4-international politics(international business)

Dr Zain Yusufzai International Politics Chapter # 4 (page 96-123).

Objectives:Political and economic systems and linkage between them Five levels of economic integrationsUse of strategic planning Impact of NGOs (Non Governmental Organization)

Introduction:Changing political systemsMoving toward democracyFormer communist bloc of Eastern Europe, converting to free market systems from command economy advocate, ideology

MNEs feel until Government willing to take the steps necessary to ensure that promises are kept and they are able to repatriate they funds, these developing economies proceed with caution, with their investment plans

Attract foreign investment: (requires) Development of high technology Initiation of many large scale projects Employee equipped with modern tools. Knowledge

Political ideologies and economics

Ideology: a set of integrated beliefs, theories, and doctrines that helps to direct the actions of a society. For example; the political ideology of USA is written in the constitution that guarantees the rights of private property and the freedom of choice. This ideology helped in laying the economic political system (US Capitalism).

Political systems: (two types)1. democracy2. totalitarianism

Number of totalitarianism systems: communism theocratic secular

1. Democracy: a system of government in which the people either directly or through their elected officials, decide what is to be done2. Totalitarianism: a system of government on which one individual or party maintains complete control and either refuses to recognize other parties or suppresses them

International businessAlan M. Rugman, Richard M. Hodgetts

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Communism: a political system in which the government owns all property and makes all decisions regarding production and distribution of goods and servicesTheocratic: a system of government in which a religious group exercises total power and represses or persecuted non orthodox factionsSecular: a system of government in which the military controls everything and makes decisions, which it deems to be in the best interests of the country

Economic systems: (Three basic economic systems).1. Capitalism2. Socialism3. Mixed Classification of these systems in terms of resource allocations:

1. Market driven versus centrally determined 2. Property ownership ( private versus public)

Market driven economy: An economy in which goods and services allocated based on consumer demand

Market driven economies are characterized by private ownership

Assets in the hands of privately owned companies that compete for market share by offering the best quality product (goods and services) at competitive prices.

Centrally determined economy: An economy in which goods and services allocated based on a plan formulated by a committee that decides what is to be offeredCharacteristics of Centrally determined economies

Owned by public Asset of production are owned by the state and

production quotas are set for each organization Mixed economies: Economic systems characterized by a combination of market and centrally driven planningCharacteristics of mixed economies

Combination of market and centrally driven planning

Most nations of the world have mixed economiesFor example a leading proponent of market driven economic policy:

Provides health care and other social services to many of its citizens through government regulatory agencies


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Many market driven economies are making greater use of centrally determined ideas such as using business , government cooperation to fend of external competitors

Most economies moving from central planning to market driven and mixed economies

Privatization movement around the3 world is good example

Government control of assets1. Privatization: The process of selling government assets to private buyers2. Nationalization: A process by which the government takes control of business assets, sometimes with remuneration of the owners and other times with out such remuneration (Six steps involved in this process)

i. Promoting economic development , for example by coordinating the assets of many businesses into one overall master plan;

ii. Earning profits for the national treasury;iii. Preventing companies from going bankrupt and

closing their doors;iv. Enhancing programs that are in the national interest;v. Increasing the political or economic control of those I

power vi. Ensuring goods and services to all citizens regardless

of their economic status

Opposite situation privatization takes two forms; 1. Divestiture: A process by which government or business sells assets2. Contract management: A process by which an organization (government) transfers operating responsibility of an industry without transferring the legal title and ownership Primary reasons for privatization include (7 reasons).i. More efficient to have the goods and services provided

by private business than by government run companies;

ii. Change in the political culture brings about a desire to sell off these assets;

iii. Company making money and the government feels that there is more to be gained by selling now than by holding on;

iv. Purchase price can be used to reduce the national debt;


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v. Company is losing money and the government has to assume the losses out of the national treasury;

vi. Company needs research and development funds in order to maintain a competitive stance and it is unwilling to make this investment;

vii. International funding agencies are making assistance to the country conditional on a reduction in the size of the government;

Privatization in action: Countries with moderate per capita gross domestic

products, (Argentina, China Brazil, Mexico, and Chile).

Countries with advanced economies (US, Japan, UK, Germany

Have a strong feeling that their economies will strengthen through privatization program

Competition increases (positive outcome)

Government business cooperationGovernment can act as big brother or umbrella for business (Saudi Hilal Ahmar);

Japan and EU assistanceMinistry of international Trade and Industry (MITI): A Japanese ministry charged with providing information about foreign markets and with encouraging investment in select industries and, in the process, helping to direct the economy

Initial focus providing protection to Japanese companies and marketing the product of four major industries: 1. electric power, 2.steel, 3. ship building, and 4. Fertilizers

Incentives created to invest in these industries and to help firms export their products

Become less proactive and more cooperative Main role finding export markets for Japanese

business

European Union (EU) Helps promote business One way through funding of research projects

for other governments Best known R&D consortium is EUREKA, a

pan European group whose main objective is to create closer cooperation between private


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companies and research institutes , in the field of advance technologies for the purpose of exploiting commercial opportunities

The American response:

Beginning in 1990 > white house panel of experts from industry academia, and government released a list of 22 technologies, considered essential to the national defense and economic prosperity of U.S.A.

List included - 1. Composite material 2. Flexible computer integrated manufacturing 3. High definition electronic displays

Conduct:- long range strategic planning and to work closely with private sector in developing important technologies

Economic integration:-The establishment of transnational rules and regulations that enhance economic trade and cooperation among countriesAt one extreme, economic integration would result in lone world wide free trade market in which all nations had common currency and could export any thing they wanted to any other nation The other extreme total lack of economic integration in which nations were self sufficient and did not trade with any one

Implementation problemsEconomic integration requires that participants agree to surrender some of their individual economic power, examples as the authority to set tariffs and quotasFree trade flow: ------- neither side can restrict the others

right to export these commodities to its country

Trade creation and trade diversion:-i. Result in trade creation

A process in which members of an economic integration group begin to focus their efforts on these goods and services for which they have a comparative advantage and start trading more extensively with each otherCountries integrate other economies bring about a shift in business activity


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Example U.S. Mexico, car deal built in Mexico shipped back to usResult in efficient, low cost producers in member countries gaining market share from high cost member producers. As well as generating increased exportResult in efficient, low cost producers

2. Result in trade diversion

Members of an economic integration group decrease their trade with non member countries in favor of trade with each other. Leads to loses of production and exports from more efficient member countries to less efficient member countries that are protected by tariffs or other barriers.

Levels of economic integration (five levels)i. Free trade area

An economic integration arrangement in which barriers to trade (such as tariffs) among member countries are removed example NAFTA NAFTA: North American Free trade Union: - a regional free trade agreement between Canada, the US, and Mexico

ii. Customs union A form of economic integration in which all tariffs between member countries are eliminated and a common trade policy toward non member countries is established

iii. Common market A form of economic integration characterized the elimination of trade barriers among member nations, a common external trade policy, and mobility of factors of production among member countries

iv. Economic union A form of economic integration characterized by free movement of goods, services, and factors of production among member countries and full integration of economic policies

v. Political union An economic union which there is full economic integration unification of economic policies and a single government

Economic integration: an overall perspectiveFour point merit:


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First it is not necessary for a country to pursue economic integration by starting with a free trade area and then working up to a common market or an economic union example Britain left free trade area and joined EUSecond, economic integration in the form of free trade typically results in a winning situation for all group members since each member can specialize in those goods and services Third and complementary to the above bloc members often find that their business is able to achieve internal economies of scale brought about by lower production costs and other savings within the firmFourth factors of production a common market are allowed to flow freely across borders, the firm may also achieve external economies of scale brought about by access to low cost capital, more highly skilled labor, and superior technology. In short, in group companies can draw on resources in member countries to help increase efficiency.Finally in the short run some bloc countries may suffer because of other member countries are able to achieve greater increases in efficiency and thus dominate certain industries and markets in the blocNGO: - Non governmental organizations: Non profit organizations that act to advance diverse social interests Civil society:-A group of individual’s orgtanizations and institutions that act outside the government and the market to advance a diverse set of interests

Ethics, environment, MNEs and the civil societyThe European Union (EU)A treaty based institutional framework that manages economic and political cooperation among its member statesEuropean free trade association (EFTA)A free trade area currently consisting of Iceland Liechtenstein, Norway and Switzerland past members included the UK (before it joined EU)Growth and challenges:-Organization (five major institutions that manage the EU)

i. The European council ii. The Council of ministers

iii. The European commissioniv. The European parliament


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v. Court of justice

The future:-Other economic alliances:-Andean pactMercosurASEANFTAAEconomic integration and strategic managementStrategic alliances and acquisitionsTelecommunication and electronicsBreweriesLocalization of business operationsProducts Localization of profitsLocalization of productionLocalization of management


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4-international politics(international business)

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