantly affect the opportunities and operations of a business enterprise

  16. Types of Political Risk Country-Specific • Is manifested in the mutual hostility between Israel and Syria. One would expect that Israeli companies would find little support in Syria, and the same would apply for Syrian companies in Israel Company-Specific • Invokes either a favorable or unfavorable response aimed at a particular company Project-Specific • Involves special treatment bestowed on a certain type of project

  17. Types of Political Risk (contd.) Transfer Risk • Is the change in the degree of ease or difficulty experienced in making transfers of capital, goods, technology, and people in and out of a country Operational Risk • Is the impact on the operations of a firm caused by changes in the government’s policies Ownership Risk • Involves a change in the proportion of equity owned by a company in a foreign subsidiary

  18. Managing Political, Legal and Economic Risk Direct Indirect > Legal Action > Host Operations Dependent on Home > Control Makeup of Management > Diversification > Risk Insurance > Contingency Planning > Home Country Govt. Pressure on Host Govt. Defensive/ Reactive Proactive/ Merging • > Joint Ventures > Licensing Agreements > Other Host Partners • > Promote Host Goals > Lobbying Home and Host Governments > Corporate Citizenship in Host Country

  19. Basic Characteristics of Law • Law is a norm that prescribes what is assumed to be a proper mode of behavior • Law not only prescribes a certain pattern of behavior, but also requires that the prescribed mode be followed • Law includes a process approved by society for applying coercive sanctions against those who do not obey and therefore perform illegal acts

  20. The International Court of Justice (The World Court) • There are three scenarios under which disputes could arise: • Between two countries • Between a country and a company • Between two companies • The International Court of Justice can adjudicate disputes between two countries only when both governments involved agree to submit to the authority of the International Court of Justice

  21. Sources of International Law International Treaties General Principles Of Law International Law International Customs Judicial Decisions and Teachings

  22. Origin of Commercial or Corporate Legal Codes • English common law • Civil law of French, German, or Scandinavian origin • Socialist law, based on Communist principles

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